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What is instant equity?
Instant equity is having more equity in a property than you have put into it yourself at the time of purchaser. I'll explain in a clearer way... If you find a 'great deal' where a property is worth 350k, but you are able to purchase this property for 320k, you now have 30k more in the property than you put in yourself with your down payment. In a regular real estate transaction this takes place on a regular basis, but a real estate agent might argue that what you pay for the property is really what the property is worth. On a normal real estate transaction for a single family home the seller (called the vendor) is trying to get as much as possible and the purchaser is attempting to pay as little as possible. They will negotiate and attempt to arrive at a price that works for both parties. If there is an unlimited amount of to time to bargain and both sides want the deal it will usually get done at a 'fair market price'. There are circumstances, however, that work to strengthen the purchaser's position or the vendor's position. Let's look at these in turn.
A seller's market
Most investors don't tend to say 'what a great market' or 'the market is terrible right now'. When the real estate market is up-trending (as it is in Calgary over the past few years) investors call it a 'seller's market'. What this means is that, typically, the seller has some bargain power on her/his side. Why? Because if the purchaser doesn't want to buy the property quickly, it ill be easy to sell to someone else. In supply/demand terminology this is where supply is more scarce and demand is high. The reason I would not call this a 'good' or 'bad' market is because it depends on a personal investing strategy and what you would like to do. Some people call this a good market, but it isn't necessarily great for the people wanting to move into their first home or get a deal on a house. It's good for people who are practicing fix/flip deals; they purchase the house for 100k today, fix it for 20k, and sell it for 150k in a few months. The reason this is a strategy that fits is that it takes out risk. If I want to fix a property before selling and it takes a little longer than I anticipated... no problem, the house will most likely be worth more anyway.
A buyer's market
A buyer's market is what investor call a market that is down turning. Prices of houses are dropping because supply abounds and demand is low. Why isn't this a bad market? Because it is a great time to buy a house for less than it was a year ago as well as what it will be in a few years from now. It's the time to get a 'deal' on a property. This is the perfect time to do a wholesale deal or purchase a house for a long term hold.
Back to instant equity
If you want to eliminate more risk from a purchase as well as make more money from the property you may have heard the phrase 'you make money in the buy'. What this means is that if you get a great deal at the beginning of a real estate investment, it will most likely make you money later on. If you overpay for a property, you will now have to hold onto the property and make money in other ways to help the numbers work and make a good return on your investment. A quick example: If you overpayed for a property in 2006 in Calgary, you most likely lost a lot of money if you needed to sell the property in 2009. If, however, you under-payed for the same property in 2006 you now may not have lost as much or even any money if you needed to sell in 2009. Also, if you under-payed for the property you will also be in a position to sell the property immediately (if needed) and still make money.
I have made the mistake of overpaying for a property in the past. I will attempt not to do so again in the future! Now that I know much more about investing what I will tend to do is make sure I'm getting a good deal. This doesn't mean I take advantage of other people and make sure they lose. I have no desire to have anyone lose. But the numbers need to work for me to get into an investment and the risk needs to be lowered in multiple ways. I only purchase properties that are good deals because I am looking in places other people aren't, negotiating well, and am willing to understand a market and area better than other professionals in the area.
A tip for building instant equity
Today's post isn't wide enough in scope to give you every method I use to find good deals, but I will give you one general tip to purchasing a house that is a good rule of thumb as well as a professional that can make a huge difference to any investor. When you are looking at properties you need to be willing to move fast. Be pre approved or have cash when getting ready to make offers so that if the right deal comes up, you can jump on it. Next, have a realtor look through data and make sure you are only putting in an offer to purchase if it is already a good deal. Remember to give your realtor very specific information. The more you tell your realtor, the more your realtor can help you. If you don't have a good realtor let me know and I can put together a future post on how to find a great team to help you in investing wherever you are.
But the real tip and instant equity is made possible when you find deals in creative ways. There are people called 'wholesalers' in every major city in Canada and the US. Find these people! What a wholesaler does full-time is find great deals. Contact this individual and tell them what you are looking for. If the wholesaler believes you are serious about buying a house when it is ready, you will be notified as soon as they have a good deal. You still need to make sure the deal works for you, but if it does... this is a great way to get good deals without doing a ton of work yourself. If you don't know what a wholesaler is you can puruse my former posts. I have one that I wrote late summer this year that explains the process and how this can work well for everyone involved.
Summary
What instant equity does is take away risk as well as give you immediate money you didn't put into the house you bought. It removes risk by putting you in a place where, if you have to sell quickly, you can sell without taking a loss. It gives you immediate money because the house is worth more than what you paid for it and if you need financing at a later date you will be able to pull out more money than you would otherwise be able to do.
The way some people build instant equity is trying to cheat other people out of money. They lie about what the house is worth or practice other, unethical, techniques. I find the best way to do business and have a clear conscience is by telling everyone the truth and simply working harder to find the great deals. If I can honestly help a family that is having trouble selling their home while explaining how I make my money (in other words, if I offer something other people are not offering a family) and this works well for everyone, I now have instant equity. If this can't all happen in a deal, then it is often best to simply not purchase the house because there are always other deals to be found if I'm willing to work hard and put in the effort.
If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html
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