Flipping houses is one of the best ways to generate long term, substantial wealth. To do that, you need to find houses with good equity.
What does home equity mean? For starters, home equity is the current value of the house in the market minus the remainder of the loan. In other words, equity is the amount of money the homeowner makes if they sold the house at market value.
The ability to find houses with equity is a foundational part of real estate investing. In order to make a profit, you must find discounted deals. And sellers are not going to discount their property if they’re going to lose money on the deal. That’s why we need to find motivated home owners. The more equity they have, the more they can discount a property and still walk away with some cash at the end.
But how do you find a house with equity? Here I’ll give you 5 useful tips I have personally used to calculate how much equity a potential seller has!
How to Find A House With Equity
Get Access To AVM
An AVM is an Automated Valuation Model. This is a program that banks use to determine if you need an appraisal on a property. It has the data points to calculate the estimated current value of a property automatically.
Although the calculated value is not perfect, it does give you a good starting point for what you should be looking for. You can type the address of the property, and the AVM will take different data points like historical data, features of the property, market value, area trends, age of the property, and much more to calculate a current fair value of the property.
Most real estate companies use AVM to get the contact details of people who are potentially putting their property on the market.
You can access AVMs from many providers online. Companies or individuals can take these AVMs and add them to their website to collect information about people who are looking to evaluate their property prices in the area.
The good thing about AVMs is that they give you a sense of how valuable the property is without you having to do a lot of research. This is a valuable data point to have if you have the intention to work in real estate. It can give you solid potential leads that are sought after highly by real estate investors and something you will not be able to capture in any other way.
AVMs are pretty interactive, and they have access to millions of transactions, tax assessments, home sales in the past, insights about the market, etc. They are not a perfect source of data, and the estimation can be off by thousands of dollars, depending on how much data is publicly available in that area at the time. Still, it’s a great place to start and can help you determine if you should look more closely at the property.
You need to know the lean value of a property, which means you need to figure out how much is owed on the property. This is a valuable data point that determines how much money you can offer on this deal.
To find out the reverse amortization amount, you need to estimate the mortgage interest rate for that year and calculate back based on the value of the property to understand what is owed on it approximately. You can take the value you got from the AVM and look up a reverse amortization table online to get the approximate amount that is owed on the property to get a good idea.
A good rule of thumb is to make sure there is at least $50k worth of equity on the property, which gives the seller room to take a discounted offer.
Buy Foreclosed Properties
Banks foreclose on properties when a homeowner has not paid their mortgage for a long time. The bank repossesses the home and removes the current owner. When repossession is done, the bank or the lender usually puts up the home on a sale.
So, keep an eye on the foreclosed list of homes in the areas you wish to invest in.
The foreclosed properties are often in good condition, maintained, and sold for a moderate price, making them some of the best equity homes that you can find in the real estate business. A bank does not want to keep properties and handle them. They want to sell those homes and get their money back as soon as possible.
Be Early To Close On A Property, Or Put Down The Last Offer
In real estate, the first offer usually gets the sale instead of the highest offer. This is simply because it has come at a time before anyone else, with no guarantee of a better offer. If you are looking to flip homes, you need to keep track of the homes that are put up for listing and have your pre-approval from a bank ready so you can place your offer as soon as you can. You can alternatively connect with a real estate agent to stay on top of all the property listings in your area.
If you haven’t been able to get there first, you can also look at properties that have been on the market for a very long time. The reason is that these owners have not received a good offer. They have been paying mortgage payments on the home while waiting for an offer. They might listen to discounted offers because they need to move on.
Contact Owners Directly
A single property can get dozens of offers on the first few days of listing because the real estate market is usually hot, and lots of people are looking to invest in a new property. This is why savvy real estate investors usually cut the middleman and get in touch with the owners directly.
Often the best deals you’ll find are off-market deals. In these cases, they aren’t even on the MLS and don’t have a real estate agent. You would contact these owners directly to get a feel if they’re ready to sell the property at a discount. We’ve got an entire post about finding off-market properties here.
Connect With Absentee Owners
These are property owners that don’t live in the properties themselves. They could be the landlords, owners of an inherited home, or a fixer-upper who doesn’t know what to do with the place. Now, you are thinking, how will you even find any property like that?
First of all, if you are planning on an investment property, you should know the area. You can drive around and look for empty properties and use public records to look for the owner. Look for individual properties that are for rent, and let them know you are not looking to rent but to buy the property entirely.
Go Through As Many Deals As Possible
Like all work, there is no shortcut when it comes to success in real estate. You need to find a deal that makes you the most money, which means you have to go through a lot of bad deals to find the ones that are real.
You can pick up raw leads through all the tactics we talked about, sort them by location, and see how many homes are in that area. Then vet those properties by yourself and understand the local market. Only then should you be considering putting an offer.
Chances are, you will have to make dozens of offers to get a really good one, and then have the owner accept your offer.
So, here’s what we have learned in this post: If you are investing in a property, home equity is the current market value minus the lien, debts, and collaterals. You need some special tips to find houses with equity, such as getting access to an AVM to get the lean value of the property, or calculating reverse amortization and combining with the AVM to get a home equity value.
No matter how you get the equity of a property, it is important to remember that a good investment property should have at least $50k worth of home equity.
Learn how all this works by attending our next webinar.