An Inman Instant Equity Reality Check

Based on the price point it’s definitely not San Francisco, but Jack Guttentag’s advice for a reader over at Inman News is worth repeating nonetheless. And yes, the emphasis is ours.

“I have been offered a tremendous deal — a house that appraises at $364,000 that I can buy for $294,000, with 100 percent financing, and the builder will pay all my closing costs … I can afford the payment for only six months, and it will take all my savings, but the broker says that I will be able to do a cash-out refinance in six months based on the appraisal and net about $60,000, which will cover the payment for another two years. …”

You need a reality check. If the builder could sell the unit for $364,000, he would not be offering it to you for $294,000. Appraisals done for builders usually produce the numbers the builders want. That this particular builder, in addition to offering the “bargain” price, is also willing to pay your settlement costs, is a reflection not of his generosity but of his desperation to sell the house.

Further, the probability that you will be able to do a cash-out refinance in six months is vanishingly small. Lenders won’t do a cash-out refinance in excess of your equity in the house. Since the true value of your house when you close is no more than $294,000, and your mortgages add to the same amount, you will have no equity. Payments of principal over the first six months will amount to about $1,000. The other $59,000 of equity you are looking for would require price appreciation of 20 percent over six months. That conceivably could happen in a go-go market, but the go-go markets are all gone.

Now about all those local listings that advertise “Instant Equity!”…
∙ Beware of new homes selling at bargain prices [Inman]
∙ Even More Instant Equity! [SocketSite]