Equity - how does it work?

[Shoshin]

My wife and I are new to property investing. We have found a 2 Bedroom property on the market desperate to sell, desirable location, and marketed at below GV.

1/ If our offer is accepted, we would have immediate equity as our offer is 20% below GV. If we refinance in 6months does this mean we have to pay back only what we borrowed initially, or what we borrowed plus the equity that we use?

2/ This property would be negatively geared but is in a high capital growth area, does the above outweigh this as we have a preference towards positively geared properties?

Any advice would be appreciated.

[fudosan]

Welcome to the forum, Shoshin

When you refinance in 6 months, do you plan to go back to the same bank? Then you can just top up. If you are using a fixed mortgage and decide to go to another bank, then you need to break the current mortgage contract and so pay the cost.

While most of us here go for +ve cashflow properties, I also think it's ok to have -ve cashflow properties if you can get a property well below market value, in a very good location, with high capital growth, and you have a very high income to service the debt.

[orion]

If our offer is accepted, we would have immediate equity as our offer is 20% below GV

Hi Shoshin, how do you know if it is below market value though - have you had a valuation, or know the values well enough to know?

If we refinance in 6months does this mean we have to pay back only what we borrowed initially, or what we borrowed plus the equity that we use?

Not sure at all what you mean by this?

but is in a high capital growth area

Again, how do you know? Can you see the future by looking at the past?
Fudosan made some good points.

Regards
Graeme Fowler

[Shoshin]

Hi Orion

Hi Shoshin, how do you know if it is below market value though - have you had a valuation, or know the values well enough to know?

The reason we know this is because the house is being marketed at a price lower than the current city council's valuation.

Again, how do you know? Can you see the future by looking at the past?

To this question, yes you can see the future by looking at the past. If you think about everything that makes a high capital growth area so good, this has it all. And I think that if you're in it for the longterm it's a pretty safe bet.

[fudosan]

When you refinance in 6 months, do you plan to go back to the same bank? Then you can just top up.

I'm not too sure about what I said when I recall my memory. I had a 1-year fixed mortgage, renovated the property, when the one year was over, got a new registered valuation, talked to the same bank, and just got it top up at new interest rate for 4 years.

I'm not sure if say you have a 3-year fixed at 7%. After 6 months you get a new valuation and then go back to the same bank. Can you top up in this case? Will it be a mortgage with two portions each with a different interest rate but same maturity date?

[Simon999]

Gidday,

Heres my thoughts on the financial options:

In answer to buying 20% below valuation and then refinancing in 6 months heres my thoughts, just thought I would use some numbers to show the $ impact:

1) Say you buy a property for $200,000, but it is worth $250,000,
so purchasing 20% belwo valuation.

Option 1:
You get a loan for $160,000 being the 80% of purchase price
and then 6 months later you get a second loan on $40,000 to top
up to $200,000 or 80% of its RV.

Option 2: (Worth a thought!)
You need to have other property with available equity though!
First get a loan of $200,000 for the $200,000 purchase price and
secure this loan over the property you are purchasing and then
6 months later either revalue and pull out 80% of the spare
$50,000 or $40,000 for additional investing or you don't need
to bother with refinancing.

Option 3: (Worth a thought!)
Look at a non bank lender that will provide 80% finance against
valuation not purchase price up front!



In terms of cashflow +ve versus cashflow -ve but higher capital
growth prospects, heres my thoughts:

1) Cashflow +ve is much lower risk - because you make money
each week and thus shouldn't be forced in to selling when its not
in your interest.

2) Capital gain occurs - but can you tell how much and when?
What if the cost of servicing the loan forces you to sell prior to
your planned capital gains occuring??

[pixie]

Just a word of warning - the rateable / government valuation is not a valuation. It is merely a tool used by local governments to determine the rates due. They vary widely.

Never, ever use them as an indication of "true" or "market" value.

If the property really is 20% below valuation ie the price someone else is willing to pay on the open market why is there no a queue to the door? Be a wee bit careful here. Sometimes there are very good reasons why it is below market value eg,. forced sale, drainage problems, terrible neighbours, decrepit old building needing TLC etc. Or it is simply good buying.

A registered valuation (from a valuer) may be needed in the future to borrow anything much over the 80% mark unless there is heaps of equity in both properties. In which case the request to see a registered valuation is likely to be waived.

If you are thinking of refinancing in 6 months - why wait 6 months. Why not finance it the way you want it now? A registered valuation less than 6 mths old is also valid so might be worth the investment now just to double check that you really are buying at the right price.

Also - another word of warning - if the property is worth more at the point of buying it and you didn't pay more then it is hard to argue that it is worth more because you never paid it. Double dutch?

Just think of it this way - valuatons stem from what people are actually paying in the open market. if it was "worth" $250k but you only paid $200k in a fair open market how can you argue that it is really worth $250k ? You are the one that proved it was only "worth" $200k !

[Gatekeeper]

Also - another word of warning - if the property is worth more at the point of buying it and you didn't pay more then it is hard to argue that it is worth more because you never paid it. Double dutch?

Just think of it this way - valuatons stem from what people are actually paying in the open market. if it was "worth" $250k but you only paid $200k in a fair open market how can you argue that it is really worth $250k ? You are the one that proved it was only "worth" $200k !

Excellent comment Pixie.
I never quite accept the thought that someone can buy below market value. To me a sale IS the market value at that point in time. Up or down from there (in real vs nominal value) is the unknown.

[orion]

The reason we know this is because the house is being marketed at a price lower than the current city council's valuation.

Hi Shoshin, I hope you are kidding when you say this, but I'm afraid you're not.

To this question, yes you can see the future by looking at the past. If you think about everything that makes a high capital growth area so good, this has it all.

Now, I'm sure you're not kidding.

I never quite accept the thought that someone can buy below market value. To me a sale IS the market value at that point in time.

Hi Gatekeeper, this has been discussed in previous threads although quite some time ago. The reason I group it in the same e-mail as the reply to Shoshin is that they both show the human minds need for simplicity - it hates complexity, so it often makes assumptions to keep things simple. For shares, yes the market price is what the price is and can change dramatically even day by day. Real estate is much slower moving and the market values do not change in the same way - a property with an approximate market value of $150,000 may be sold for $120,000 one day, then sold on again for $155,000 a week later - what changed was the buyers or the sellers motivation to create a sale, not that the market value of the property changed.

Regards
Graeme Fowler

[Shoshin]

Great to hear all the feedback. After talks with others, it has been interesting to find such varied theories. Simon999 finance ideas were interesting. Come to understand that you have to trust your own judgement. You know a good deal when you see it. Unfortunately, this one came down to a multi-offer situation -
A 2 Bedroom near new townhouse
Central Nelson city
GV $275K - was marketed for $250K
Family Estate desperate for quick sale
We offered $220,500 looking to gain immediate equity. The other investors involved had their offer accepted at $230K.
A good learning curve, missed out but will get the next one!

[fudosan]

Hi Shoshin,

Maybe it's a good time to start learning about your market. Look at a lot of properties, note their conditons and prices, develop good relationship with your real estate agents so that you can easily get information on properties sold (without having to pay for it from other sources). Knowing your market is essential to developing the ability to spot bargins. Good luck!

[Shoshin]

Thanks for that,

Yes have been very busy lately trying to find out as much as possible about the current market situations in the two areas we are looking to invest, Have come across a few good buys and both have now come down to multi offer deals.
Any tips on how to make your offer more favourable to the vendor in these situations besides the obvious, i.e cash offers etc.

[fudosan]

Ask questions and try to figure out why the vendors are selling. Then see if you can make an offer that can solve their problems.

[Marcus]

Boy oh boy the posts are coming thick and fast lately.
I have had some good giggles at this thread in particular. It makes for good reading

Just a word of warning - the rateable / government valuation is not a valuation. It is merely a tool used by local governments to determine the rates due. They vary widely.

Never, ever use them as an indication of "true" or "market" value.

Well said. As Graeme said, Registered valuation and/or having allot of current experience in the area are your safest options.

Also - another word of warning - if the property is worth more at the point of buying it and you didn't pay more then it is hard to argue that it is worth more because you never paid it. Double dutch?

The solution to that is, you don't argue. You say:
"Hi. Remember me?
I bought house "X" for a steal a few months back.
Since then, the property has undergone extensive improvements (mowed the hay paddock, weeded the gardens, planted a few shrubs, water blasted the driveway, commercially cleaned the stains out of the carpet, cleaned the oven and bathroom thoroughly, replaced the crusty old toilet seat, plastered the holes in the walls, replaced the odd door, and gave the place a lick of paint) as you can see by this updated (and cheaper as the valuers have existing information already) registered re-valuation including comparable houses sold recently. They now value the property at $XXX,XXX.XX and it just so happens that bank "XY" would like to finance me to 80% of that value which (by golly gosh) will allow me enough to repay you and still have a bulge in my pants....... pocket that is ..... of money(Ahem!)
Despite this, I understand that we already have a great professional relationship here that I would dearly love to nurture for many years to come. So, how about we try and work out some way to keep my business here "

what changed was the buyers or the sellers motivation to create a sale, not that the market value of the property changed.

I agree whole heartedly.

Maybe it's a good time to start learning about your market. Look at a lot of properties, note their conditons and prices, develop good relationship with your real estate agents so that you can easily get information on properties sold (without having to pay for it from other sources). Knowing your market is essential to developing the ability to spot bargains.

And then grabbing them.
That’s it in a nutshell, innit?!?!

Regards,
Marcus.

[Roger_2004]

Interesting comments!