No equity deals means that if you sell the property, you can’t afford to pay the agent commission and the closing costs.
How can you have no equity?
Well if you bought an FHA loan and you rolled the closing costs into the mortgage, and the seller contributed some way to closing, you may have a property it has very little equity.
Many people don’t realize this but the first five years to 7 years of a mortgage, you’re paying mostly interest.
You don’t build equity with your mortgage payment until after the 7th to 10th year with each payment going mostly to principal instead of Interest.
from consumerfinance.gov
In the beginning of your mortgage term, you owe more interest, because your loan balance is still high. Most of your monthly payment is applied to the interest you owe, and the remainder is applied to paying off the principal. Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. This means that over time, more of your monthly payment goes to paying down the principal. Near the end of the loan, you owe much less interest, and most of your payment goes to pay off the last of the principal. This process is known as amortization.
Lenders use a standard formula to calculate the monthly payment that allows for just the right amount to go to interest and principal, to pay off the loan precisely at the end of the term.
So if there’s no equity what can you do as a real estate investor? I generally explain to the sellers that they can either pay the cost to sell with an agent out of their savings which is a lot of money, or they can rent the property out with a property manager, and there’s costs for that, generally 8 to 10% of collected rent and no guarantees of damage to the property,
As Real Estate Investors we make money with buying the property on a lease option or buying the property on a land contract.
