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There is a little-known, poorly understood (but highly powerful) strategy for creating instant equity that could drastically speed up your property purchasing.
Blogger: Nick Burke, director, Property 4 Profit
An Equity Release is the least understood but definitely the best way of easily creating instant equity. It is so poorly understood that even the vast majority of industry professionals aren’t even aware of it, let alone understand it.
It basically involves organising with the vendor that they will gift to you 10% of the purchase price on settlement day.
But hang on, why on earth would they do that?
The key is usually that the vendor needs to act fast and wants the transaction to settle quickly. Often this happens where a vendor owns more than one property. Typically a builder has kept, say, five units in a complex of 20 for a couple of years after they have been built.
Then they decide they want to liquidate, usually to invest their money into the next project. And for the Equity Release model to work, they need to be motivated to move quickly. This is because rather than just putting those five properties on the market and taking several months to sell them, they need their money out now.
So they are offered a lower nett price for a quick transaction.
But with the Equity Release model, the price is not discounted, or even rebated; it’s gifted.
So on a property that is worth say $350,000, a valuation is done. That is an independent, typically conservative bank valuation, ordered by your lender. The valuation comes in at $350,000, the contract is $350,000, the price is $350,000 and $350,000 gets recorded with the land titles office. However the magic is that the investor only settles on $315,000.
Conceptually this is quite complex, and many seasoned investors at this point say ‘hang on, how will the bank settle on $315,000 when the price is $350,000?’ This is where the Equity Release triggers. The $35,000 equity that is being generated for the buyer, 10% in this example, is signed over from the seller to the buyer on settlement day. This is the amount by which the seller has agreed to discount the property, in exchange for a fast transaction.
So 90% from your bank and 10% from the seller makes up the entire purchase price.
So in this example the buyer has generated 10% equity simply by buying the property in this somewhat unusual way.
The Penny Drops
While this is always a little confusing at first, once the penny drops, the potential for investors buying in this way is huge. Let me explain…
Not only has the buyer generated 10% equity, as they similarly could have with one of the other Instant Equity methods, but the beauty of this system is they have done so instantly, on settlement day. All the other methods of creating instant equity such as renovating, building and networking take time, often a year or more, before the equity can be visible in the property, so they are not really “instant” at all. What you really want is for the equity to be visible to your lender, by way of an independent bank valuation as soon as possible. And with an Equity Release it is available within just one day…settlement day.
So guess what you can do next…?
…that’s right…go again.
In the above example you went into the transaction with (say) a 10% deposit available, ready to settle. And the bank came up with 90% and the seller came up with 10%. So what happened to your 10%?
Nothing; it’s still available. It is still sitting in your bank account ready to be used on property number 2, or anything else you want to use it for.
So buying in this way can greatly accelerate the rate at which you can purchase investment properties. Because you don’t need to wait say a year or more between each property, for the equity to be generated. Here the equity is generated instantly so that it is available instantly for you to move onto your next
As I mentioned at the beginning, this method of buying and generating instant equity is pretty unusual. Hardly anyone knows about it and fewer again really understand it.
You have several options available to you if you want to generate instant equity. We have reviewed them over the last four blogs in this series. Click here for part 1 and part 2 in this series to review all the options that we have covered, or here for an overview of instant equity.
No prizes for guessing which method is my personal favourite.