Is it Equity, or is it Memorex?

What is equity? Well I consulted my trusty dictionary and one of its meanings is “the value of a property in excess of claims against it”. Fair enough, but what prompted me to look it up? Well, I was having a discussion with a fellow real estate professional who was rather proud of himself. He had a client who had bought an “investment” property this past summer, who was having a little trouble re-selling it for a profit after upgrading (and spending too much on) the kitchen. So the agent advised, and the client complied, re-financing to take out the “equity”. Do you see where I am going here? After marketing the home for sale for several months no one had bought the property at its asking price which suggests it may have been overpriced. Let’s be honest, in the overheated and now somewhat cooler, real estate market we are experiencing here in the greater Phoenix metropolitan area, the chances of buying a home in summer of 2006 and flipping it for a profit within 6 months are very slim. So what was wrong with re-financing? Well the problem is that the buyer is releasing equity that does not really exist. Sure, you can find a lender, and a helpful appraiser, to value the home a little on the high side so that they can grant you a loan. In some cases, we will get to those later, such helpfulness borders on the criminal. However, lenders will usually bend over backwards to loan you money, it is their business after all, but they will be the first to cry “foul” when you can no longer make the payments, or the property goes into foreclosure because its value has dipped below the size of the loan. And that is the problem. If there was real equity in the property, it would have sold. Now that you have taken every last penny out of the home, you cannot endure any drop in property values that the Arizona real estate market may suffer in general.

Now, what of the actual criminal activity I mentioned earlier, I hear you cry. As houses stagnate on the market, sellers and agents start to get creative, and that is where the trouble begins. Usually, it ends in a criminal investigation into fraud, and a trip to the “grey-bar hotel”. The current crop of schemes and scams operate broadly as follows. It generally includes a buyer making an offer way above the asking price with the excess to be kicked back either for “repairs” or, in cash, under the table. It will involve, with varying degrees of complicity, a corrupt agent, lender, appraiser and likely title and escrow officer. A duped or criminal buyer, who very often does not even view the property and an unwitting, usually, seller who is unaware of the fraud being perpetrated, but may still be criminally liable.

The key factor in all these, and similar internet “Nigerian type” schemes is greed. Do not let greed blind you to the reality. These are difficult times in Arizona real estate. There are no quick fixes, no get out of jail free cards and no charitable angels paying big prices to get you out of a jam.

Remember, if it walks like a duck….