Buying a new home and having 'equity' in it

Question

I viewed a model home that was originally priced at about $207,000. The builder is offering it for $173,000 since it was a model. He says that for this reason the home will already have over $30,000 in equity when I purchase it. Is this true, and if so, what does that mean for me? Equity is foreign language in my mind.

Answer 1

This statement is a come-on, an attempt to impress you with the "wonderful deal" you would be getting if you bought the house. It is not a reality-based statement.

Equity is just a fancy word for how much something you own is worth in cash to you. If you own a bicycle, you could maybe sell it for say $20, so you have equity of $20 in it. This is despite the fact that you paid $100 for it long before, and despite it having more utility for you than $20 would, and despite it being emotionally priceless to you; the equity is $20 since that is all the cash you could get for it in the market.

In the case of houses, you have to account for the fact that you (presumably) have borrowed much of the money to buy the house (via a mortgage), and have to pay off the borrowing. You also have to assess how much you could actually sell the house for. This selling price is the hard thing to determine, and depends on hard-to-assess factors, such as economic conditions locally and how effective the salesman or broker is. So for a house that you already own, your equity (estimate) is how much you would be left with after selling it and paying off the borrowings on the house.

In this case, the salesman is trying to imply that the house would be worth $30,000 to you the day you bought it, which is patently absurd. He is implying it is "really worth" $207,000 despite the fact that the builder can't sell it at that price (because he would do so if he could). If you tried selling it in the months after buying it, you probably could not get more than$173,000 for it (and maybe less), and like most buyers you would start out with an equity, or net worth to you, of slightly less than your down payment.

Answer 2

It doesn't mean anything to you, its a sales pitch. You know how much equity your home has when you have an appraiser write an appraisal report for you/your bank, and even then it doesn't mean much unless you want to cash out on that equity (with a home-equity loan or a mortgage refinance). Or when you try to sell the house.