Real Property Division: Calculating Equity

March 23, 2019

Clients often ask for a Fair Market Valuation to establish their property’s value and calculate the equity they’ve built in their homes. They don’t seem to realize that fair market value is only part of the picture. Without considering several additional key metrics, a miscalculation of true equity is almost guaranteed.

Here’s what to look for when calculating the equity in your client’s home:

Mortgage balance: this is the principal balance of your client’s loan plus any unpaid interest that has accrued since your last payment.

Mortgage payoff: this number is not the mortgage balance. The payoff total does include the mortgage balance, but may be peppered with unanticipated fees, penalties and additional interest. The payoff is the bank’s down-to-the-penny calculation that reflects every dollar your client needs to pay to satisfy the loan in full.

Negative amortization: in a negative amortization loan, the homeowner’s minimum monthly payments are not sufficient to cover the interest due on the loan. Therefore, the loan balance continues to increase, even when the homeowner remits all her payments on time. Further, if the loan is, or ever was, in foreclosure, then additional fees will apply. These fees are typically not reflected in the mortgage balance, but will appear on the mortgage payoff document.

Pre-payment penalties: if pre-payment penalties are stipulated in your client’s loan, it will be important to discover whether the penalties are “hard” or “soft.” In a soft prepay, the homeowner can pay off the loan from the proceeds of the sale without penalty. However, in the case of a hard prepay, additional—and often significant—penalties will be due upon selling the home.

Deferred principal balance: this type of loan modification, in which a balloon payment of deferred principal is due upon the sale of the home, can seriously impact a client’s equity calculation. A recent case involving an equity buy-out turned up an unexpected $80,000 deferred principal balance, which required some unraveling of other equalized assets in the case.

Energy-efficient rehab programs: these property improvements are financed through programs such as PACE or HERO, and those loans are wrapped up in property tax bills. They, too, must be paid when a home is sold, so pulling tax bills is an important part of discovery.

Personal liens and judgments: these can impact available equity because title companies typically demand that liens be satisfied during a property buy-out or sale. Income tax liens, HOA liens, and personal judgments should all be researched before calculating equity.

Today’s equity calculation formula looks like this:

Property Value – The Sum of: mortgage payoffs, homeowner’s association balances, outstanding property taxes, income tax liens, outstanding judgments, PACE loans, etc. = EQUITY

The documents you’ll need to have on-hand when calculating equity include: Mortgage payoff (not the mortgage balance shown on the monthly statement)

  • Homeowner’s Association balance due, if applicable
  • Property tax bill
  • Personal and property lien and judgment search
  • Lien and judgment current balances (aka., “payoffs” or “demands”)

Visit my complimentary online document portal for access to several key documents you’ll need to calculate equity for your client.


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