What is Equity?
In traditional real estate, equity is the difference between the value of the home and how much is owed on the mortgage. A homeowner’s equity in the home changes as they pay down their mortgage and as the property appreciates or depreciates.
At Hany Adam Homes, we define equity as the value of your initial down payment, plus or minus any appreciation or depreciation in the price of the property. When a home is first purchased, the down payment makes up the entire available equity in the home. Then, over time, the available equity will fluctuate as the home’s price increases or decreases, respectively.
Why is this term important?
Equity is important because it is the amount that you, and Hany Adam Homes, can expect to share when the property is sold. We use what we call the equity split to calculate our respective ownership shares in the home and fairly divide the home’s equity when it is sold.
You can think of the initial equity, our combined down payment amount, as “risk capital” that both you and Hany Adam Homes, put towards a home. When you purchase the home your down payment is your initial investment made in the property. There is no guarantee that the investment will be returned. Whether, or how much of, that investment you and we get back is linked entirely to the value of the property.
Here is an example:
If a traditional homebuyer purchases a property at $1,000,000 and pays a down payment of $200,000, they would have $200,000 of equity in the home. Then, if the property appreciates by $500,000 and is now worth $1,500,000, the equity in that home is $700,000 (i.e. $200,000 + $500,000).
In a co-ownership example, let’s say we co-buy the same $1,000,000 home. If you contribute $80,000 (8% of the home value) and Ourboro contributes $120,000 (12%), together we’ll have a $200,000 (20%) down payment. Since you contributed 40% of the total down payment, and Ourboro contributed 60%, we would have a 40:60 equity split in the home.
If the property appreciates by the same $500,000 to be worth $1,500,000, there would be $700,000 in equity to be shared 40:60 between you and Hany Adam Homes, respectively.