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## AI Legalese Decoder: Solving Equity Dilemmas in Property Transactions

This is more so directed towards those with property or have property experience/knowledge:

### The Issue of Equity Extraction in Property Transactions

When pulling out equity from a house, the bank will do a valuation and generally give you 80% of the equity. However, the valuation is based on an automatic desktop valuation.

In a situation where a house is purchased below market value due to structural issues (which can sometimes result in significant discounts compared to market value), and the bank does an automatic desktop valuation (as it usually does most of the time), do you think this worsens inflation or adds to the possibility of a crash?

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So for example, say you have a $1M house. It is purchased for $800K because it has structural issues. After settlement, the client wants to pull out equity. The bank conducts an automatic desktop valuation, which puts the house at $1M. Therefore $200K equity, and they get 80% of that to put as another deposit for another property.

Essentially the “true” value of the house is $800K but the bank has now created $200K (80% of that) out of thin air based on an automatic desktop valuation which does not take into account the structural issues.

### The Impact on Economic Stability

So economically, money has been created out of thin air based on a wrong estimation; and suppose over 5-10 years those structural issues worsen requiring repairs.

Does this worsen inflation?

Could this add to the possibility of a crash?

**Just wondering: again, not trying to suggest there will be a crash. I believe the property market is healthy but I am just trying to understand the dynamics of this.** More so for my curiosity’s sake.

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12 Comments

  • VictoriousSloth

    That’s not how desktop valuation works. One of the key pieces of data used is the previous sale price for the property in question.

  • Novel_Swimmer_8284

    >you have a $1M house. It is purchased for $800K

    Then it is a $800K house, not a $1M house.

  • crappy-pete

    A desktop valuation will be influenced by the last sale price. That cancels the whole theory.

  • Wow_youre_tall

    The bank doesn’t just give you equity. You borrow against the equity.

    A bank won’t change their valuation on a property without a reason. If you buy it for 800k and the local market has gone up 1% since you bought they’ll revalue at 808k

  • JesusKeyboard

    Say desktop valuation one more time. I dare you. 

  • Hasra23

    You won’t get an auto val at 1mil if you bought the property a week ago at 800k, the main influence of the auto val algo is the sale price of the property and how long ago it was sold.

  • xvf9

    You’re missing a big factor here in what determines market value – the market. Banks don’t just pull valuations from thin air. They’ll look at a few factors but the biggest one is going to be what the property recently sold for. If a house recently sold for $800k, the bank will value it at $800k. Because that’s what the market *just* valued it at.

    Now you *could* do a cheap reno to “cover up” the structural issues and get a valuer in to give you a more friendly valuation, I guess? But depending on the lender they might want to do their own due diligence before lending against that property.

    And also, if your plan was to retain the property (rather than offload it onto some poor schmuck) then you’re ultimately going to be on the hook at some point for the repairs. Or if you get in strife the bank probably would still be able to recoup their 80% anyway, just leaving the original borrower holding the bag.

  • Bigaussiedic87

    Generally the banks will not lend equity on a desktop valuation. From experience and as an agent they are always full onsite valuations

  • maton12

    Love these imaginery posts, from imaginery people who pretty much have NFI and then claim to know everything.

    Yeah, there’s no thin air bro, move onto the next YouTube video about creating wealth and please don’t udpate us.

  • RoomWest6531

    “say you have a $1M house. It is purchased for $800K because it has structural issues”

    then its not a 1m house, its an 800k house.

    “So economically, money has been created out of thin air based on a wrong estimation”

    Why would the banks value a house at 1m if it was literally just bought at 800k?

    I also dont think you understand how equity loans work. Its not free money, its just an additional loan that uses the increased value of the property as secuirty. It still needs to be paid back with interest.

  • JacobAldridge

    I haven’t done it since Covid (now just phone/email), but going back a few years I’d sit down with my broker annually to review things.

    And he’d bang whatever variables into his software, to see where the Bank would agree an automatic valuation.

    Neither house was a recent purchase, but one was consistently valued 5-10% higher than actual value, and the other ~5% below. The algorithms keep improving, but they don’t know about major improvements or structural issues.

  • m3umax

    The answer is an ADP wouldn’t value the $800k house at $1M.

    A sale price is heavily weighted as far as information toward generating a valuation goes. More than number of bedrooms, land size etc.