The Gift of Equity

By Nicole Rueth - December 7, 2020

2020 has been such a challenging year. Let’s start by saying that our hearts go out to those families and businesses who have been adversely affected by the pandemic and its economic fallout. As the promise of a vaccine grows, we want to reflect on some of the good news we have enjoyed in Colorado. 

Our state’s average homeowner gained $17,000 in equity this past year. Just 1.4% of Denverites are underwater - which does make sense since we’re in the mountains. With Boulder placing #7 in the nation for homeownership wealth gains and Denver-Aurora-Lakewood, CO coming in at #9 last year according to the Survey of Consumer Finance, it’s safe to say “location-location-location” continues to be on our side. 

According to the Denver Metro Association of REALTORS®' (DMAR) October 2020 Market Trends Report, Denver’s real estate market has not only recovered from March and April’s loss; it has picked up the pace from before. As of the end of November, year-to-date closed homes were up 6.02% over last year and sales volume was up 14.01%. The median close price was up 7.14% - which is an incredible equity win for our homeowners.

According to DMAR’s November 2020 Market Trends Report…
  • Through the first 3 quarters of this year, 90% of the metro area zip codes experienced a median closed price increase.
  • High purchase demand (28% year over year) and limited inventory is giving homeowners incredible equity! FHFA came out showing 9.1% annual growth, and Case Shiller noted 7.3%. With a 2.75% rate, this equates to an annual $27,300 appreciation and $6,333 principal reduction on a $300,000 home. 
  • November’s housing inventory of 3,415 homes broke the previous record-low by 1,406 active listings yet 1,164 more properties were bought and sold landing at 4,820 closed transactions. With hungry buyers competing in bidding wars, home prices are on the rise and 22 days in MLS represents the lowest on record.
This all sets the stage for today’s conversation which is “the gift of equity.” With Santa firing up the reindeer, now seemed like the right time to explore the topic. First, we think you already know that you can count yourself as incredibly fortunate if the gift of equity is in your past, present, or future. And, who are we to tell someone’s parents or kooky Aunt that they should not invest in your family’s prosperity instead of buying some more tech stock? Speaking of which, please consult with your accountant, attorney, or financial advisor before acting on anything discussed here. 

So, what exactly are we talking about? Simple. Peter and Wendie intend to sell their home (a primary residence or 2nd home) to their son David and his wife Diane, but at a price below market value. The delta between the sales price and the market value of the home is the gift of equity. The transfer counts as a present even though no money changes hands.

Beyond the obvious lower sale price, there are many ways this can benefit David and Diane. Most lenders allow the gift to pay off or reduce the required down payment and it can also help save them the cost of private mortgage insurance. Peter and Wendie can alleviate any number of things they feel guilty about and possibly avoid gift and capital gains taxes but there are details that need to apply.

Best of all, this is ridiculously easy. A gift of equity requires a dedicated letter signed by both the seller and the buyer along with a legal appraisal that specifies the reduced sales price. So maybe remember to return your parents’ calls a little faster than you used to. 

This is as good a place as any to say the obvious because sometimes it’s not so obvious if someone has never heard it before like if you’re Gen Z. The sooner you can invest in real estate, the better. Give yourself the gift of equity. We don’t mean speculating and rolling the dice and flipping house like pancakes. But do the math. Could you take your current lease payment along with your Starbucks addiction and go qualify for a home loan? Well, then why aren’t you? Even with the real estate booming and inventory exceptionally low, with a good Realtor® on your team, you’ll be surprised what you can find in a starter home. And look forward. Someday, maybe that house you buy now is still an investment property and you can ‘rent’ it out to your kids.

Last for today. You don’t need us to tell you all the different ways you can subsequently leverage your home’s equity, but did you know if you have at least 50% equity in your home you are deemed "equity-rich"? Sounds like a Monopoly milestone doesn’t it? The bottom line is homeownership accounts for 90% of total wealth and a gift of equity is a powerful way to achieve that. Here’s to a happy, healthy, and equity-rich year for all of us in 2021.  
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