Real estate equity is the difference between the worth of a property and the amount owed on it. The value of a piece of real estate can vary significantly depending on the market. The essence of worth, particularly in real estate, is what a buyer is willing to pay versus what a seller is willing to accept.
More often than not, buyers may think a property is worth less than the seller’s asking price. Conversely, sellers frequently believe their property holds more value than what any buyer is prepared to pay. This disparity necessitates the intervention of real estate appraisers to bridge the gap and establish a more accurate market value.
An appraisal is pivotal as it stipulates the true market value of a property. The variance between the amount owed on the mortgage and the appraisal value constitutes the equity. Ideally, you would hope that the appraisal confirms the property is worth more than what you owe; however, this isn’t always the case.
Should the appraised value be less than the owed amount, such a property is termed
Related Terms: loan-to-value ratio, home appraisal, property equity, mortgage.
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### What does real estate equity represent?
- [x] The difference between the worth of a property and the amount owed on it
- [ ] The fair market value of the property
- [ ] The amount owed on the property
- [ ] The asking price set by the seller
> **Explanation:** Real estate equity is defined as the difference between the market value of a property (worth) and the amount still owed on the mortgage. If a property is worth more than what is owed on it, the owner has positive equity.
### What often determines the true market value of a piece of property?
- [ ] Real estate agents
- [ ] An auction
- [ ] The seller's asking price
- [x] An appraisal
> **Explanation:** An appraisal is conducted by a professional appraiser to determine the true market value of a property based on various factors including its condition, the market, and comparative sales in the area.
### What is a property considered if the appraisal value is less than the amount owed?
- [x] Under water
- [ ] High-value
- [ ] Affordable
- [ ] Over-valued
> **Explanation:** When the appraisal value of a property is less than the amount owed on the mortgage, the property is considered "under water" or "up-side-down." This means there is no equity in the property.
### How can an appraisal affect real estate equity?
- [ ] It increases the amount owed on the property
- [x] It determines the difference between the market value and the amount owed
- [ ] It has no effect on real estate equity
- [ ] It suggests the asking price
> **Explanation:** An appraisal assesses the market value of a property and therefore helps determine the equity by comparing this value to the existing mortgage amount. If the market value is higher than the mortgage amount, positive equity exists.
### Which statement is true about buyers and sellers in the real estate market?
- [x] Buyers often believe real estate is worth less than the seller is asking
- [ ] Buyers always agree to the seller's asking price
- [ ] Sellers always list property below market value
- [ ] Sellers undervalue their property
> **Explanation:** Buyers often perceive the property as being worth less than the asking price set by sellers. Conversely, sellers may believe their property is worth more than potential buyers are willing to pay, which is why appraisals are used to find an objective market value.
### When does a property owner have positive equity?
- [x] When the market value is higher than the amount owed
- [ ] When the outstanding mortgage exceeds the market value
- [ ] When they pay off their mortgage completely
- [ ] When the property is under water
> **Explanation:** A property owner has positive equity when the market value of the property exceeds the amount owed on the mortgage. This positive difference represents the equity the owner holds.
### What is a synonym for being "under water" with a property?
- [x] Up-side-down
- [ ] Above-par
- [ ] In-the-money
- [ ] High-equity
> **Explanation:** Being "under water" or "up-side-down" means the value of the property is less than the amount owed on the mortgage. Both terms indicate negative equity.
