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Equity Stripping

Equity Stripping

Most borrowers use assets as collateral when it comes to obtaining a loan. Lenders take this into consideration because there would be no way to guarantee their lending risk. Sometimes cash flow is considered more important than collateral, but this is not always the case when it comes to real estate.

What is Equity Stripping?

Equity Stripping is a strategy that is often used to reduce the value of property in order to protect that property or another property. Typically this strategy is used by those who are in debt, to appear as though they do not have equity in their investments. This can deter debt collectors and creditors from suing or pursuing the debt.

How Does Equity Stripping Work in Real Estate?

Equity stripping began out of the need to protect property. By reducing the value of a property through equity stripping, it decreases any interest in a property because creditors believe the owner does not hold any equity.

At first this may seem like it is illegal, but in reality, it is not because the debtor is simply giving their equity to another party. The owner may be able to continue the use of the property, as well as any cash flow if it is being rented. The only difference is that legally the debtor will no longer own the property, meaning it will be an unattractive asset to possess.

Different Types of Equity Stripping

Two of the most common types of equity stripping are: spousal stripping and home equity lines of credit.

Spousal Stripping

One common type of equity stripping has to do with giving the equity to the number one person in your life, your spouse. Spousal stripping means that the debtor will transfer ownership of the property that is in question, to their spouse. This should only be done if the spouse has less debt. This is done commonly because a spouse can be trusted.

Home Equity Lines of Credit

More commonly referred to as a HELOC, a home equity line of credit is something that homeowners can take out against the equity of their home. It gives the owner the same amount of money that there is in equity, and they will use their home as collateral.

When borrowing against the equity in a home the equity is removed, essentially stripping it. The result of this is that creditors will see that the asset is no longer worth the time to collect on, and the owner will get more time to figure out their finances.

Why Would Someone Want to Strip Their Equity?

Equity stripping is a good option for real estate investors, as well as everyday debt borrowers. Since laws do not always protect the equity in each home or property in the same manner.

In some cases, even if you have paid off your home more than someone else, it will not be protected anymore. This is why one might want to practice equity stripping, as it is a legal method for protecting your home.

What are the Benefits of Equity Stripping?

Equity stripping is not for everyone, but there are some advantages of equity stripping. Here are 5 key benefits of equity stripping.

  1. Creditors will be turned off: Oftentimes creditors will avoid pursuing property in debt if there is not enough equity in it which is the main purpose of equity stripping.
  2. Provides more money to invest: It can allow you to take out a loan on your own property, which then provides cash to put into a new investment. This might include a new mortgage, second mortgage, or HELOC. These are often easily granted by banks.
  3. Use traditional LLCs: This can be done to strip equity and make assets less appealing to creditors.
  4. Continue use of assets: When investors practice equity stripping it is a bit different than that of those who are in debt. If an investor wants to strip their equity, they can continue collecting rent even while switching the legal ownership of that asset.
  5. Re-invest equity: Investors that engage in equity stripping not only make their assets look attractive should they fall into debt, but also provide them the opportunity to reinvest the equity they have built up.

Legalities of Equity Stripping

Equity stripping is a practice of removing value from your assets in order to make them look less desirable to creditors or to provide investors with money to reinvest. In many cases this will make you appear to hold fewer assets, therefore creditors will not want to sue you. This is completely legal, but it needs to be done before a creditor goes after your assets.

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