[Gone Forever]

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It really doesn't matter because you're not really going to be paying down hardly any of your principal over the first 10 years anyway so my comment should still hold some weight.

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With his downpayment, he will have about $40K in equity on an undervalued $175K home.

This, along with your "HUGE liability" comment, make me wonder if you know what the [censored] your talking about.

Real Estate is nearly always an excellent asset in the long-term (7-10 years or more). Short-term, yes, your comments have some validity, but you need to clarify your time frame.

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Well, being that the down payment was his money already, when he sells and gets it back, we can't really count that as profit now can we?

"Undervalued"? This is a term realitors use to get their clients wet.

The bottom line is that when he goes to sell this house, his success will not be based on what his home is ACTUALLY worth, but, what all of the other homes in the AREA are worth.

Why is this?

Because when lenders lend money to people to buy a home they base their assessment of value off of comparable sales (comp's) in the area. Most lenders wont let you get comp's from further than a mile away. If you're in an area by main roads or freeways, most lenders wont let you cross those lines to get comp's even if they're still within the alloted mile boundary. If you're in a major city like Detroit the lenders aren't going to let you go more than half a mile.

All of these restrictions mean that you're home is worth what other homes of the same size and style in a limited area have sold for in the last year. NOT what you're home is actually worth.

Of course you could have somebody show up with a briefcase full of money to buy your house, but, the majority of people are going to need to get a loan.

I had a client that's a builder. He just built this beautiful home. Two stories, finished basement, 4 bedroom, 3 bath w/an attached 3 car garage. This place is easily worth 300k. The problem is that he built this house in an area where there are no houses like it. None close in size and none close in style.

He needs to refi to get out of his construction loan and I haven't been able to find a lender who hasn't told me there is "Insufficient collateral".

What this basically means is that since there are no comp's in the area that are close to this house they can't assess a value to his home.

Obviously this is an extreme case, but, you can clearly see that a house that is "Over valued" doesn't exactly mean it's worth more than any other house in the area.