Form-of-the-Week: Balance Sheet Financial Statement – Assets, Liabilities, and Net Worth – Form 209-3

A balance sheet is a worksheet used to list in dollar amounts all of an individual’s or family’s assets and liabilities. Thus, it is an ideal tool to decipher their financial health. The use of the balance sheet, also called a statement of financial position, is a simple exercise in financial planning which should be conducted by every household (and investor and businessperson) every year.

Preparation of a balance sheet is especially instructive to homeowners who purchased or refinanced after 2002 since they are likely underwater. Further, the primary bulk of a homeowner’s assets and losses will be comprised principally of their home. [See first tuesday Form 209-3]

With a firm mental grasp on the individual’s or family’s finances through completion of a balance sheet, forward-looking and prudent financial decisions can be made.

The balance sheet

first tuesday’s Balance Sheet Financial Statement is used by brokers, lenders, homeowners and sellers to determine an individual’s or family’s financial health for many purposes. Common situations involving the use of a balance sheet include:

  • a buyer applying for purchase-assist financing with a mortgage lender;
  • a buyer seeking seller carryback financing;
  • a homeowner looking to refinance;
  • a homeowner requesting a short sale or loan modification;
  • a homeowner considering a strategic default; and
  • a nonresidential landlord screening a tenant. [See first tuesday Form 209-3]

The balance sheet assists a lender, or seller in the case of carryback financing, to determine the credit worthiness of a buyer when reviewing an application for financing. It is incorporated into the standard loan application used by lenders as part of the analysis used to qualify for a loan. It is also part of the hardship package a homeowner provides their lender when requesting a loan modification or short sale.

The balance sheet analysis also reveals whether the family is on track to meet its long-term financial goals, or whether it is insolvent and in need of a change in behavior – or handling of assets. It helps the family determine which assets they best spend their earnings on – which assets to keep and which to discard.

Related articles:

Brokerage Reminder: Carryback financing – A beneficial alternative for buyers and sellers

Short sale or foreclosure? The naked truth for underwater homeowners

Assets and liabilities distinguished

A balance sheet distinguishes the relation between two basic things: assets and liabilities.

Assets are tangible and intangible things of value held by an individual or family. Among them are liquid assets which take the form of cash or something easily converted to cash, and include money held in a savings account or tradable stocks and bonds. [See first tuesday Form 209-3 §1 and 2]

Generally, the largest dollar-valued asset a homeowner will ever own is their home. It is historically considered an illiquid asset as its equity cannot quickly be converted to cash. With a positive equity stake in the home, the owner treats it as a valued asset and thus maintains and improves it. Over time, the property’s equity buildup can be cashed-out by either further financing or sale.

Other items make up a homeowner’s assets, such as:

  • funds held in retirement accounts;
  • ownership interests in businesses;
  • trust deed notes owned;
  • vehicles, furniture and equipment owned; and
  • any other item of recognized value, such as collectibles. [See first tuesday Form 209-3 §5 through 9]

Liabilities are the flip-side of the financial coin. Together, liabilities and net (or negative) worth are equal to the value of the assets. The formula is:

  • assets minus liabilities equals net worth.

Liabilities included in a balance sheet are financial obligations and debts owed to others, including:

  • real estate mortgages;
  • auto loans;
  • charge accounts;
  • credit card balances;
  • one year’s amount of alimony/child support/lease payments; and
  • loans collateralized by stocks, bonds or notes. [See first tuesday Form 209-3 §11 through 15]

An individual’s or family’s net worth is revealed when their total liabilities are subtracted from the current fair market value (FMV) of their assets. When net worth is positive, the homeowner is worth more than what is owed to creditors. In other words, the homeowner is solvent.

Negative equity begets insolvency

The balancing act between assets and liabilities is immediately upended when a high-value asset, such as the homeowner’s residence, has a negative equity. If the negative equity is large enough, the value of the homeowner’s other assets is overwhelmed. Thus, their net worth appears as a negative figure. Instead of a positive measure of wealth, the negative net worth is a measure of insolvency.

But how does the real estate agent fit into this arrangement?

A competitive and high-functioning agent may assist homeowners who complete the balance sheet by being available to answer questions about their home’s market price and rental value. This availability and awareness is  all  part of an agent’s  standard farming practice within a particular community. The confidential financial discussions between the homeowner and agent that result from a review of a completed balance sheet build long-term goodwill which the agent will reap the next time the homeowner considers or hears about a real estate transaction.

At the bottom of each page of the balance sheet, space is provided for the agent to enter their contact information. Thus, whenever the homeowner reviews their financial status by referring to the balance sheet, they will be visually reminded of the beneficial real estate related services provided by the forward-looking agent. [See first tuesday Form 209-3]

And when the homeowner next needs representation in a real estate transaction, the friendly real estate expert who provided sage advice on price and rental values will be the first agent to come to mind — and the agent who will get a fee.209-3_Page_1209-3_Page_2