WHAT IS Stripper
Stripper as a real estate term refers either to an individual homeowner who strips the equity out of their home through mortgage refinancing, or to an investor who buys a property in foreclosure and then rents it back to the defaulting homeowner, thereby stripping value from the home.
BREAKING DOWN Stripper
Stripper is a slang term that refers to the practice of stripping equity out of a house. A stripper may be a homeowner who wants to strip the equity out of their own residence as a way to avoid having the house used as payment on a debt they owe, or because they need money and don’t understand the ramifications of stripping equity from their primary residence.
In the first case, stripping equity out of a house by refinancing the mortgage can be a way to make the property unattractive to a creditor to come after. If it is impossible to sell the house without clearing off the lien created by the mortgage, the creditor may look for other assets to take that don’t involve as much legal work. By refinancing the mortgage or taking out a home equity line of credit, the homeowner strips the equity out of the house and makes it a weak target for creditors. A variation on this technique is called spousal stripping, in which a spouse without debt takes out a quit-claim deed on a mutually-owned house to strip it of equity to keep it safe from the creditors of the other spouse. This type of stripper is taking a chance that could fail, but if it is successful, the homeowner can keep their house safe from creditors.
In the second case, the homeowner might take out a home equity line of credit and then spend the money without adding value to the house. This strips the equity out of the house with no benefit to the homeowner. This type of stripper is an inexperienced homeowner who doesn’t understand how to maintain value in a property. Strippers who are not removing value strategically are in danger of losing their houses if they cannot repay the line of credit.
Stripper as Investor
The other meaning of stripper is a person who strips equity out of another person’s property by buying it out of foreclosure and then renting it back to the original homeowner. This type of stripper is removing value by buying a house for a price that does not reflect any equity in the house, and then renting it back to the original homeowner who gets no equity in the house despite possibly having had equity in it before the foreclosure. If the former homeowner falls behind in rental payments, the new owner can evict them from the property as if they had never owned it. This precarious situation is essentially a shell game with equity that harms the original homeowner and does not create substantial value for the investor.