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Sticking with houses, if you buy a foreclosed house for $200k (the "market cap") and assume a $300k outstanding mortgage, the house's real value is closer to $500k.



Further sticking with houses, if the officially appraised value of that house drops 40% since the said mortgage was issued, and comp sales in that neighborhood are 50% lower, the house's real value is nowhere near $500K, no matter what the formula says.

You'd still owe $300K in mortgage, and be out $200K of cash, but that doesn't mean the house is worth $500K.

P.S. And what's up with downvoting?

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But no one is going to spend $200k for a $300k mortgage if the house's value is significantly less than $500k. The price you would be willing to pay is basically the house's value minus the outstanding mortgage.

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Well, it could decline in value after you buy it. The point is that having debt of $N doesn't always mean the value of the house is automatically adjusted by $N. Value is in the eye of beholder, or buyer in this case.

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