Chapter 07:Single Family Housing: Pricing,

Investment, and Tax Considerations

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

7-2

HomeownershipHomeownership

Homeownership is not just shelter. It can also be an investment vehicle.

Price Influences Income and Employment Interest Rates Renting vs. Owning

– Economic– Other Issues

7-3

Tax ConsiderationsTax Considerations

Interest Deduction– Qualified residence– Maximum deduction

Points Real Estate Taxes Capital Gains Exclusion

– $250,000 and $500,000 – Primary residence rules and occurrence rules

7-4

Regional DynamicsRegional Dynamics

Speculative Housing Bubbles Regional Economic Drivers

– Growth or Decline?

Regional Comparative Advantage– Natural Advantages– Employee Characteristics– Access to Transportation– Quality of Life

7-5

Regional DynamicsRegional Dynamics

Base & Service Industries Location Quotient

– LQ>1 is a base industry– LQ<1 is a service industry

Employment Multiplier

7-6

Housing SupplyHousing Supply

Housing Starts Existing Home Sales Local Supply Influences

– Interest Rates– Zoning – Building Codes– Land Terrain

7-7

Housing SupplyHousing Supply

Neighborhood Influences– Public goods– School quality

Capitalization Effect– Public services provided relative to taxes paid

Optimal City Size

7-8

Appraisal: Qualifying the PropertyAppraisal: Qualifying the Property

Establish Market Value– Most probable price under competitive market

conditions

Price, Cost of Construction, and Market Value

What are market conditions? What are submarket conditions? What is the neighborhood?

7-9

Sales Comparison (Market) Sales Comparison (Market) ApproachApproach

“Subject” is the property being appraised “Comparables” are recently sold similar

properties Estimate value of subject by adjusting the

sales price of the comparables for any differences

Subject Value Estimate =Comparable Sales Price ± Feature Differences

7-10

Cost ApproachCost Approach

Subject Value Estimate =

Cost New – Depreciation + Land Value Physical depreciation, functional

obsolescence, external obsolescence Depreciation is often estimated straight-

line

7-11

Income ApproachIncome Approach

Gross Rent Multiplier (“GRM”) Subject Value Estimate = GRM x Rental Income

7-12

Appraisal: Qualifying the PropertyAppraisal: Qualifying the Property

The sales comparison approach is most effective for active residential markets

The cost approach is most effective for special use property or newer homes

The income approach is most effective for cash flow generating property

7-13

Appraisal: Qualifying the PropertyAppraisal: Qualifying the Property

Example 7-1:– Consider the following property:

2,000 Sq Foot; $100 per square foot new10% of total effective 100 year life span is

depreciation estimateLand value is estimated at $30,000

7-14

Appraisal: Qualifying the PropertyAppraisal: Qualifying the Property

Cost New = 2,000 x $100 = $200,000 Depreciation Estimate =

$200,000 x .10 = $20,000 Site Value = $30,000 Subject Value Estimate =

$200,000 - $20,000 + $30,000 = $210,000

7-15

Appraisal: Additional TechniquesAppraisal: Additional Techniques

Example 7-2 GRM = 4, derived from the market Subject potential gross income (PGI) is

$200,000 per year Subject Value Estimate =

4 x $200,000 = $800,000

7-16

Distressed PropertyDistressed Property

Below Market Value Property Reasons:

– Financial – Legal – Personal

7-17

Distressed PropertyDistressed Property

Financial Framework– Acquisition Phase– Holding Period Phase– Disposition Phase– Profitability

7-18

Distressed PropertyDistressed Property

Acquisition Phase– Information sources for distressed property– Legal Research: Title Quality– Auction Process

Lenders at auctions

– Equitable Rights– Market research– Inspections

7-19

Distressed PropertyDistressed Property

Holding Period Phase– Financial Issues

Renovation cost Interest or other carrying costsTaxes and insurance

Disposition Phase– Selling– Renting– Occupying