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Chapter 07: Single Family Housing: Pricing, Investment, and Tax Considerations McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
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7-2 Homeownership 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
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7-3 Tax Considerations Interest Deduction –Qualified residence –Maximum deduction Real Estate Taxes Capital Gains Exclusion –$250,000 and $500,000 –Primary residence rules and occurrence rules
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7-4 Regional Dynamics Speculative Housing Bubbles Regional Economic Drivers –Growth or Decline? Regional Comparative Advantage –Natural Advantages –Employee Characteristics –Access to Transportation –Quality of Life
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7-5 Housing Supply Housing Starts Existing Home Sales Local Supply Influences –Interest Rates –Zoning –Building Codes –Land Terrain
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7-6 Housing Supply Neighborhood Influences –Public goods –School quality Capitalization Effect –Public services provided relative to taxes paid Optimal City Size
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7-7 Appraisal: 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?
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7-8 Sales Comparison (Market) Approach “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
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7-9 Cost Approach Subject Value Estimate = Cost New – Depreciation + Land Value Physical depreciation, functional obsolescence, external obsolescence Depreciation is often estimated straight- line
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7-10 Income Approach Gross Rent Multiplier (“GRM”) Subject Value Estimate = GRM x Rental Income
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7-11 Appraisal: 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
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