1. McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER7CHAPTER7 CHAPTER7CHAPTER7 Single Family Housing: Pricing, Investment, and Tax Considerations

2. 7-2 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Homeownership Shelter Investment Price Influences  Income and Employment  Interest Rates  Immigration  Social Trends  Government Policy  Cost of Renting

3. 7-3 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Tax Considerations Interest Deduction  Qualified residence  Maximum deduction Points Property Taxes Capital Gains Exclusion  $250,000 and $500,000  Primary residence rules and occurrence rules

4. 7-4 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Regional Dynamics Speculative Housing Bubbles Regional Economic Drivers  Growth or Decline? Regional Comparative Advantage  Natural Advantages  Employee Characteristics  Access to Transportation  Quality of Life

5. 7-5 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Regional Dynamics Base & Service Industries  Conceptually Base industries bring money to a region Location Quotient  LQ>1 is a base industry  LQ<1 is a service industry Employment Multiplier

6. 7-6 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Housing Supply Housing Starts Existing Home Sales Local Supply Influences  Interest Rates  Zoning  Building Codes  Land Terrain

7. 7-7 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Housing Supply Neighborhood Influences  Public goods  School quality Capitalization Effect  Public services provided relative to taxes paid Optimal City Size

8. 7-8 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Appraisal: Qualifying the Property Establish Market Value  Most probable price under competitive market conditions Price vs. Cost vs. Market Value What are market conditions? What are submarket conditions? What is the neighborhood?

9. 7-9 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved 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

10. 7-10 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Cost Approach Subject Value Estimate = Cost New – Depreciation + Land Value Depreciation  Physical  Functional  External Depreciation is often estimated straight- line

11. 7-11 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Income Approach Subject Value Estimate = Net Operating Income/Capitalization Rate

12. 7-12 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved 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

13. 7-13 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Appraisal: Qualifying the Property Example 7-1:  Consider the following property: 2,000 Sq Foot; $100 per square foot new 10% of total effective 100 year life span is depreciation estimate Land value is estimated at $30,000

14. 7-14 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Appraisal: 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

15. 7-15 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Appraisal: Qualifying the Property Example 7-2:  NOI = $80,000  R = 10%

16. 7-16 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Appraisal: Additional Techniques Income and Rent Multipliers GIM: Gross Income Multiplier  Used for commercial property GRM: Gross Rent Multiplier  Used for residential property Both are similar to a price to sales ratio

17. 7-17 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Appraisal: Additional Techniques Example 7-3 GIM = 4, derived from the market Subject potential gross income (PGI) is $200,000 per year Subject Value Estimate = 4 x $200,000 = $800,000

18. 7-18 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Appraisal: Additional Techniques Example 7-4 GRM = 100 Subject monthly rent is $2,000 per month Subject Value Estimate = 100 x $2,000 = $200,000 The GIM and GRM techniques are good starting points for further analysis.

19. 7-19 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Distressed Property Below Market Value Property Reasons:  Financial  Legal  Personal

20. 7-20 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Distressed Property Financial Framework  Acquisition Phase  Holding Period Phase  Disposition Phase  Profitability

21. 7-21 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Distressed Property Acquisition Phase  Information sources for distressed property  Legal Research: Title Quality  Auction Process Lenders at auctions  Equitable Rights  Market research  Inspections

22. 7-22 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Distressed Property Holding Period Phase  Financial Issues Renovation cost Carrying costs Taxes and insurance Disposition Phase  Selling  Renting  Occupying