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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.

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
7-2

Tax 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
7-3

Regional Dynamics
Speculative Housing Bubbles
Regional Economic Drivers
Growth or Decline?

Regional Comparative Advantage


Natural Advantages
Employee Characteristics
Access to Transportation
Quality of Life
7-4

Regional Dynamics
Base & Service Industries
Location Quotient
LQ>1 is a base industry
LQ<1 is a service industry

Employment Multiplier

7-5

Housing Supply
Housing Starts
Existing Home Sales
Local Supply Influences
Interest Rates
Zoning
Building Codes
Land Terrain

7-6

Housing Supply
Neighborhood Influences
Public goods
School quality

Capitalization Effect
Public services provided relative to taxes paid

Optimal City Size

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?
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
7-9

Cost Approach
Subject Value Estimate =
Cost New Depreciation + Land Value
Physical depreciation, functional
obsolescence, external obsolescence
Depreciation is often estimated straightline

7-10

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

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

7-12

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

7-13

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

7-14

Appraisal: 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

7-15

Distressed Property
Below Market Value Property
Reasons:
Financial
Legal
Personal

7-16

Distressed Property
Financial Framework
Acquisition Phase
Holding Period Phase
Disposition Phase
Profitability

7-17

Distressed Property
Acquisition Phase
Information sources for distressed property
Legal Research: Title Quality
Auction Process
Lenders at auctions

Equitable Rights
Market research
Inspections
7-18

Distressed Property
Holding Period Phase
Financial Issues
Renovation cost
Interest or other carrying costs
Taxes and insurance

Disposition Phase
Selling
Renting
Occupying
7-19

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