Chapter 07: Single Family Housing: Pricing, Investment, and Tax Considerations McGraw-Hill/Irwin...
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Transcript of Chapter 07: Single Family Housing: Pricing, Investment, and Tax Considerations McGraw-Hill/Irwin...
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