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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