FACTS TO CONSIDER WHEN EVALUATING POTENTIAL APPRECIATION I

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ESTIMATING THE VALUE OF A HOUSE

• CONSIDER THE COMPARISON OF A BUY VS. RENT
• Buy 3 bedroom house - 150,000
• Rent 3 bedroom house - 1,000 per month
• Assume - borrow the full price - no down
  payment
• Assume you have a 30 tax rate
• Assume 5 year holding period

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ESTIMATE YEARLY REVENUES AND COSTS AFTER TAX
12,000 Rent revenue (rent avoided)
1,000 Other income (psychic) 13,000 Gross
Revenues - 700 Vacancies - bridge loan
(4mo.1250.7)/5yrs - 600 Closing costs
plus points (3000/5years) -10,500 After-tax
interest expense (150,000.10)(1 - .3) - 2,500
Repair owner time - 1,000 Property
taxes after tax, other 1500(1-.3) - 1,800
Brokerage commission (.06 x 150,000)/5 - 3,900
CFAT


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THE PRICE APPRECIATION OF THE HOUSE MUST BE

• At least 3900 per year or approximately 2.6.
• Of course, this ignores the brokerage cost of 6
  when the house is sold in 5 years and any
  unforeseen major expense (furnace blows).
• Include another 1 per year for these costs.
• Thus, the house must appreciate about 4-5 per
  year to be considered a good option relative to
  renting.

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FACTS TO CONSIDER WHEN EVALUATING POTENTIAL
APPRECIATION IN A SINGLE FAMILY HOME

• 1. Demographics are important
• Middle age group usually own single family
  houses while old and young rent multifamily.
• The ability of middle age and usually middle
  income to afford down payments and mortgage
• Population growth in general - India and China
• 2. Income
• Housing is a superior good as income rises,
  demand rises more - in US - 1950 - 35 owned
  home 1998 - 67.

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• 3. Interest Rates
• Affect mortgage payments -especially for ARM's
• Affect the cost of builders in financing
  construction.
• 4. Inflation
• Housing is a real asset - hedge against
  inflation
• 1966 - 1982 inflation increased 165
• 1966 - 1982 Housing prices increased 240

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• 5. Tax Rates
• Higher tax rates mean lower after tax costs for
  houses - government subsidy - not true in most
  foreign countries
• Some believe the favorable treatment of
  mortgage interest will be phased out gtcapital
  loses
• Capital gains can be deferred if proceeds
  reinvested in new house - over 55 gt 500,000
  tax free gain.

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• 6. Local economy U.S. economy
• Boom implies rising income
• New businesses moving into area
• Cheap relative to an expensive area near by
• 7. Location
• Close to transportation but away from danger -
  busy streets and industrial waste
• Good services - trash pick-up, schools, etc.

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TIPS ON HOUSE BUYING

• Houses are complex assets with many features
• much psychological attachments
• much leverage
• people don't want to take losses on their homes

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BUYER TIPS

• Get as much information as possible
• Friends
• Neighbors of house you are interested in
• Multiple Listing book - brokers have - inside
  cover lists average monthly prices, volume
  sold, inventory, and other helpful statistics.
  Also, lists specifics on houses for sale,
  pictures, and how long on the market.
• Comparable houses sold for last three years -
  brokers have this.

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Remember - brokers are salespeople - they will
present the best of this information to you in
order to sell you - they often don't fully
understand the statistics - GET ALL THE
INFORMATION Some of the statistics reported in
MLS and reported to you by the broker are
biased. For example Average time on the
market is biased down since only the time on
the market with the current broker is included.
Some sellers go through more than one broker -
especially in bad markets
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Selling price / list price biased up because the
list price is often cut more than once - only
the final list price is used. Control the
information you give about yourself to broker
-enough to get them to work for you i.e.,
that you are a serious buyer, but not enough
that it will work against you in price
negotiations (e.g., must buy immediately or must
have specific house) Get as much information
about seller as possible from deed records,
broker, etc.
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Bidding low is OK as long as you don't mind if
you don't get the house - should at least bid
low enough to get a 'no' and a counter
offer. Some sellers have psychological fixations
on round number prices - e.g. if you are
thinking of offering 205,000, you may as well
offer 200,000. Brokers are usually a few steps
behind the market - therefore - in a rising
market - bid higher and consider paying full
price (brokers have many opportunities and so
don't bid as aggressively for listings - they
are more interested in fast turnover which
implies lower pricing)
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- in a declining market bid below the price of
recently sold comparable homes - brokers
offer to sell homes at high prices in order to
compete for fewer listings. Check out as many
potential problems with the house before
submitting a bid and all potential problems
before signing a purchase and sale. - pay
attention to details - condition of the house -
brokers bid with one another for listing and so
winner usually claims they can sell house for
more than its worth - overlooks defects.
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Brokers help to arrange home showings for you,
alert you to new homes on the market, and
provide some information. However, you can do
much of this by yourself by looking through the
newspaper and calling for appointments. Doing
it yourself has two advantages The seller's
broker is more likely to cut their commission
to lower the price if he/she doesn't have to
split the commission with your broker You are
more likely to see homes for sale by owner -
brokers won't show them to you
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You can identify a down market before prices drop
a lot by looking at newspaper listing -look for
more for-sale- by-owner homes, calls for bids,
price discounts, gimmicks to attract buyers.
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MAKING OFFERS AND NEGOTIATING
1. Give only one or two days for seller to
respond to an offer, otherwise they will use
your offer to push other potential buyers to
bid. 2. Keep responding quickly to their
counteroffers to keep the pressure on them. 3.
If you really want the property - settle on a
price quickly - this excludes other potential
buyers 4. Make thorough inspections, send seller
copy of defects and renegotiate the price down
before signing the purchase and sale agreement.
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SELLER TIPS
1. Don't choose a broker simply because they say
they can sell your house for the most money.
Offering to sell for a high price may be a way
to get your listing and later they will work you
down to a lower price in order to sell the
house. 2. Do your homework by viewing similar
houses that are for sale or have sold. - be
realistic in your appraisal of how your house
compares to others. - many sellers have a
psychological attachment to their home - it is
the best
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- much of the RTC property had faulty appraisals
because they used only basic qualities and
missed other qualities that made property less
attractive - biased - like most investments,
effort pays off on difficult to see factors 3.
In a down market you may have to price below
recent sales and the average of houses for sale
now. This is because some houses presently on
the market are over-priced. The better buys
sell first so their features are probably
better than the average home.
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- at the start of a down market - it pays to cut
price before sellers are forced to realize the
market condition - don't hang on because
average prices appear to be holding up - they
are holding up because fewer homes are sold and
only the better quality homes at a specific
price are sold. 4. In an up market - quality
details are less important and you can sell
based on basic features (4 bedroom, 2 bath,
etc.) 5. Often, the first or second offer is the
best because it is from someone who knows your
house is new to the market and wants to buy it
before someone else.
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6. If you must sell - cut price until sold - you
must attract one of the few buyers by offering
what looks like a good deal. You may feel
better later if prices fall a lot. If they
don't fall, at least you have the use of the
money and avoid further hassles and can move
on. - this is important if you move away and
must buy another house. A quick sale avoids
costs of carrying two houses (interest, heat,
taxes, extra insurance on unoccupied home).
Also, showing a home that is vacated shows the
seller may be desperate. 7. Offer to pay points,
do repairs, etc. in order to get home sold.
This sells some buyers that don't have cash.