Case Study - Existing SFR ready to occupy (Module 5)

VALUEXPOSE INC.

Case Study - Existing SFR ready to occupy (Module 5)

Your client is purchasing an average quality move-up house for $526,000 as of the current date. The house is 2,600 SF on a 10,000 SF lot with a private pool. The new owner’s property taxes well be $4,600/year. The fire and liability insurance is estimated to be $1800/year. These two fixed expenses are expected to increase 2% annually during a typical seven year ownership holding period. Although the new owner plans to occupy the house, he has determined the house would rent for $2600/month on a longterm lease of one year or more if he decided to lease instead of buying the house. This monthly rent is expected to have an average increase of 2% annually. Based on this annual rental, it is customary in the neighborhood the landlord pays for the pool service of $100/month and gardener at $300/month. In addition, it is estimated the landlord will have an average of $75/month in maintenance and repair costs over his ownership holding period. These variable expenses are expected to increase 1.5% annually. Lastly, the landlord will also pay the annual taxes and insurance.

How to input this data into Valuexpose:

1.      In your user dashboard select “Create new project”

2.   In the decision tree select:

       a. Property WITH reversion

       b. Residential classification

       c. Existing or proposed single family Dwelling

       d. Move-up home

       e. Average Quality

       f. Module 5 - At stabilized Occupancy and Market Rents (Stabilized)

3.   Fill out the wizard questions with the above case study data and hit the finished button.

4. The timeline shows your client’s $526,000 current sale price (some small rounding       differences) on the left side of the timeline. The right side of the timeline indicates what the       house is expected to sell for at the end of a typical seven year ownership holding period.  This ending sale price (or reversion) is what the market is forecasting as of today’s date based on the $526,000 current sale price. Consequently, Valuexpose calculates the present  

value of the owner benefits (rental income benefit is equivalent to owner occupied benefits) during a seven year ownership holding period. In order for the present value to equal $526,000 current sale price, the ending sale price must be $566,765 based on a 4% annual  unleveraged annual yield (Valuexpose presets this yield for only the SFR property type based on historical trends).

5.   Now press the “Economic Fabric Graph” (button on the upper right hand side of the timeline

graphic page). This graphic shows the subject’s current sale price of $526,000 together with what the ending sale of $566,765 that must be based on the current sale price. This timeline is super imposed over the subject’s fundamental/intrinsic current value and ending sale price value for this property. You can see the subject’s current selling price of $526,000 is very close to its fundamental value of $527,999. Also, the subject’s ending sale price of $566,765 attributed to its current sale price is very close to the subject’s ending sale price ($565,423) attributable to the subject’s fundamental current value.

  

6.  In the upper right hand corner of the “Economic Fabric Graph” (EFG), press the “Show Market Cycle Button” to overlay the economic wave cycle. In this particular scenario, the      wave cycle is indicating the subject’s current sale price of $526,000 is sustainable during a      typical seven year ownership holding period. This means the current sale price/market value     is reasonable and aligned with the property’s economic fundamentals. Please note you will     find on the right hand side of the EFG graph the annual household income of $109,200     needed from a tenant/owner to pay the $2,600/month market rent (market rent is increased 5% in the DCF model for pride of ownership benefits for most, if not all SFR’s). Consequently, the household family income needed to pay the market rent (plus 5%rent bonus for pride of ownership) indicates 30% of the household income. For the subject’s neighborhood, $109,200 annual household income coincides with the demographic households that occupy dwellings in this neighborhood (Can check census data at http//eddm.usps.com to validate neighborhood’s household income). This household annual income and ability to pay $2,600/month rent (plus 5% more for pride of ownership benefit) coincides with the subject’s current asking price/market value of $526,000 which further coincides with the subject’s fundamental/intrinsic current value of $527,999. In both cases, the asking price of $526,000 and its ending sale price of $566,795 as well as the fundamental/intrinsic current value of $527,999 and its ending sale pice of $565,423 both produce a 4% annual yield rate (present value of net rental annuities plus net ending sale price reversion (after selling expenses are deducted).

  

7.  Now, let’s go back to the timeline graphic by pressing “timeline” button on the upper left hand corner of the EFG graphic page. Let’s pretend its the year 2005 when single family market values were in a bubble. Let’s say this same house, with the same demographic and household income, and the same long term market rent of $2,600/month existed on that date. However, do to loose lending standards and a supply and demand imbalance the asking price/market value of the house is now $675,000. This asking price is well supported by recent comparable sales in the neighborhood. Buyers, Seller, Appraisers, Bankers are all convinced $675,000 is the fair market value of the house.

8.  On the left side of the timeline press the button labeled “input your value”. In the pop-up window insert the sale price of $675,000 and hit update. Valuexpose recalculates what the ending sale price of $774,831 must be if the present value of $675,000 is to be achieved at a 4% annual yield rate (or discount rate). Once again, at the timeline graphic page’s upper right hand corner, push the “see economic fabric graph (EFG)”.

9.  You can now see the $675,000 current sale price has detached 27.82% from its current $527,999 fundamental/intrinsic value (see bottom right side of the EFG page that displays the 27.82% detachment in value difference). Now press the “show market cycle” button on the upper right hand corner. This resulting graphic overlay indicates the current sale price/market value of $675,000 is not sustainable over a typical seven year holding period. Notice on the right side of the EFG model the household annual income of $139,584 is needed to support a sale price of $675,000. Also notice in both these scenarios the $675,000 current market value and its needed ending sale price of $774,831 and the $527,999 current fundamental/intrinsic value and its ending sale price of $565,423 both have 4% annual yield rates (or discount rates) during the seven year ownership holding period. Consequently, the market is irrationally speculating on the property’s ending sale price of $774,831 that would need an annual household income of $160,249 to support this ending sale price. If Valuexpose was available in 2005, the user of this software would have been aptly warned as the subject’s market value begins or has significantly detached from its fundamental/intrinsic value.

 (See Yields)

10. Valuexpose also indicates buyer opportunities. For the same property example, let’s pretend the bubble has burst and its now the year 2008. The home is now selling for $425,000 Follow the procedure in #9 above to revise the timeline and EFG graphics. The revised EFG graphic indicates the current market value of $425,000 will most likely gravitate toward equilibrium ending sale price of $565,423 (fundamental/intrinsic ending sale price) increasing the owners annual yield from 4% to 7.67% (scroll down to bottom right hand side of EFG graphic to see yield). Once again, notice in both these scenarios the $425,000 current market value and its needed ending sale price of $425,719 and the $527,999 current fundamental/intrinsic value and its ending sale price of $565,423 both have 4% annual yield rates (or discount rates) during the seven year ownership holding period.

(See Yields)

11. Lastly, Valuexpose puts it all together for you when you have completed your analysis. On the timeline page press the button labeled “print report”, or on the EFG page press the button “Single Family Residence/Condo Report”. Both buttons produce the same comprehensive report describing your property’s graphics and results. (See Addemdum with “Single Family Residence/Condo Report”)

12. The above demonstration shows you how Valuexpose isolates a property’s current fundamental/intrinsic value from whatever the property’s current market value happens to be as of the same date of value. This new category of valuation analysis prevents you from making critical decisions in a vacuum based on the traditional single-point-in-time appraised market value. Comparing current market value of a property to its fundamental/intrinsic value flushes out hidden risks.

13. There are other important analysis features associated with existing SFR’s and single condos. Getting back to our example, go to the timeline that shows the last current market value we imputed at $425,000. Scrolling down from the timeline graphic shows all the components of value (or forecasts) associated with this property for its current market value to equal its market value of $425,000. Notice in each grouping you can change forecasts within that grouping. You must push the “update” button for that grouping after you have changed any of the forecasts in that grouping. Any changes to other groupings must also hit the “update” button for that grouping before you proceed to the next grouping changes. Once all forecast changes in each grouping have been made and updated, notice that Valuexpose has recalculated your $425,000 market value (or sale price). Simply go to the “input your value” button underneath the right hand side of the timeline graphic and insert again your $425,000 market value. Valuexpose will now recalculates using the $425,000 value and all your changes to the forecasts indicating a new ending sale price plus revised fundamental/intrinsic current value and its ending value.

(See Components of Value)

14. One limitation you might notice when changing forecasts pertaining to average forecast changes in annual market rent is that the percentage changes to your property’s market rent cannot be less than the annual percentages indicated in the fixed and variable expense groupings. We are working to solve this limitation.

15. Another important analysis feature is adding financing (or leverage) to the analysis to find the optimal annual equity yield. Existing Single Family/Condo property types is the only module that preselects the annual property yield (no financing) at the historical rate of 4%. For all other property types and modules, the user is allowed to input this risk rate. Using our former example based on a $425,000 market value, let’s analyze a loan of $400,000 at 3.5% fixed annual interest including $2,500 in closing costs. Underneath the timeline graphic press the button labeled “Remove/Update Financing”. Fill in the pop-up window with the above financing information and hit the “update” button. Timeline values are first updated changing your $385,000 market value input. Simply re-input your $425,000 market value estimate using the “Input Your Value” button. Valuexpose then recalculates and indicated the property’s equity yield displayed to the immediate left of the “Remove/update Financing” button. In this scenario, the equity yield indicates 11.925% (this result might be a little different if you changed some of the original forecasts in the forecast groupings below the timeline). You can continue testing different financing scenario to find the optimal equity yield before a subsequent financing scenario results in a declining equity yield rate. If the financing scenario results in a negative equity yield rate, Valuexpose will show “Caution”.

16. Unlike most valuation software, Valuexpose provides all Discounted Cash Flow (DCF) analysis for all value results. On the left side of the timeline graphic (underneath), you will see buttons labeled “DCF as is” and “DCF as is-financed”. Pushing these buttons displays the customized intricate DCF models so the user can verify the value results.

(See Discounted Cash Flow at the end of the “Single Family Residence/Condo Report” in the addendum)

17. Another interesting analysis feature is being able to access the property’s beginning and ending stabilized income and expense statement used to calculate the property’s annual net operating income. You will find buttons on the timeline graphic labeled “stabilized operating statement”. The button on the left side of the timeline (above timeline) represents the first year of ownership. The button on the right side of the timeline (below timeline) represents the year following the seventh year of ownership and after the property is sold to another buyer.

18. Once you have completed your analysis on your particular property and are satisfied with the results, scroll down underneath the timeline graphic to see the “units of comparison” grouping. This grouping box summarizes all the metrics associated with your property.

19. The above demonstration represents only one real estate classification (residential), one property type (SFR), and one “state of its building existence” (100% completed and stabilized). Valuexpose can analyze 13 different real estate classifications (ex. residential, retail, industry, office, etc.) that include a potential of 320 property types; each in five different states of building existence (100% complete stabilized; 100% complete at non-stabilized; partially complete or needs remodeling; and properties that are to be developed with and without entitlements.

20. Any property types that are to be developed or remodeled also have a patent pending financial feasibility feature indicating whether the developer should proceed with the advancement of the development process. If not, Valuexpose allows the timeline to be extended for a holding period before a development becomes financially feasible. This timeline extension now will show the property’s current “as is” market value on the left side of the timeline and when in the future the property will be ready to start the development.

21. Valuexpose is the first patent pending commercial automated valuation model (AVM) that uses comparable sales with very similar highest and best uses located in markets that are similar to the subject’s market. Valuexpose uses the comparable sale properties components of value forecasts (that make up their sale prices) to value the subject properly if its value is unknown. Now dozens if not hundreds of comparable sales can be automatically used to value your property’s current market value. This gives a more accurate valuation than the traditional comparable sales analysis that is time consuming, expensive and potentially biased.  This new category of valuation analysis further eliminates appraisers logic inconsistencies and incompentency problems due to lack of experience. All valuation results are compared to the property’s fundamental/intrinsic value to flush out hidden risks and keeping you from making important decisions in a vacuum.

  

22. Valuexpose financial reporting option allows the user to initially analyze portfolios of properties on a property-by-property basis. The user can set Valuexpose to update any or all of the properties in the portfolio to update each property’s current market value on a daily, monthly, semi-annual or annual basis (or anything in-between). This analysis feature will also track the relationship of a property’s current market value with its fundamental/intrinsic current value. This relationship tracking will give the user a better strategic management and exit advantage.

23. Now banks that use Vauexpose financial reporting feature can plan their portfolio better on a property-by-property basis. This is the kind of analysis and planning bank examiners are encouraged banks to adopt.

24. If you would like to see another case study on a different property type and/or in a different state of existence (existing building or to be developed/remodeled), you can personally call the founder Ray Dozier, MAI at (760) 413-5011 for a demonstration.