Equity and Selling Equity and Selling CostsCosts© Dr. B. C. Paul 2002 revisions 2008© Dr. B. C. Paul 2002 revisions 2008

Note – The subject covered in these slides is considered to be “common Note – The subject covered in these slides is considered to be “common knowledge” to those familiar with the subject and books or articles knowledge” to those familiar with the subject and books or articles covering the concepts are widespread. covering the concepts are widespread.

Herby’s Home Buy Cash Herby’s Home Buy Cash FlowFlow

$2,800Down Payment

$1,260Loan Initiation Fees$600Homeowners Insurance

Bank also charged$378 in “Points thatrolled into loan

$230.31 $227.52 $224.55 $221.39 $218.03 $161.18$132 $139 $146 $153 $161 $169

$372.06/mo.

$385.56/mo.

$310.56

$316.56

$323.05

$329.84

$200 Home improvementloan initiation.

$75/month for Home Repairs

$106.24/month Bank Loan for Repairs

$79.22/month Sinking Fund for Roof

One More IssueOne More Issue Herby will sell the house when he graduatesHerby will sell the house when he graduates Herby hopes to have built some equityHerby hopes to have built some equity

Herby’s has $22,792.47 left on his home loanHerby’s has $22,792.47 left on his home loan Herby’s house should have grown in valueHerby’s house should have grown in value

according to tax assessment records the home value according to tax assessment records the home value has increased 27.63% since he bought ithas increased 27.63% since he bought it

$28,000 + 1.2763 = $35,736$28,000 + 1.2763 = $35,736

Herby has also made some home Herby has also made some home improvements since he got the houseimprovements since he got the house

Home Improvements and Home Improvements and EquityEquity

Many home maintenance items are Many home maintenance items are needed to keep a salable house but add needed to keep a salable house but add little to the selling valuelittle to the selling value There are guides on what kinds of things There are guides on what kinds of things

add valueadd value example new Kitchen usually returns valueexample new Kitchen usually returns value finishing a basement often does notfinishing a basement often does not

Many items add part, but not all of their cost Many items add part, but not all of their cost to the homes valueto the homes value

Herby’s Home Herby’s Home ImprovementsImprovements

Herby bought $5,000 in goods and put a lot Herby bought $5,000 in goods and put a lot of sweat into installing them.of sweat into installing them. Lets assume Herby gets his cash out, but not his sweatLets assume Herby gets his cash out, but not his sweat Value increases $5,000Value increases $5,000

Herby has just reroofedHerby has just reroofed Herby may get 50% out of thatHerby may get 50% out of that Value increases $2,100Value increases $2,100

Herby’s new home valueHerby’s new home value $35,736 + $7,100 = $42,836$35,736 + $7,100 = $42,836

Herby’s EquityHerby’s Equity Home Value is $42,836Home Value is $42,836 Buyers will usually try to hack at the priceBuyers will usually try to hack at the price

In a sellers market you can get what you ask In a sellers market you can get what you ask (if its reasonable)(if its reasonable)

In a buyers market you often have to be In a buyers market you often have to be dickered down (Southern Illinois is a buyers dickered down (Southern Illinois is a buyers market)market)

Lets assume Herby will get $40,000Lets assume Herby will get $40,000

Herby’s EquityHerby’s Equity $40,000 - $22,792.47 = $17,207.53$40,000 - $22,792.47 = $17,207.53

Not So FastNot So Fast

It costs money to sell a houseIt costs money to sell a house Real Estate Brokers CommissionReal Estate Brokers Commission

7% of selling price $2,8007% of selling price $2,800

Title Insurance $400Title Insurance $400 Deed Preparation $200Deed Preparation $200 Mortgage Release Recording $15Mortgage Release Recording $15 Real Estate Stamps (about 75cent/$100)Real Estate Stamps (about 75cent/$100)

$40,000/$100 = 400 * 0.75 = $300$40,000/$100 = 400 * 0.75 = $300

Taxing QuestionsTaxing Questions

Property Taxes are in arears - Buyer will Property Taxes are in arears - Buyer will get a creditget a credit Next years taxes will be about 5% higher Next years taxes will be about 5% higher

than last yearsthan last years $1,123.38 * 1.05 = $1,179.58$1,123.38 * 1.05 = $1,179.58 Herby sold part way through the year so he Herby sold part way through the year so he

only covers 9 months of the 12only covers 9 months of the 12 $1,179.58 * 9/12 = $884.66$1,179.58 * 9/12 = $884.66

Herby’s WindfallHerby’s Windfall Sellers CostsSellers Costs

$2800 + $400 + $200 + $15 + $300 + $884.66 +$2800 + $400 + $200 + $15 + $300 + $884.66 +$22,792.47 = $27,392.13$22,792.47 = $27,392.13

Home Sells for $40,000Home Sells for $40,000 $40,000 - $27,392.13$40,000 - $27,392.13 = = $12,607.87$12,607.87 Cleared Cleared

Herby can also cash in that Escrow AccountHerby can also cash in that Escrow Account Account will have $3,657 - $2,051.89 + $177.78*9 = Account will have $3,657 - $2,051.89 + $177.78*9 =

$3205.13$3205.13

Herby can also cancel his homeowners Herby can also cancel his homeowners insurance for last 3 months of yearinsurance for last 3 months of year $730 * 0.25 = $182.50$730 * 0.25 = $182.50

Herby’s Homey Cash FlowHerby’s Homey Cash Flow

$2,800Down Payment

$1,260Loan Initiation Fees$600Homeowners Insurance

Bank also charged$378 in “Points thatrolled into loan

$230.31 $227.52 $224.55 $221.39 $218.03 $161.18$132 $139 $146 $153 $161 $169

$372.06/mo.

$385.56/mo.

$310.56

$316.56

$323.05

$329.84

$200 Home improvementloan initiation.

$75/month for Home Repairs

$106.24/month Bank Loan for Repairs

$79.22/month Sinking Fund for Roof

$15,995.50from sale ofhome

Now How Do We Decide Now How Do We Decide Whether to Buy or Rent?Whether to Buy or Rent?

That’s Right - The old subtract one That’s Right - The old subtract one alternative from the other trickalternative from the other trick

Our Thought would probably be that Our Thought would probably be that Herby Should Buy Rather than Rent.Herby Should Buy Rather than Rent. Lets look at the cash flowLets look at the cash flow

Look At FlowLook At Flow

Comparative Cash Flow if HerbyBuys Instead of Rents

BuyingRenting Buying Over Rent

Initial Cost -1300 -4860 -3560Month # 1 -650 -627.67 22.33

2 -650 -627.67 22.333 -650 -627.67 22.334 -650 -627.67 22.335 -650 -627.67 22.336 -650 -627.67 22.337 -650 -627.67 22.338 -650 -627.67 22.339 -650 -627.67 22.33

10 -650 -627.67 22.3311 -650 -627.67 22.3312 -670 -627.67 42.33

Note that the cashflow of thePreferredAlternative is justPreferred - Alternate.

Look at the Cumulative Cash PositionLook at the Cumulative Cash Position

Comparative Cash Flow if HerbyBuys Instead of Rents

Buying CashRenting Buying Over Rent Position

Initial Cost -1300 -4860 -3560 -3560Month # 1 -650 -627.67 22.33 -3537.67

2 -650 -627.67 22.33 -3515.343 -650 -627.67 22.33 -3493.014 -650 -627.67 22.33 -3470.685 -650 -627.67 22.33 -3448.356 -650 -627.67 22.33 -3426.027 -650 -627.67 22.33 -3403.698 -650 -627.67 22.33 -3381.369 -650 -627.67 22.33 -3359.03

10 -650 -627.67 22.33 -3336.711 -650 -627.67 22.33 -3314.3712 -670 -627.67 42.33 -3272.0413 -670 -278.86 391.14 -2880.914 -670 -641.17 28.83 -2852.0715 -670 -641.17 28.83 -2823.2416 -670 -641.17 28.83 -2794.4117 -670 -641.17 28.83 -2765.5818 -670 -641.17 28.83 -2736.7519 -670 -641.17 28.83 -2707.9220 -670 -641.17 28.83 -2679.0921 -670 -641.17 28.83 -2650.2622 -670 -641.17 28.83 -2621.4323 -670 -641.17 28.83 -2592.624 -690 -641.17 48.83 -2543.7725 -690 -199.65 490.35 -2053.4226 -690 -566.17 123.83 -1929.5927 -690 -566.17 123.83 -1805.7628 -690 -566.17 123.83 -1681.9329 -690 -566.17 123.83 -1558.130 -690 -566.17 123.83 -1434.2731 -690 -566.17 123.83 -1310.4432 -690 -566.17 123.83 -1186.6133 -690 -566.17 123.83 -1062.7834 -690 -566.17 123.83 -938.9535 -690 -566.17 123.83 -815.1236 -710 -566.17 143.83 -671.2937 -710 -201.62 508.38 -162.9138 -710 -572.17 137.83 -25.08

Payback Period 39 -710 -572.17 137.83 112.75

Point at Which the CumulativeCash Position Goes Positive isCalled the Payback Period

What are the Chances of Getting YourRate of Return from a Cash Flow thatnever pays back?Payback Period can be a quick check fora looser proposition.

I Bet You Thought I Was I Bet You Thought I Was Going to Show You Whether Going to Show You Whether Herby should buy or rentHerby should buy or rent

But that would spoil all your fun in But that would spoil all your fun in assignment #9assignment #9