Exam 1: Results

Mon, Oct 3

If you were absent for the exam last week, take it NOW!

Exam 1 Results:

• Mean: 80.7
• Std Dev: 18.4
• Median: 84.8
• Max: 100
• Min: 0

Exam Make-up Option:

• Redo sections to correct mistakes
• Earn back up to 50% of points missed
• Must be submitted in writing
  • Include a cover page with instructions identifying and clarifying corrections
  • Include the original exam
• Due in class on Mon, Oct 10

Exam 1: Review

Mon, Sep 26

Review:

• Exam 1 on Wed, Sep 28
• Take-home assignment due at time of exam

Exam 1 Review Topics:

• Real Estate purchase process
• Mortgage Finance
  • Types of loans
• Comparable Sales Analysis
• Pro-Forma Analysis
• How the housing bubble inflated
  • Federal Reserve Monetary Policy
  • Financial deregulation
• How the housing bubble burst
  • Mortgage meltdown after “teaser” rates went away
  • Strategic defaults on mortgage loans
  • Neighborhood deterioration
• Location, location, location
  • Market level analysis
  • Neighborhood level analysis
  • Parcel level analysis

Lesson 10: Location, Location, Location

Wed, Sep 21

Review:

• Housing Market Collapse and Foreclosure Tsunami
• Exam 1: Part 1 Take Home Assignment

Presentation:

• Location, location, location
• Geographic Scale
  • Market (Metropolitan Area – CBSA)
    • Economy/Jobs/Cost of Living
    • Natural Environment/Climate
    • Culture/Lifestyle
  • Neighborhood
    • Schools (once upon a time)
    • Crime
    • Housing stock
    • Convenience to work/school/entertainment
    • Proximity to parks, green space
  • Parcel
    • Lot size and orientation
    • Traffic
    • Cul-de-sac
    • View
    • Neighbors

Assignment:

• Work on Exam 1 Part 1
• Prepare Questions for Exam Review on Monday

Exam 1: Part 1 Take Home Assignment

Instructions for Exam 1: Part 1 Take Home Assignment

Students have each been assigned 3 single-family residential properties on Pueblo’s Eastside. You can find your property assignments on this shared spreadsheet. Note: these properties sold at some point during 2014 and the selling price is provided on the spreadsheet in Column I, “Selling Price”.

For each assigned property complete the following steps:

• (1) Prepare an ROI analysis using the following assumptions:
  • 30-year fixed-rate mortgage
  • 5% interest rate
  • 20% down payment
  • Set 2014 as Year 1, 2015 as Year 2, 2016 as Year 3 and 2017 as Year 4
  • Use the 2014 Selling Price as the “Property Value” in Year 1 (Row 3)
  • Use 4% for value appreciation
  • Use 6% for rent appreciation
  • Use Craigslist (or other web resource) to estimate market rent
  • Look up property taxes on the Pueblo County Assessor’s website
  • Use 1% of selling price to estimate property insurance
  • Use 3% of selling price to estimate Maintenance, Repairs and Misc expenses
• (2) Estimate the current market value of the property using Comparable Sales Analysis
  • Identify 3 comparable properties sold in 2015 or 2016
  • Calculate average Price per Square Foot
  • Apply Price per Square Foot to your subject property
  • Make adjustments up or down as you deem appropriate
• (3) Write a 1-page report
  • Copy-paste your ROI table (Columns A-E, Rows 1-24)
  • List assumed 1st year Rent and last year’s Property Tax amount
  • Describe your Comparable Sales Analysis and how you arrived at your current valuation estimate
  • What are the pros and cons of this property as an investment?
  • Did the 2014 buyer get a good deal?

Once you’ve completed your 3 property assessments, write a 1-page paper providing a summary of your analysis and comparing the 3 properties. Which property is the best investment? Which one is the worst? Why?

What to submit:

• 3 Property reports with ROI and Comparable Sales analyses
• 1-Page Summary and Comparison report
• You should have 4-8 pages total.
• Bring to the in-class exam on Wed, Sep 28

Lesson 9: Housing Market Collapse and Foreclosure Tsunami 2008-2012

Mon, Sep 19

Review:

• Deregulation and the 2008 Housing Crisis

Presentation:

• Home Price Index (HPI): Bubble, Bust and Recovery

• Click for 10 Metro Area HPI Interactive Chart

• Mortgage Meltdown as reported on CBS 60 Minutes
  • US Mortgage Meltdown (May 2008; 14 min)
  • Walking Away from Underwater Mortgages (May 2010; 12 min)
  • Neighborhood Deterioration (Dec 2011; 13 min; start at 2 min)

Assignment:

• Prepare for “Trial of the Federal Reserve”
  • Watch final 45 min of Money for Nothing: Inside the Federal Reserve (begin at 1:02)
  • Consider recommendations:
    • Appropriate regulations for Banking industry?
    • Appropriate monetary policy?
• Read my “Banks are Destroying America’s Neighborhoods” blog posts (2012)
  • Part 1
  • Part 2

Lesson 8: Financial Deregulation and the 2008 Housing Crisis

Wed, Sep 14

Review:

• Monetary Policy

Presentation:

• Deregulation of the Financial System
  • Reaganomics
    • Unregulated capitalism
    • Trickle-down economics
      • Help the rich
      • The rich will invest more
      • New industries and jobs will be created
      • Rising tide lifts all boats
  • 1999 Repeal of Glass-Steagall
    • Gramm-Leach-Bliley Act
    • Republican Congress
    • Democratic White House
    • Removed “firewall” between commercial banks and investment banks
  • Derivatives Market
    • $100 Trillion in 2001, over $500 Trillion in 2008
    • Completely unregulated in 2008
    • Still trying to regulate now
  • 2004 Securities and Exchange Commission (SEC)
    • In reply to global investment banks asking for more freedom
    • Agreed to loosen capital requirements
    • Allows fewer reserves and more debt
    • Voluntary regulation and self-reporting
  • Short History of Financial Deregulation in the US
• Money for Nothing: Inside the Federal Reserve (begin at 0:29, end at 1:02)

Assignment:

• Select an “Investment” property to prepare for Exam 1 Take Home assignment
• More on Exam 1 next week

Lesson 7: Monetary Policy and the 2008 Housing Crisis

Mon, Sep 12

Review:

• ROI Analysis

Presentation:

• Monetary Policy and the Housing Crisis of 2008
  • Historical context
    • Bush II elected and takes office in Jan 2001
    • Tech Stocks (NASDAQ) and tech jobs decline weakening the economy
    • 9/11 and continued economic weakness
    • War in Afghanistan and Iraq
    • 2004 Election
    • Political pressure to stimulate economy
  • Federal Reserve
    • Central Bank for the US and, in some ways, the World
    • Alan Greenspan
      • Federal Reserve Chairman (1987-2006)
      • Free market champion appointed by President Reagan
    • Ben Bernanke
      • Federal Reserve Chairman (2006-2014)
      • Promised to continue Greenspan policies
      • At the eye of the storm in 2008
    • Kept interest rates too low for too long (2001-2004)
  • Housing Bubble
    • Began inflating in 2002
    • Low interest rate environment
    • Financial engineering of mortgage debt
      • Mortgage backed securities
      • Derivatives (aka “financial weapons of mass destruction” – Warren Buffet)
      • Subprime, Alt-A, NINJA
  • Money for Nothing: Inside the Federal Reserve

Assignment:

• Watch more about the 2008 crisis
  • Warren Buffet on Charlie Rose Oct 2008
  • Frontline “Inside the Meltdown”

Lesson 6: ROI Pro Forma Analysis

Wed, Sep 7

Review:

• Comparable Sales Analysis

Presentation:

• ROI Pro Forma Analysis
  • ROI Pro Forma worksheet
  • Begin with Valuation – what’s the property worth?
  • Estimate rental income – fair market rent?
  • Estimate expenses
    • Property taxes
    • Insurance
    • Maintenance
    • Repairs
    • Management
    • Utilities
  • Use an amortization schedule
    • Calculate interest payments
    • Calculate principal payments
  • Estimate tax benefits
    • Depreciation
    • Tax shelter
    • Tax savings
  • Make assumptions
    • Appreciation of property value
    • Rent appreciation
    • Expense inflation
  • Estimate ROI
    • Total
    • Annualized – ROI Calculator
• The story of 235 E Adams
  • Purchased from Freddie Mac (foreclosure) in May 2012
    • Paid $32,900
  • Paid less than half estimated value (my estimate)
    • Why? Banks wouldn’t loan on the property
    • How? I offered cash
    • Can I do it too? Probably not; 2010-2012 was a once in a generation opportunity
  • Remodel/repair
    • Removed exterior stairs
    • Converted from Duplex back to Single Family
    • Cleaned
  • Rented for $700/month, eventually up to $875/month
  • Last tenant had to be evicted, left a mess
  • I decided to sell (getting sick of being a landlord) and “carry the note” (seller financing)
    • Sold for $110,000
    • $10k down payment
    • $100k loan @ 8.9% interest
  • Currently collecting mortgage checks. I like it better than collecting rent.

Assignment:

• Use your Subject Property
• Make a copy of the ROI Pro Forma worksheet
• Fill out ROI Pro Forma worksheet
• Estimate Total and Annualized ROI

Lesson 5: Comparable Sales Analysis

Mon, Sep 5

Review:

• Residential Real Estate Valuation

Presentation:

• Student comparable analyses
• Sample Realtor’s MLS driven Comparable Sales Analysis (pdf)
• Comparable Sales Analysis Exercise
  • 8 Hampton Lane Pueblo, CO 81001
  • 628 Lincoln St Pueblo, CO 81004
  • 2703 Cheyenne Ave Pueblo, CO 81003
  • 3461 ONeal Ave Pueblo, CO 81005

Assignment:

• Review this ROI Pro Forma Worksheet

Lesson 4: Residential Real Estate Valuation

Wed, Aug 31

Review:

• Mortgage 101

Presentation:

• Comparable Sales (aka “comps”)
  • Find similar properties recently sold (typically 3)
  • Calculate price per square foot
  • Apply price per square foot to your property
  • Adjust for key valuation drivers
    • Identify key value differences (e.g., 2-car garage, AC), if any
    • Estimate valuation difference and +/- value
• Determining Property Values (YouTube video)
• Estimate value of new listing
  • 3017 8th Ave. [list price = $269,000 | sqft = 1807]
  • Comps [ address | $ per sqft | Selling date ]
    • 2918 Country Club Dr. | $111.91  | 7/8/16
    • 2935 Country Club Dr. | $98.70 | 5/26/16
    • 3213 Northridge Dr. | $97.19 | 1/4/16
    • Average: $120 per sq ft @ 1,807 = $216,840

Assignment:

• Identify 3 comparable sales for your property
• Estimate property valuation based on your 3 comps