Review of Residential Real Estate Analysis Valuation Methodologies

Adkins Capital Management
Review of Residential Real Estate Analysis Valuation
Methodologies

CONTENTS
The purpose of this presentation is to provide an overview of the conventional residential
real estate analysis valuation methodologies that are utilized by academic professionals,
residential housing industry professionals, mortgage lenders, and prospective home
buyers, and to explain two new analytical methodologies that have been developed by the
founder of Adkins Capital Management in order to help prospective home buyers make
a prudent home purchase decision. This presentation is organized as follows:
 Overview of Adkins Capital Management
 Overview of Traditional Valuation Methodologies
 Cost-based Methodology
 Sales-based Methodology
 Overview of the Adkins Residential Home Valuation Analyzer (ARĤVA)
 Finance-based Methodology
 Expense-based Methodology
 Comprehensive Case Study: City of Detroit, Michigan
 Issues Prospective Home Buyers Should Remember
 Reasons to Use the Adkins Residential Home Valuation Analyzer (ARĤVA)
 Conclusion
1

 Privately owned and independently operated company.
 Exclusive focus on residential real estate.
 Company not affiliated with any parties associated with
the residential housing industry.
 Our mission is to bridge the gap in the residential
housing market, where deficiencies in public policy,
regulation, product structure, and personnel have
created an environment where prospective home buyers
need objective information and useful tools in order to
be able to make a prudent home purchase decision.
Adkins Capital Management, LLC. 2
 More than 15 years of real estate analysis experience, more than 10 years of
institutional investment consulting experience, and more than seven years of
freelance financial writing experience.
 Author of more than 20 published articles, including publications by Forbes,
Investor’s Business Daily, Yahoo, Investopedia, Financial Edge, and more than
230 news organizations worldwide.

 Our Goal: To offer prospective home buyers a comprehensive, accurate, automated,
user-friendly and affordable residential real estate analysis software application,
while providing contemporary information about the trends and events that are
taking place in the residential housing market, in an economical, efficient, and
effective manner.
 Our Commitment: To make Adkins Capital Management, the ARĤVA
Residential Real Estate Analysis Software Application, and our residential real
estate research, the premier analytical source for prospective home buyers to use in
order to make a prudent home purchase decision.
 Our Product and Service: Developer of
an Internet-based residential real estate
analysis software application
 Adkins Residential Home
Valuation Analyzer (ARĤVA)
 ARĤVA ANALYTICS - finance-
based and expense-based analytical
methodologies.

OVERVIEW OF COST-BASED ANALYTICAL METHODOLOGY
Justified Home Price = Land + Building Materials + labor
Advantages
 Methodology based on the premise that
the price of a home should be a function
of what it costs to produce the home.
 Methodology is used by home builders.
 Methodology is easy to understand.
 Methodology may be a helpful
valuation approach for new home
purchases and existing home purchases.
Disadvantages
 Difficult for prospective home buyers to utilize
due to the complexity of compiling a complete
list all building materials and associated costs.
 Difficult to accurately determine the costs for
land acquisition and labor utilization.
 Inaccurate valuation process when the costs to
build a home are subject to inflation or deflation.
 Difficult to apply to existing homes due to the
cost impact of dilapidation and obsolescence.
 Incomplete valuation process because it does not
take into account the impact of ongoing operating
expenses.
 Incomplete valuation process because it does not
take into account the cost of debt financing for a
mortgage loan.
4Adkins Capital Management, LLC.

OVERVIEW OF SALES-BASED ANALYTICAL METHODOLOGY
Justified Home Price = Benchmark Proxy Price ± Idiosyncratics
Advantages
 Methodology is based on the premise that
the price of a home should be correlated
with the price of recently sold homes that
have comparable characteristics.
 Methodology is utilized by the news
media, academic professionals, home
builders, mortgage lenders, real estate
agents and prospective home buyers.
 Methodology is easy to understand and
easy to apply.
 Methodology may be a helpful valuation
approach for new home purchases and
existing home purchases.
Disadvantages
 Sales-based data may be untimely,
inaccurate, and incomplete.
 Difficult to find a home in the correct
location and with comparable
characteristics to use as an accurate
benchmark proxy.
 Inaccurate valuation process because it
does not take into account the personal
reasons for purchasing a home.
 Incomplete valuation process because it
does not take into account ongoing
operating expenses.
 Incomplete valuation process because it
does not take into account the cost of
debt financing for a mortgage loan.

OVERVIEW OF FINANCE-BASED ANALYTICAL METHODOLOGY
 ARĤVA CALCULATES THE JUSTIFIED MORTGAGE LOAN INTEREST RATE
 Represents the cost of debt for a 30-year fully-amortized fixed-rate mortgage loan
that equates the median home price level for a city with the median household
income level for the city.
 Based on the assumption that 28% of household income is the largest amount of
money that should be spent in order to repay the principal and interest costs for a
30-year fully-amortized fixed-rate mortgage loan.
6
 ARĤVA CALCULATES THE JUSTIFIED PERCENTAGE OF HOUSEHOLD INCOME
 Represents the percentage of pre-tax household income that would have to be spent by the
people that live in a city in order to justify the relationship between the median household
income level for the city and the median home price level for the city.
 Based on the month-ending national average mortgage loan interest rate for a 30-year
fully-amortized fixed-rate mortgage loan.
Adkins Capital Management, LLC.
Justified Home Price = Function of (Household Income Level) &
(Percentage of Household Income Allocated to Loan Costs) & (Cost of Debt)

APPLICATION OF FINANCE-BASED ANALYTICAL METHODOLOGY
 According to the U.S. Census Bureau, median household income was $52,250 in 2013 and $30,056 in 1989.
In comparison, the median home price level was $265,092 in 2013 and $120,383 in 1989.
 At first observation of the chart above, it appears there is a significant problem in the housing market,
because the home price level has inflated at a much higher rate than household income (120% v 74%).
 However, the dramatic difference in the national average mortgage loan interest rate for a 30-year fully-
amortized fixed-rate mortgage loan in 2013 (3.98%) versus 1989 (10.32%) raises key points to consider:
 In 2013, 29% of household income would have to be spent in order to justify the median home price,
or the national average mortgage loan interest rate would have to be 3.7%. The spread between 29%
and 28% and 3.98% and 3.7% represents the degree of overpricing in the home price level; and
 In 1989, 44% of household income would have to be spent in order to justify the median home price,
or the national average mortgage loan interest rate would have to be 5.75%. The spread between 44%
and 28% and 10.32% and 5.75% represents the degree of overpricing in the home price level.
 Therefore, in 1989 (2013), based on the justified percentage of household income amount, and the justified
mortgage loan interest rate amount, the median home price level was significantly (only slightly) overpriced
nationwide.
7
$0
$200,000
$400,000
1989 2013
Median Household Income
Median Home Price

ASSESSMENT OF FINANCE-BASED ANALYTICAL METHODOLOGY
Advantages
 Methodology is based on the financial concept
that the price-level of a home that is purchased
with debt is a function of the income level that
will be used to repay the debt, the percentage of
the income level that will be used to repay the
debt, and the cost of debt.
 Methodology allows prospective home buyers to
conduct an analysis based on their specific risk
profile.
 Methodology allows prospective home buyers to
conduct an analysis based on market risk.
 Methodology is very accurate and very objective.
 Methodology is a feasible valuation approach for
new home purchases and existing home
purchases.
 Methodology only requires a minimal number of
input variables in order to facilitate the analysis.
Disadvantages
 Methodology is very difficult to
understand for people that do not
have a financial education.
 Methodology is not utilized by the
news media, academic professionals,
home builders, real estate agents,
mortgage lenders, or prospective
home buyers.
apply without the use of the ARĤVA
Residential Real Estate Analysis
Software Application.

OVERVIEW OF EXPENSE-BASED ANALYTICAL METHODOLOGY
9
Home Expenditures
Cost As A
Percent of
Home
Purchase
Price
Dollar Cost
Amount
Month-
Ending
Period
Cumulative
Home
Ownership
Cost
Annual
Home
Ownership
Cost
Cost As A
Percent of
Home Price
Cost As A
Percent of
Household
Income
Month-
Ending
Period
Cumulative
Home
Ownership
Cost
Annual
Home
Ownership
Cost
Cost As A
Percent of
Home Price
Cost As A
Percent of
Household
Income
Maintenance Costs 1.00% $ 2,000
12 15,402$ 15,402$ 7.7% 31% 192 203,138$ 9,879$ 4.9% 20%
Natural Disaster Insurance 0.50% $ 1,000
24 30,700$ 15,298$ 7.6% 31% 204 212,741$ 9,603$ 4.8% 19%
Private Mortgage Insurance 0.55% $ 1,100
36 45,894$ 15,194$ 7.6% 30% 216 222,055$ 9,314$ 4.7% 19%
Transaction Costs (7 Yr. amortization) 0.86% $ 1,714
48 60,976$ 15,082$ 7.5% 30% 228 231,067$ 9,012$ 4.5% 18%
Closing Costs (7 Yr. amortization) 0.21% $ 429
60 75,943$ 14,967$ 7.5% 30% 240 239,763$ 8,696$ 4.3% 17%
Property Taxes (28% federal tax rate) 0.93% $ 1,860
72 90,788$ 14,845$ 7.4% 30% 252 248,128$ 8,365$ 4.2% 17%
Mortgage Interest Expense (fixed rate loan; 95% debt) 4.24% $ 8,487
84 105,507$ 14,719$ 7.4% 29% 264 256,148$ 8,020$ 4.0% 16%
Subtotal 8.30% $ 16,590
96 117,949$ 12,442$ 6.2% 25% 276 263,805$ 7,657$ 3.8% 15%
108 129,428$ 11,479$ 5.7% 23% 288 271,085$ 7,280$ 3.6% 15%
Mortgage Interest Tax Shield (single homeowner) 0.33% $ 668
120 140,487$ 11,059$ 5.5% 22% 300 277,969$ 6,884$ 3.4% 14%
Property Interest Tax Shield (28% federal tax rate) 0.26% $ 521
132 151,394$ 10,907$ 5.5% 22% 312 284,439$ 6,470$ 3.2% 13%
Subtotal 0.59% $ 1,188
144 162,141$ 10,747$ 5.4% 21% 324 290,477$ 6,038$ 3.0% 12%
156 172,723$ 10,582$ 5.3% 21% 336 296,061$ 5,584$ 2.8% 11%
Required Annual Home Appreciation Rate to Offset
Home Ownership Costs
7.70% $ 15,402
168 183,115$ 10,392$ 5.2% 21% 348 301,173$ 5,112$ 2.6% 10%
Percent of Household Income ($50,000)
180 193,259$ 10,144$ 5.1% 20% 360 305,788$ 4,615$ 2.3% 9%
EXPENSE-LEVEL METHODOLOGY EXPENSE-LEVEL RESULTS OVER A 30-YEAR TIME HORIZON
Less
Results of Expense-Level Analysis
31%
 ARĤVA utilizes expense-based analytical methodology to evaluate total homeownership costs.
 ARĤVA calculates total home ownership costs as a percentage of pre-tax household income.
 ARĤVA calculates the required annual home appreciation rate and the required annual dollar
appreciation amount that offsets the costs associated with owning a home.

ASSESSMENT OF EXPENSE-BASED ANALYTICAL METHODOLOGY
Advantages
 Methodology is based on the financial concept that the
price of a home should be a function of the ongoing
expenses associated with owning the home.
 Methodology is based on the premise that the price of a
home should only require a modest appreciation in
value in order to offset the ongoing operating expenses
associated with owning the home.
 Methodology is very accurate and very objective.
 Methodology is a feasible valuation approach for new
home purchases and existing home purchases.
 Methodology facilitates the ability to accurately assess
the seven costs associated with owning a home:
(interest expense, property taxes, maintenance, natural
disaster insurance, private mortgage insurance, closing
costs, and real estate agent commissions).
Disadvantages
 Methodology is difficult to
understand for people that do not
have a financial education.
 Methodology is not utilized by the
news media, academic
professionals, home builders, real
estate agents, mortgage lenders, or
prospective home buyers.
apply without the use of the
ARĤVA Residential Real Estate
Analysis Software Application.
Justified Home Price = Function of Ongoing Operating Expenses

CASE STUDY - BACKGROUND
 From 1950 through 2013, the City of Detroit’s population decreased from approximately two million people to
less than 700 thousand people due to the restructuring of the automobile industry.
 Due to the decrease in Detroit’s population, in 2013 Detroit had over 80,000 vacant homes.
 Home prices in Detroit collapsed in value for two primary reasons:
 The automobile industry restructuring has led to a significant reduction in the number of high-paying
management jobs and manufacturing jobs; and
 The automobile industry restructuring has led to a significant reduction in the income level of the salaried
employees and hourly employees that have retained their jobs.
 In terms of residential real estate valuation, Detroit provides a classic example of why traditional residential real
estate analysis valuation methodologies are inaccurate valuation processes:
 Cost-based methodology is not an accurate process, as evidenced by the fact that thousands of homes are
listed for sale for a fraction of what it would cost to build them; and
 Sales-based methodology is not an accurate process, as evidenced by the fact that historical home price
levels in Detroit are not an accurate barometer of current home price levels, the current range of
comparable home prices in the market is too widely dispersed to provide an accurate benchmark proxy,
and the reasons people are buying the homes varies widely by home buyer and investor. These issues
make it virtually impossible to assign a proper discount or premium.
 City of Detroit illustrates why the finance- and expense- based analytical methodologies are vital to the home
valuation process.

CASE STUDY - ANALYTICAL FACTORS
Analytical Factors Necessary to Conduct the
Finance-Based Analysis
Household Income $40,000
Home Purchase Price $130,000
Down-payment Amount $0
Cost of Debt 4.0%
Percent of Pre-Tax Household
Income (PTHI)
28%
Median Home Price $50,200
Median Household Income $25,193
Analytical Factors Necessary to Conduct
the Expense-Based Analysis
Cost of Debt 4.0%
Property Taxes 3.3%
Maintenance Costs 1.0%
Natural Disaster
Insurance
1.0%
Private Mortgage
Insurance
0.55%
Closing Costs
$2,800 ($400 yr.)
0.31%
Real Estate Agent
Brokerage Fees
5%
Federal Income Tax Rate 25%
Federal Standard Income
Tax Deduction Amount
$12,400
 Costs expressed as a percentage of the home
purchase price.
 PTHI represents the largest amount of money
that should be spent in order to repay the
principal and interest costs of a mortgage loan.

CASE STUDY - RESULTS
Results of Finance-Based Analysis
Largest Amount of Money to Spend to Purchase a Home $195,497
Amount of Household Income Required to Afford the Home $26,599
Home Price Level Underpriced
Justified Mortgage Loan Interest Rate 12.0%
Justified Percentage of Household Income 13.8%
Results of Expense-Based Analysis
Cumulative Home Ownership Costs (30-year time horizon) $271,178
Annual Home Ownership Costs
(Required Home Appreciation Amount ($1k = $1 thousand)
Yr. 1, $12.6K; Yr. 5, $12.2K
Yr. 10, $9.9K; Yr. 15, $8.8K
Required Home Appreciation Rate (%)
Yr. 1, 10.1%; Yr. 5, 9.8%
Yr. 10, 7.9%; Yr. 15, 7.0%
Home Ownership Costs as a Percentage of Household Income
Yr. 1, 31.6%; Yr. 5, 30.4%
Yr. 10, 23.7%; Yr. 15, 21.9%

Issues Prospective Home Buyers Should Remember!
 The exclusive reliance on the cost-based methodology and sales-based methodology
will likely cause prospective home buyers to make an imprudent home purchase
decision, because these methodologies have a host of significant short comings that
are pertinent to conducting comprehensive residential real estate analysis.
 Prospective home buyers should not rely on the financial advice provided by housing
industry associations, home builders, real estate agents, or mortgage lenders, because
these groups of people have a biased financial interest for promoting home ownership
and for trying to sell homes for as high of a price as possible.
 Prospective home buyers should not rely on the residential housing information
provided by the financial news media, because:
 much of their financial sponsorship comes from individuals and groups that
benefit financially from housing activity;
 many of their recurring guests benefit from increased housing activity; and
 they do not provide a counter-voice that addresses the issues from the standpoint
of the prospective home buyers best interest.

provided by governmental agencies (e.g. Fannie Mae, Freddie Mac), because these
entities are directed by political officials to put in place housing policies that
promotes home ownership in order to bolster economic activity and increase jobs.
 In many cases, such policies are not in the prospective home buyers’ best
financial interests and run contrary to prudent long-term public policy.
provided by elected officials, because elected officials typically support policies
that promote home ownership in order to increase economic activity, create jobs,
and give the appearance that they are doing something constructive to help their
constituents. This in turn helps elected officials garner higher approval ratings
and voter support during elections.
 In many cases, such policies are not in the prospective home buyers’ best
financial interests and run contrary to prudent long-term public policy.
Issues Prospective Home Buyers Should Remember Cont’d!

Reasons to use the
Adkins Residential Home Valuation Analyzer (ARĤVA)
 The price of a home that is purchased with debt is a function of the income level that will
be used to repay the debt, the percentage of the income level that will be used to repay
the debt, and the cost of debt. Therefore, prospective home buyers need to use ARĤVA
in order to have the ability to generate a finance-based analysis.
 The price of a home should only require a modest appreciation in value in order to offset
the ongoing operating expenses associated with owning the home. Therefore,
prospective home buyers need to use ARĤVA in order to have the ability to generate an
expense-based analysis.
 Prospective home buyers cannot build a proprietary analytical spreadsheet or subscribe
to use a residential real estate analysis software application that facilitates the ability to
analyze residential real estate from a finance-based perspective or expense-based
perspective for less money than it would cost them to subscribe to use ARĤVA.
 Buying a home will likely be the largest single financial transaction that prospective
home buyers will ever make, and the bulk of their net worth will likely be tied up in their
home. Therefore prospective home buyers need to use ARĤVA in order to be able to
make a prudent home purchase decision.

residentialrealestateanalysis.com
 ACCESS THE ARĤVA RESIDENTIAL REAL ESTATE
ANALYSIS SOFTWARE APPLICATION AT ANY TIME AND
FROM ANYWHERE.
CONTACT INFORMATION

THANK YOU FOR VISITING!
Segments Produced at the New York Public Business Library
Borough of Manhattan, Madison Avenue
New York, NY, U.S.A.
Contents of this report are the property of Adkins Capital Management. No part of this report may be reproduced,
redistributed, displayed, or transmitted without the written consent from representatives of Adkins Capital Management.

Review of Residential Real Estate Analysis Valuation Methodologies

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