com F IF TH E D I T I O N Real Estate Principles A VALU E A PPROACH David Ling | Wayne Archer www.com Real Estate Principles A Value Approach Fifth Edition www.com Finance Series Page, c 2018 (spring) The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate Stephen A. Ross, Ross, Westerfield, Jaffe, and Jordan Saunders and Cornett Franco Modigliani Professor of Finance and Corporate Finance: Core Principles Financial Institutions Management: A Risk Economics, and Applications Management Approach Sloan School of Management, Fifth Edition Ninth Edition Massachusetts Institute of Technology, Saunders and Cornett Ross, Westerfield, and Jordan Consulting Editor Financial Markets and Institutions Essentials of Corporate Finance Ninth Edition Sixth Edition FINANCIAL MANAGEMENT Ross, Westerfield, and Jordan INTERNATIONAL FINANCE Fundamentals of Corporate Finance Block, Hirt, and Danielsen Eun and Resnick Eleventh Edition Foundations of Financial Management International Financial Management Sixteenth Edition Shefrin Eighth Edition Behavioral Corporate Finance: Brealey, Myers, and Allen Decisions that Create Value Principles of Corporate Finance REAL ESTATE Second Edition Twelfth Edition Brueggeman and Fisher Brealey, Myers, and Allen Real Estate Finance and Investments INVESTMENTS Principles of Corporate Finance, Concise Fifteenth Edition Second Edition Bodie, Kane, and Marcus Ling and Archer Brealey, Myers, and Marcus Essentials of Investments Real Estate Principles: A Value Approach Fundamentals of Corporate Finance Tenth Edition Fifth Edition Ninth Edition Bodie, Kane, and Marcus Brooks Investments FINANCIAL PLANNING AND FinGame Online 5.0 Tenth Edition INSURANCE Bruner Hirt and Block Allen, Melone, Rosenbloom, and Mahoney Case Studies in Finance: Managing for Fundamentals of Investment Management Retirement Plans: 401(k)s, IRAs, and Corporate Value Creation Tenth Edition Other Deferred Compensation Approaches Eighth Edition Jordan, Miller, and Dolvin Eleventh Edition Cornett, Adair, and Nofsinger Fundamentals of Investments: Valuation Altfest Finance: Applications and Theory and Management Personal Financial Planning Fourth Edition Eighth Edition Second Edition Cornett, Adair, and Nofsinger Stewart, Piros, and Heisler Harrington and Niehaus M: Finance Running Money: Professional Portfolio Risk Management and Insurance Third Edition Management Second Edition First Edition DeMello Kapoor, Dlabay, Hughes, and Hart Cases in Finance Sundaram and Das Focus on Personal Finance: An Active Third Edition Derivatives: Principles and Practice Approach to Help You Achieve Financial Second Edition Grinblatt (editor) Literacy Stephen A. Ross, Mentor: Influence Fifth Edition through Generations FINANCIAL INSTITUTIONS Kapoor, Dlabay, Hughes, and Hart AND MARKETS Grinblatt and Titman Personal Finance Financial Markets and Corporate Strategy Rose and Hudgins Eleventh Edition Second Edition Bank Management and Financial Services Walker and Walker Higgins Ninth Edition Personal Finance: Building Your Future Analysis for Financial Management Rose and Marquis Second Edition Eleventh Edition Financial Institutions and Markets Ross, Westerfield, and Jaffe Eleventh Edition Corporate Finance Eleventh Edition www.com Real Estate Principles A Value Approach Fifth Edition David C. Ling University of Florida Wayne R.
Archer University of Florida www.com REAL ESTATE PRINCIPLES: A VALUE APPROACH, FIFTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America.
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Library of Congress Cataloging-in-Publication Data Names: Ling, David C. Title: Real estate principles : a value approach / David C. Ling, University of Florida, Wayne R. Archer, University of Florida.
Description: Fifth Edition. | Dubuque, IA : McGraw-Hill Education, [2016] | Revised edition of the authors’ Real estate principles, c2012. Identifiers: LCCN 2016047076| ISBN 9780077836368 (alk. paper) | ISBN 0077836367 (alk.
paper) Subjects: LCSH: Real estate business—United States. Classification: LCC HD255 .33/2—dc23 LC record available at https://lccn.gov/2016047076 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.com/highered www.com Dedications To my wife, Lucy, for her continued patience and understanding during this latest revision of the book and to our children, Alex, Sarah, and Rebecca, who have really tried to understand why Dad spends so many nights and weekends working in his home office. —DCL To my wife, Penny, who has always matched our efforts in this book with an equal measure of her devotion, support, and assistance; to our children Stephen, John, and Jennifer, who generously supported me with enthusiasm for the task; and to my mother and Penny’s mother, who always kept the faith that I would do something useful with my “typewriter.com About the Authors david c.
Ling is the McGurn Professor of Real Estate at the Wayne R. Archer is the William D. Hussey Professor at the University of Florida. Professor Ling received an MBA (1977) Warrington College of Business, University of Florida.
He is in finance and a Ph. (1984) in real estate and economics from Executive Director of the Bergstrom Center for Real Estate Stud- The Ohio State University. His academic and professional publi- ies. He received a Masters in economics from Wichita State Uni- cations have included articles on housing policy and economics, versity (1968) and a Ph.
in economics from Indiana University mortgage markets and pricing, private commercial real estate (1974). He has been a faculty member at the University of Florida investments, publicly traded real estate companies, and perfor- since 1971. From 1979 through 1981, he served as a visiting mance evaluation. researcher at the Federal Home Loan Bank Board and Federal During 2000 Professor Ling served as President of the Savings and Loan Insurance Corporation.
His research publica- American Real Estate and Urban Economics Association tions include articles on office markets, house price indices, mort- (AREUEA). From 2000 to 2005, he also served as editor of Real gage prepayment, mortgage pricing, and mortgage default risk. Professor Ling serves on numerous journal Professor Archer is a member of the American Real Estate editorial boards including Real Estate Economics, the Journal of and Urban Economics Association, where he has served on the Real Estate Finance and Economics, the Journal of Housing board of directors, and also is a member of the American Real Economics, and The Journal of Real Estate Research. In 2011, Estate Society.
He served on the editorial board of Real Estate Professor Ling was the recipient of the George Bloom Award, Economics. He is a Fellow of the Homer Hoyt Institute. which is presented annually by the Directors of the American Professor Archer has worked in industry education through- Real Estate and Urban Economics Association for “outstanding out his academic career, including service as the educational contributions to the field of real estate academics.” In 2010, he consultant to the Florida Real Estate Commission from 1985 to was awarded the David Ricardo Medal by the American Real 1999. Among additional roles, he served as a regular faculty Estate Society, which is ARES’s highest honor “in recognition of member in programs of the Mortgage Bankers Association of research productivity and influence over a twenty year period.” America, in the Institute of Financial Education affiliated with Professor Ling has provided research and consulting ser- the U.
League of Savings and Loan Associations, and, more vices to several state and national organizations including the recently, with Freddie Mac. In addition, he has provided consult- Federal National Mortgage Association, the National Associa- ing services to industry and government from time to time tion of Home Builders, the National Association of Realtors, the throughout his career. Florida Association of Realtors, and the CCIM Institute. He is a Additional information on Professor Archer is available at Fellow of the Homer Hoyt Institute, a faculty member of the http://warrington.edu/departments/fire.
Weimer School of Advanced Studies in Real Estate, a board member and Fellow of the Real Estate Research Institute, a member of the National Association of Real Estate Investment Trusts’s Research Council, and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). Additional information on Professor Ling is available at http://warrington.edu/departments/fire.com Brief Table of Contents part 1 SETTING THE STAGE 1 part 6 TIME, OPPORTUNITY COST, AND VALUE DECISIONS 384 1 The Nature of Real Estate and Real Estate Markets 1 14 The Effects of Time and Risk on Value 384 15 Mortgage Calculations and Decisions 410 part 2 LEGAL AND REGULATORY DETERMINANTS OF VALUE 18 part 7 FINANCING AND INVESTING 2 Legal Foundations to Value 18 IN COMMERCIAL REAL ESTATE 430 3 Conveying Real Property Interests 45 16 Commercial Mortgage Types and Decisions 430 4 Government Controls and Real 17 Sources of Commercial Debt and Equity Estate Markets 69 Capital 455 18 Investment Decisions: Ratios 483 part 3 MARKET VALUATION AND 19 Investment Decisions: NPV and IRR 503 APPRAISAL 99 20 Income Taxation and Value 523 5 Market Determinants of Value 99 6 Forecasting Ownership Benefits and Value: Market Research 129 part 8 CREATING AND MAINTAINING VALUE 555 7 Valuation Using the Sales Comparison 21 Enhancing Value through Ongoing and Cost Approaches 160 Management 555 8 Valuation Using the Income Approach 191 22 Leases and Property Types 578 part 4 FINANCING HOME OWNERSHIP 217 23 Development: The Dynamics of Creating Value 604 9 Real Estate Finance: The Laws and Contracts 217 Glossary 633 10 Residential Mortgage Types and Borrower Index 648 Decisions 244 11 Sources of Funds for Residential Mortgages 273 part 5 BROKERING AND CLOSING THE TRANSACTION 305 12 Real Estate Brokerage and Listing Contracts 305 13 Contracts for Sale and Closing 339 vii www.com Preface T he study and practice of real estate draws on a multitude of disciplines including architecture, urban and regional planning, building construction, urban econom- ics, law, and finance. This diversity of perspectives presents a challenge to the instructor of a real estate principles course. Depending on their backgrounds and training and on the interests of the students, some instructors may choose to emphasize the legal concepts that define and limit the potential value of real estate.
Other instructors may focus more on licensing and brokerage issues (popular topics with many students) or on the investment decision-making process. Still others may feel that real estate market and fea- sibility analysis should be the core topics in a principles class. In short, one of the difficul- ties in teaching an introductory real estate course is that there appear to be too many “principles.” The critical question thus becomes: What framework should be used to teach these principles? Although the subject of real estate can be studied from many perspectives, we have adopted the value perspective as our unifying theme. Why?