The Resale Formula
One of the most important reasons for creating a housing land trust is to make sure that people of modest means can afford to live in our neighborhood in the future. Perpetual Affordability can be achieved by limiting the resale price of a land trust home-the land trust limits the price for which you can sell your land trust home and thereby limits the price that the next homebuyer pays to become a homeowner. The Land Stewardship Program asks that land trust homeowners share the benefit of the land subsidy that you receive from the land trust with the next family that wants to buy your home.
The resale formula is designed to be simple and fair to implement. It is based on the appraised value of the home at the time you purchase it and the appraised value of the home at the time you decide to sell it. The formula gives you a portion of the appreciation in value, based on what you paid for the house, but does not permit you to sell the house for "full market value". It allows you to build equity and to share in the market appreciation, but also ensures affordability. The formula also encourages home improvements and long-term residence in the home and the community.
The resale formula allocates to the homebuyer a portion of the increase in market value based on two factors:
The purchase price for the house relative to the appraised value of the entire property (house plus land). This is called the investment ratio-the purchase price of the home divided by the appraised value of the property.
How many years you live in the house. This is the percentage. The longer you live in the home the greater the percentage.
If a homebuyer makes substantial additions to the living space of the the home, creates a new bedroom or builds a garage, the value added by the capital improvements will be added to the resale price.
In addition, when a home is sold, the homebuyer has built equity by paying off the mortgage. Initially, the mortgage payments are mostly interest and very little o the principal, but over time the principle will pay off the bank loan. The following is an example of the equity gained on a fictional resale of a land trust home. These numbers are based on the actual selling price of a home at Clark Fork Commons .
Let's say you purchase a new two-bedroom home in the Clark Fork Commons development for $114,000.
This house appraised for $127,300. The below-market-rate appraisal is to your advantage as a buyer-it keeps your taxes lower and it gives you a higher "Investment Ratio."
To purchase this house, you get a $109,000 mortgage from a local bank, through the Montana Board of Housing at 5% interest. You bring $1,666 of your own money toward the down-payment that you had deposited in a Home$tart savings account, plus $3,333 that the Federal Home Loan Bank deposited in that same account as their gift to you, helping you buy a house. Your monthly mortgage payment as a land trust homeowner is $705* , including the principal and interest on your mortgage loan, property taxes and homeowner's insurance.
The Initial Appraised Value when you buy the home is $127,300.
Your Purchase Price is $114,000.
Your Investment Ratio is $114,000÷ $127,300 = 89.5%.
You Make Capital Improvements to Your Home.
Let's say that seven years after purchasing the home, you make a major capital improvement-you add a bonus room in the garage. Let's say this adds $3,000 in value to the home. This is called Value Added, and it will be reflected in the price for which you may sell your home.
You Decide to Sell Your Home.
Ten years after you purchased the home, you decide you're ready to move on. What equity have you built by paying down your mortgage? After ten years, you've paid approximately $20,338 of the $109,000 first mortgage you borrowed. You'll subtract what you still owe the bank from your total equity in your house. (Your "total equity" is the dollar amount you build up by paying down your mortgage, plus your share of the market appreciation.) You still owe:
$109,000 - $20,338 = $88,662 (first mortgage)
You still owe a total of $88,662 on your mortgage. Keep this number in mind, since it figures into calculating your total equity, on the next page. Let's say the property (house plus land) appraises for $207,358 at the time you decide to sell. This figure reflects your bonus room added in the seventh year, and assumes a fairly steady appreciation of 5% per year (appreciation varies, though-houses appreciated as rapidly as 10% annually in the last ten years).
Step One: Calculate the Total Appreciation of the property.
This is calculated by subtracting the original appraised value of the property at the time of purchase from the current appraised value at the time you are selling. In our example, that would be
$127,300 - $207,358 = $80,058
In the example, you also made $3,000 of Value Added capital improvements. Subtract the Value Added to calculate the Total Appreciation (we add it in at the end): $80,058-$3,000 = $77,058
Step Two: Determine your Investment Ratio .
In our example, from the calculations above,
your Investment Ratio is 89.5% .
Step Three: Multiply the Total Appreciation by your Investment Ratio.
In our example, that would be
$77,058 x 89.5% = $68,966.
Step Four: Pick our your Percentage.
Determine how many years you have lived in your home, and the corresponding percentage.
Year 1 .the percentage is 10% Year 2 ...15% Year 3 ...20% Year 4 ...20%
Years 5-9 ......... the percentage is 25%
Years 10-14 ........ the percentage is 30% (our example)
Year 15-19 ......... the percentage is 35%
Years 20 and thereafter ..... the percentage is 40%
(Note: Year 5 begins the day after the 4 th anniversary of your closing .)
Step Five: Calculate your Maximum Resale Price:
Multiply the amount from Step 3 by your Percentage from Step 4: $68,966 x 30% = $20,689.
Add the Value Added: $20,689 + $3,000 = $23,689
Your Maximum Resale Price would be
$114,000 (original sales price)
+$23,689 (step 3 x step 4) + Value Added
= $137,689 Maximum Resale Price.
So if you sell your house for $137,689, what's the "profit"? In other words, how much equity did you build?
Your total equity equals the Maximum Resale Price of $137,689 minus the amount you still owe on your loans at the time you sell. Remember that you still owe $88,662 to your mortgage lender.
$137,689 - $88,662 = $49,027
Your total equity in this example : $49,027
View the Lease Formula (Excel document)