Resale Price Calculation

In the first half of this decade, home values increased rapidly.  Today, they are increasing much more slowly, or even decreasing.  This market force “wild card” will not exist at Ramona Village because the Ground Lease contains a specific formula for determining the maximum resale price.  The formula considers both changes in the Consumer Price Index (CPI) and the value of home improvements that have been made by the owners. 

There are two upsides of the resale price formula:  1)  Village homes will remain affordable to subsequent buyers forever; and 2)  it prevents a loss in home value:  the Ground Lease provides that the sale price will never be less than the purchase price, even if the change in the CPI is negative (i.e., the market is declining). 

The downside of the resale price formula is that a wildly escalating real estate market (if that happens again) will not result in sudden wealth for homeowners.  However, this is the only (potential) homeownership advantage that is restricted.  As current market conditions illustrate, there is no guarantee that home prices will escalate so quickly as a few years ago.  Other beneficial aspects of homeownership – income tax deductions, equity appreciation from mortgage principal payments, and quality of life factors – will be the same as in any homeownership situation.

The Ground Lease formula is based upon the total housing component* of the Consumer Price Index (CPI), which is published bi-monthly by the US Dept. of Labor, Bureau of Labor Statistics at its website http://www.bls.gov/CPI/.  There are numerous CPI indices.  The one used is entitled “All Urban Wage Earners and Clerical Workers” (not seasonally adjusted) for the San Francisco Bay Area, the closest area for which the index is published.

The starting point for the calculation is the CPI published just prior to Homeowner’s initial purchase of the home.  That number is subtracted from the CPI published just prior to the Homeowner’s sale of the home.  The difference is divided by the initial purchase CPI to obtain the percentage change over the time of Homeowner’s possession. 

Example resale price calculation:

• Initial purchase date = February 2003
  • Purchase price = $250,000
  • CPI = 220.3 (CPI of 100.0 = the average of 1982 – 1984.)
• Resale date = December 2007
  • CPI = 236.028
  • (Note:  After 2006, data was published to three decimal points.  For this example, the Initial CPI is also assumed to be accurate to 3 decimal points)
• Resale CPI minus Initial CPI = 15.728
• Resale Price Index = 15.728 divided by Initial CPI 220.300 multiplied by 100% = 7.139%
• Resale price = $250,000 + (7.139% x $250,000) = $267,847.50
• Other allowable increases to resale value, per the Ground Lease:
  • Up to 15% of the original purchase price may be added for home improvements properly approved by the Ramona Village Association and professionally appraised prior to resale ($37,500 for the example home).
  • Up to 3% of the original purchase price may be added for sale preparation and fix-up costs ($7,500 for the example home).
• Maximum resale price = $267,847.50 + $37,500 + $7,500 = $312,847.50.
• Maximum increase from purchase price = $312,847.50 - $250,000 = $62,847.50 = 25%.

* Consumer Price Index components are described on the Bureau of Labor Statistics website.