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COMPREHENSIVE QUESTIONS
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What is Real Estate? - ansLand + Improvements Improvements - ansAnything reasonably permanently attached/affixed to land What are the 6 most important things in Real Estate? - ansLocation, location, location timing, timing, timing Careers in Real Estate - ansBrokerage, Management, Finance, Appraisal, Consulting, Development and Consulting, Corporate Asset Management, Public Sector Real Estate Special Characteristics - ansFixed Location, Uniqueness, Interdependence of land uses, Long life, Long term commitments, Large transactions, Long gestation period Real Estate Sectors/Property Types - ansResidential, Commercial, Industrial, Ranch/Agriculture Types of Single Family Attached Residential Real Estate - ansDuplex/Quad-plex, Apartment Complex, Rowhouse, Condominium Types of Single Family Detached Residential Real Estate - ansSingle family residence (home), Patio home, Zero lot line home Types of Commercial Real Estate - ansRetail, Office, Office/Warehouse, Medical, Hospitality, Education, Religious Types of Industrial Real Estate - ansManufacturing Plant, Oil and Gasoline Refineries Types of Ranch/Agriculture Real Estate - ansRecreational land, Cattle Production, Farmland, Wildlife Refuge, Wetlands 4 Factors of Production in Economics - ansLand, Labor, Capital, Entrpreneurship 3 Economic Attributes of land - ansDurable, Supply is finite, Useful to people Real Estate - ansThe physical land and appurtenances (improvements or buildings) affixed to the land Real Property - ansIncludes all interests, benefits, and rights inherent in ownership of physical real estate Title - ansOwnership rights to real property Deed - ansThe document normally used to convey the rights from one party to another Lease - ansConveys the rights of use and possession of real property under the agreed terms. Do not transfer ownership rights of the property Personal Property - ansAKA "Chattle" Anything that is not real estate. Movable items of property that are not permanently affixed to or apart of the real estate Fixture - ansAn article that was once personal property, since been installed or attached to the land or building in a rather permanent manner, considered real estate Trade Fixture - ansAKA "Chattle Fixture" An article that is owned and attached to a rented space or building by a tenant and used in conducting a business. i.e.- Grocery store refrigerators, Gas pumps, underground storage tanks 3 Tests for Fixture Status - ans1. Test of intent of the parties
- Test of attachment
- Test of adaptability
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Test of Intent of the parties - ansIntention of the party who attached the item. Best to have in Re contract. i.e. - gold bathtub fixtures Test of attachment - ansManner in which item is affixed. Can it be removed without serious injury to real estate. i.e.- Portable A/C vs. central air and heat Test of adaptability - ansCharacter of item and its adaptation to the real estate. Would its removal alter the usefulness of the real estate. i.e.- custom built entertainment center vs. stand alone Air Rights - ansReal property rights to the space above the earth's surface. (Pie shaped) (Transferable) Mineral Rights - ansReal property rights to the minerals and other useful materials that exist below the surface. (Transferable) Water Rights - ansThe rights to withdraw from the land Owner of land on navigable bodies of water - ansCalled "littoral proprietor", generally owns the land to the high water mark. Government generally owns land underneath the water Riparian Rights Doctrine - ansDominates the Eastern United States. All owners whose land underlies or borders the water have equal rights to the water. Can use all water needed as long as not depriving others Underground or Subterranean Stream - ansWater that flows in a defined channel. Apply same principles used if the body of water existed on the surface Percolating Water - ansWater in pockets not clearly located. Landowner may use water beneath land for industrial, agriculture, or other purposes Estates in land - ansBundles of ownership interests in real property Freehold - ansOwnership, grantor-seller, grantee- buyer Leasehold - ansRight to use and possess, for renters, lessor-owner, lessee-renter What are the 2 basic types of estates? - ansFreehold and Leasehold Freehold Estates - ansSeparated into present and future interests. Present Interests in Freehold Estates - ansFee Simple Absolute Estates, Qualified Fee estimates Future Interests in Freehold Estates - ansAccompany qualified fee and life estates Fee Simple Absolute Estate - ansThe fullest and most complete set of ownership rights one can possess in real property Qualified Fee Estate - ansOwner's rights can be "defeased" or lost in the future should a slated event or condition come to pass. i.e. Lumkin house at UGA Life Estates - ansOwnership terminates automatically and immediately upon the death of a named person Life Tenant - ansOwner of the property as long as he/she lives. i.e.- "To Joe, for Joe's life" Estate pur autre vie - ansWhen life tenant is someone other than the person whose life the life estate is tied to. i.e.- "To Joe, for Bill's life" Joe owns as long as Bill is alive Remainder - ansRights to property upon death of life tenant Remainderman - ansThe party who holds the remainder interest associated with life estate
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Lien - ansA claim on a property as either security for a debt or fulfillment of some monetary charge or obligation. i.e.- mortgage on property to borrow money Voluntary Lien - ansPlaced on property by owner (Mortgage) Involuntary Lien - ansProtect the interest of persons who have valid claims against the owner of real property. (unpaid taxes, lawsuit) Specific Liens - ansCreated to protect creditors using a particular parcel of real estate as security for repayment 2 types of specific liens - ansMortgages and Mechanics' liens Mechanics' Liens - ansaka Construction lien General Liens - ansPlaced on all of the property that might be owned by an individual, including any real estate Easement - ansA right given to one party by a landowner to use the land in a specific manner 2 types of Easements - ansEasement Appurtenant and Easement in Gross Easement Appurtenant - ansExists when an easement is legally connected to an adjoining property. There is a dominant estate (benefits from easement) and a servient estate (burdened by easement) Easement in Gross - ansOnly has servient estate (no dominant estate) 3 methods of creating an Easement - ans1. Express Grant or Express Reservation
- Easement by Implication
- Easement by Prescription Express Grant - ansi.e.- Expressly grant neighbor the right to use a portion of property for driveway Express Reservation - ansi.e.- reserve a right of passageway Easement by Implication - ansRight to use land my be implied from the factual circumstances even when an easement is not expressly created. Reflects intentions of the parties Implied Grant - ansUse of property allowed, despite having not made mention of an easement Implied Reservation - ansOccurs when continued use of the property is allowed after property is sold Both implied grants and implied reservations arise from ____________ - ansNecessity Easement by Prescription - ansMay be created when someone other than the owner uses the land "openly, hostilely, and continuously" for a statutory time period. (Usually between 7 and 20 years) Permanent in nature - ansEasements "run with the land" Easement is not a "license" - ansLicenses are revocable 3 steps of Termination of Easements - ansAgreement Merger Abandonment Agreement in Termination of Easements - ansParties affected by easement may expressly agree to terminate their respective rights in the easement. Must be written, can be costly and have time restrictions
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Merger in Termination of Easements - ansMerger of dominant and servient estate can terminate easement. i.e.- Servient estate could purchase dominant estate's parcel Abandonment in Termination of Easements - ansIf the benefitted party does not exercise his or her rights the servient estate over an extended period of time Conservative Easement - ansA type of "Negative Easement" (vs. Affirmative Easement) Protects specific uses of the real estate by the owner. Protects raw land from being developed and preserves the natural area Profit a Prendre - ansA nonpossessory interest in real property that permits the holder to remove part of the soil or produce of the land (fancy term for mineral rights) Encroachment - ansAn unauthorized or intrusion of a fixture, a building, or other improvement onto another person's property. i.e.- fence cuts across adjoining property Adverse Possession - ansAllows individuals to acquire title to land they do not own because they have openly possessed it for a statutory period of time (Squatter's Rights) How many square feet are in an acre? - ans43,560 square feet Ad Valorem Tax - ansTax is levied as a % of value of the property. It is not a tax on the income earned from the property What is the Ad Valorem Tax usually expressed in? - ansmillage rates (not basic % rates)
- $1 per $1000 of value Ad Valorem Tax is typically not ______ - ansmarket value Exemptions on Ad Valorem Tax - ansLower tax burdens from properties that qualify for special treatment Taxable Value - ansAssessed value - Exemptions Eminent Domain - ansGovernment can acquire property for public use.
- Just compensation
- Condemnation proceeding
- Inverse condemnation Police Powers - ansEnables government to have the power of regulation to protect the public health, safety, morals, and general welfare Comprehensive General Plan - ansProjected economic development and population change 15 to 25 years in the future Parts of the Comprehensive Plan - ansTransportation plan, Public facilities plan, land use plan, official map Zoning - ansThe process of dividing a community's land into districts in which only certain uses of the land are allowed. Types of zoning use - ansResidential, Commercial, Industrial Intensity of Use - ansThe extent to which land in the zone may be used for its permitted purposes. AKA "development density" Height and Bulk Limitations - ansHeight regulates the height of buildings. Bulk regulates the building footprint or % sqf lot building occupies Floor Area Ratio - ansRatio between total area of building and total land area of site
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The title has not actually been transferred until _________ to grantee has been completed - ansdelivery Covenants - ansAny agreement or promise. Traditional Covenants (4) Warranty - ansA guarantee that the statements made are true. Traditional Warranty (1) - Warranty forever What are the four Traditional Covenants? - ans1. Against encumbrances
- Seisin or ownership
- Quiet enjoyment
- Further assurances Against encumbrances - ansOther that those disclosed Seisin or Ownership - ansAssurance to the purchaser that the grantor has the very estate in quantity and quality which he purports to convey Quiet enjoyment - ansCovenants that represent seller's promise to protect the buyer against anyone who comes along later and claims paramount title to the property Further assurances - ansRequires the seller to take affirmative steps to cure any defects in the grantor's title 4 Varying Degrees of Deed Protection - ans1. Warranty Deed
- Special Warranty Deed
- Bargain and Sale Deed
- Quitclaim Deed Warranty Deed - ansBroadest type of all deeds. Grantor promises all the traditional covenants and warranty. Grantor promises to defend the title conveyed ( The best type of deed) Special Warranty Deed - ansLimits the extent of the grantor's warranties to events that occurred during the grantor's period of ownership. Does not protect against encumbrances prior to grantor taking title Bargain and Sale Deed - ansImplies the grantor has title to the property and the right to convey it. Does not contain any express covenants as to title's Validity. AKA "Warranty Deed without Covenants) Quitclaim Deed - ansTransfers any interest the grantor may have in the property described but does not imply the grantor has any valid interest in it. Most commonly used to clear defects in title to property. (Worst type of deed) A good title is _____, ______, _______ - ansMarketable, Insurable, Perfect of Record Marketable - ansFree and clear of all past present or future claims that would cause a reasonable purchaser to reject such a title Insurable - ansOne that a reputable title insurance company is willing to insure Perfect of Record - ansPublic records related to the particular title involved show no defects whatsoever Title Opinion - ansA statement by a lawyer that summarizes the findings disclosed by a search through all public documents that may relate to the title
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Title Insurance - ansA policy that insures the title received by the grantee against any deficiencies that may have been in existence at the time the title was transferred. It provides protection in case the acquired title is defective Title Search - ansReveals the ownership history, or CHAIN OF TITLE, of a property Title Abstract - ansA written summary of the chain of title for a given parcel of real estate The Torrens System - ansProvides landowner with a title certificate similar to that used to show title to a car. Obtained through legal proceedings What happens in the Torrens System when transferring title? - ansOld certificate of title is returned to the registrar and new certificate is issued to the new owner Necessary Elements of a Contract - ans1. Offer
- Acceptance
- Consideration
- Parties with Capacity
- Lawful Purpose Offer - ansA statement that specifies the position of the maker of the offer (called the offeror) Offer becomes a ___________ when it is __________ by the party who receives it - ansValid Contract, Accepted Acceptance - ansExpresses satisfaction with an offer, must mirror the precise terms and conditions stated in the offer Counteroffer - ansThe original offeror and offeree switch legal positions, and a contract may result when a counteroffer is accepted Acceptance of contract indicated by _________ of all parties - anssignatures Consideration in a contract - ansRequired by law for a contract to be enforceable. Is anything that incurs a legal detriment or the forgoing of a legal benefit. i.e.- land for money Capacity of Parties - ansTo be a valid contract, all parties involved must have "Contractual Capacity" 2 categories of people that lack contractual capacity - ans1. Those declared "Mentally Incompetent"
- Minors (Typically younger than 18) Lawful Purpose - ansA valid contract must have as its ultimate purpose some legal act or function Writing Requirement - ansAll contracts involving land or items attached to it must be in writing before a court will enforce them. Found in each state's STATUE OF FRAUDS Breach of Contract - ansA failure to perform a required contractual obligation Specific Performance - ansCourt orders the breaching party to perform the terms of the contract Contract Contignencies - ansA well drafted contract provides that the parties will be discharged from performance in the event of certain conditions, called "Contingencies" Types of Contingencies - ansFinancing Contingency, Title Contingency, Inspection and Repair Contingency
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Basic Employment (export activities) - ansProduces goods and services for consumption outside the community. Drives the local economy and brings money to local market. i.e.- Dell computer in Austin, Texas A&M professor Non-Basic Employment (population serving activities) - ansProduces goods and services for the local economy. i.e.- plumber, restaurant, kindergarden teacher Highest and Best Use (HBU) - ansUse of a parcel that will produce the highest return or price to the owner Bid-Rent - ansMaximum rent a potential real estate space user would be willing to pay, or "bid," for a specified location Von Thunen- Isolated State Model - ansAll that matters is transportation cost Ergo - ansMost expensive land is always in the center Weaknesses of Isolated State Model - ansDifferential transportation costs, variations of topography, soil fertility, changes in demand or price of the commodity Sector Growth Theory by Homer Hoyt - ansPrevailing winds, sectors according to where the pollution goes Axial Growth Theory - ansDeveloped in 1930s, Builds on Concentric Growth Pattern, often characterized by a star shape, CBD is most used area, travel time is key to growth, land tends to develop along major transportation routes Cities often located at ___________ under the Axial Growth Theory - anstransportation nodes, these nodes occur at junctions of major transportation routes Multiple Nuclei Theory - ansHarris and Ullman, 1940s, Los Angeles, version of sector growth theory, new urban centers are created within residential areas, represents satellite communities (smaller CBDs) Growth vectors - ansGrowth occurs typically along transportation routes, gaps between major highways, expanding circles around a hub of commercial activity, where money is concentrated, if on a river almost always upstream Barriers to growth - ansPhysical barriers Political barriers Intangible barriers Agglomeration - ans(aka clustering) a trend of a number of similar land uses grouped together in relatively close proximity Central Place Theory - ansWalter Christaller and August Losch, where will a company locate to maximize its accessibility to a potential market? Under the Central Place Theory, what two things force drive location decisions of retail and office establishments? - ansRent minimization or income maximation 3 basic concepts of the Central Place Theory - ans1. Threshold population (Walmart requires 25000 people to open a store)
- Higher vs lower order goods and services
- Trade area or range of a good or service Neighborhood Change - ansGestation, youth, and maturity
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Incipient decline Clear decline Accelerating Decline and Abandonment Neighborhood Stabilization and Rehabilitation (gentrification) Edge Cities - ans5 million sf office space, 600 sf retail, population increases at 9am, history of rural or residential land use 30 years prior (not urban) Exurbia - ansThe place beyond places- suburb of suburbs, job location in suburb and home in exurb New urbanism - ansNo gates, no single pre-dominant use, neighborhood center, civic space Sustainable Growth - ansSubset of new urbanism, reduce sprawl, less reliance on cars, pedestrian friendly, up not out Smart Growth - ansLimit infrastructure thus reducing sprawl, Transfer costs to newbies, higher density, open space, core and infill, pedestrian friendly Broker - ansIntermediary who brings together buyers and sellers, assists in negotiating agreements between them, executes their orders, and receives a commission. Salesperson - ansActs only under direction of a licensed real estate broker. State - ansBrokers and Salespersons are both licensed by what? Trade organization - ansA realtor is a ________________ Realtor - ansNot every salesperson is a _______________ Salesperson - ansDon't have to be a realtor to be a __________________ Yes - ansCan you be a Real Estate Agent and not be a Realtor? No - ansCan you be a Realtor and not be a Real Estate Agent? Open Listing - ansBroker is only entitled to a commission if he/she closes (arranges transaction). Created through Commission Agreement Exclusive Brokerage Listing - ansDifferent broker cannot be authorized to find a buyer. Original broker will receive commission, except the property owner can sell property themselves paying commission Exclusive Right to Sell Listing - ansBroker's most prefer. Broker receives commission, no matter who sells it. Broker gets best guarantee of receiving a commission Net Listing - ansRarely used, illegal in many states. Owner guaranteed a $$ amount, broker receives any $$$ above that amount Limited Services Listing - ansBroker only lists property on Multiple Listing Service (MLS). Provides minimal support to seller. Written, Essential elements of contract, type of property desired, duties of buyer and seller, commission/fee - ansBuyer's Representation Agreement must have: Exclusive right to represent, Open arrangement - ans2 types of Buyer Representation Agreements Fiduciary - ansposition of trust and confidence to another person or his or her property, protects client's best interest at all times
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Appraisal license or certification - ansAll states have established minimum education and experience requirements. Prior to 1989 very little regulation and no licensing Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) - ansGoal: Improve reliability of appraisals in loan approval process. All "Federally Related" transactions performed by state-licensed or state-certified appraisers Appraisal Foundation - ansNonprofit. Goal: Promote professionalism in appraisal industry Appraisal Qualifications Board (AQB) - ansEstablishes minimum education and experience guidelines. States must use in licensing/certification Appraisal Standards Board (ASB) - ansEstablishes USPAP (Uniform Standards of Professional Appraisal Practice). Must be followed for "Federally Related" transactions Trainee Appraiser License and Certification - ansMust have minimum of 75 hours of appraisal education. Typically for 2 years Licensed Real Property Appraiser License and Certification - ansResidential: 1-4 units no more than $250K. Non complex residential: 1-4 unit, no more than $1M. 150 hours of education. Pass exam. 2000 hours of appraisal experience Certified Residential Real Property Appraiser - ans1-4 units no $ limit, 200 hours education, passed examination, 2500 hours of appraisal experience Certified General Real Property Appraiser - ansAny type of property, any $ amount, 300 hours education, pass examination, 3000 hours of appraisal experience Appraisal Problem - ansClient and intended uses of appraisal, property involved, effective date of valuation, type of value (market, insurance, or taxable value), Specific property rights Determine the required scope of work - ansTime and personal requirements, Outline of proposed appraisal report, data and procedures used to complete required tasks Collect data and describe property - ansMarket area data (Characteristics of region, city, and neighborhood), Subject property data (Site, building, and locational characteristics), Comparable property data Perform data analysis - ansMarket analysis (demand, supply, and marketability studies), Highest and Best Use (HBU) Highest and Best Use (HBU) - ansAs though vacant; considers any possible use. As improved; must consider any cost of demolition
- Physically possible
- Legally possible
- Financially feasible
- Maximally productive - ans4 criteria that must be met in Highest and Best Use Determine Value of Land - ansImportant to value land and improvements seperately
- Sales comparison approach
- Cost approach
- Income approach - ans3 approaches to valuation Reconcile indicated values from 3 approaches - ansWeight based on relative reliability of the three approaches
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Report final value estimate - ansExtremely important. Must meet requirements of 1 of 2 reporting options Appraisal reporting - ansContains full detail and information. Usually takes a full narrative approach Restricted report - ansProvides minimal info and discussion. Client does not intend to provide appraisal to anyone else Sales Comparison Approach - ansValue determined by sales prices of similar properties. In competitive markets, close substitutes should sell for similar prices Data sources for Sales Comparison Approach - ansPublic records, Multiple listing service, private vendors, personal relationships Cost Approach - ansAdd estimated value of land to current improvement reproduction/replacement cost less depreciation. Add entrepreneurial incentive (profit), depreciation, most useful when improvements are new or not frequently sold Depreciation - ansPhysical deterioration, Functional obsolescence, External obsolescence Procedure to Cost approach to Value - ansEstimated reproduction of improvements
- Estimated accrued depreciation = Depreciated cost of building improvements
- Estimated value of site = Indicated value by the cost approach Two Concepts of Cost - ansReplacement cost, Reproduction cost Replacement cost - ansCost to create something of equal utility (functionality) Reproduction cost - ansCost of an exact physical replica Methods to estimate replacement cost - ansQuantity survey method, Cost per square foot or cubic foot, Unit in place Physical deterioration - ansLoss in market value due to aging, decay, and ordinary use Functional obsolescense - ansLoss in value due to changes in tastes, preferences, technological innovations, or market standards External (economic) obsolescense - ansLoss in value due to changes beyond property boundaries (neighborhood effects)- increased traffic congestion in area, conversion of residential neighborhood from owner-occupied to rental, environmental issues, decline in desirability/demand for neighborhood
- New buildings
- Insurance appraisals
- Specialty buildings - ansWhere is cost approach heavily weighted? Income Approach to Value - ansBased on the premise that a correlation exists between the income a property produces and its value
- Direct Capitalization Method
- Discounted Cash Flow Model - ans2 methods to determine value based on income Direct Capitalization Method - ansConverts a one year stabilized NOI into a market value of the property. V=NOI/R
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Deed of Trust - ansConveys title to a 3rd party called trustee. Executed at time loan is originated. Trustee's title lies dormant as long as borrower(trustor) meets the terms of the debt. If default occurs, trustee sells property to pay off debt to the lender (beneficiary of trust) Land Contract (Contract for Deed) - ansSeller retains ownership of property until buyer has paid % of purchase price, up to 100%. Buyer has equitable ownership and seller has legal ownership Deed-in-lieu of foreclosure - ansBorrower in default transfers title to the bank. "Jingle Mail" Assumption aka "Loan Assumption" - ansOriginal borrower sells property and buyer assumes responsibility for the debt Loan origination - ansOccurs in Primary Mortgage Market Secondary Mortgage Market - ansOriginators sell off loan to investors Federal Housing Administration (FHA)- 1934 - ansGoal was to restore confidence in mortgage market, established standards (borrowing and lending), promoted long term fully amortized loans, mortgage insurance "FHA insured Loan" Private Mortgage Insurance (PMI) - ansAlternative to FHA, collapse of industry during Great Depression, conventional loans, cheaper (no up front fees) Department of Veterans Affairs Loan Guarantee Program- "VA- Guaranteed Loans" - ans"GI Bill of Rights" post WWII. Helped veterans purchase homes, low or no down pmt/interest rates, VA guarantees the loan Federal National Mortgage Association- "Fannie Mae" 1938 - ansCreated by congress to 1. Operate a secondary market for FHA insured loans. 2. Provide FHA insured loans to low income borrowers in remote areas 1949 - ansWhat year did Fannie Mae begin purchasing VA guaranteed loans?Converted to "quasi government agency" 1968 - ansWhat year did Fannie Mae become a Private Corporation and labeled as a GSE (Government Sponsored Entity)? 1972 - ansWhat year did Fannie Mae begin purchasing Conventional Loans? 1981 - ansWhat year did Fannie Mae begin selling (MBS) 2006 - ansWhat year did Fannie Mae have a downturn and headed toward bankruptcy 2008 - ansWhat year did Congress seize control of Fannie Mae? Federal Housing Finance Agency (FHFA) - ansFannie Mae is now under supervision of
Government National Mortgage Association "Ginnie" 1968 - ansGoal- Step in and directly assist borrowers with loans. Filled a void when Fannie Mae became private. Provided subsided loans to borrowers through FHA loan programs Introduced payment guarantee program - ansWhat happened in 1970 to Ginnie Mae? Mortgaged Backed Securities (MBS) - ansIssued in secondary market by mortgage holders to investors. Loans combined into "mortgage pools" with tranches. Securities are backed by the underlying mortgages.
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Federal Home Loan Mortgage Corporation- "Freddie Mac" 1970 - ansGoal: Increase flow of funds to mortgage market through "Conventional Loans". Problem in that loans are not guaranteed by FHA or VA Congress seized control and made it no longer private. Now under control of Federal Housing Finance Agency (FHFA) - ansWhat happened in 2008 to Freddie Mac? Equal Opportunity Act (1974) - ansGoal: Prevent Discrimination. Notification within 30 days of application of acceptance or denial. Consumer Credit Protection Act (Aka "Regulation Z" or "Truth in Lending Law") - ansGoal: Permit borrowers to shop for the best loan deal Real Estate Settlement Procedures Act (RESPA) - ansGoal: Protect buyers using federally related mortgage loans Flood Disaster Protection Act - ansGoal: Protect buyers from flood damage. Lenders must disclose if property is in flood hazard area. Lender must require flood insurance Fair Credit Reporting Act - ansGoal: Protect privacy of borrowers credit history. Requires lenders to 1.get permission to investigate credit history 2. Handle credit history with "due care" 3. Notify applicant if denial is based on credit report Mortgage Debt Ratio- "Front End Ratio" - ans% of gross monthly income needed for monthly housing expenses Total Debt Ratio- "Back end Ratio" - ans% of gross monthly income needed to meet monthly contractual expenses Debt Coverage Ratio - ansFor commercial properties 95% taxable income - ansReal Estate Investment Trusts (REITs) must distribute how much taxable income to shareholders annually? Rate of Return - ansIs forecasted and based on uncertainty Business Risk - ansChanging economic conditions Financial Risk - ansRisk of default on borrowed funds Purchasing Power Risk - ansRisk of Inflation Liquidity Risk - ansAbility to convert an asset to cash
- Initial investment
- Cash Flows from operations during the holding period
- Cash Flow from disposition (sales proceeds)
- Holding Period - ansCash Flow Model has 4 basic components: More is better than less. Sooner is better than later - ansRational investor preferences Compounding - ansWhat will an investment made today be worth in the future? Discounting - ansWhat is a payment to be received in the future worth today? Discounted Cash Flow (DCF) - ansAdvanced application of compounding and discounting. Reduces each investment alternative being analyzed to the amounts and timing of all the cash flows to calculate the internal rate of return (IRR) or the NPV
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- Outstanding balance declines to zero by last payment - ansCharacteristics of Amortization Schedule Fixed Rate Mortgage - ansMost common, Interest Rate fixed at beginning of loan, will not change Prepayment - ansLoan is repaid before its full term has expired Refinancing - ansRetiring existing loan with proceeds of a new loan for same property. Calculate "Payback period" of cost savings to loan costs Discount Point - ans1 __________= 1%____________. 1 applied to $100,000 loan is a charge of $ Origination Fee - ansLoan cost expressed as a dollar amount Effective Interest Rate - ansRefers to the actual cost of borrowing funds from a lender, after consideration of loan costs Two-step Mortgages (aka "Reset Mortgages) - ansInitial payments are based off of mortgage payment formula. After 5-7 the remaining balance and term based on "prevailing interest rate" + Spread Adjustable-rate mortgages (ARMs) - ansTypically have annual rate adjustments. Typically tied to one year T-Bill + spread of 2 or 3%. Often have "Teaser" rate of 1-2% spread Hybrid Arm - ansBegins with fixed rate then converts to standard ARM Negative Amortization Loan - ansPayments made are less than what is required for Annual Debt Service. What is not paid off with each payment is added to the Principal Amount.
- Return ON your money
- Return OF your money
- Renters PAYOFF your loan amount - ans3 Ways to Make Money with 1 investment Interest - ans____________ from mortgage loan is tax deductible Advantages of of Real Estate Investments - ansCash flow from Operations, Appreciation, Portfolio Diversification, Financial Leverage Cash Flow from Operations - ansSource: Rent checks. Money in wallet of investor at the end of each year Appreciation - ansReal Estate values typically grow at least at the rate of inflation After Tax equity reversion (ATER) - ansReturn of money invested in property + change in value Portfolio Diversification - ansMaximizing investment returns while spreading risk exposure across different types of investments Financial Leverage - ansaka "OPM"- other people's money. Can amplify returns by investor. Risky
- Involve high money amounts
- Lack of liquidity
- Changing economic environments - ansDisadvantages of Real Estate Investments Investment - ansPresent sacrifice in anticipation of expected future benefit
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Wealth Maximization Objective - ansInvestors will choose only those projects that offer expected benefits in excess of the costs; especially those whose benefits exceed costs by the largest amount IRR - ansThe discount rate that makes the NPV exactly equal to zero Great - ansIRR>Discount rate Good - ansIRR=Discount rate Bad - ansIRR<Discount rate Discount rate - ansalso termed "hurdle rate" Potential Gross Income - ansRental income assuming 100% occupancy. Sometimes referred to as a potential gross revenue (PGR) Historical experience of subject property Competing properties in the market "Natural vacancy" rate (what rate of vacancy expected) - ansVacancy and collection loss is based on: Miscellaneous income - ansGarage rentals and parking fees, laundry and vending machines, clubhouse rentals Potential gross income (PGI)
- Vacancy and collection loss (VC)
- Miscellaneous income (MI) - ansEffective Gross Income equation Operating Expenses - ansOrdinary and regular expenditures necessary to keep a property functioning competitively Fixed Operating Expenses - ansExpenses that do not vary with occupancy (at least in the short run)(hazard insurance, local property taxes) Variable Operating Expenses - ansExpenses that tend to vary with occupancy (utilities, maintenance and supplies)
- Mortgage payments
- Tax depreciation
- Capital expenditures - ansOperating Expenses do not include: Capital Expenditures (CAPX) - ansNon-recurring expenditures that increase value of structure/prolong its useful life. (roof replacements, additions, resurfacing of parking areas) Appraisers - ansMost _________ treat CAPX as "above line" expense and a part of NOI Institutional Investors - ans_____________ usually treat CAPX below the line expense and not part of NOI Dividend - ansNOI is property's ___________ Fundemental - ansProjected stream of NOI is _________ determinant of property's value
- Service the mortgage debt
- Provide equity investor with an acceptable return on equity - ansNOI must be sufficient to do to 2 things: V= NOI(1) / R(0) R(0) is a "cap" rate not a discount rate - ansBasic Value equation=
