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206 Cards in this Set
- Front
- Back
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What are the two major differences between freehold estates and leasehold estates? |
Freehold estates last for an indefinite period of time, while leasehold estates expire on a definite date.A freehold estate denotes property ownership by the estate holder, while a leasehold estate involves the right to possess and use property that is owned by someone else. |
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Which type of leasehold estate has a definite beginning and ending date? |
Estate for years |
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What are the three common ways to get title assurance? |
Deed Abstract and opinion Title insurance |
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Title insurance policies protect policy holders from what kinds of losses? |
Forged documents, such as deeds or mortgages Undisclosed heirs Mistaken legal interpretation of a will Misfiled documents Confusion arising from similarity of names Incorrectly stated marital status Mental incompetence |
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When does supply and demand usually improve for a buyer? |
When the economy is in a recession. |
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What determines how healthy the real estate market is at any given point in time? |
How healthy the real estate market is at any given point in time relates directly to the cost of money or interest rate |
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Why are the savings of individuals important to the economy? |
Savings become the eventual source of funds for borrowing. |
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Define discount rate and prime rate. |
The discount rate is the interest rate charged by the Fed to its member banks. The prime rate is what the bank charges to the borrower. |
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What role does the United States Treasury play in our economy? |
The United States Treasury plays a critical role by managing the debt of the entire federal government. Some of the Treasury's functions include:Managing federal finances. Managing government accounts and the public debt. Supervising national banks and thrift institutions. Enforcing federal finance and tax laws. |
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Name three important provisions of the Financial Institutions Reform, Recovery and Enforcement Act. |
Transferred the regulatory powers of the Federal Home Loan Bank Board to a new agency, the Office of Thrift Supervision. Placed the 12 district Federal Home Loan Banks under control of the Federal Housing Finance Board. Abolished the defunct Federal Savings and Loan Insurance Corporation (FSLIC). |
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What is the role of the California Housing Finance Agency? |
This agency provides financing and programs that create housing opportunities for individuals within specified income ranges and makes below market-rate loans through the sale of tax-exempt bonds, repaid by revenues generated through mortgage loans rather than taxpayer dollars. |
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Name three issues that lenders deal with that can affect the cost of mortgage money. |
Cost of getting people to deposit, costs of floating bonds and costs associated with advertising. |
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Describe and define the two classifications of encumbrances. |
An encumbrance that affects the physical condition of the property, such as restrictions, encroachments and easements. An encumbrance that affects the title, such as judgments, mortgages, mechanics' liens and other liens. |
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List and describe three provisions that are common to most notes |
Amount borrowed - This is the face amount of the note that is advanced when the note is executed. Interest rate - The rate can be either fixed or adjustable. If it's adjustable, the note should specify how the rate will change. Amount of payments - The amount of the payments will be determined by the face amount of the loan, the length of the loan and the interest rate. |
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what is a mortgage? |
A mortgage is a financing instrument that pledges the real property described in the mortgage document as collateral for the debt described in the note. |
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How does a note differ from a mortgage? |
A note is a complete contract. After it is legally signed by the borrower, it is a legally-enforceable and fully-negotiable financial instrument. A mortgage however, always needs a note to be legally valid. |
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What is a deed of trust? |
A deed of trust is a legal document which transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender). |
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List two reasons that lenders prefer to use the deed of trust when making loan |
A trustee may be given the power to sell property after default without going through the time-consuming judicial foreclosure process. A deed of trust can be used to secure more than one note. |
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List two differences between a mortgage and a deed of trust? |
A mortgage is a lien on the property being given as collateral, with the legal title remaining in the name of the borrower. In a deed of trust, the borrower conveys the property to the trustee, who holds the title to the collateral on behalf of the lender until the loan terms have been satisfied. A mortgage may be discharged by a simple acknowledgement that the loan terms have been satisfied. A deed of trust is discharged using a reconveyance of title form. |
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What is a land contract? |
A land contract is a complete financing contract in and of itself that is executed between a seller and a buyer, in which the seller pledges to convey the title to the property at the time when the buyer completes whatever obligations the contract stipulates. Under the terms of the land contract, the buyer gets possession of the property and equitable title, while the seller holds legal title to the property and continues to be primarily liable for payment of any existing mortgage. |
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What is the California rule regarding late payments on a loan? |
A late payment cannot exceed an amount equal to 10% of the principal and interest payment. In addition, a late charge cannot be assessed on any payment received within 10 days of the due date. |
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According to California law, how much could a borrower prepay on a loan without incurring any penalty? |
A borrower could prepay up to 20 percent of the unpaid balance in any 12-month period without penalty. |
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What is a lock-in clause? |
A very drastic form of a prepayment clause which actually prohibits the borrower from paying the mortgage loan in full before a specific date. |
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What is the main advantage and what is the main disadvantage to a borrower to purchase a property "subject to" the mortgage? |
Advantage: He cannot be held personally liable for the amount of the debt he assumed. The original owners are still personally and legally responsible for the loan and they may be held liable for any deficiency judgment that could be the result of a foreclosure sale. Disadvantage: They risk losing all the equity they have in the property. |
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What is the major difference between an institutional lender and a noninstitutional lender? |
Institutional lenders are highly regulated by state and federal agencies, while noninstitutional lenders have few, if any, regulations. |
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Who licenses commercial banks? |
The California Department of Financial Institutions licenses state-chartered banks, while the Comptroller of the Currency gives licenses to nationally-chartered banks. |
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Historically what has been true of interest rates on loans from savings and loan associations? |
The interest rates for loans from savings associations have historically been higher than what banks have charged, due to the higher demand for loans from the savings institutions. However, more recently that has changed, and the rates charged by both savings associations and banks are usually about the same. |
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What kinds of projects are typical for life insurance company investments? |
Life insurance companies are a major source of credit for shopping centers, office buildings, hotels and motels, industrial buildings and large apartment complexes. |
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What is the major difference between an institutional lender and a noninstitutional lender? |
Institutional lenders are highly regulated by state and federal agencies, while noninstitutional lenders have few, if any, regulations. |
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Who licenses commercial banks? |
The California Department of Financial Institutions licenses state-chartered banks, while the Comptroller of the Currency gives licenses to nationally-chartered banks. |
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Historically what has been true of interest rates on loans from savings and loan associations? |
The interest rates for loans from savings associations have historically been higher than what banks have charged, due to the higher demand for loans from the savings institutions. However, more recently that has changed, and the rates charged by both savings associations and banks are usually about the same. |
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What kinds of projects are typical for life insurance company investments? |
Life insurance companies are a major source of credit for shopping centers, office buildings, hotels and motels, industrial buildings and large apartment complexes. |
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What is usury law and what type of private party lender is exempt from these laws? |
Usury laws regulate the maximum amount of interest an entity can charge on various loans. Most private party lenders are not exempt; however, seller carryback loans are exempt. |
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What is a mortgage correspondent and what does it do? |
A mortgage correspondent is a mortgage banking company that represents an institutional lender. The correspondent receives a fee for originating, processing and closing a loan. In some cases the correspondent may also collect payments, periodically inspect the property and supervise a foreclosure. |
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How many types of Real Estate Investment Trusts are there and what are they? |
There are three types of real estate investment trusts: equity trusts, mortgage trusts and hybrid (or combined) trusts. |
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What are the two types of municipal bonds and how are they used? |
General obligation (GO) bonds are typically used to fund projects that will benefit the entire community, like sewers, road paving and parks. Revenue bonds are used to fund projects that will benefit specific populations, who provide the revenue to repay the debt through user fees and user taxes, such as toll charges for a bond-financed toll bridge construction project. |
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What kinds of loans do private loan companies usually deal in and why? |
Private loan companies have been particularly active in the junior loan market. The Tax Reform Act of 1986 abolished deductions for any interest paid on consumer finance, but maintained the deductions for any interest paid on home loans. This action served to make investment in junior loans more widespread. |
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What makes credit union membership so attractive? |
Credit unions pay no income tax, so they can pay higher interest rates on deposits than other savings institutions. They also offer a wide variety of loans at far lower interest rates than their competitors. |
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What types of deductions from the loan proceeds are detailed in paragraph three of the Mortgage Loan Disclosure Statement? |
This paragraph estimates the costs for arranging the loan, including appraisal fees, escrow fee, title insurance, notary fees, recording fees, credit investigation fee, and other cost and expenses. |
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Mortgage loan brokers are limited in what they can charge for commissions and expenses associated with securing a loan. To what kinds of loans do these limits apply? |
These limits apply only to first trust deeds of under $30,000 or second trust deeds of under $20,000. Loans above those amounts are not subject to these limits, so a broker can charge as much as a borrower would agree to pay. |
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Explain the difference between "points" and "discount points" on a loan. |
Points are a one-time service charge to the borrower for making the loan. Points represent prepaid interest, and the lender charges them to get additional income on the loan. Points are paid at closing and are usually equal to 1 percent of the loan amount. Discount points are designed to offset any losses the lender might suffer when selling the loan to the secondary mortgage market. Discount points are a means of raising the effective interest rate of the loan. The rule of thumb is 1/8 percent for each discount point. |
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List two advantages of conventional loans over government-backed loans. (See other correct answers on Screen 3.) |
Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency. |
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What are four ways that fixed-rate loans can be structured? |
Fully amortized loan Term loan Growing equity mortgage Graduated payment mortgage |
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What does federal law say about the termination of private mortgage insurance? |
Federal law requires that any loans originated after July 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments. However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI. |
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FHA and VA loans differ from conventional loans in what important way? |
FHA and VA do not loan funds directly. FHA insures loans and VA guarantees loans, but the loans themselves are made by approved, qualified lenders. |
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What kind of insurance does FHA require borrowers to pay? |
As of 2006, the borrower must pay two insurance premiums. The first is the "upfront" Mortgage Insurance Premium (MIP) which is a percentage of the loan amount. The borrower can pay this one-time premium at closing or the charge could be financed with the loan. The second premium, called Mutual Mortgage Insurance (MMI) is a monthly premium that is paid with the monthly principal, interest, taxes and insurance payment. MMI premiums may be dropped when the remaining loan balance is 80 percent loan-to-value ratio or less. |
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Name four popular FHA loan programs. |
Section 203(b)-Mortgage Insurance for One-Family to Four-Family Homes Section 234(c)-Mortgage Insurance for Condominium Units Section 245(a)-Growing Equity Mortgage Section 203(k)-Rehabilitation Home Loan |
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What is a Certificate of Reasonable Value and what is it used for? |
A Certificate of Reasonable Value (CRV) shows the value of a property in relation to its sales price. It is issued by an approved VA appraiser when a veteran is seeking a DVA loan. |
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How is a Cal-Vet loan different from an FHA or VA loan, and how is the loan handled? |
the Cal-Vet loan is actually a land contract. When a veteran is approved for a Cal-Vet loan, the state purchases the property and resells it to the veteran using a contract of sale. The state retains the title to the property until the loan is paid off, after which California will issue a grant deed to transfer legal title to the veteran. |
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What kinds of programs are offered by the California Housing Finance Agency? |
The California Housing Finance Agency program offers below-market interest rate first mortgage programs and a variety of down payment assistance programs to eligible first-time homebuyers. |
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What is the relationship of a junior loan to a senior or first loan? |
A junior loan is "subordinate in right or lien priority" to an existing mortgage on the same property. |
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What are two ways a junior lender can protect itself from default? |
By adding clauses to the financing instrument, such as: A provision that grants the junior lender the right to pay property taxes, insurance premiums and other charges if the borrower is not making these payments.A clause that allows the junior lender to pay funds for taxes and insurance into an escrow account and make any payments on the first loan to offset a possible default. |
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What is the purpose of the Farm Credit System and what agency regulates their activities? |
serves the unique financial needs of farmers, ranchers, producers/harvesters of agricultural products and rural homeowners by providing loans for real estate, operating costs and rural homes. They also offer credit-related life insurance and crop insurance. FCS is regulated by the Farm Credit Administration. |
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What kinds of programs does USDA Rural Development support? |
Supports essential public facilities and services, such as water and sewer systems, housing, health clinics, emergency service facilities and electric and telephone service. Promotes economic development by supporting loans to businesses through banks and community-managed lending pools. Offers technical assistance and information to help agricultural and other cooperatives get started and improve the effectiveness of their member services |
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What are the three conventional loan programs offered by CalHFA? |
interest only PLUSSM 40-Year Fixed Mortgage 30-Year Fixed Mortgage |
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Name and describe three CalHFA down payment assistance programs. |
Affordable Housing Partnership Program (AHPP) - A joint effort - first-time homebuyer receives a deferred-payment subordinate loan from a locality to assist them with the down payment and/or closing costs. High Cost Area Home Purchase Assistance Program (HiCAP) - assista first-time homebuyers in the highest housing cost areas of the state. California Homebuyer's Downpayment Assistance Program (CHDAP) - deferred-payment junior loan of an amount up to the lesser of three percent (3%) of the purchase price or appraised value. |
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List three major HUD activities |
Supervising the Federal Housing Administration. Regulating Ginnie Mae. Overseeing (but not regulating) the operations of Freddie Mac and Fannie Mae. |
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To what does the Interstate Land Sales Act apply and what does it require? |
The Act applies to subdivisions of undeveloped land sold or offered for sale or lease through interstate commerce. It requires submission of a statement of record describing a proposed subdivision in detail, accompanied by maps, contract documents and certifications that fully disclose relevant information about the subdivision. |
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Explain HUD's Good Neighbor Next Door home purchase program. |
In this program for law enforcement officers, pre-Kindergarten through 12th grade teachers, and firefighters/emergency medical technicians, HUD offers a discount of 50% from the list price of a home. In return, the buyer must commit to live in the property for 36 months as his or her sole residence. |
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Which California fair housing law(s) apply to financial institutions? |
Both the Unruh Civil Rights Act and the Holden Act. |
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What does ECOA prohibit? |
Discrimination against applicants on the basis of race, color, religion, national origin, sex, marital status, age or dependency on public assistance |
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What is the right to rescind and what is not covered by this rule? |
The borrower has a right to cancel the transaction by notifying the lender within three days. This does not apply to residential first mortgage loans |
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Why did Congress pass the Community Reinvestment Act? |
To prevent redlining and to encourage banks and thrifts to help meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods. |
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According to California Community Redevelopment Law, what is the fundamental purpose of redevelopment? |
To expand the supply of low- and moderate-income housing. To expand employment opportunities for jobless, underemployed, and low-income persons. To provide an environment for the social, economic, and psychological growth and well-being of all citizens. |
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Describe a graduated payment mortgage. |
the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage |
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How many GPM plans does FHA offer and how are they structured? |
5; Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first 5 years of the loan. The other two plans permit payments to increase 2 and 3 percent annually over 10 years. After term their payment remains the same. |
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List three ARM indexes |
Certificate of Deposit Index (CODI) Treasury Bill (T-Bill) London Inter Bank Offering Rates (LIBOR) |
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What is an interest rate cap and how many are there? |
Interest rate caps limit the amount of interest the borrower can be charged. 2: Periodic & Overall |
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Describe a two-step mortgage. |
two-step mortgage is an ARM loan program in which the interest rate is adjusted only one time - usually five or seven years after the loan is originated. |
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List two advantages of growing equity mortgages. |
The low up-front payments may make it easier for first-time home buyers to qualify for and afford a loan. A GEM is usually paid off faster than a traditional fixed-rate mortgage. |
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Define a reverse mortgage and list three types. |
With a reverse annuity mortgage, the lender is making payments to the borrower. 3 Types: Single-purpose - Offered by some state and local government agencies and nonprofit organizations. Federally-insured - Home Equity Conversion Mortgages (HECMs) - backed by HUD. Proprietary - private loans - backed by the companies that develop them. |
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What is a biweekly loan and what's the advantage? |
Half the mortgage paid bi- weekly which equates to an additional payment each year - pay off faster and lowers overall interest paid. |
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Define an open-end loan and name one common type of open-end loan. |
An open-end loan is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. A construction loan is a common type of open-end loan. |
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What two clauses are important to have in a blanket loan? |
Release clause and recognition clause |
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What type of loan is very popular in the sale of new subdivision homes and furnished condominiums and why? |
A package loan finances the purchase of a home along with the personal items. It is popular with both lenders and borrowers because they believe there is less risk of default. Borrowers can pay for the essential personal items over the extended period of the loan, rather than have to exhaust their reserves to purchase the items outright. |
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Describe a wraparound loan. |
A wraparound loan allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. |
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What is the role of the secondary mortgage market? |
The secondary mortgage market consists of holding warehouse agencies that purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors. |
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Who are the three major players in the secondary mortgage market? |
Ginnie Mae Fannie Mae Freddie Mac |
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What was the first mortgage-backed security called and why was it called this? |
It was called a pass-through security because the monthly principal and interest payments were collected from the borrowers and then "passed through" to the investors. |
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What is Ginnie Mae's most heavily traded product and what is the minimum pool size? |
Ginnie Mae I MBS (Mortgage-Backed Securities) are the most heavily-traded MBS product, based on single-family pools. The minimum pool size is $1 million. |
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Why did the federal government establish Fannie Mae? |
The federal government established Fannie Mae to increase the flow of mortgage money by creating a secondary market to purchase Federal Housing Administration (FHA)-insured mortgages. |
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What important action took place with the 1968 Charter Act? |
Fannie Mae became a fully private company operating with private capital on a self-sustaining basis. Its role was expanded to buy mortgages beyond traditional government loan limits. |
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What automated underwriting systems does Fannie Mae have available for users and for whom are they designed? |
Desktop Underwriter (DU) ® is designed for lenders. Desktop Originator (DO) ® is designed for brokers and correspondents. |
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Name and explain two of Fannie Mae's special programs. |
Neighborhood Champions mortgages make home buying easier for teachers, police officers, firefighters, nurses, hospital workers and other community service professionals. America's Living Communities Plan supports communities' visions for neighborhood revitalization and development. |
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Why was Freddie Mac created and what is its mission? |
Freddie Mac was created in 1971 to develop a mortgage-backed security for conventional loans. Freddie Mac's mission is to provide stability, affordability and opportunity to the housing market by putting home ownership within reach for minority populations and making rental housing more affordable. |
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Name three Freddie Mac fixed rate programs and name one feature of each. |
Streamlined Purchase - Offering 400 - a nominal fee or higher interest rates for a loan with less documentation and faster. Affordable Merit Rate - use alternative sources of funds not permitted for other mortgages Freddie Mac purchases. Alt 97 - for borrowers with weak credit reputations or past credit challenges. |
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What do Home Possible mortgages do? |
flexible underwriting, low-to-no down payments, expanded loan-to-value (LTV) ratios other special underwriting features to under-served qualified borrowers. |
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Explain Don't Borrow Trouble. |
Anti-predatory lending campaign, combining extensive public education with comprehensive counseling services. Helps homeowners avoid scams and resolve any financial difficulties they may be experiencing. |
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What are the four critical procedures for processing a loan? |
Determine the ability of the borrower to repay the loan Estimate the value of the property that is collateral for the loan Research and analyze the marketability of the title. Prepare the documents necessary to approve the loan and close the transaction. |
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Define underwriting. |
The evaluation process used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral. |
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Who usually performs the underwriting tasks? |
The loan officer at the financial institution |
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What is detailed in the Assets and Liabilities section of the loan application? |
All things of value -cash, stocks, bonds, life insurance policies, real estate owned, businesses, automobiles and other personal property. What the borrower owes - auto loans, charge accounts, real estate loans, medical bills, insurance premiums, long-term liabilities such as alimony and child support |
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What is the Request for Verification of Deposit form? |
A verification form that allows the bank to give the lender information about current balances in the borrower's accounts. |
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What kinds of information does an employer provide on the Verification of Employment form? |
The borrower's wages and length of employment, an opinion of the borrower's attitude on the job, the probability of continued employment and a prediction of what the borrower's prospects are for pay increases or promotions. |
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What is the most important part of the credit report? |
The borrower's payment history. |
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Name two red flags that might appear on a borrower's credit report |
The employment or residence data on the credit report is different from the application. There are several recent inquiries from credit card companies or other mortgage lenders |
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Explain the difference between market value and market price. |
Market value is an opinion of the value of a property based on analyzing data collected about the property. The market price of a property is the actual sales price. |
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What does the term anticipation mean as it relates to property value? |
The benefits a buyer expects to receive over the period of time he or she holds the property. |
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What are the four levels of appraiser licensing? |
Trainee License Residential License Certified Residential License Certified General License |
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What are the three approaches to estimating a property's value? |
Sales comparison approach Cost approach Income approach |
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What does a title search reveal? |
The legal description of the property The owners of record Any outstanding liens or encumbrances on the property |
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Who needs title insurance and why? |
Both the buyer and the lender need title insurance. Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property. |
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What is the difference between CLTA and ALTA policies? How does ALTA-R differ from ALTA? |
CLTA is the basic standard policy and ALTA provides extended coverage. ALTA includes a survey and ALTA-R does not. |
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What items are not covered by any title insurance policy? |
Defects known to the insured but not disclosed to the title insurer Government zoning regulations |
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What does a survey show? |
The "footprint" of the house and any deck, patio, garage or carport. It also shows other buildings on the property, driveways, fences or swimming pool. |
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What does RESPA require lenders to give to borrowers? |
The correct figures pertaining to their closing costs. |
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RESPA does not apply to what kinds of loans? |
Seller-financed loans or loan assumptions (unless the lender has changed the terms of the assumed loan or charges more than $50 for the assumption) |
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List three items that a buyer usually pays at closing. |
Credit fees Loan origination Homeowner's insurance |
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If an item is paid for in advance by the seller, how will it be handled on the settlement statement? |
The buyer will receive a debit and the seller will receive a credit. |
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What do you call those items that the seller has incurred but have not been paid and how will they be handled on the settlement statement? |
These items are paid in arrears. The buyer will get a credit and the seller will get a debit. |
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What does page 2 of the Closing Disclosure show? |
The details of the closing costs |
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What does page 3 of the Closing Disclosure contain? |
Calculations of the amount of cash the buyer needs to bring to closing and summaries of all the transactions for both the buyer and the seller |
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Name three common types of default. |
Failure to meet an installment payment of the interest and principal. Failure to pay taxes when they are due. Neglecting to pay hazard insurance premiums. |
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What does the Housing Act of 1964 require? |
Requires that lenders provide relief in circumstances where the default is beyond the borrower's control. |
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What is a moratorium? |
A temporary or permanent, partial or full waiver of mortgage payments that the lender grants to the defaulting borrower. |
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Define recasting. |
A redesign of a loan by changing the terms, either temporarily or permanently. Lenders can change terms such as interest rate, amortization period or payment amoun |
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Describe the difference between equity of redemption and statutory redemption. |
The right to redeem property between the time of the default and the foreclosure sale is equity of redemption. The right to redeem the property after the foreclosure sale has taken place is statutory redemption. |
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What is a deficiency judgment? |
Any outstanding debt remaining after foreclosure and sale of a property |
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With a judicial foreclosure, when is the Deed of Conveyance issued and who issues it? |
The sheriff will issue a Deed of Conveyance if the debtor does not redeem the property within the redemption period. |
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What does the FHA expect a lender to do at the foreclosure sale for an FHA-insured property if the bids are less than the loan balance? |
FHA expects the lender to bid on the debt, take the title, and present it to the FHA along with a claim for insurance. |
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What kind of redemption rights does a defaulted borrower have under a power-of-sale foreclosure? |
The borrower has the right to redeem the property between the notice of sale and the actual sale (equity of redemption). But there is no statutory redemption period with a power-of-sale foreclosure. |
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In a nonjudicial foreclosure sale, the new purchaser will receive a trustee's deed to the property. But what potential problem exists? |
There is no guarantee that the title is clear. There may be some outstanding liens still in effect, such as a federal tax lien, real property taxes or assessments, or a valid mechanic's lien |
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What is the disadvantage of a strict foreclosure? |
There is no clearly established value for the property because there is no public auction. The lender's losses cannot be established and there are no deficiency judgments with strict foreclosures. |
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Which form of bankruptcy is the least favorable to a lender? |
Chapter 11 bankruptcy is the least favorable because the lender may find that the security is tied up for years during the reorganization process. |
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List two reasons investors purchase residential property. |
To keep for the long term benefits. To flip in hopes of a quick profit. |
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What are the two important measures of a good single-family residence investment? |
Income produced. How much the home has appreciated. |
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List three advantages of investing in a single-family home |
a large selection of properties Management of a single residence easier investment is more liquid than other kinds of property. |
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List three disadvantages of investing in a single-family home |
Vacancy rate. Management. Repairs. |
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If a buyer wanted to purchase a vacation home as an investment, what would be considered an important criterion in choosing the home? |
It should be close to a popular recreational interest, such as a ski resort or a lake, or be in a year-round warm, sunny location. |
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List two advantages of purchasing a condominium as an investment. |
Ease of rental. Services provided by the association do not have to be provided by the owner. |
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What is the most important consideration when deciding to purchase a fixer-upper as an investment? |
What the demand for the property will be when it's ready for resale. |
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List two advantages and two disadvantages of investing in a two-to-four unit dwelling |
Properties of this size can be found in most communities.Tenants often pay all of their own utilities and do repairs. Fewer of these types of buildings are being newly built.find.It is becoming more expensive to purchase units that already exist. |
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What typically happens to the loan ratio on an apartment building loan as the building size increases? |
The loan ratio is usually reduced from 75 percent to 60 percent or less. |
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What does California law say about the need for a resident manager for an apartment building? |
Any apartment complex that has 16 units or more must have a resident manager, unless the owner lives on the property. |
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What are the subcategories of commercial real estate? |
Office buildings, retail space and hotels/motels. |
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What makes institutional real estate different from other types? |
It has a unique use to the persons who own and use it, such as a government agency, a church, a hospital or a university, and usually would not be easily tailored to other uses. |
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List three reasons why a business might prefer leasing over purchasing property. |
It's more cost effective if a tenant needs less space than what is currently available. Leasing is a more flexible option if an owner decides to move to a different location. Ownership involves operation, maintenance and repair of the building, which take focus away from the owner's primary business activities. |
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What factors affect net operating income? |
Market Rent Vacancies Expenses |
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List five items normally contained in a lease. |
Date of the agreement Starting date and the length of the lease Parties to the lease The description of the leased space A description of how the property can be used |
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What is a step-up lease? |
A lease containing a provision that spells out how the rent will increase periodically and gives the specific amounts and specific dates of those increases. |
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Describe the difference between a gross lease and a net lease. |
A gross lease is defined as one in which the owner pays all of the operating expenses and the tenant has no responsibility for these expenses. A net lease is defined as one in which the tenants pay the operating expenses. |
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Why might tenants leasing industrial property prefer to have very long-term leases? |
They might have this preference if they are installing expensive equipment that would be very difficult to move. |
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What's the best way to forecast the future potential benefit of a particular property? |
By looking at its past operating history |
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An investor owns an apartment building with the following figures: Gross Rent - $176,500 Vacancy Estimate - $6,700 Parking Lot Proceeds - $5,400 Operating Expenses - $32,800 What is the effective rental income, gross and net operating income ? |
ERI = $181,900 GOI = $175,200 NOI = $142, 400 |
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What is debt service? |
Debt service is the principal and interest payments made on a debt over a period of time. |
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What two physical traits affect a property's ability to stay competitive? |
Functional efficiency Physical durability |
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What is an appraisal? |
An appraisal is an opinion or estimate of the value of a property. |
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What location factors affect the value of a property? |
Convenience and accessibility, aesthetic issues and neighborhood factors |
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What three physical factors affect the value of a property? |
Arrangement and design Physical durability Visual appeal |
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What's the difference between reproduction cost and replacement cost? |
Reproduction cost is the cost at today's prices of producing an exact duplicate of the current building, including its improvements and its flaws. Replacement cost is the construction cost at today's prices of producing a similar or equivalent structure. |
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Jim is using the cost approach to appraise Greg's property. Jim has the following figures: land value $25,000, building value $137,500, total depreciation, $33,000. Using these figures, what will Jim estimate as the total value of the property? |
$129,500 ($137,500 - $33,000 + $25,000) |
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The income approach is based on which two principles of value? |
Anticipation and substitution |
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Define the capitalization rate. What is the capitalization rate of a property that sold for $325,000 and is producing an annual net operating income of $29,250? |
The rate of return an investor will require on his or her investment of capital in this kind of property. 9% ($29,250 ÷ $325,000 = .09) |
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For what types of property would an appraiser use a gross rent multiplier? If a property had a monthly rental income of $650 and the gross rent multiplier was 180.7, what would the appraiser estimate the property's value to be? |
Properties such as single-family homes and duplexes that could produce income, but are not primarily income-producing properties. $117,455 ($650 x 180.7 = $117,455) |
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What does an appraiser do after he or she has completed the estimates of value using all three estimating approaches? |
The appraiser reconciles the estimates into a final value estimate. |
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What does a mortgage lender need in addition to an appraisal to help evaluate the risk involved in a loan on investment property? |
The lender needs information about the market value of a property over the life of the loan, or at least for several years. |
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When developing a meaningful multiple-year operating forecast, what must an analyst forecast? |
Gross revenue Operating expenses Changes in market value |
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What are the potential benefits of seller financing over a conventional lender loan? |
Lower interest rates Longer loan terms |
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How is an installment land contract different from other types of financing? |
With this financing arrangement, the seller keeps title and sometimes keeps possession and use of the land as well. After all the payments have been made, the seller transfers ownership of the property to the buyer. |
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What is the advantage of using an option to obtain property? |
A developer who options land does not incur any holding costs, such as taxes, insurance, interest and maintenance, until he or she exercises the option. If the economy weakens or the developer believes that the development of the parcel is not feasible, he or she can simply decline to exercise the option. |
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In what situations might the entity that develops the land be different from the entity that does the building on the land? |
In the single-family residential home market, where a land company will subdivide large pieces of land and sell packages of lots to individual builders. In industrial parks, where many of the users have special needs that will require custom-designed buildings. |
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How do construction loans differ from regular financing on an existing structure? |
A construction loan is a short-term, interim, or temporary loan usually lasting from 9 to 12 months for a single-family home and 18 to 24 months for a more major project such as an apartment building. |
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What are the two basic kinds of construction loan? |
A combination loan, which combines a construction loan with a permanent take-out mortgage and requires only one loan closing. An interim, short-term, straight construction loan, which involves the financing of the construction phase only. |
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Before deciding to do a construction loan, what things will the lender consider? |
Plans and specifications Breakdown of costs Contract Repayment plan Financial information |
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How are the payments on a construction loan disbursed? |
Lenders can disburse funds using the draw method, the percentage-of-progress system (which is a type of draw), the voucher method, or a builder's control service. |
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What is a take-out commitment? |
A promise by the permanent lender that if certain conditions are met, the lender will issue a permanent loan to the borrower once the construction is completed in a satisfactory manner. |
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What is a subordination clause and what must it specify to be enforceable? |
An agreement to reduce the priority of an existing loan to allow a new future loan to take a higher priority. To be enforceable, a subordination clause must specify the maximum amount, the maximum rate of interest and the loan repayment terms. |
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What is a rental achievement clause? |
A clause that requires the developer-borrower to pre-lease a certain amount of space in the building. To meet this contingency, the developer will give the lender a certified rent roll that specifies who the tenants will be and which space they will be leasing, the length of each lease and the annual rent each of the tenants will be paying. |
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Under what circumstances can a mechanic's lien be placed on a property? |
If the builder does not complete the project or if the job is completed and the builder does not pay those suppliers or contractors who worked on the project. |
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How did risk management develop into a formal discipline? |
From the insurance industry |
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What are the three ways of controlling loss? |
Avoid Loss Limit Loss Reduce Loss |
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What are the four main reasons that investors invest their equity capital? |
Return rate Property appreciation Diversification Tax benefits |
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What is often said about development in the real estate industry? |
Because the real estate industry is cyclical, the real estate industry is often said to have a tendency toward cycles of overdevelopment. |
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If investor Jim is skilled at predicting when to buy or sell property based on property types and economic conditions, what investment strategy would he be most likely to use? |
Market timing |
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What is arbitrage investing? |
The investment strategy based on the ability of an investor to recognize the differences in prices that buyers are willing to pay for the same real estate investments that are located in different markets. |
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Define financial leverage. |
The benefits that may result for an investor who borrows money at a rate of interest lower than the expected rate of return on the total funds he or she invested in the property. |
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What kind of risk results from a slow real estate market with few buyers and sellers? |
Liquidity Risk |
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List three risk management procedures. |
Diversification Property management Shifting risk to insurance companies |
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Use of a triple-net lease is an example of which risk management procedure? |
Shifting risk to tenants |
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List two types of hedging mechanisms. |
Purchase options Interim financing commitments |
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What are two alternatives to selling a property that an investor can use if the property is not performing as well as anticipated? |
Refinancing Renovating |
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Define a syndicate and list its three cycles. |
A syndicate is a descriptive term for a group of two or more people who combine their financial resources to achieve certain investment objectives. Organization Operation Liquidation |
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What business forms can syndication take? |
Limited Partnership General Partnership Corporation Real Estate Investment Trust |
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List three important things to know about partnerships |
Partners' interests are undivided. The partners' spouses do not have a direct community property interest in partnership property. A general partnership agreement does not need to be in writing to be valid. |
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In a limited partnership, what is the liability difference between a general partner and a limited partner? |
Limited partners are liable only to the extent of their investment. General partners have unlimited liability. |
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What requirement does California have regarding REIT shares? |
California requires that each share carry with it an equivalent vote in determining trust policy. |
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List four important things about corporations. |
Corporations can own property. Shareholders have limited liability and do not participate directly in managing the corp. Shareholders elect directors, who are the ones responsible for setting corporate policy. The directors hire officers, who operate the corporation. |
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What is the difference between an equity trust and a mortgage trust? |
Equity trusts buy and sell real property. Mortgage trusts buy and sell mortgage loans. |
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What is a hybrid trust? What does California call a hybrid trust? |
A hybrid trust unites real estate equity investing with mortgage lending. In California, a hybrid trust is called a balanced trust. |
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How do REITs handle taxes? |
REIT shareholders report the taxable income from their REIT shares on their personal income tax returns. |
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How are REIT mutual finds different from other REITs? |
While REITs invest in real estate or mortgage-secured debts, REIT mutual funds invest in bonds or the stock of other companies. |
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What are the three types of private REITs? |
Institutional investors that take large financial positions. As part of a package offered by a financial consultant. "Incubator" REITs that are funded by venture capitalists who expect that the REIT will develop a good enough track record to launch a public offering in the future. |
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Explain how a REIT can grow its income from its existing properties. |
Increase the occupancy level by renting more space. Raise rents. Redevelop the space. Change the marketing strategy. Control expenses. |
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Computation for Cost Recovery |
1) tax basis * building depreciation allowance 2) BDA / property depreciation term (ie residential 27.5 years; non residential 39 years) |
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What is a property's initial tax basis? |
Everything of value that was given in exchange for the property, including any commissions, legal fees, title insurance and other items that the purchaser had to pay to complete the purchase that are not deductible as a current operating expense. |
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Define depreciation allowance. |
An amount an investor can deduct from his or her taxable income to recover some of his or her investment capital. |
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Glenda purchased a nonresidential building in June 2004. Her initial tax basis on the building is $480,500. What is her monthly depreciation allowance? |
$480,500/39 = $12,320.51 $12320.51/12 = $1026.71 |
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What kind of circumstance would decrease the tax basis of a property and what type of circumstance would increase the basis? |
Damage to the property decreases Improvements to the property increases |
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Under what circumstances would the joint tenancy form of ownership be a bad idea? |
Because of the right of survivorship, joint tenancy is not a good idea unless the other joint tenant or tenants are people to whom the investor intended to leave the property to anyway. |
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What is the most important consideration when choosing an investment ownership type? |
Maintaining decision-making control over the operations |
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Explain the difference between a tax deduction and a tax credit. |
A tax deduction reduces a person's taxable income. A tax credit reduces the actual tax liability dollar for dollar, after the tax due amount has been computed. |
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What does the Foreign Investment Real Property Tax Act of 1980 require? |
The act requires that any person who purchases property from a seller who is not a US citizen must withhold and send to the IRS 10% of the gross sales price. |
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Explain the difference between realized and recognized gains or losses. |
A gain or loss is realized at the time the property or asset is sold. A recognized gain or loss is the amount incurred that must be reported on income taxes for a specific year (either the year of the transaction or later) and is determined by how the transaction is structured. |
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Which kinds of assets are considered Section 1231 assets and which are not? |
Assets used in a trade or business are Section 1231 assets. Assets held for investments or personal use are not Section 1231 assets. |
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What is the potential important advantage to a seller who uses the installment sales method when selling a property? |
The seller may be able to defer the taxes on the gain until he or she is in a lower tax bracket. |
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What is the definition of a like-kind exchange? |
One property can be exchanged for another property regardless of the property type, as long as it is held as an investment or for use in a trade or business. |
