Real Estate Exam 2

Front 1

Income Approach to Appraisal

Back 1

Value = Present Value of anticipated income

Front 2

Two Approaches to Income Valuation

Back 2

Direct capitalization & Discounted Cash Flows (DCF)

Front 3

Direct Capitalization

Back 3

Used with an overall "Cap Rate". Finds the value of NOI with multiples from comparable properties. (Most commonly used approach)

Front 4

Discounted Cash Flow (DCF)

Back 4

Projected cash flows for a standard holding period. Youneed the cash flows for each year, you need anestimated discount rate, you need the expected sale of property.

Front 5

Potential Gross Income (PGI or PGR)

Back 5

Rental income assuming 100% occupancy

Front 6

Contract Rent

Back 6

Rent that is contracted at acertain price :$1000 apartment special market rate @ $1300

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Current Market Rent

Back 7

Rent is valued at market price

Front 8

Types of Commercial Leases

Back 8

Straight Lease, Step Up or Graduated Lease, Indexed Lease, Percentage Lease

Front 9

Straight Lease (most common)

Back 9

Your rentis $1000/mo for12 months (generally used)

Front 10

Step Up or Graduated Lease

Back 10

Rent raises at a predeterminedschedule and rate

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Indexed Lease

Back 11

Rather than specifying the rentincreases, we specify the dates they are going to up and some measure ofinflation and cause rates to go up.

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Percentage Lease (Retail Only)

Back 12

Your rent is going to be ‘x’ dollars or 3% of your gross sales,whichever is higher

Front 13

Vacancy & Collection Loss

Back 13

It’snot just the physical vacancy. For whatever reason that you didn’t receive they money youshould have collected. (Economic occupancy)

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Natural Vacancy

Back 14

Vacancy rate that is expected in a stableor equilibrium market

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Miscellaneous income

Back 15

Thingsthat do not relate to physical occupancy (orrent). (Garage Rentals, Parking Fees, Clubhouse rentals, Laundry & Vending Machines)

Front 16

Operating Expenses

Back 16

Ordinary ®ular expenditures necessary to keep a property functioning competitively (maintenance.) Does not include mortgage payments,principle interest on payments.

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Capital Expenditure

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Any item for which has a long lived value,i.e. multiple years and prolongs useful life.Replacing roofs, air conditions, repavingparking lots, are all capital expenditure.

Front 18

Net Operating Income

Back 18

A property's dividend

Front 19

Cap Rates

Back 19

A means to capture future growth expectations. Calculated by NOI/Purchase Price

Front 20

Effective Gross Income Multiplier

Back 20

Easier to calculate. Quick indicator of value for smallerrental properties. Best used for properties with short-termleases (apartments &rental houses)

Front 21

Two elements of a Mortgage Loan

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The note and the mortgage

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Note

Back 22

The document evidence of a debt and contains exactterms of the financial obligation

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Mortgage

Back 23

Pledgesthe property as security for the note

Front 24

The Note: Adjustable Rate

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Market-determinedrate beyond control of either borrower or lender. Themargin is fixed (whatever the lender makes), butthe rate is comprised of the margin + the index. It’s cheaper due to the buyerbearing the risk of an interest rate change.

Front 25

The Note: Adjustable Rate (Change Rate)

Back 25

Date that interest rate changes each timeperiod. Ex: Most common frequency is 1 year.They also have ones that adjust 5:1 or 5:2, fixed rate for 5 years, adjustedrate every 1 or 2 years.

Front 26

Payment Caps

Back 26

Yourinterest rate can’t go up more than X% at atime

Front 27

Balloon Loan

Back 27

A mortgage that requires a larger-than-usual one-time payment at the end of the term. This can mean your payments are lower in the years before the balloon payment comes due.

Front 28

Bullet Loan

Back 28

A loan where a payment of the entire principal of the loan, and sometimes the principal and interest, is due at the end of the loan term. (Interest only balloon loan)

Front 29

Right of Prepayment

Back 29

The right given to a debt holder to pay all or part of a debt prior to its maturity or ahead of schedule.

Front 30

Loans with Right of Prepayment

Back 30

All“conforming” and FHA/VA loans & homeequity credit lines

Front 31

Types of Prepayment Penalties

Back 31

Percentage of outstanding balance, Yield Maintenance, Defeasance

Front 32

Percentage of Outstanding Balance

Back 32

Prepayment penalty calculated by taking a percentage of the loan balance owed in addition to full payment of the loan.

Front 33

Yield Maintenance

Back 33

A mortgage loan prepayment penalty computed as the present value of interest income to be lost by the lender due to the early prepayment.

Front 34

Defeasance

Back 34

Cannot pay loan in full with cash.Only way to pay is buying treasury securities paying the mortgage for the restof the loan. (substitution or simulating continual loan payments)

Front 35

Nonrecourse Loan

Back 35

No personal recourse. Common incommercial property only.

Front 36

Acceleration Clause

Back 36

Under these circumstances likemissing a payment, they have the right to accelerate all the loans, making theremainder of the balance due all at once.

Front 37

Due-on-Sale clause

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A provision in a mortgage contractthat requires the mortgage to be repaid in full upon a sale or conveyance ofpartial or full interest in the property that secures the mortgage. If you deedthe property you must pay it off.

Front 38

Short Sale

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Where the bank agrees to take lessthan what is fully owed on the mortgage as payment in full.

Front 39

Deed in lieu

Back 39

Instead of going through theforeclosure process, the borrower agrees to “return the keys” to the bank.

Front 40

Foreclosure

Back 40

Legal process of terminating allclaims of ownership and all liens inferior to foreclosing lien

Front 41

Equityright of redemption

Back 41

Youhave the legal to redeem theproperty up until the judgment is made.

Front 42

Statutory right of redemption

Back 42

A law that says you have some timeafter the foreclosure sale to redeem the property (up to 180 days). *farmers inMidwest*

Front 43

Deficiencyjudgment

Back 43

Judgmentagainst mortgagor for unrecovered balance.

Front 44

Aquiring Property with Existing Debt

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Subjectto – When you buy the property, and the mortgage is not paid off. “Taking oversomeone’s payments." Theoriginal borrower may be released of liability, but in some situations the newbuyer can come in, but the original borrower is aguarantor.

Front 45

Mortgage Types

Back 45

Conventional mortgages, FHA mortgages, VA mortgages, Home equity Loans

Front 46

Conventional Mortgage

Back 46

Anystandard home mortgage loan not insured by FHA or guaranteed by Department ofVeterans Affairs

Front 47

Conforming Conventional Home Loan

Back 47

Meetsthe requirements for purchase by Freddie Mac or Fannie Mae: Standardnote, Standardmortgage, Standardappraisal, Sizelimit: Currently $417,000 (higher for high cost areas), Interestrate advantage due to liquidity (at least .25%, over 1.00 percent sincemid-2007)

Front 48

Nonconforming Home Loan

Back 48

Doesnot meet GSE requirements in some respect. i.e. Jumbo loan:Nonconforming in terms of size

Front 49

FHA Mortgages

Back 49

Let people who didn’t have perfectcredit get mortgages. FHA mortgages havea higher foreclosure rate.

Front 50

What does the FHA do?

Back 50

FHA is strictly a loan insurance program.

Front 51

Veterans Affairs Guarantees (VA loans)

Back 51

Backs loans made by private lenders (banks, savings and loans, or mortgage companies) to veterans who qualify.

Front 52

Primary Mortgage Market

Back 52

Where loans are created (retail or street market)

Front 53

Primary Market Players

Back 53

Mortgage Bankers, Mortgage Brokers, Banks, Thrifts

Front 54

Mortgage Bankers

Back 54

Someone who's going to give you their money toclose a loan with their name.

Front 55

Mortgage Broker

Back 55

Matches you up with a lender, whonever closes the loan in their name (earns commissions)

Front 56

Secondary Mortgage Market

Back 56

Where existing homes are resold.

Government-sponsored enterprises(GSEs)–Fannie Mae & Freddie Mac, Government National MortgageAssociation (GNMA or “Ginnie Mae”), and wholesale mortgage bankers.

Front 57

Private Mortgage Insurance (PMI)

Back 57

Insuranceto pay the lender if the borrower fails to do so.

•Generallyrequiredfor loans over 80% of value•Protectslender for losses up to 25% - 35% of loan

Front 58

PurchaseMoney Mortgage

Back 58

Mortgage given by a property buyersimultaneous with receipt of title

In lieu of taking cash for thepurchase, they take back part of the purchase in the mortgage.

Front 59

Reverse Mortgage

Back 59

A special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. Usually claimed by individuals 65 and older.

Front 60

Interest Only Mortgage (Balloon)

Back 60

Hasinterest-only payments for five to seven years, ending with a full repayment ofprincipal.

Front 61

Interest Only Mortgage (Amortizing)

Back 61

Hasinterest-only payments for up to fifteen years, then converts to a fullyamortizing payment for the remainder of the term

Front 62

HybridARM

Back 62

Interestrate is fixed for some years, then becomes adjustable. Paymentis set to be fully amortizing. Fixedrate period ranges from two to ten years. Fixedrate is higher as its term is longer

Front 63

Negative Amortization

Back 63

Occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases.

Front 64

Three Traditional 'C's of Underwriting

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–Collateral:URAR appraisal

–Creditworthiness:Credit report

–Capacity:Ability to pay (payment ratios)

Front 65

Housing Expense Ratio (Front End)

Back 65

PITI/GMI

PITI = Principle, Interest, Property Tax, Insurance

GMI = Gross Monthly Income

Maximums: 28% for Conventional Loans

29% for FHA loans

Front 66

Total Debt Ratio (Back End)

Back 66

Considers Long Term Obligations

(PITI + LTO) ÷ GMI

Maximums: 36% for Conventional Loans

43% for FHA loans

Front 67

Long Term Obligations

Back 67

CarPayments, Credit Card payments, Student Loan payments, Judgment payments.Does not include utilities, cable,groceries, etc.

Front 68

Law of Agency

Back 68

Governsrelationship between a principal (client) and someone charged to act onprincipal's behalf

Front 69

Types of Agents

Back 69

Universal - Powerto act for principal in all matters

General - Powerto act within limits of a business or employment relationship

Special - Powerto act in a specific event or transaction (Real Estate Agents)

Front 70

Fiduciary Responsibilities (6 total)

Back 70

Disclosure, Confidentiality, Accounting, Obedience, Loyalty, Skill and Care

Youhave to act on the best interest of your client, evenif it goes up to harming yourself to do the best thing for your client.

Front 71

Disclosure

Back 71

Beingcompletely open and honest

Front 72

Confidentiality

Back 72

Neverbetraying confidential information

Front 73

Accounting

Back 73

Keepingprincipal informed about financial aspects of assignment

Front 74

Obedience

Back 74

Followinginstructions of the principal fully

Front 75

Loyalty

Back 75

Neversubordinating the best interest of principal

Front 76

Skilland care

Back 76

Representingprincipal as agents would represent themselves

Front 77

Anti-Discrimination Laws

Back 77

TitleVIII of the Civil Rights Act of 1968 prohibits discrimination by race, color,religion, national origin, sex, familial status, and handicap

Front 78

"Blockbusting"

Back 78

Approachinga seller and saying “Do you know so and so is moving in, do you want to selleryour home?”

Front 79

Types of Listing Contracts

Back 79

Right of sale, Exclusive Agency, Open "Pocket" listing

Front 80

Right of Sale

Back 80

If the property sells at all, theagent will get paid their commission regardless (including friends, familywithout relators)

Front 81

Exclusive Agency

Back 81

That agent will get paid if they orany other licensed real estate agent sells the property.

Front 82

Open "Pocket" Listing

Back 82

The seller verbally agrees to havesomeone show the home and if someone buys, I’ll pay a (agreed upon) commission.You can theoretically give an open listing to multiple agencies and whoeversells first gets the commission discussed.

Front 83

Single Agent Duties

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–Dealinghonestly and fairly

–Loyalty

–Confidentiality

–Fulldisclosure

Front 84

Transaction Broker

Back 84

–Dealinghonestly and fairly

–Limitedconfidentiality

–Disclosingall known facts…affecting value… that are not readily observable to buyer

Front 85

Statute of Frauds

Back 85

The old english lawthat serves as the basis for contract law in most states, impose therequirement of writing on some types of contracts in order for them to beenforceable

Front 86

Legal Title

Back 86

Ownershipof a freehold estate

Front 87

Equitabletitle

Back 87

Rightto obtain legal title when you sign a contract

Front 88

Contingent contract

Back 88

Obligationof a party to perform depends on one or more conditions being met

Front 89

Assignment

Back 89

Oneparty’s contractual rights and obligations are transferred to someone else

Front 90

Remedies of Buyer and Seller

Back 90

•Suitfor damages: Always an option to both parties

•Specificperformance: Buyer can force seller to convey title

•Liquidateddamages (seller): Seller can retain deposit if buyer backs out

•Rescission:Mutual agreement to cancel

Front 91

InvestmentValue

Back 91

Maximum price an investor is willing topay for ownership interest in real property or mortgages

Front 92

Realestate valuation

Back 92

–Estimate all future net cash flows

–Convert into estimate of present value

Front 93

Required Yields/IRRs

Back 93

–Highquality, safe real estate investments: 8% or less

–Development:30% or more

Front 94

Lender's Yield

Back 94

Implicitinterest rate received on a loannalsolender’s expected IRR on loan isbased on:

- Actualcash loaned out by lender

- Actualcash payments received by lender

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Effective Borrowing Cost

Back 95

Third-partyexpenses: up-front expenses incurred by borrower but not paidto lender:

–Mortgageinsurance premium

–Taxeson the loan

–Lender’stitle insurance

–Appraisal

–Survey

Front 96

Alternative Amortization Schedules

Back 96

•Interest-only mortgage –Seldom with home loans (at least untilrecently)

–Often with income property loans

•Partially amortized mortgage –Maturity is shorter than amortizationperiod–Results in “balloon” payment

•Early payment mortgage

Front 97

Commercial Mortgages

Back 97

• Commercialmortgages ¬es for existing properties not as standardized as home loans

• Documentsare longer & morecomplex

• Notes are negotiable (rate & terms)

Front 98

Restrictions on Prepayment

Back 98

•Lock-out: Prohibition against prepayment for upto, say, 5 years on permanent

•Prepaymentpenalties:

–Percentage of loan:Say, 2-4% of loan balance

–Yield maintenance penalty:Borrower must pay lender PV of losses due to prepayment

–Defeasance penalty: Borrowermust replace mortgage loan with a set of U.S. Treasury securities that producecash flows equivalent to those on the paid-off mortgage

Front 99

Three Main Underwriting Ratios

Back 99

Debt Coverage, Loan to Value, DebtYield

Front 100

Debt Coverage Ratio

Back 100

•Indicatorof “cash flow cushion” from lender’s perspective

•Lender’swant DCR to be as high as possible, but typically 1.35 or higher

Front 101

Loan-To-Value Ratio

Back 101

•An indicator of borrower’s incentive tomaintain the loan (i.e., not default)

Protects from default, typical residential 80%,commercials at a lower LTV due to lower risk 65%

Front 102

Debt Yield

Back 102

•Indicator of lender’s mortgage “return”

Moreoften than not, this is the binding constraintchosen.

Front 103

Two types of REITs

Back 103

Equity REIT & Mortgage REIT

Front 104

What is a REIT?

Back 104

If acompany can meet the four tests of a REIT, they do not have to paycorporate taxes.

Front 105

Four REIT Tests

Back 105

Ownership Test, Asset Test, Income Test, Dividend or Payout Test

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Ownership Test

Back 106

At least 100 shareholders

Front 107

Asset Test

Back 107

75% of assets invested in Real Estate(Owned Mortgage, Equity positions, land, buildings)

Front 108

IncomeTest

Back 108

75% of gross income must come from RealEstate assets

Front 109

Dividendor Payout Test

Back 109

Mustpass out 90% of taxable income in dividends. (Practically, this is the easiestone to deal with.)

Front 110

Funds From Operations (FFO)

Back 110

Taking net income and turning it into a measure ofcash flow. It’s the measure of cash flow that theoretically could be paid outor reinvested.

Front 111

Net Asset Value

Back 111

NAVis equal to estimated total market value of a REIT’s underlying assets, lessall liabilities including mortgages

Front 112

Net Asset Value (Premium and Discounts)

Back 112

• Iftotal stock market capitalization > its NAV, REIT is said to be selling fora “premium” to NAV

• Conversely,REITs selling at “discounts” to NAV may signal buying opportunities forinvestors