Chapter 10 Flashcards
Describe how an asset manager’s performance is measured both from a qualitative and quantitative perspective.
Quantitatively-revenue generated
Qualitatively-success at renewing tenants, gaining new tenants who compliment the character of the property and who increase revenue
What does a buyer need to know prior to pursuing a specific property for purchase?
Buyers need to have a good sense of their goals for the acquisition. Examples of factors that are evaluated based on buyers goals include: property size, location, and class
What line items should you review in an operating statement that are important to the due diligence process?
Line items that show the property has been well maintained.
Expenses-utilities, insurance, management fees, repairs, maintenance, long-term operating and service agreements, fee structures
Major capital expenses that will be required in the future
What issues should be addressed from a due diligence perspective related to each of the following areas: income and expense environmental physical plant title surveys legal concerns
Environmental-phase 1 ESA
Physical Plant-cost of replacing or repairing anything that is not working or is in need of repair
title surveys-utility easements and property taxes
legal concerns-legality of the buyer’s entity, litigation against the seller
What is the distinction between price and value in the appraisal process?
Price is the amount of money that a seller will accept and a buyer will pay
value is the worth that either party associates with the transaction
What are the key components of the narrative appraisal process?
Narrative appraisal evaluates comparable sold properties.
It also examines value from three perspectives-cost approach, income capitalization approach, and market comparison approach
Additional data includes narrative descriptions, population patterns, economic patterns, etc.
What is the distinction between subjective and objective actors in the purchase contract negotiation process?
Subjective-emotion, motivation
Objective-price, cash versus financing, property condition, date of closing
What are some strategies a buyer should use when establishing an initial purchase price?
Consulting with local real estate professionals to identify a realistic offer, look at comparable sold properties, and perform preliminary due diligence
What are the benefits associated with cash offers versus those requiring a loan?
Cash offers get higher priority from sellers as they can get their money more quickly than waiting for the loan approval process.
Define due diligence.
The activities performed by a buyer during the period before purchasing a property.
Define preliminary due diligence
Due diligence activities performed before an offer is made.
Income statements, tenants, upcoming budget, cash flow statements, etc
Define comprehensive due diligence.
Stage in the due diligence process that begins when the seller accepts a purchase offer containing a “subject to” clause.
Physical plant inspection, zoning, evaluating legal and title issues
Describe the consequences of a buyer failing to complete a thorough due diligence process.
Overestimating the value of a property
List the areas that should be included in a comprehensive due diligence process review.
Analyzing the financial performance of the property
environmental
physical plant
zoning
evaluating legal and title issues
Why is it important for a buyer to evaluate environmental issues during due diligence?
Because federal states that any environmental problem associated with a property are the responsibility of the current owner regardless of whether or not that owner created the problems.
Define title commitment
A written statement by a title insurance company to issue a title insurance policy to the buyer and lender in order to facilitate the purchase.
What is an indefeasible title?
A title that is free and clear of all judgments, liens, loans, or actions at the moment preceding the funding of a new loan
How does a survey support the due diligence process?
They can identify where utility easements cross or intersect the property. The locations of easements can have a dramatic effect on the property.
Define appraisal and identify its purpose.
The act or process of estimating value
Define market value
The most probable price a property should sell for.
What does the phrase highest and best use mean?
The lawful use of a property that produces the highest net income to its owner.
4 criteria-legal permissibility, physical possibility, financial feasibility, maximum profitibility
What are factors that determine the price a buyer will pay for a property?
Condition of the property
Rental income versus cost of operations
amount and cost of deferred maintenance
cost to finish uncompleted space
What are considered to be quantifiable factors that affect price?
Occupancy and rental income operational costs and expenses environmental issues interior condition exterior condition improvements taxes
What are three factors not specifically related to the property that can affect its price?
Real estate values
Price comparisons
New construction
On what items do buyers and sellers need to agree during the negotiating process?
Price cash or loan general terms and conditions buyer pre-qualifications earnest money timely completion of due diligence closing date condition of the property
Define earnest money
Funds committed to the seller by the buyer to purchase real property. The funds are at risk if the buyer successfully completes and complies wit issues relative to the purchase of the property prior to closing.
What are some strategies buyers can use to set themselves apart and make their offer appear stronger to the seller?
Timing substantial earnest money loan preapproval complete appraisal ownership entity in existence standard offer and/or purchase agreement
