Chapter 12 Concepts

Question 1

Property Management

1) Can you manage your own property in NC?

2) How can a W-2 employee be allowed to managed a property?

Answer 1

1) Yes. Only title-holding owners can manage their own property without active North Carolina real estate licenses.

2) A property manager who is the employee of the owner is still required to have a real estate license. However, if the owner of the property is a Chapter C or Subchapter S corporation and the property is titled in the corporation’s name, then a W-2 employee without a real estate license will be allowed to manage the property.

Question 2

What type of agent is a property manager usually?

Answer 2

A property manager usually serves the property owner as a general agent

Question 3

What don’t property managers do?

Answer 3

Property managers do not perform functions such as making capital improvements, reinvesting profits, paying the owner’s income tax, or establishing a depreciation schedule.

Question 4

What is a Property Manager expected to do?

Answer 4

The property manager is expected to market the property and control operating expenses in order to maximize income.

The manager carries out these objectives by securing suitable tenants, collecting the rents, caring for the premises, budgeting and controlling expenses, hiring and supervising employees, keeping proper accounts, and making periodic reports to the owner.

Question 5

The first step in taking over the management of any property is to

Answer 5

enter into a property management agreement with the owner

Question 6

1) A property manager is usually considered to be

2) a residential real estate broker is usually considered to be a

Answer 6

1) A General agent

2) Special Agent

Question 7

In preparing a management plan, a property manager should take into consideration three factors:

Answer 7

(1) the owner’s objectives

(2) the regional and neighborhood market analysis

(3) the specific property analysis.

Question 8

A regional market analysis should include:

Answer 8

general economic trend

population trends

employment data

transportation resources.

Question 9

What should the neighborhood market analysis explore?

Answer 9

The neighborhood market analysis should explore many of the same things on a more localized level that include neighborhood amenities and resources. Occupancy, absorption rates, and new starts are critical indicators.

Question 10

What should the property analysis involve? (4)

Answer 10

the number and size of the rental units

the physical condition of the property

the occupancy and rental history

plus what makes the property desirable to prospective tenants.

Question 11

Operating budget

Answer 11

is the projection of income and expense for the operation of a property over a one-year period

Question 12

Operating Budget

1) When should this be developed? Before or after attempting to rent property?

2) What else should be created with an operating budget?

Answer 12

1) This budget, developed before attempting to rent property, is based on anticipated revenues and expenses and provides the owner the amount of anticipated profit

2) The manager should also establish a cash reserve fund for variable expenses such as repairs, decorating, and supplies.

Question 13

capital expenditures

1) What is this ?

2) What happens in the case of large-scale construction?

Answer 13

If an owner and a property manager decide that modernization or renovation would enhance the property’s value, the manager should budget money to cover the costs of remodeling.

In the case of large-scale construction, the expenses charged against the property’s income should be spread over several years. The property owner decides to make capital improvements based on projections and advice from the property manager.

Question 14

What is a Cash flow report?

Answer 14

A cash flow report is a monthly statement that details the financial status of the property. Sources of income and expenses are noted, as well as net operating income and net cash flow.

The cash flow report is the most important financial report because it provides a picture of the current financial status of a property.

Question 15

Potential Gross Income (Management plan)

Answer 15

includes potential gross rentals if 100% occupied and collected, delinquent rental payments, utilities, vending, contracts, late fees, and storage charges

Question 16

Effective Gross Income (Management Plan)

Answer 16

Any losses from vacancy and collection losses or bad debt expenses (e.g., fees for bad checks) are deducted from the total potential gross income to arrive at the effective gross income

Question 17

Gross Collectable/Billable/Rental Income

Answer 17

Non-income generating space like the property manager office.

The rental value of the property that is not producing income is subtracted from the gross rental income to equal the gross collectible, or billable, rental income.

Question 18

Expenses (Management Plan)

1) What are examples of fixed and variable expenses?

2) What is a fixed expense?

3) Variable expenses may be ______ or _____

Answer 18

Fixed and variable expenses include administrative costs (including building personnel), operating expenses, and maintenance costs.

Fixed expenses that remain constant and do not change include employee wages and other basic operating costs.

Variable expenses may be recurring or nonrecurring and can include items such as building repairs and landscaping.

Question 19

The 3 formulas for arriving at cash flow is as follows: (Effective Gross, Net Operating Income and Cash Flow)

Answer 19

Potential gross rental income + Other income − Losses incurred = Effective gross income

Effective gross income − Operating expenses = Net operating income before debt service (e.g., mortgage payments)

Net operating income before debt service − Debt service − Capital expenditures − Reserves = Cash flow

Question 20

profit and loss statement

Answer 20

A profit and loss statement is a financial picture of the revenues and expenses used to determine whether the business has made money or suffered a loss.

The statement is created from the monthly cash flow reports and does not include itemized information.

A formula for profit and loss statement looks like this:

Gross receipts − Operating expenses − Total mortgage payment + Mortgage loan principal = Net profit

Question 21

Budget comparison statement

Answer 21

compares the actual results with the original budget, often giving either percentages or a numerical variance of actual versus projected income and expenses. Budget comparisons are especially helpful in identifying trends in order to help with future budget planning.

Question 22

1) What is cash flow?

2) What can cash flow also be described as?

Answer 22

Cash flow is the total amount of money remaining after all expenditures have been paid.

Cash flow can also be described as before-tax cash flow and after-tax cash flow.

Question 23

What is before tax cash flow and after tax cash flow?

Answer 23

Before-tax cash flow is the amount of money remaining after all expenditures have been paid except for income tax due.

After-tax cash flow is the amount of cash remaining after the owner has reported all income from the property, less appropriate tax deductions and any taxes due.

Question 24

What is leverage?

Answer 24

is the use of borrowed money to finance an investment

Question 25

Why would an investor use leverage?

Answer 25

An investor often stands to make more money by investing with borrowed money, usually obtained through a mortgage loan or deed of trust loan

As a rule, an investor can receive a maximum return from the initial investment by making a small down payment, paying a low interest rate, and spreading mortgage payments over as long a period as possible

Question 26

Equity Buildup

Answer 26

is a result of a loan payment directed toward the principal rather than the interest, plus any gain in property value due to appreciation or increasing value.

Question 27

What two main factors affect appreciation?

Answer 27

Two main factors affect appreciation: inflation and intrinsic value.

Question 28

What is inflation?

Answer 28

Inflation is the increase in the amount of money in circulation. When more money is available, its value declines. When the value of money declines, wholesale and retail prices rise.

Question 29

What is intrinsic value?

Answer 29

An intrinsic value of real estate is the result of a person’s individual choices and preferences for a given geographic area.

For example, property located in a desirable neighborhood near attractive businesses and shopping areas has a greater intrinsic value to most people than similar property in a more isolated location. As a rule, the greater the intrinsic value, the more money a property commands on its sale.

Question 30

In establishing rental rates, the property manager has four long-term considerations:

Answer 30

The rental income must be sufficient to cover the property’s fixed charges, such as taxes and insurance, and operating expenses, such as maintenance. (Note that debt service [principal and interest payment] on a mortgage loan is not an operating expense.)

The rental income must provide a fair return on the owner’s investment.

The rental rate should be in line with prevailing rates in comparable properties. It may be slightly higher or slightly lower, depending on the strength of the property.

The current vacancy rate in the property is a good indicator of how large a rent increase is advisable. A building with a low vacancy rate (that is, few vacant units) is a better candidate for an increase than one with a high vacancy rate.

Question 31

In selecting a prospective commercial or industrial tenant, a manager should be certain that: (4 things)

Answer 31

(1) the size of the space meets the tenant’s requirements (each business fits the space)

(2) the tenant has the ability to pay for the space

(3) the tenant’s business is compatible with the building and the other tenants’ businesses,

(4) if the tenant is likely to expand in the future, expansion space will be available.

Once a prospect becomes a tenant, the manager must be certain that the tenant remains satisfied in all respects commensurate with fair business dealings.

Question 32

Property maintenance encompasses 4 main areas:

Answer 32

(1) preventive maintenance

(2) repair or corrective maintenance

(3) routine maintenance and cleaning

(4) construction

Question 33

The Americans with Disabilities Act

1) How many employees or more?

2) What must they do if they have more than that number?

Answer 33

Title I of the ADA provides for the employment of qualified job applicants regardless of their disability. Any employer with 15 or more employees must adopt nondiscriminatory employment procedures.

2) In addition, employers must make reasonable accommodations to enable individuals with disabilities to perform essential job functions. The ADA requires that managers ensure that people with disabilities have full and equal access to facilities and services.

Question 34

Who is responsible for making sure the ADA requirements are fulfilled?

Answer 34

The property manager typically is responsible for determining whether a building meets the ADA’s accessibility requirements. The property manager must also prepare a plan for retrofitting a building that is not in compliance when removal of existing barriers is readily achievable—that is, can be performed without much difficulty or expense.

Question 35

The following are typical examples of readily achievable modifications that meet ADA standards:

Answer 35

Ramping or removing an obstacle from an otherwise accessible entrance

Lowering wall-mounted public telephones

Adding raised letters and Braille markings on elevator buttons

Installing auditory signals in elevators

Reversing the direction in which doors open

Question 36

In considering the possibility of a loss, the property manager must decide whether it is better to:

Answer 36

avoid it by removing the source of risk, such as a swimming pool;

retain it to a certain extent by insuring it with a large deductible (loss not covered by the insurer);

control it by installing sprinklers, fire doors, and other preventive measures; or

transfer it by taking out an insurance policy.

***A proper decision as to how much and what type of insurance to purchase and where to focus the insurance could save many thousands of dollars, especially in large buildings.

Question 37

Avoid, control, transfer, or retain are the four alternative techniques of

Answer 37

Risk Management

Question 38

Among the duties of a property manager, one is to assess risk and minimize it to the lowest degree possible. Which of the options below is NOT typically an option to consider for a property manager?

A)
Hide the risk

B)
Avoid the risk

C)
Transfer the risk

D)
Control the risk

Answer 38

A)
Hide the risk

Hiding a risk still allows for the chance someone will find it and the property owner will be liable if something happens. Avoiding the risk (removing it from the property completely) is the correct approach to sweeping risk under a rug to be found later.

Question 39

A semiannual statement sent to an owner that does NOT reflect the entire debt service as an expense is called

A) a budget comparison statement.

B) an operating budget statement.

C) a profit and loss statement.

D) a cash flow report.

Answer 39

C) a profit and loss statement

A profit and loss statement is a financial picture of the revenues and expenses used to determine whether the business has made money or suffered a loss. It may be prepared monthly, quarterly, semiannually, or annually. The statement is created from the monthly cash flow reports and does not include itemized information.

Question 40

Which of the following is NOT a provision of the North Carolina Association of REALTORS® Exclusive Property Management Agreement?

A) Responsibilities of the owner

B) Description of the property

C) The contract period

D) Maintenance fee

Answer 40

D) Maintenance fee

The agreement also covers the management fee, management’s responsibilities, reporting, and duties upon termination

Question 41

The primary function of a property manager is to

A)
create a tax loss for the owner while maintaining resale value.

B)
preserve the long-term resale value of the property.

C)
generate the highest possible cash flow for the owner.

D)
preserve the value of an investment property while generating income.

Answer 41

D)
preserve the value of an investment property while generating income.

A property manager is someone who preserves the value of an investment property while generating income as an agent for the owner. The agency relationship is created by the property management contract.