Lesson 1: Basic Principles of Real Estate

Question 1

What is “real estate”?

Answer 1

Real estate refers to property consisting of land and the buildings on it, along with its natural resources. It is a tangible asset and a key sector in the economy, influencing residential, commercial, and industrial properties.

Question 2

Define “personal property”.

Answer 2

Personal property consists of items that are moveable and not fixed permanently to one location, such as furniture and vehicles. Unlike real estate, personal property is easily transportable.

Question 3

What is the difference between “real property” and “real estate”?

Answer 3

Real property includes the interests, benefits, and rights inherent in the ownership of real estate, whereas real estate refers only to the physical land and improvements.

Question 4

What does “title” refer to in real estate?

Answer 4

In real estate, “title” refers to a bundle of rights in a piece of property in which a party may own either a legal interest or equitable interest.

Question 4

What is “market value”?

Answer 4

Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing.

Question 5

Explain the term “lien”.

Answer 5

A lien is a legal right or interest that a creditor has in another’s property, typically lasting until the debt that it secures is paid. It is a way to ensure debt repayment via property.

Question 6

What is “equity” in terms of real estate?

Answer 6

Equity is the difference between the market value of a property and the amount still owed on its mortgage. It represents the owner’s financial stake in the property.

Question 7

Describe “foreclosure”.

Answer 7

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as the collateral for the loan.

Question 8

What is an “appraisal”?

Answer 8

An appraisal is a professional assessment of a property’s value conducted by an appraiser. It is used to determine how much a home is worth, often in the context of a sale or loan application.

Question 9

Define “broker”.

Answer 9

A broker is a person or firm licensed to buy, sell, exchange, or lease real property for others and to charge a fee for these services.

Question 10

What are “property taxes”?

Answer 10

Property taxes are levied by local governments based on the assessed value of the property. These taxes fund various public expenses like schools, roads, and public services.

Question 10

What is the purpose of a “deed”?

Answer 10

A deed is a legal document that transfers ownership of real estate from one party to another. It must be in writing and typically requires a description of the property and signatures.

Question 10

Define “lease”.

Answer 10

A lease is a contractual arrangement in which a lessee (tenant) pays the lessor (landlord) for use of an asset. In real estate, this refers to tenancy agreements for properties.

Question 11

What does “zoning” regulate?

Answer 11

Zoning regulates land use across cities and towns to separate residential property from commercial and industrial areas. It aims to ensure that properties are used in a manner that fits a master plan.

Question 12

What is an “easement”?

Answer 12

An easement is a right to cross or otherwise use someone else’s land for a specified purpose. It can be for utilities, access, or other uses and does not involve ownership transfer.

Question 13

What does “MLS” stand for, and what is its purpose?

Answer 13

MLS stands for Multiple Listing Service. It is a database established by cooperating real estate brokers to provide data about properties for sale. It helps brokers find buyers by sharing information.

Question 13

What is “condemnation”?

Answer 13

Condemnation is the process by which private property is taken for public use by a government, with compensation paid to the owner under eminent domain laws.

Question 13

Define “fixture”.

Answer 13

A fixture is personal property that has been attached to land or a building and is regarded as an integral part of the real property. It is typically included in the sale or leasing of the property.

Question 14

Explain the concept of “dual agency”.

Answer 14

Dual agency occurs when a real estate agent represents both the buyer and the seller in the same transaction, which can lead to conflicts of interest and is regulated or prohibited in some states.

Question 15

What are “covenants” in the context of real estate?

Answer 15

Covenants are written agreements or promises in a deed or lease that stipulate certain uses or actions regarding the property, such as architectural standards in a residential subdivision.

Question 16

Define “escrow”.

Answer 16

Escrow is a legal concept describing a financial instrument wherein an asset or escrow money is held by a third party while the buyer and seller fulfill the obligations of their deal.

Question 17

What does it mean to “refinance” a property?

Answer 17

Refinancing a property means replacing an existing mortgage with a new one, typically with better terms, such as a lower interest rate, to reduce monthly payments or alter the loan’s duration.

Question 18

What is a “cap rate”?

Answer 18

Cap rate, or capitalization rate, is a real estate valuation measure used to compare different real estate investments. It is calculated by dividing the property’s net operating income by the current market value.

Question 19

Explain “net operating income” in real estate.

Answer 19

Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property minus all reasonably necessary operating expenses.

Question 20

What is the “right of first refusal” in real estate terms?

Answer 20

The right of first refusal is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party.

Question 21

What is a “real estate investment trust” (REIT)?

Answer 21

A REIT is a company that owns, operates, or finances income-producing real estate. Modeled after mutual funds, REITs pool the capital of numerous investors, making it possible for individual investors to earn dividends from real estate investments without having to buy, manage, or finance any properties themselves.

Question 22

What does “amortization” mean in the context of a mortgage?

Answer 22

Amortization refers to the process of paying off a debt over time through regular payments. A part of each payment goes toward the interest, and the remaining amount goes toward reducing the principal balance.

Question 23

Define “balloon payment”.

Answer 23

A balloon payment is a large, lump-sum payment scheduled at the end of a series of considerably smaller periodic payments. It is often used in mortgage terms, where a large amount of the mortgage principal remains unpaid until the end of the loan period.

Question 24

What is “depreciation” in real estate?

Answer 24

In real estate, depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

Question 25

Explain the “1031 exchange”.

Answer 25

A 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. The properties exchanged must be of like kind, and both must be held for business or investment purposes.

Question 26

What does “underwriting” involve in real estate financing?

Answer 26

Underwriting in real estate financing involves the process by which a lender reviews an application and decides whether to make a loan based on the credit history, income, and property value.

Question 27

Define “adjustable-rate mortgage” (ARM).

Answer 27

An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, at annual or even monthly intervals.

Question 28

What is “subdivision” in real estate?

Answer 28

Subdivision is the act of dividing a single piece of real property into smaller parcels. This process typically involves a plat map, which shows how a piece of land is divided and is used for development or sale.

Question 29

Explain the importance of “due diligence” in real estate transactions.

Answer 29

Due diligence in real estate transactions is the process of thoroughly investigating a property before purchase, to evaluate its legal status, physical condition, and financial position to ensure no surprises arise after the transaction.

Question 30

What is “land use planning”?

Answer 30

Land use planning involves the systematic assessment of land and water potential, alternatives for land use, and the economic and social conditions to select and adopt the best land-use options.

Question 31

Define “real estate syndication”.

Answer 31

Real estate syndication is an arrangement where multiple investors pool their capital to invest in real estate properties. One party is responsible for finding, acquiring, and managing the property, while the others provide the capital.

Question 32

What are “building codes”?

Answer 32

Building codes are sets of regulations governing the design, construction, alteration, and maintenance of structures. They ensure that the structures are safe, sanitary, and fit for occupation and use.

Question 33

What is a “purchase agreement” in real estate?

Answer 33

A purchase agreement is a legal document outlining the terms and conditions connected to the sale of property. It includes price, closing date, contingencies, and other terms and is binding once signed by both the buyer and the seller.

Question 34

Explain “property management”.

Answer 34

Property management involves the operation, control, maintenance, and oversight of real estate. This includes dealing with tenants, managing budgets, and ensuring that a property is kept up to standard.

Question 35

What is “landlord insurance”?

Answer 35

Landlord insurance is a type of policy specifically designed to protect landlords from financial losses connected to rental properties. It typically covers the building, loss of income, and liability protection.