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Finance 331 > Midterm 1 > Flashcards

Midterm 1 Flashcards

1
Q

Two types of property

A

Tangible and intangible

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2
Q

Tangible property

A

Physical assets that can be owned

Can be real or personal property

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3
Q

Intangible property

A

Nonphysical assets such as stocks, bonds, mortgages, leases

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4
Q

real estate as a tangible asset

A
  • raw land
  • improvements TO the land
  • structures (improvements ON the land)
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5
Q

real estate as a bundle of rights

A
  • exclusive possession of the real property
  • use or enjoyment
  • disposition
  • can be unbundled in many ways
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6
Q

3 things that determine real estate value

A
  1. user (space) markets
  2. capital markets
  3. governmental sectors
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7
Q

how much of the worlds wealth does real estate represent

A

1/2

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8
Q

real estate also includes

A

area above and below the surface

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9
Q

raw land

A

a larger area that does not include any improvements

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10
Q

real property

A

real estate

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11
Q

personal property

A

things that are movable and not permanently affixed to land

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12
Q

what is the value of a bundle of rights

A

a function of the property’s physical, locational, and legal characteristics

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13
Q

physical

A

age, size, design, construction, quality of structure, natural features of land

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14
Q

locational

A

convenience/access to places of employment, schools, shopping, health care (residential), visibility, access to customers, suppliers, employees (commercial)

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15
Q

acre

A

43,560 square feet or 209 feet square. 640 acres in 1 square mile

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16
Q

how many acres is a typical single family residential lot

A

1/5-4/5 acre

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17
Q

local user/space markets

A

competition among users for physical locations and space

  • where rental rates are determined
  • seperate markets for different property types
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18
Q

capital markets

A

serve to allocate financial resources among households and firms requiring funds. Participants invest in stocks, bonds, mortgage contracts, real estate etc with the expectation of return on investment

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19
Q

two categories of captial markets

A 
equity interests (owners)
debt interests (lenders)
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20
Q

property markets

A

determine the required property, specific investment returns, property values, capitalization rates, construction feasilibility
-integrated, nOT segmented like the space market

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21
Q

capitalization rate

A

the ratio of a property’s annual net income to its value

- a fundamental pricing metric in commercial real estate markets

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22
Q

because of segmentation, rental prices can

A

vary widely for physically similar space across locations and property types

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23
Q

in capital markets bidding by investors determines

A
  • risk free rates of various maturities

- required risk premiums for risky investments

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24
Q

public capital markets

A

small homogenous units (shares) of ownership in assets traded in public exchange

  • many buyers and sellers
  • price quotes available for all to see
  • high degree of liquidity
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25
Q

equity in capital public markets

A

publicy traded RE investments trusts (REITs), real estate companies

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26
Q

debt in capital public markets

A

commerical mortgage backed securities (MBs), and mortgage REITs)

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27
Q

private capital/property markets

A
  • absence of centralized markets (or even price list)
  • assets trade infrequently in private transactions(lack of transparency)
  • less liquidty than public markets
  • higher transaction costs
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28
Q

equity in private captial markets

A

individuals, partnerships, LLCs, private equity funds, hedge funds

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29
Q

debt in private capital markets

A

banks, thrifts, insurace companies, fianance companies, private lenders

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30
Q

government role in real estate

A

affects the market, zoning codes, land use regulations, building codes, property taxes, federal insurace

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31
Q

what determines rental rates

A

space market equilibrium and expected cash flows

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32
Q

where are risk premiums determined

A

in capital markets

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33
Q

when property values are more than cost of new construction

A

incentive for new construction and excess profits but ultimately, rise in supply causes rents/market values to decrease

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34
Q

when property values are less than cost of construction

A

-overbuilt market
a combo of reduced construction, demand growth, steady obsolence of existing stock is required to push market rents and property values back to required levels to be profitable

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35
Q

hetergeonity

A

each property has unique features (even in suburbs)

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36
Q

immobility

A

not able to be moved

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37
Q

what does it mean when “real estate markets are localized”

A

potential users usually lie within short distance to each other

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38
Q

what is real estate segmented by

A

product price

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39
Q

investment grade properties

A

larger, more valuable commericial properties generally over 10 mil
(institutional grade real estate)

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40
Q

what are rights?

A

claims the gov is obligated to enforce

  • nonrevocable
  • enduring
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41
Q

personal rights

A

freedoms in the bill of rights/constitution

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42
Q

property rights

A

rights to things both tangible and intangible,

  • exclusive possession
  • enjoyment of use or benefit
  • freedom to dispose as one pleases (within safety limits)
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43
Q

fixture

A

real property that was formerly personal property

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44
Q

rules for determining when something becomes a fixture

A
  1. manner of attachment (will removal cause damage)
  2. character of the article and manner of adaptation (custom things)
  3. intention of the parties (most dominant rule, if sold: remain w/seller , if rented: remain w/owner)
  4. relation of the parties
    (trade fixtures [personal property], agricultural fixtures)
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45
Q

interests

A

a bundle of rights that is dismantled into lesser bundles or any set of rights in real property

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46
Q

estate

A

a real property interest that includes the right of exclusive possession

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47
Q

nonpossessory interests

A
  • easements
  • restrictive covenants
  • liens
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48
Q

ownership estates (freeholds)

A

estate interests having unlimited duration; title interests

  • fee simple absolute
  • fee simple conditional
  • life estate w/remainder interest
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49
Q

fee simple absolute

A

all possible rights, has greatest value, limited only by the powers of the government

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50
Q

fee simple conditional

A

all rights, but revocable if specific condition is violated (trigger event) will cause ownership to revert to previous owner

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51
Q

reverter interest

A

the uncertain interest held by the previous owner

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52
Q

ordinary life estate

A

created by the owner, the rights of dispostion of the fee simple absolute are unbundled and seperated completely.
ex: college wants to purchase neighborind home, owner wants to sell but not move

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53
Q

remainder estate

A

the ownership interest subsequent to a life estate which upon the death of the life estate owner becomes a fee simple absolute
ex: college will get home when she dies

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54
Q

legal life estate

A

created by the action of law

-can also arise from marriage

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55
Q

leasehold estates (nonownership or nonfreehold)

A

the interest or rights of a lesee or tenant in a leased property, including the possessory rights that are temporary conveyance of the rights of exclusion, use/enjoyment but NOT disposition.

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56
Q

tenancy for years

A

specific period of time

  • must be written if more than one year
  • written lease contract governs entirely
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57
Q

periodic tenancy

A

no definite length of time

  • often by oral agreement
  • more risk for misunderstanding but simple and quick
  • length of period is implied by payment period
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58
Q

tenancy at will

A

granted by landlords to tenants allowing them to remain in possession without written agreement, a short period when it suits both landlord and occupant to continue

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59
Q

tenancy at sufferance

A

when a tenant that is supposed to vacate does not

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60
Q

non-possessory interests in land

A
  • easements
  • liens
  • restrictive covenants
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61
Q

easement

A

the right to use land for a specific and limited purpose

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62
Q

government limitations on ownership

A

eminent domain, police regulatory power, taxation

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63
Q

private limitations on ownership

A

liens, deed restrictions, easements, leases

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64
Q

easements appurtenant

A

a right of use a dominant parcel of land “enjoys” over an adjacent (servient) parcel of land

  • affirmative or negative
  • consrained or diminished by the easement
  • runs w/ the land
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65
Q

affirmative easements

A
  • driveway or access right of way
  • sewer line
  • drainage
  • common wall
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66
Q

negative easements

A
  • light and air easement

- scenic easement

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67
Q

easement in gross

A

the right to use land for a specific, limited purpose unrelated to any adjacent parcel

  • no dominant parcel
  • transferable w/o transfer of parcel of land
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68
Q

examples of easements in gross

A

-right of ways for roads, railroads, irrigation, water, communication/cable lines, gas lines, billboards, mineral/oil extraction, harvest crops, wetlands preservation

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69
Q

license

A

permission to use the land
(the RIGHT to use the land is an EASEMENT)
-revocable
-automatically terminated at the death of the grantor or sale of the land

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70
Q

exclusive easement in gross

A

conveys all rights of the easement, recipient can convey access to tohers

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71
Q

nonexclusive easement in gross

A

rights limited to one user only

  • cannot extend access to others
  • only the owner can convey access to others
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72
Q

restrictive covenants (deed restrictions)

A

impose restrictions on the uses of land

-created at conveyance of land to a new owner

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73
Q

examples of restrictive covenants

A
  • height restrictions
  • minimum floor area
  • no freestanding structures
  • no chain link fences
  • no RVs or boats in view of street
  • required use of professional lawn service
  • no satellite dish
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74
Q

two methods of creating restrictive covenants

A
  • restriction in a deed conveying a single parcel of land to a new owner (grantor or heirs)
  • restrictions imposed on an entire subdivision at its creation (mortgage loan holders, renters)
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75
Q

enforcement of restrictive covenants

A
  • court injunction
  • only by “parties at interest”
  • courts will be reluctant if changed neighborhood, public policy, abandonment
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76
Q

lien

A

an interest in real property that serves as security for an obligation
-usually a debt

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77
Q

general lien

A

arises out of actions unrelated to ownership of the property

  • court awarded damages
  • federal tax liens
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78
Q

specific lien

A

directly from events related to the property

  • mortgage
  • mechanics lien
  • property tax
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79
Q

attach

A

to place a lien on

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80
Q

assesement lien

A

lien assessment by local governments to ensure that those who receive the primary benefit of neighborhood improvements will be charged their “fair share”

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81
Q

community development district (CDD) lien

A

secures finances for improvements within a private community

  • not a gov lien but enjoys same priority
  • tax exempt debt
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82
Q

mortgage

A

an interest in property as security for a debt

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83
Q

mechanics lien

A

arises from construction and other improvements to real estate

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84
Q

consequences of liens

A

can result in sale of property to compensate the creditor

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85
Q

three levels of liens on a personal residence

A
  1. property tax/assessment liens
  2. mortgages/mechanics liens
  3. judgment liens
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86
Q

forms of co-ownership

A

direct and indirect

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87
Q

indirect co-ownership through a single entity

A

persons in a business organization acquire real estate

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88
Q

direct co-ownership

A

each co-owner holds a titled interest in the property (freehold estate)
- a house with multiple owners

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89
Q

examples of direct co-ownership

A

tenancy in common
joint tenancy
tenancy by the entirety
condiminium

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90
Q

tenancy in common

A

“normal” form of direct co-ownership, close to fee simple absolute, each co-owner retains full rights of disposition, is free to mortgage or to convey their ownership share to a new owner (like to heirs)
-bad form for owning an operating business

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91
Q

joint tenancy (survivorship)

A

2 or more owners hold equal shares and have equal rights of possession. the surviving partners divide the interests of a deceased partner

  • difficult to create and easily disrupted
  • prevented or restricted by law in some states
  • restricts inheritance to heirs of last survivng owner
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92
Q

tenancy by the entirety

A

a form of joint tenancy for husband and wife

  • simplifies effect in minor children are present
  • protected against liens arising from either spouse alone
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93
Q

condomimium

A

a form of ownership combining single person ownership with tenancy in common
-the owner holds a fee simple interest as an individual owner to a certain space but the owner is a tenant in common in the community elements

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94
Q

examples of indirect co-ownership

A 
general partnership
limited partership
LLC
corporation
trust
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95
Q

condomimiun bylaws

A

the official rules and regulations that define owner rights

  • share of all obligations
  • restrictions on sale or rental
  • methods of altering bylaws
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96
Q

condominium declaration

A

the master deed creating or establishing the conominium corporation

  • sets restrictions
    examples: kids, ages, etc
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97
Q

cooperative

A

a form of individual ownership of apartments, the property is owned by a corporation of which each resident is a shareholder entitled to a proprietary lease (no term and no rent)

  • cannot mortgage individual interests
  • owner is mutually liable for any specific liens
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98
Q

dower

A

gives wife 1/3 life estate for a surviving spouse in real property of a decedent spouse

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99
Q

curtsey

A

husband version of dower

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100
Q

elective share

A

a modern subsitute for dower/curtesy which gives a surviving spouse a share of most wealth of the decedent (1/3)

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101
Q

community property

A

the automatic right to 1/2 interest in all property acquired “out of the fruits of the marriage”

  • not property owned before the marriage
  • not gifts or inheritances to one spouse
  • growing in acceptance as superior arrangement to elective share
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102
Q

seperate property

A

excluded from community property, acquired prior to marriage or gifts of inheritance received during marriage

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103
Q

timesharing

A

multiple individuals have use of property but interests are not simultaneous

  • buyers acquire leasehold interest for a fixed number of years
  • floating time intervals
  • never a financial investment
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104
Q

rights to oil, gas and minerals

A

can be seperated from land ownership

-owner receives an implied easement to retrieve the minerals

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105
Q

rule of capture

A

the owners of an oil or gas well could claim all that is pumped from it, regardless of whether the oil or gas migrated from adjacent property

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106
Q

reasons why conveying real estate is complex

A
  • real property is a complex bundle of rights
  • rights to land are enduring
  • land is a continuous surface
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107
Q

deed

A

a special, written contract for conveying a permanent interest in real property

  • fee simple absolute
  • life estate
  • conditional fee
  • easement
  • oil, mineral, or water rights
  • MUST BE IN WRITING
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108
Q

requirements of a deed

A
  • grantor (and signature) and grantee
  • words of conveyance
  • covenants
  • habendum clause
  • exceptions and reservations clause
  • acknowledgment
  • delivery
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109
Q

grantor

A

person or entity conveying real property

  • must be of legal age
  • must be legally competent
  • must sign deed
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110
Q

grantee

A

recipient of real property

  • no need for legal age
  • no need to be competent
  • only needs to be identifiable
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111
Q

recital of consideration

A

a minimal statement of “for 10 dollars and other good and valuable consideration”

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112
Q

words of conveyance

A

-does hereby grant
-bargain
-sell
-convey
these words affirm intention to convey real property AND determine the type of deed

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113
Q

covenant

A

legally binding promise

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114
Q

three main covenants

A
  • covenant of seizin
  • covenant against encumbrances
  • covenant of quiet enjoyment
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115
Q

covenant of seizin

A

grantor has good title and right to convey it

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116
Q

covenant against encumbrances

A

no encumbrances except as noted in deed (liens, easements)

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117
Q

covenant of quiet enjoyment

A

no one with better claim to title

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118
Q

habendum clause

A

defines interest being conveyed

-required drafting by a knowledgable legal professional

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119
Q

in habendum clause, “for use as” implies

A

easement

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120
Q

in habendum clause, “so long as” implies

A

conditional fee with reverter

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121
Q

in habendum clause, “and his/hers heirs and assigns forever” implies

A

fee simple absolute

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122
Q

exceptions and reservations clause

A
  • deed restrictions
  • clauses withholding mineral or oil rights
  • creation of an easement
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123
Q

property descriptions

A
  • must be unambiguous and enduring

- street address and tax parcel number are UNACCEPTABLE

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124
Q

acknowledgment

A

confirmation that grantor acted voluntarily

-notarized or equivalent

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125
Q

delivery

A

observable, verifiable intent that deed is to be given to grantor

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126
Q

examples of failure of delivery

A
  • deed found in a desk/safety deposit box and handed to named grantee
  • grantors attorny hands deed to named grantee without explicit instructions to do so
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127
Q

how deeds differ

A

by number of covenants

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128
Q

types of deeds

A
  • general warranty deed
  • special warranty deed
  • deed of bargain and sale
  • quitclaim deed
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129
Q

general warranty deed

A

all 3 covenants: seizen, no encumbrances, and quiet enjoyment

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130
Q

special warranty deed

A

all 3 covenants but “no encumbrances” limited to grantor’s ownership

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131
Q

deed of bargain and sale

A

no covenants, but still is regarded as implying ownership

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132
Q

quitclaim deed

A

no covenants and makes no assertions about grantor’s interest

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133
Q

conveying real property voluntarily with a deed

A
  • normal transaction

- patent

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134
Q

conveying real property voluntarily without a deef

A
  • implied easement
  • easement by estoppel
  • dedication
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135
Q

conveying real property involuntarily with a deed

A
  • probate
  • bankruptcy
  • divorce
  • condemnation
  • foreclosure
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136
Q

conveying real proerpty involuntarily without a deed

A
  • easement by prescription
  • title by adverse possession
  • action of water
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137
Q

ways title can transfer

A
  • voluntary conveyance by deed

- involuntary conveyance by deed

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138
Q

implied easement

A

not created by an explicit deed or clause. created when a subdivision map is placed in the public records

139
Q

easement by prior use or necessity

A

when a path of access across part of the property to a now landlocked parcel preexists and if the sale leaves that path as the only access (prior use). if the landlocked parcel has no prior path of access of egress then this is created (necessity)

140
Q

easement by estoppel

A

can occur is a landowner gives an adjacent landowner permission to depend on her land

141
Q

easement by prescription

A

the acquisition of a right easement by open, notorious and continuous assertion of the right, hostile to the subservient land owners interest. the amount of time required to attain the right of easement by prescription varies by state

142
Q

title by adverse possession

A

involuntary conveyance of real property rights by an individual demonstrating a use that is 1) hostile to the interests of the owner 2) actual 3) open and notorious; can be no efforts to disguise or hide the use from owners/neighbors 4) continuous [5-20 years] 5) exclusive, cannot share possession with owners or neighbors

143
Q

action of water

A

(accretion) water may deposit soil which can become property of the owner
(reliction) subsiding water may leave additional land as property of the owner

144
Q

doctrine of constructive notice

A

cannot be bound by what you cannot know

145
Q

statute of frauds

A

contract must be written to be enforcable

146
Q

recording statutes

A

a contract recorded in public records is considered known

147
Q

title

A

collection of evidence indicating a particular persons as holder of the “fee”

148
Q

title search

A

examining public records to construct “chain of title”

149
Q

chain of title

A

the sequence of conveyances passing ownership down through time

150
Q

possible breaks in the chain of title

A
  • conveyance of only a partial interest
  • conveyance by adverse possession
  • fraudulent documents
  • inconsistent property descriptions
  • inferior deed
  • faulty seperation of mineral or water rights
  • missing spousal signature
151
Q

evidence of title

A

assurance of a good or marketable title

  1. title abstract
  2. title insurance commitment
152
Q

marketable title

A

claim to title is regarded as free from reasonable doubt

153
Q

marketable title laws

A

state laws to shorten necessary title search

154
Q

title insurance

A

protects a grantee (or mortgage lender) against the legal costs of defending a title and against loss of property in case of unsuccessful defense

155
Q

methods of land description

A
  • metes (measures) and bounds (boundaries)
  • subdivision plat lot and block number
  • government rectangular survey
156
Q

basic reference points of gov rectangular survey

A

baseline: running east and west
principal meridian: running north and south
-range lines
-tier lines

157
Q

property taxes

A

a primary source of local government revenue

158
Q

property exempt from taxes

A
  • religious organizations
  • state property
  • nonprofit organizations
  • homestead
  • educational institutions
159
Q

special assessments

A

taxes for specific public improvements affecting a property

  • street, sewer, etc
  • usually charged on a per front foot basis
160
Q

issues with property tax

A
  • regressive
  • uneven across geographic areas
  • poorly administered
161
Q

features of real estate that cause market distortions

A
  • “spillover” effects from nearby land uses
  • uniqueness of location(monopoly)
  • unknown quality or condition of existing structures
  • instability of land uses around residential neighborhoods
162
Q

resulting market failures in real estate

A
  • monopoly
  • externatlities (spillover effects, traffic congestion, storm runoff, emissions, urban sprawl)
  • incomplete information
  • uncertainty of residential values
163
Q

revolution in land use controls

164
Q

urban planning is needed for

A

storm management
traffic management
schools/other services

165
Q

traditional planning

A
  • seperated uses
  • automobile oriented
  • uniform density
  • cul-de-sac hierarchy
166
Q

new urban planning

A
  • mixed use
  • public transportation
  • pedestrian oriented
167
Q

traditional land use controls

A
  • building codes
  • zoning
  • subdivision regulations
  • planning and zoning administration
  • board of adjustment
  • site plan review
168
Q

newer approaches to land use control

A
  • planned unit development
  • performance standards
  • impact fees
  • growth restrictions
169
Q

hazardous materials

A
  • asbestos and fiberglass
  • PCBs
  • leaking underground storage tanks (LUSTs)
  • radon
  • mold
170
Q

eminent domain

A

right of government to acquire private land, without owners consent, for public use, with due process and compensation

171
Q

condemnation

A

legal procedure for exercising right of eminent domain

172
Q

ways to minimize market risk

A
  • avoid projects with high market risk (hotels, restaurants/entertainment)
  • avoid projects with prospective major change
  • study urban markets
173
Q

linkages

A

the attractions or important access needs that one land use has for other land uses or the demand between one urban activity and others

174
Q

what causes urban clustering

A

demand for access

175
Q

where cities occurred

A
  • religious center
  • where the water was
  • where natural resources were
176
Q

economic base

A

activities that bring income into a city (why the city formed in the first place)

177
Q

indicators of the economic base

A
  • location quotient

- data from gov agency

178
Q

economic base multiplier

A

base export activities and services that bring money into a city which then is respent and recirculated within a city (most is recirculated through paychecks or commissions)

  • large cities will draw in residents from small towns for goods and services
  • employment
  • tourism
179
Q

location quotient

A

identifies concentrations of excessive employment and normal pattern of employment distribution

180
Q

supply factors affecting a community economic base

A
  • labor force characteristics
  • quality of life
  • leadership
181
Q

industry economies of scale

A

the growth of an industry within a city can create special resources and advantages for that industry

182
Q

agglomeration economies

A

-the emergence of specialized resources in a locality response to demand from multiple industries, generally associated with large cities

183
Q

bid rent

A

what does it cost to travel to the city center

184
Q

what is the central force creating cities

A

demand for proximity

185
Q

bid rent model

A

model of how land users bid for location that reveals influences on how density of land use is determined, how competing urban land uses sort out their locations, how urban land value is determined, and why land use changes over time

186
Q

bid rent is only based on one linkage, the reality is

A

based on many linkages

187
Q

concentric ring model

A

the center circle is the CBD, adjacent is the zone of transition which contains warehousing and other land uses, followed by a ring of lower income residential land use followed by a ring of middle and upper income land use

188
Q

sector model

A

characterized by radial corridors and wedges particularly for higher income residential land use
-valid before 1930s, now not so much

189
Q

multinuclei city

A

CBD no longer the single center of aciivIty

-BC CARS

190
Q

technological changes from 1920

A

-automotive revolution
-production revolution
-advances for offices and retailing
-data processing and communications
-dispersion of employment and urban functions to suburbs
-

191
Q

central place pattern

A

a location pattern in which similar economic entities such as particular type of convenience of service or retail establishment, tend to disperse evenly over the market region
-opposite=clustering

192
Q

comparison activities

A

goods and services whose optimal location pattern is clustering
ex: shopping malls

193
Q

idealized location pattern of convenience goods and services

A
  • circles are maximum market perimeter

- straight lines demarcate equal-access ridges between providers

194
Q

variations on intra urban location patterns

A
  • comparison goods and clustering

- industry economies of scale and clustering

195
Q

implications for real estate analysis

A
  • location within the urban matrix is the most meaningful notion of location
  • urban growth is not uniform; both emerging and declining nuclei
  • transporation network and urban patterns respond to technical and market changes but very slowly
196
Q

factors affect real estate demand

A
  • need for access (linkages)

- non-locational factors (housing style, design, size, commerical, offices)

197
Q

market segmentation

A

differences in preferences or needs among market subgroups

198
Q

challenges of market segmentation

A
  • its an empirical notion
  • research process must recognize this challenge
  • no simple, universal procedure
199
Q

cycle of market research

A
  1. what is product under consideration?
  2. who are customers
  3. where are customers
  4. what do customers care about
  5. who are competitiors
200
Q

market parameters

A

key numbers that characterize the current condition and trend in market

201
Q

story approach to market research

A

begins with property and its market segments, and builds links to larger economy

202
Q

conventional approach to market research

A

-goes from state of world, to the nation, to state, to city, to property

203
Q

geographic info systems

A

computer software systems that enable one to manipulate and “map” inforatmion with great flexibility and speed

204
Q

psychographics

A

a tool for sophisticated determination of market segmentation

205
Q

when are valuations calculations required

A

when

  • property acquisition is contemplated
  • structure is modified/abandoned
  • site is developed
  • property is used as collateral for a loan
  • litigation
206
Q

market value

A
  • most probable selling price, assuming “normal” sale conditions
  • value for the “typical” market participant
  • rests upon willing buyers/sellers
  • result of interacting forces of supply and demand
207
Q

appraisal

A

an unbiased written estimate of the market value of the subject property

208
Q

appraisal report

A

the document the apprasier submits to the client and contains the appraisers final estimate value and the reasoning and calculations behind it

209
Q

investment value

A

the value a particular investor places on a property

-based on unique expectations of investor NOT market in general

210
Q

transaction price

A

price actually paid for a specific property

  • we observe this only when the investment value of a buyer exceeds the investment value of a seller
  • represents the price agreed upon by one willing buyer and one willing seller
211
Q

why do we have to estimate market value?

A

bc the price its worth is not necessarily the price people will be willing to pay

212
Q

rules to comply with uniform standards of professional appraisal practice

A
  1. identify the appraisal problem
  2. determine the required scope of work
  3. collect data and describe property
  4. perform data analysis
  5. determine value of land
  6. apply 3 approaches to valuation
  7. reconcile indicated values from 3 approaches
  8. report final value estimate
213
Q

how to identify problem

A
  • client/intended users
  • intended use
  • purpose of assignment (type of value)
  • effective date of valuation
  • relevant characteristics
  • important assumptions
214
Q

highest and best use

A

use that is found to be 1) legally permissable 2) physically possible 3) financially feasible 4) maximally productive

215
Q

3 approaches to valuation

A
  • sales comparison approach
  • cost approach
  • income approach
216
Q

as though vacant

A

land vacant or not is always valued as though vacant/available for developemt
the value=total estimated value assuming best and highest use - the estimated value of the anticipated improvements

217
Q

of the property as improved

A
  • used when a seperate estimate of the value of the land is not necessary
  • helps determine if existing improvement should be retained, modified, or demolished
218
Q

sales comparison approach

A
  • value of RE can be determined by analyzing the sale prices of similar properties
  • applicable to almost all 1-4 family residential properties and some income producing properties
  • pro is that it is easily understood by buyers and sellers
219
Q

steps of sales comparison

A
  1. identify elements of comparison and value adjustment
  2. select comparable sales
  3. adjust comparable sale prices to approximate subject
  4. reconcile adjusted sale prices; obtain indicated value of subject
220
Q

income approach

A
  • the dominant approach when estimating value of income producing properties
  • assumes a property’s value is determined by its expected future cash flows
221
Q

cost approach

A
  • involves estimating the cost of replacing the property, new, and then substracting the loss in value (sum of accrued depreciation)
  • most relied on for valuing specialty properties- parks, monuments, bridges, etc
222
Q

reconciliation

A

the process of forming a single point estimate from 2 or more numbers
-developing a final estimate, the appraiser weighs the relative reliability of value indicators

223
Q

self-contained appraisal report

A

includes all the detail and information that were relevant to deriving market value or other conclusions

224
Q

summary appraisal report

A

summarizes the conclusions of the appraisal

225
Q

narrative appraisal report

A

longest and most formal self contained appraisal report

226
Q

“form” reporting option

A

most single-family homes bc generally required by mortgage lenders

227
Q

indicated value

A

-the final value estimate after appraisal

228
Q

comparable sales data

A
  • similar location, size, style
  • recently sold
  • arms length transaction
229
Q

arms length transaction

A

a fairly negotiated transaction that occurred under TYPICAL MARKET CONDITIONS

230
Q

sources of market data

A

public records
multiple listing services
private data services

231
Q

adjustments to comparable sale prices

A
  • convert characteristics of each comparable to an approximation of subject
  • transactional adjustments
  • property adjustments
232
Q

transactional adjustments

A

concern the nature and terms of the deal

  • property rights conveyed
  • financing terms
  • conditions of sale
  • expenditures made immediately after purchase
  • market conditions
233
Q

property adjustments

A

recognize that the locational, physical, and economic differences between properties all can add or subtract incrementally to a base value

  • location
  • physical characteristics
  • economic characteristics
  • use
  • nonrealty items (personal property)
234
Q
  1. real property rights conveyed
A
  • if the legal estate (bundle of rights) is different than those of subject property
  • really should be elimated as a comparable
235
Q
  1. financing terms
A

-if a special nonmarket financing program (low-income, gov sponsered, etc) was used it should not be comparable

236
Q
  1. conditions of sale
A
  • forced sale
  • personal relations
  • if not arms length it is nOT comparable
237
Q
  1. market conditions
A
  • inflations
  • changes in economy
  • use repeat-sale analysis
238
Q
  1. location
A

if one location is superior/inferior to another

239
Q
  1. nonrealty items
A

-items that come w/ the house

240
Q

cost approach

A
  • assumes the market value of a NEW building is similar to the cost of constructioning it today
  • assumes the cost of creating a good equals its value
241
Q

cost approach procedure

A

estimated reproduction cost of improvements - estimated accrued depreciation = depreicated cost of improvements + estimated value site = indicated value by the cost approach

242
Q

two types of construction costs

A

replacement cost

reproduction cost

243
Q

reproduction cost

A

cost of an exact physical replica

244
Q

replacement cost

A

cost to create something of equal utility (functionality)

  • can estimate by
  • quantity survey method
  • cost per square foot or cubic foot
  • unit in place
245
Q

accrued depreciation

A
  • the difference between the current market value of a building (or improvement) and the total cost to construct it new
  • physical deterioration
  • functional obsolescence
  • external obsolescence
246
Q

functional obsolescence

A

a loss in value within a structure due to changes in tastes, preferences, technical innovations or market standards

247
Q

external obsolesence

A

the loss in value due to influences external to the site

248
Q

appraisal assignments where cost approach is heavily weighted

A
  • new buildings
  • insurance appraisals
  • specialty buildings
249
Q

income approach

A

value of a property is the present value of its anticipated income

  • income capitalization
  • right now refering to EXISTING properties
250
Q

net operating income

A

expected annual rental income, net of vacanies minus annual operating and capital expenses

251
Q

income capitalization

A

second step in the income approach of converting the NOI forecast into an estimate of property value

  1. direct capitalization models
  2. discounted cash flow models
252
Q

direct capitalization models (with an “overall” rate)

A

value estimates are based on a ratio or multiple of expected NOI over next 12 months.

  • ratios must be from comparable properties
  • analogous to the use of price-earnings ratio to value common stocks
253
Q

discounted cash flow models

A

-the appraiser must identify the investment holding period, forecast the NOI for each year of the holding period, select appropriate yield rate or required internal rate of return at which to discount all future cash flows

254
Q

potential gross income

A

rental income assuming 100% occupancy

- estimated rent per unit for each year x number of units available to rent

255
Q

reconstructed operating statement

A

shows the appraisers estimate of stabalized income and expenses
-the appraiser bases estimates of future cash flows on what they believe market participants are expecting, not what they expect

256
Q

market rent

A

rental income the property would most likely command if placed for lease on the open market as of the effective date of the appraisal
-PGI is usually based on market rent

257
Q

contract rent

A

actual rent being paid under contract

258
Q

types of commercial leases

A
  • straight lease
  • step up or graduated lease
  • indexed lease
  • percentage lease
259
Q

straight or flat lease

A

“level” lease payments, rent remains fixed over entire lease

260
Q

step up/graduated lease

A

rent increases on a predetermined schedule

261
Q

indexed lease

A

rent tied to an inflation index

262
Q

percentage lease

A

rent includes percentage of tenants sales

263
Q

natural vacancy rate

A

proportion of PGI not collected- even when market is in equilibrium (multiply by PGI to get vacancy collection loss)

264
Q

effective gross income

A

whats left after subtracting the vacancy allowance from PGI and adding miscellanous income (fees, parking, laundry etc)

265
Q

operating expenses

A

expenses to maintain and operate rental properties

  • fixed (do not vary with occupancy)
  • variable (vary with occupancy)
  • does NOT INCLUDE: mortgage payments, tax depreciation or capital expenditures
266
Q

capital expenditures

A

replacements and alterations to a building that materially prolongs its life and increases value

267
Q

NOI is property’s

268
Q

projected stream of NOI is fundamental

A

determinant of value

269
Q

direct capitalization

A

the process of estimating a property’s market value by dividing a single year NOI by a “capitalization” rate

270
Q

V=NOI/Ro

A

v=value
NOI=projected income over next 12 months
Ro=capitalization rate

271
Q

direct market extraction

A

abstracting cap rates from the market

Ro=NOI/Vo or Ro=NOI/sale price

272
Q

cap rate

A

a measure of the relationship between a property’s current income stream and its price or value
-NOT an interest rate, discount rate or IRR

273
Q

IRR= Yo= Ro+ g

A

Ro= NOI/price g=P1-Po/price

274
Q

effective gross income multiplier

A

sale price + effective gross income

  • quick indicator for smaller rental properties
  • best used for properties with short-term leases
275
Q

problems with valuation by direct capitalization

A
  • inadequate data on comparable sales

- different prices between institutional and private investors

276
Q

discounted cash flow analysis

A

the process and procedures for estimating

  1. future cash flows from property operations
  2. the net cash flow from disposition of the property at end of assumed investment holding period
  3. appropriate holding period
  4. required total rate of return
    - using these to generate an indicated value
277
Q

pro forma

A

a cash flow forecast prepared to facilitate discounted cash flow analysis

278
Q

reversion

A

cash proceeds from a sale

279
Q

terminal value

A

sale price at end of expecting holding period (Vt)

280
Q

net sale proceeds

A

sale price- selling expenses

281
Q

discounting

A

future cash flows converted into present values

282
Q

fee simple estate

A

complete ownership of a property w/o regard to any leases

283
Q

leased fee estate

A

ownership subject to leases on the property

284
Q

effects of mortgage debt

A
  • more households can own their home
  • businesses can use their cash for core activities
  • investors can leverage and diversify investments
  • homeowners can obtain credit on better terms than consumer debt
285
Q

two elements of a mortgage loan

A

note and mortgage (deed of trust)

286
Q

deed of trust

A

secures the note, creates collateral interest on the property

287
Q

note

A

details the financial rights and obligations between borrower and lender

288
Q

note

A

details the financial rights and obligations between borrower and lender
-defines the exact terms and conditions

289
Q

commercial mortgage loans

290
Q

commercial mortgage loans

A

360 day interest

291
Q

adjustable rate

A
  • index rate
  • US treasury constant maturity rate
  • LIBOR
  • thrift institution cost of funds index
  • home mortgage rate index
292
Q

index rate

A

market-determined rate beyond control of either borrower or lender

293
Q

constant maturity rate

A

the one year constant maturity rate for example is the average of the market yield found by survey on any outstanding US treasury debt having exactly one year remaining to final repayment, regardless of original maturity

294
Q

cost of funds index

A

an index based on the weighted average of interest rates paid for deposits by thrift insitutions (savings and loans assocations, savings banks)

295
Q

LIBOR rate

A

a common index of interest rates for income producing property, the London Interbank Offering Rate is a short term interest rate for loans among foreign banks based in London

296
Q

change date

A

the date the rate changes

-home mortgage lenders must notify borrowers of interest rate changes at least 30 days in advance

297
Q

margin

A

the lenders “markup”

  • determined by the individual lender and can vary with competitive conditions and with the risk of the loan
  • normally constant throughout the life of the loan
  • usually around 275 basis points
298
Q

fully index rate

A

index rate + margin

299
Q

interest rate caps

A

limit on changes in interest rate charged

  • periodic
  • lifetime
300
Q

payment caps

A

limit on payment changes rather than interest rate changes

-can result in negative amortization

301
Q

periodic caps

A

limit change in the interest rate from one change date to the next

302
Q

overall caps

A

limit change over the life of the loan

303
Q

teaser caps

A

temporarily reduced interest rate, maybe be a % point or two below the sum of index plug margin

304
Q

negative amortization

A

scheduled payment is insufficient to pay all of the accumulating interest, causing some interest to be added to the outstanding balance after each payment shortfall, increasing the loan amount

305
Q

partially amortizing

A

it may pay down partially over a certain number of years but may require an additional large payment of principal with the last scheduled payment

306
Q

nonamortizing

A

require interest but no regularly scheduled principal payment prior to the last payment

307
Q

right of prepayent

A
  • no right of prepayment unless explicity provided

- VA and FHA loans do not have prepayment penalties

308
Q

loans with restricted right of prepayment

A
  • subprime home loans
  • jumbo home loans
  • most income property mortgage loans
309
Q

prepayment penalties

A
  • % of outstanding balance
  • yield maintenance
  • defeasance
310
Q

nonrecourse loan

A

no personal liability

  • exculpatory clause
  • single purpose, single asset, bankruptcy remote entity for borrower
311
Q

demand clause

A

right of lender to require prepayment

312
Q

mortgagor (trustor)

313
Q

mortgagee (beneficiary)

314
Q

title theory

A

mortgage a temporary transfer of title

315
Q

lien theory

A

mortgage a lien

316
Q

important mortgage clauses (DOT)

A
  • description of the property
  • insurance clause
  • escrow/impound clause
  • acceleration clause
  • due-on-sale clause
  • hazardous substance clause
  • preservation and maintenance clause
317
Q

default

A

failure to meet requirements of the note or mortgage

318
Q

technical default

A

any violation of terms

319
Q

substantive default

A

three missed payments (90 Days)

320
Q

non-foreclosure responses to default

A
  • counseling and consumer debt reorganization
  • temporary reduction of payments
  • assisted sale
  • short sale
  • deed in lieu of foreclosure
321
Q

foreclosure

A

legal process of terminating all claims of ownership and all liens inferior to foreclosing lien

322
Q

definciency judgment

A

judgment against mortgagor for unrecovered balance

323
Q

judicial foreclosure

A

court-administered public auction

324
Q

power of sale

A

public auction conducted by trustee or mortgagee (preferred by lenders)

325
Q

chapter 7 bankruptcy

A

liquidation

326
Q

chapter 11 bankruptcy

A

court supervised “workout”

-can result in delay

327
Q

chapter 13 bankruptcy

A

wage earners proceeding

-can result in delay

328
Q

acquiring property with existing debt

A

“subject to” borrower does not sign mortgage note

  • no personal liability for loan
  • property is still subject to the mortgage
329
Q

assumption

A

buyer adds signature to note

  • personal liability
  • property subject to mortgage
330
Q

equal credit opportunity act

A

prohibits discrimination in lending

331
Q

federal truth in lending act

A
  • statement of annual % rate

- disclosures

332
Q

HOEPA

A

home ownership and equity protection act

333
Q

subprime

A

loan to a borrower not qualifying for standard prime financing

334
Q

Dodd-Frank Act

A

createss consumer financial protection bureau

335
Q

real estate valuation

A

estimates all future net cash flows

-converts into estimate of present value

336
Q

how are investment decisions made

A

by comparing estimate of present value to required equity investment

337
Q

value depends on

A

-magnitude
-timing
-riskiness
of expected cash flows

338
Q

compounding operatiosn

A

future value of a lump sum

future value of an annuity

339
Q

discounting operatiosn

A

present value of a lump sum

present value of an annuity

340
Q

present value

A

an amount at time zero

341
Q

future value

A

a single cash flow at any future time point

342
Q

payment

A

a repeating amount of cash inflow or outflow, flow normally begins at end of first period, sometimes at time zero

343
Q

ordinary annuity

A

another name for payment

344
Q

lump sum

A

any future cash inflow or outflow occuring only once

Finance 331 (10 decks)

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