Principles of Real Estate 2 Flashcards
Yearly Interest Calculation
Yearly interest= Interest Rate x Principal
Compound Interest Calculation
Compound Interest Future Value= Principal(1+Interest Rate)^periods
Loan-To-Value Ratio
Percentage of value lender is willing to finance
Ad Valorem Taxes Calculation
Annual Taxes= Assessed Value x Tax Rate
Points
- Point is 1% of loan amount
- Point Value= Percentage Points x Loan Amount
One Acre
43,560 square feet
Area of Rectangle
Length x Width
Area of Triangle
1/2 Base x Height
Commission Value
Sales Price x Commission Percentage
Useable Area
% x Total Area
Seller’s Net
100%- Commission Rate x Sales Price
Appreciated Value
100%+Appreciation% x Original Cost
Depreciated Value
100% - Depreciation% x Original Cost
Profit
% x Original Cost
Sales Price
% x List Price
Assessed Value
% x Market Value
Monthly PITI
Qualifying Ration x Gross Monthly Income (GMI)
Net Income
Capitalization Rate x Market Value
Volume
Length x Width x Height
Appreciation
increase in value due to market forces
Ad Valorem Taxes
- according to value
- per hundred or thousand (mills)
Special Assessment Tax
providing benefits such as curbs
Municipal Improvement Tax Bill
until improvement is paid for or permanent
Two Year Right of Redemption
has 2 years to pay expenses for tax auction if lose homestead property
Requirements of a valid lease
- Competent Parties
- Let and Take Agreement
- Adequate Consideration
- Legal Purpose
- Description of Property/ Street Address
Appraisal Characteristics of Value of Real Property
- Demand
- Utility- must be able to fulfill need
- Scarcity- if too abundant, value reduced
- Transferability- ability to transfer title
Approaches to Appraisal
- Sales Comparison
- Cost Approach
- Income Approach
Sales Comparison
focused on recent sales in area
Cost Approach
how much a new structure of size and type would currently cost
Income Approach
- uses the income the property generates to estimate fair value
- net income/capitalization rate
Gross Rent Multiplier
Sales Price/ Monthly Rent
Tax advantages of real estate investment
- tax-sheltered income- depreciation
- Favorable capital gains tax treatment- on sale
- Deferred taxation on exchanges
Government’s Rights in Land
PETE
- Police Power
- Eminent Domain
- Taxation
- Escheat
Police Power
right to regulate and control how land is used
Eminent Domain
right to take private land for public use
Escheat
transferring real estate to the state when a person dies without will or heirs
Certified Commercial Investment Member
- Designation by National Association of Realtors
- Program for commercial real estate professionals regarded as gold standard
- 200 hours of course work and experience
Purpose and timing of a buyer’s final walkthrough
1-3 days before closing to verify condition of property
Loan Estimate
- Estimate of settlement charges borrower is likely to pay
- Provided no later than 3 business days after receipt of application
- Delivered no later than 7 days before consummation
Factors considered by appraisers in addition to the principles of value
- Property and lender information
- Neighborhood description
- Site description
- Improvements to site
- Analysis of market data (Sales Comparison Approach)
- Cost Approach Analysis
- Income Approach Analysis
- Reconciliation of Values
- Additional Support Documents
Closing
documents signed and funds disbursed
Funding
transferring funds to title or escrow
Underwriting
evaluating loan application to determine risk
Servicing
collecting payments, maintaining records, collecting taxes, remitting funds and following up on delinquencies
Origination
process of creating a loan
Consummation
contract is executed
Loan Processing
build file for underwriting decision
Appraisal Principles
- Highest and Best Use*
- Principle of Contribution*
- Principle of Change*
- Principle of Anticipation*
- Principle of Substitution*
- Principle of Conformity*
- Principle of Increasing and Decreasing Returns*
- Principle of Supply and Demand*
- Principle of Regression/ Progression*
- Principle of Competition*
- Principle of Balance*
Highest and Best Use
legal use that gives highest return in money
Principle of Contribution
property’s value is equal to the sum of the contributory value of each of its components
Principle of Change
forces of change can be specific or external to the property
Principle of Anticipation
purchase price is affected by the expectation of future benefit and appeal
Principle of Substitution
value influences by the cost of acquiring a substitute or comparable item
Principle of Conformity
value maximized when there is a reasonable degree of homogeneity
Principle of Increasing and Decreasing Returns
improve property when the value of the improvement exceeds the cost
Principle of Supply and Demand
supply is short, prices go up. Supply high, prices go down
Principle of Regression/ Progression
lower-priced properties in the area will cause a decline in value
Principle of Competition
absence of competition will cause prices to increase
Principle of Balance
mixed land use should result in maximum value for all properties
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)
- Passed in 1980
- Clean up sites contaminated with hazardous substances
- Authority to federal, state natural resource agencies and native american tribes
- Responsibility to EPA
- Safe Harbor- may be exempt from liability
Depreciation
reduction in value due to deterioration or obsolescence
Physical Deterioration
loss in property value due to daily wear and tear
Functional Obsolescence
loss in desirability of style, layout, or function of an element of a property over time
External Obsolescence
loss in value of property cause by factors outside of the property itself
Types of depreciation considered by an appraiser
- Physical Deterioration
- Chronological Age
- Effective Age
- Functional Obsolescence
- External Obsolescence
Requirements of a valid deed and transfer of title
- Must have grantor
- Must have grantee
- Consideration be given by the grantee to the grantor
- Must have words of conveyance
- Legal description
- Must be executed, signed and delivered
Types of Leasehold Estates
- Estate for years
- Periodic Tenancy
- Tenancy at Sufferance
- Tenancy at Will
Estate for Years
set term. Survives death and sale
Periodic Tenancy
renews automatically. Survives death and sale
Tenancy at Sufferance
tenant occupies against owner’s wishes
Tenancy at Will
tenant occupies with permission for uncertain time
Special Warranty Deed
promises to defend title only against claims during their ownership
Bargain and Sale Deed
no guarantees or warranties. Implies ownership
Quitclaim Deed
no guarantees, warranties or covenants. Does not claim to own property
Gift Deed
consideration is love and affection
Guardian’s Deed
minor’s interest is conveyed
Sheriff/Trustee’s Deed
foreclosure
Correction Deed
corrects error in previous deed
Tax Deed
property sold by government at a tax sale
General Warranty Deed
greatest degree of protection
Fixed- Rate Mortgage
- Rate does not change
- Amortized loan
- Payment applied to interest first
Adjustable-Rate Mortgage
rate changes
Advantages of ARM Loans
- Lower interest rate
- Higher loans
- Falling rates
Disadvantages of ARM Loans
- Early refinancing
- Unpredictable home mortgage payments
- Long-term cost
- Confusion
Blanket Mortgage
covers more than one property
Package Mortgage
Includes real and personal property
Budget Mortgage
Payment includes PITI, principal, interest, taxes, insurance
Balloon Note
- Partially amortized final payment is much larger
- Lower interest rate
- High cost of refinancing
Collateral- Dependent Loans (Hard Money Loans)
Funds secured by value of parcel
Wraparound Mortgage
- Low interest rate
- Seller financing, new loan takes secondary lien original not repaid
Open-End Mortgage
- Additional borrowing on same note
- Home Equity Line of Credit
- Minimum withdrawal is $4,000
Participation Loan
- 2+ lenders own a share
- Share appreciation mortgage
- Lender collected PI and shares when sold
Reverse Annuity Mortgage
- At least 62 years old
- Due upon sale or death
Sub-Prime Loans
- Risk-based pricing
- Borrowers rated A-F
- Interest is based on rating
Mortgage Insurance Premium
- Part of FHA loan
- Covers claims when borrower defaults on loan
- Pays up-front and annual premium
- Can be added to loan even if it exceeds appraised value
Private Mortgage Insurance
- Allows lenders to increase LTV
- Required when LTV exceeds 80% in conventional loans
- Insures difference between down payment and 80% LTV
Graduated Lease
-payments begin at lower, fixed rate and increase as it matures
Gross Lease
- landlord pays charges. taxes, insurance, repairs
- tenant only pays rent
Net Lease
- tenant pays rent plus expenses
Percentage Rent
- rent is based of gross receipts of tenant’s business
Lease Option
- allows tenant to buy at preset price and terms for given period
- binding only on seller
Sale and Leaseback
- one party sells property and leases it back
Inverse Condemnation
Landowner sues government to force them to buy land
Types of Title to Real Property
- Clear/Good
- Marketable
- Equitable
Clear/Good Title
title can be transferred to another
Marketable Title
title a reasonable buyer would accept as clear
Equitable Title
interest created by legal document who has not gone to closing yet
Chain of Title
history of all previous owners
Abstract of Title
complete history of title
Attorney’s Opinion of Title
opinion regarding state and transferability of title
Cloud on the Title
claim or encumbrance on title
Patent
original conveyance of land from government
Title Commitment
statement of condition of title from title company
Roles and Responsibilities of a Sponsoring Broker
- Advise agent of scope of authorized activities
- Ensure competency
- Written policies and procedures
- Education
- Background checks
Constructive Notice of Ownership
- Legal concept that a person received notice of a document even if not delivered directly
- Places burden on future buyers and lenders
- Public records
- Taking possession of property
Right of First Refusal
A tenant has the right to match or better any offer the landlord may receive
on the property before the property is sold to someone else.
Lease Purchase
- tenant makes lease payments.
- Tenant agrees to purchase at agreed time and price.
- Binding on both parties
Covenant
promise made to another
Covenant of Seizin
grantor owns property and has right to convey and has not conveyed it before
Covenant Against Encumbrances
only limitations in title are listed in deed and no unpaid claims
Covenant of Quiet Enjoyment
uninterrupted use of property
Covenant of Further Assistance
grantor responsible for documentation needed to transfer title
Covenant of Warranty Forever
promises have no expiration date
Restriction
limitation placed on new owner
Reservation
reserves rights for grantor
Real Estate Mortgage Investment Conduits
- hold commercial and residential mortgages in trust and issue interests in these securitized mortgages to investors.
- Freddie Mac and Fannie Mae
Secondary Mortgage Market
- Purchase and sale of existing mortgage to investors
- Designed to provide better liquidity
Real Estate Investment Trusts
- Small investors can invest in larger commercial properties by purchasing shares in organization that owns it
- Minimum of 100 investor
- Two types equity and mortgage
- Listed with securities and exchange commission
Equity REIT
Purchases commercial property
Mortgage REIT
Invests in mortgages and pays dividends
Advantages of a REIT
- High returns/low risk
- Portfolio diversification
- Capital appreciation
- Liquidity of shares
- Properties managed by professionals
Disadvantages of a REIT
- Subject to market conditions
- Reliance on debt
- Paying for rising property taxes
- 90-100% income is dividends and not reinvested
- Must pay management fees
Voluntary Alienation
transfer of title that is a free act
Involuntary Alienation
transfer of ownership against will of owner
Foreclosure
sale of property due to default
Adverse Possession
acquires title from the rightful owner through hostile,
actual, and continuous occupation of the land for the statutory period
Real Estate Syndicate
- Two or more parties join to create and operate real estate investment
- Do not have title in property, it is a securities investment
- Registration with SEC if 35+ people or across state lines
Real Estate Settlement Procedures Act (RESPA)
- Consumer Financial Protection Bureau (CFPB) Regulation X
- Ensures consumers are provided with information regarding mortgage settlement and protected from unnecessarily high settlement charges
- Prohibits undisclosed referral fees and kickbacks
Coverage of RESPA
-Applicable to all federally-related mortgage loans
one-to-four family structure
-Manufactured home
-And any of the following loans
-made by lender, creditor or dealer
-Made or insured by agency of federal government
-Made in connection with HUD program
-Made and intended to be sold to FNMA, GNMA, FHLMC
-Subject of a home equity conversion mortgage or reverse mortgage
Community Reinvestment Act (CRA)
prohibits redlining and ensures banks serve needs of community in which they do business
Equal Credit Opportunity Act (ECOA)
- 1974
- All consumers given equal chance for credit
- Prohibits discrimination on protected classes, and for receiving public assistance
- Does not prevent obtaining information
Truth in Lending Act (TILA)
-Disclosure of key terms in lending arrangement and all costs
Regulation Z
-Advertisement must disclose key terms
Easement
Gives one right to use or pass through another’s property
Easement in Gross
Belongs to person or corporation and not land
Easement Appurtenant
Right to benefit from piece of land
Creation of Easements
- Grant
- Reservation
- Implied grant
- Prescription- continuous use without permission
- Necessity
- Condemnation
Termination of Easements
- Merger
- Release
- Abandonment
- Death
Clouds on a title typically discovered during the commitment process
- Unreleased liens
- Judgments filed lis pendens (pending lawsuits)
- Unpaid taxes
Complete Application
- Property Address
- Estimated Value
- Name of borrower
- Social Security Number
- Income
- Loan Amount
Pre-Approval
- Requires application
- Issued after underwriting
Pre-Qualification
- When basic information is provided
- No obligation to lender or borrower
- Buyer with Conditional Qualification Letter will not receive Loan Estimate
Pre-Approval/Qualification Benefits
- Buyers more realistic with pricing
- Agent understands buyer’s ability to pay
- Agent can avoid showing overpriced properties
- Sellers ensure buyer has enough income to close
Intestate Succession
person dies with no will
Probate
judicial proceeding to confirm validity of will
Formal Will
prepared by attorney
Holographic Will
handwritten
Nuncupative Will
oral or deathbed will, only valid for personal property
Codicil
addition to existing will
Fannie Mae
- Formerly known as Federal National Mortgage Association (FNMA)
- privately-owned
- Exclusively on secondary market
- Addresses imbalance of mortgage credit by making funds available to capital deficient areas
- Allows lenders to originate mortgages for sale
- Standardizes mortgage loans
Short Sale
property is sold for less than mortgage owed
Quick Sale
sale of property in defaulted mortgage before foreclosure
Deed in Lieu of Foreclosure
borrower conveys all interest in property to lender to satisfy default
Equitable Redemption
redeem property by making late payments
Types of Agency Employment Contracts
- Listing
- Buyer Representation Agreement
- Management Agreement
