Real Estate National Test Ch 19

Question 1

What are the 3 responsibilities of the property manager?

Answer 1

1. Achieve the objective of the property owners.
2. Generate income for the owners
3. Preserve and/or increase the value of the investment property.

Question 2

What are the areas that property manager can specialize?

Answer 2

1. Community Association Management
2. Housing for Seniors
3. Manufactured Homes
4. Resort Housing
5. Concierge Services
6. Asset Management
7. Corporate Property Manager
8. Leasing Agent

Question 3

What are the better known associations for Property Managers? And what they focus on.

Answer 3

1. Building Owners and Managers Association International (BOMA) - Commercial Real Estate.
2. Building Owners and Managers Institute International (BOMI)—education programs for commercial property and facility management industries.
3. Community Associations Institute (CAI)—homeowners associations, condominiums, and other planned communities.
4. Institute of Real Estate Management (IREM)—multifamily and commercial real estate designation.
5. International Council of Shopping Centers (ICSC)—shopping centers worldwide.
6. National Apartment Association (NAA)—multifamily housing industry.
7. National Association of Home Builders (NAHB)—all aspects of home building.
8. National Association of Residential Property Managers (NARPM)—single-family and small residential properties.

Question 4

D: Management Agreement

Answer 4

A contract creating a general agency relationship between the owner and the property manager.

The management agreement defines the duties and responsibilities of each party; it is a guide used in operating the property, as well as a reference in case of any future disputes.

Question 5

What are the elements that should be in a property management contract?

Answer 5

1. Description of the property.
2. Time period the agreement covers and specific provisions for termination.
3. Definition of the manager’s responsibilities. All the manager’s duties should be specifically stated in the contract. Any limitations or restrictions on what the manager may do should be clearly stated.
4. Statement of the owner’s purpose and responsibilities. The owner should clearly state what the manager is to accomplish. One owner may want to maximize net income, while another may want to increase the capital value of the investment. What the manager does depends on the owner’s long-term goals for the property. The agreement also should list the owner’s responsibilities for management expenses, such as payroll, advertising, insurance, and management fees.
5. Extent of the manager’s authority. This provision should state what authority the manager is to have in matters such as hiring, firing, and supervising employees; fixing rental rates for space; and making expenditures and authorizing repairs. Repairs that exceed a certain expense limit may require the owner’s written approval.
6. Reporting. The frequency and detail of the manager’s periodic reports on operations and financial position should be agreed on. These reports serve as a means for the owner to monitor the manager’s work. They also form a basis for both the owner and the manager to spot trends that are important in shaping management policy. The state real estate commission usually will have regulations concerning reporting.
7. Compensation. The management fee or other form of compensation may be based on a percentage of gross or net income, a fixed fee, or some combination of these and other factors. The compensation provision of the agreement should state the base fee, as well as any leasing fees, supervision fees, or other commissions or compensations.
8. Allocation of costs. The agreement should state which of the property manager’s expenses—such as office rent, office help, telephone, advertising, and association fees—will be paid by the manager. Other costs will be paid by the owner.
9. Liability. The agreement should require that the manager be included as an additional insured on the property liability policy.
10. Antitrust provisions. Management fees are subject to the same antitrust considerations as sales commissions. They cannot be standardized in the marketplace, because standardization would be considered price-fixing. The fee must be negotiated between the agent and the principal. In addition, the property manager may be entitled to a commission on new rentals and renewed leases.
11. Equal opportunity statement. Residential property management agreements should include a statement that the property will be shown, rented, and otherwise made available to all persons, regardless of race, color, religion, sex, disability, national origin, or family status, and to any class of person protected by local, state or federal law.

Question 6

D: Management Plan

Answer 6

Equal opportunity statement.

Residential property management agreements should include a statement that the property will be shown, rented, and otherwise made available to all persons, regardless of race, color, religion, sex, disability, national origin, or family status, and to any class of person protected by local, state or federal law.

Question 7

In preparing a management plan a property manager analyzes what factors?

Answer 7

1. The owner’s objectives
2. The regional and neighborhood market
3. The specific property

Question 8

What are the financial reports that the Property Manager is responsibly for?

Answer 8

1. Operating Budget
2. Cash Flow Report
3. Income
4. Expenses
5. Cash Flow
6. Profit and Loss Statement
7. Budget Comparison Statement

Question 9

D: Operating Budget

Answer 9

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

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

The property uses the operating budget as a guide for the property’s financial performance in the present and future.

Once a property manager has managed a property for a length of time, an operating budget may be developed based on the results of the profit and loss statement in comparison to the original budget (actual versus projected).

After making the comparison, a new operating budget is prepared for a new time period in the future.

Question 10

D: Cash Flow Report

Answer 10

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 11

D: Income Reporting

Answer 11

Income includes gross rentals collected, delinquent rental payments, utilities, vending machine proceeds, contracts, late fees, and storage charges. In some properties, there is space that is not income producing, such as the property manager’s 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.

Any losses from uncollected rental payments or evictions are deducted from total gross income to arrive at net operating income.

Question 12

D: Cash Flow

Answer 12

Cash flow is derived as shown below. The entry for “debt service” in the third equation includes any mortgage payments on the property.

gross rental income + other income – losses incurred = total income

total income – operating expenses = net operating income

net operating income – debt service – reserves = cash flow

Question 13

D: Profit & Loss Statement

Answer 13

Is a financial picture of revenues and expenses used to determine whether a 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.

A formula for a profit and loss statement is as follows:

gross receipts – operating expenses – total mortgage payment + mortgage loan principal = net profit

Question 14

D: Budget Comparison Statement

Answer 14

Compares 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 15

Terms of rental payment should be spelled out in the lease agreement, including what?

Answer 15

1. Time and place of payment
2. Provisions and penalties for late payment and return checks
3. Provisions for cancellation and damages in case of nonpayment.

Question 16

Keeping a property in good condition involves what three types of maintenance?

Answer 16

1. Preventive
2. Repair or Corrective
3. Routine

Question 17

D: Preventive Maintenance

Answer 17

Includes regularly scheduled activities such as painting and seasonal servicing of appliances and systems.

Preventive maintenance preserves the long-range value and physical integrity of the building.

This is both the most critical and the most neglected maintenance responsibility.

Failure to perform preventive maintenance invariably leads to greater expense in other areas of maintenance.

Question 18

D: Corrective Maintenance

Answer 18

AKA: Repair

Involves the actual repairs that keep the building’s equipment, utilities, and amenities functioning.

Repairing a toilet, fixing a leaky faucet, and replacing a broken air-conditioning unit are acts of corrective maintenance.

Question 19

D: Routine Maintenance

Answer 19

Includes such day-to-day duties as performing minor carpentry and plumbing repairs, and providing regularly scheduled upkeep of heating, air-conditioning, and landscaping.

Question 20

What factors do property managers consider when budgeting for repairs are?

Answer 20

1. Size of the building.
2. Complexity of the tenant’s requirements
3. Time and expense involved
4. Availability of suitable labor

Question 21

D: Tenant Improvements

Answer 21

AKA: Build-Outs

These are construction alterations to the interior of the building to meet a tenant’s particular space needs. Such alterations range from simply repainting or recarpeting to completely gutting the interior and redesigning the space by erecting new walls, partitions, and electrical systems.

Tenant improvements are especially important when renting new buildings.

In new construction, the interiors are usually left incomplete so that they can be adapted to the needs of individual tenants.

One matter that must be clarified is which improvements will be considered trade fixtures (personal property belonging to the tenant) and which will belong to the owner of the real estate.

Modernization or renovation of buildings that have become functionally obsolete and thus unsuited to today’s building needs is also important.

The renovation of a building often enhances its marketability and increases its potential income.

At the same time, federal and state regulations regarding lead-based paint, asbestos, and other hazardous substances that may be found in or around a structure can entail expensive remediation efforts.

Question 22

True or False & Why

Net operating income (NOI) is the income that remains after all expenses and the debt service have been deducted.

Answer 22

False

Total gross income is reduced by uncollected rental payments or evictions to arrive at net operating income.

Question 23

Explain Public Accommodations and Commercial Facilities Title 3

Answer 23

Title 3 prohibits discrimination on the basis of disability in the activities of places of public accommodation as well as commercial facilities to comply with ADA standards.

Question 24

What are examples of Reasonable Modifications to Public Facilities or Services?

Answer 24

1. Provide doors with automatic opening mechanisms.
2. Provide menus and real estate listings in a large-print or braille format.
3. Install an intercom so customers can contact a 2n floor business in a building without an elevator.
4. Lower public telephones
5. Add grab bars to public restroom stalls.
6. permit guide dogs to accompany customers
7. provide a shopper’s assistant to help disabled customers.
8. Provide ramps in addition to entry stairs.

Question 25

D: Equal Credit Opportunity Act

Answer 25

Prohibits a lender from denying a loan based on a person’s race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.

The ECOA affects the property manager in several ways.

A manager should use the same lease application for every applicant.

If a manager requires a credit report from one applicant, the manager should require credit reports from all applicants.

The manager should be consistent in evaluating the income and debt of applicants and in determining whether to rent to an applicant.

Question 26

True or False & Why?

The Equal Credit Opportunity Act (ECOA) does not prohibit a landlord from denying a rental application based on a person’s receipt of public assistance.

Answer 26

False

Receipt of public assistance may not be used to deny a rental application, although an applicant’s overall income level may be considered in deciding whether or not the application should be approved.

Question 27

D: Risk Management

Answer 27

Evaluation and selection of appropriate property and other insurance.

Question 28

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

Answer 28

1. avoid it by removing the source of risk (e.g., a swimming pool may pose an unacceptable risk)
2. control it by preparing for an emergency before it happens (by installing sprinklers, fire doors, and security systems)
3. transfer it by shifting the risk onto another party (by taking out an insurance policy)
4. retain it by deciding that the chances of the event occurring are too small to justify the expense of any other response (an alternative might be to take out an insurance policy with a large deductible, making the policy less expensive).

Question 29

D: Multiperil Policies

Answer 29

For apartment buildings.

Such a policy offers an insurance package that includes standard types of commercial coverage, such as fire, hazard, public liability, and casualty.

Special coverage for terrorism, earthquakes, and floods is also available.

Remember that flood insurance is always a separate policy.

Question 30

True or False

Condominium Associations carry insurance on all the common elements, and cooperatives carry insurance on the whole building.

Answer 30

True

Question 31

True or False & Why?

The four alternative risk management techniques are transfer, control, avoid, and retain.

Answer 31

True

 Risk management involves answering the question:

What happens if something goes wrong?

The four alternative risk management techniques include avoidance, control, transfer, and retention.

Question 32

True or False & Why?

In a commercial property, the risk of a shopper suffering a slip-and-fall injury would be covered by casualty insurance.

Answer 32

False

 In a commercial property, insurance against the risk of a shopper suffering a slip-and-fall injury would be covered by liability insurance.

Question 33

True or False & Why

Examples of variable expenses of property management are employee wages and utilities.

Answer 33

False

Employee wages and utilities are fixed expenses.

Variable expenses may be recurring or nonrecurring and can include capital improvements, building repairs, and landscaping.

Question 34

The property manager’s relationship with the owner is most similar to that of

A) a sales associate with the employing broker.

B) a stockholder with the board of directors of a corporation.

C) a cashier with the owner of a store.

D) a tenant with a landlord.

Answer 34

A. a sales associate with the employing broker.

A property manager is hired as a general agent with broad authority for a specific activity and for a long time.

A sales associate is usually a general agent for the employing broker.

Question 35

All of the following would cause a high vacancy rate EXCEPT

A) indifferent management.

B) excessive rent.

C) desirable amenities.

D) poor location.

Answer 35

C. Desirable Amenities

Desirable amenities would be found in properties with a low vacancy rate.

When the vacancy rate is high, the manager needs to determine why.

The manager should first identify and correct problems before lowering rents because the problem might be poor management or a defective or undesirable property.

Question 36

Many states now require at LEAST a real estate license or an association management license for those who specialize in managing

A) medical buildings.

B) shopping centers.

C) homeowners and condominium associations.

D) mobile home parks.

Answer 36

C. homeowners and condominium associations.

Many states now require at least a real estate license or an association management license for those who specialize in managing homeowners and condominium associations.

Question 37

Successful risk management by a property manager benefits from

A) a retention of all risk.

B) an avoidance of all risk.

C) an insurance audit.

D) a transfer of all liability to tenants.

Answer 37

C. an insurance audit.

An insurance audit performed by a competent, reliable insurance agent who is familiar with insurance issues for the type of property involved will indicate areas in which greater or lesser coverage is recommended and will highlight particular risks.

As a practical matter, it would be impossible to avoid all risk.

Question 38

A real estate broker acting as an owner’s property manager

A) must not profit from private contracts at the expense of the owner.

B) can personally collect the interest earned on trust account funds.

C) may manage the client’s property to their own advantage.

D) need not maintain complete and accurate trust account records.

Answer 38

A. must not profit from private contracts at the expense of the owner.

As the general agent, the property manager is charged with the fiduciary responsibilities of care, obedience, accounting, loyalty, and disclosure. In all activities, the manager’s first responsibility is to realize the highest return on the property in a manner consistent with the owner’s instructions.