Test 3 Study Guide Flashcards
What is the difference between market value and investment value?
Market value: most probable selling price market condition
Investment value: the value of the investor
What is the difference between value and price?
Value: is a concept- never know what they actually are
Price: an actual amount
What are the criteria that are used to identify a property’s highest and best use?
- legally permissible
- physically possible
- financially feasible
- most profitable
What are the three approaches that are used in real estate valuation?
- the sales comparison approach
- the cost approach
- the income approach
What do each of the terms used in real estate valuation mean:
a. Indicated value
b. Elements of comparison
c. Comparable properties
d. Adjusted sale price
a. indicated value= the single estimate of the properties value
b. goal is to identify the key determinants of value
c. must be properties that prospective buyers would consider substitutes for subject property
d. make a series of value adjustments to the transaction prices for each of the comparable/ the adjustments will reflect differences but with the comparables differ from the subject property regarding the elements of comparision
What are the three steps involved in the cost approach to real estate valuation?
- estimate the value of the land
- estimate the cost of the structures as new
- deduct accrued depreciation
What are the three sources of depreciation in the cost approach to real estate valuation?
- physical depreciation
- functional depreciation
- external depreciation
How do you calculate each of the following income measures for Year 1
a. Potential Gross Income
b. Effective Gross Income
c. Net Operating Income
a. leasable space x average rent
b. EGI= PGI - losses + other income
c. NOI= EGI- (operating expenses + capital expenditures)
How do you calculate each of the following income measures for Year 2
a. Potential Gross Income
b. Effective Gross Income
c. Net Operating Income
a. adjust avg rent inc.
b. adjust other income inc.
c. NOI= EGI - (OE + CE)
What is the difference between operating expenses and capital expenditures?
operating expenses: day-to-day expenses
capital expenditures: long-term expenses
What is the basic valuation equation for the direct capitalization approach to real estate
valuation?
market value = year 1 NOI/capitalization rate
What is a capitalization rate? How would one be calculated?
it’s the ratio of NOI to selling price
What are the cash flows that are needed to use the direct capitalization approach to real estate valuation? How are the cash flows used to calculate the market value using the DCF approach?
Cash flow 1
Cash flow years 2- whatever year
Put into cashflow worksheet
How are the net sale proceeds calculated in the discounted cash flow approach to real estate
valuation?
NOI/ going-in cap rate
What is the difference between the note and the mortgage?
The note: contract that establishes the financial obligation and the exact terms of the loan the mortgage: contract by which the borrower pledges the property as security for the loan
What do the following terms mean and what role to they plan in determining the interest rate
on an adjustable-rate mortgage?
a. The index rate
b. The margin
a. A market-determined rate that is beyond the control of either the borrower or the lender
b. The margin is the lender’s markup and reflects the differences in risk between the index rate and the loan adjustable-rate mortgage: the annual rate of interest is calculated as the sum of an index rate + margin
What is the normal range for the margin in a residential adjustable-rate mortgage?
usually between 200-300 basic points
What is the difference between a traditional adjustable-rate mortgage and a hybrid adjustable-rate mortgage?
Traditional: can change every year
Hybrid: a mix of traditional adjustable- can be set for 2,3, or 5 years and can change
With a hybrid adjustable-rate mortgage, what is the relationship between the initial interest rate on the loan and how long the borrow “locks in” the initial rate?
Longer lock: smaller interest rate savings
Shorter lock: larger interest rate savings
What are periodic caps and lifetime caps and what role do they play regarding adjustable-rate
mortgages?
Periodic: limit how much the payment or interest
Lifetime: limit how much the payments or interest rate can change in total during the life of the loan caps limit how much the interest rate or payment can change at any one time
What does it mean for loan payments to be the following:
a. Fully-amortizing
b. Partially-amortizing
c. Non-amortizing
What types of loans tend to restrict a borrower’s right of prepayment?
- large residential mortgages
- subprime mortgages
- most commercial mortgages
What is the difference between a recourse loan and a nonrecourse loan?
nonrecourse: no personal liability
What right does a demand clause give a lender?
allows the bank to “call” the loan and require immediate repayment of all outstanding principle even if the borrower is current with their payments.
What obligation does an escrow clause typically place on the borrower?
the lender requires the borrower to include 1/12 of their anticipated property insurance premium
What is the difference between an acceleration clause and a demand clause?
acceleration clause: in the event of default, allows the lender to declare all the outstanding principal is immediately due
What obligation does a due on sale clause place on a borrower?
requires the loan to be paid off in the property securing the loan is sold
At what point does the lender declare a borrower to be in substantive default?
falling at least 3 payments behind
What does the term equity of redemption refer to?
used to describe what the borrower must do to stop the foreclosure process and retain ownership of the property
How do you find the payment on a loan with annual payments and annual compounding?
same thing as monthly but payments per year is one
How do you find the payment on a loan with monthly payments and monthly compounding?
monthly payment: divide I/Y by 12, and leave P/Y as 1
How do you find the amount outstanding on a loan at any point in time?
FIND PV using:
PMT
I/Y divided by 12
P/Y
N
CPT PV
