FRL 3062 Midterm 2 + HW - Chapter 7, 8, 9, 10

Suppose you are interested in obtaining a mortgage loan for $250,000 in order to purchase your principal residence. Your lender has suggested that you might be interested in taking an FHA loan. In order to do so, you must pay an additional up-front mortgage insurance premium (UFMIP) of 1.0% of the mortgage balance. If the interest rate on the fully amortizing mortgage loan is 5% and the term is 30 years, what is your monthly mortgage payment assuming the UFMIP is financed?

$1,355.47

Suppose that examination of a pro forma reveals that the fifth-year net operating income (NOI) for an income-producing property that you are analyzing is $138,446 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 5% per year, determine the projected sale price of the property at the end of year 5 if the going-out capitalization rate is 9%.

$1,615,203.00 Capitalized sale price = net income x (1 + r%) / capitalization rate = 138,446 x (1 + 5%)/9% = 1,615,203

Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first-year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization?

$1,806,666.67 Direct Capitalization=Net Operating Income / Overall Capitalization Rate

Suppose that an appraiser has come to the following conclusions in evaluating the subject property. Due to the dramatic shift in the perceived safety of the neighborhood, values of any residential properties in the area of the subject property have fallen by $10,000, on average. Due to the subject property's age, physical deterioration to the building accounts for an estimate of $50,000 in lost value. An evaluation of the floor plan reveals that it is quite obsolete relative to current homebuyer preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Based on your understanding of adjustments related to accrued depreciation, which of the following pertains to the adjustment for external obsolescence?

$10,000

Given the following information, calculate the effective gross income: property: 4 office units, contract rents per unit: $2,500 per month; vacancy and collection losses: 15%; operating expenses: $42,000; capital expenditures: 10%.

$102,000 Effective Gross Income = Gross Income - Vacancy Expense = ($2,500 x 4 units x 12 months) - ($2,500 x 4 units x 12 months x 15%)

Using the following information, determine the net operating income (NOI) for the first year of operations of the subject property assuming "below-line" treatment of capital expenditures. Subject Property Number of apartments 15 Market rent (per month) 1000 Vacancy and collection losses 10% of PGI Operating expenses 5% of EGI Capital expenditures 10% of EGI

$153,900

Given the following information, determine the final appraisal value of the subject property. Adjustments Market conditions -0.50% (per month) Lot size $25,000 (per acre) Effective age (years) $1,000 (per year) Living area (sq. ft) $45.00 (per sq. ft.) Bath $1,250 (per bath) Bedrooms $3,000 (per bedroom) Subject Property Comparable Property Time sold Today 4 months ago Lot size (acres) 0.83 0.80 Effective age (years) 8 7 Living area (sq. ft) 2,197 2,383 Bath 3.5 3.5 Bedrooms 4 4 Sale price - $287,000rev: 07_14_2017_QC_CS-93438, 05_24_2018_QC_CS-127747

$272,640

Let's assume that we are about to appraise a house using the cost approach. The home was originally constructed in the early 1900s and is one of the last of its kind in this area. The cost of constructing an exact replica of this residence is estimated to be $350,000. On our trip to the actual property, we notice that this is the only residential unit located on this particular road. Based on the current usage of adjacent real estate, we estimate that the property would be worth an additional $25,000 in its highest and best use. However, due to the dramatic shift in the perceived safety of the neighborhood, values of any remaining residential properties in the area have fallen by $20,000. Due to the home's age, we also notice that there has been a significant amount of physical deterioration to the building, amounting to an estimate of $50,000 in lost value. Since the home was built over 100 years ago, the floor plan is quite obsolete relative to current preferences. This has a detrimental effect on the value of the property that is estimated to be approximately $15,000. Given this information, determine the appraised value of the home using the cost approach.

$290,000Correct

Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the market value of the subject property is $400,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the reproduction cost of the building?

$370,000 Reproduction Cost= Market Value+Accumulated Depreciation-Added Value

Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 11.44%. If the projected first-year net operating income (NOI) for the subject property is $44,500, what is the indicated value of the subject using direct capitalization?

$388,986.00 Direct Capitalization=Net Operating Income / Overall Capitalization Rate

Suppose that an appraiser has just completed her analysis using the cost approach to valuation. She has determined that the reproduction cost of the subject property is $370,000. If the added value of the site was $80,000 and accrued depreciation amounted to $50,000, what was the estimated value of the building using the cost approach?

$400,000 Reproduction Cost= Market Value+Accumulated Depreciation-Added Value

Given the following information, calculate the net operating income assuming below-line treatment of capital expenditures: property: 4 office units, contract rents per unit: $2,500 per month; vacancy and collection losses: 15%; operating expenses: $42,000; capital expenditures: 10%.

$60,000 total revenue = 2500 * 4 units * 12 months = $120,000 Less Vacancy and allocation losses (120,000*15%) = $18,000 Effective Gross Income (EGI) = $102,000 Less Operating Expenses $42,000 Net Operating Income = $60,000

Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold today at $375,000 and $340,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis.

0.28%

Suppose that we observe two comparable properties that have each sold twice within the past two years. Property A sold 24 months ago for $350,000 and Property B sold 18 months ago for $325,000. If the two properties were sold today at $375,000 and $340,000, respectively, estimate the change in market conditions (percentage change in price) per month, assuming we equally weight the two properties in our analysis.

0.28% Property A: Percentage change in prices= (New price - old price)/Old price = (375000 - 350000)/350000 =.0714= 7.14% Monthly percentage= 7.14/24= .2975% Property B: Percentage change in prices= (New price - old price)/Old price = (340000 - 325000)/325000 = .0461= 4.61% Monthly percentage= 4.61/18= .256% As they have equal weightage= (.256 + .2975)/ 2 = .2767= .28%

In addition to the UFMIP (up-front mortgage insurance premium), the owner-occupant borrower who decides to use an FHA mortgage loan will normally pay an additional annual mortgage insurance premium (MIP) that depends on the loan-to-value ratio and the term of the loan. For loans with maturity longer than fifteen years and a loan to value ratio that is greater than 95%, the MIP will be what percentage of the average annual loan balance?

1.15%

Three highly similar and competitive income-producing properties within two blocks of the subject property have sold this month. All three offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: Comparable Sale Price NOI1 A $500,000 $55,000 B $420,000 $50,400 C $475,000 $53,400

11.4%

Four highly similar and competitive income-producing properties located in close proximity to the subject property have sold this month. All four offer essentially the same amenities and services as the subject property. The sale prices and estimated first-year NOI for each of the comparable properties are as follows: Comparable Sale Price NOI1 A $1,450,000 $155,000 B $1,100,000 $135,400 C $1,250,000 $143,400 D $1,500,000 $169,000 Using the information provided, calculate the overall capitalization rate by direct market extraction assuming each property is equally comparable to the subject.

11.43% Capitalization rate of A = (NOI / Sale price) × 100 = (55,000 / 500,000) × 100 = 11% Capitalization rate of B = (NOI / Sale price) × 100 = (50,400 / 420,000) × 100 = 12% Capitalization rate of A = (NOI / Sale price) × 100 = (53,400 / 475,000) × 100 = 11.2% Overall capitalization rate = (Rate of A + Rate of B + Rate of C) / 3 = (11% + 12% + 11.2%) / 3 = 11.4%

Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis; mortgage financing, 75%; typical debt financing cap rate: 10%; sale price: $1,950,000; before tax cash flow (BTCF): $390,000.

12.5%

Given the following information, calculate the appropriate going-in cap rate using mortgage-equity rate analysis; mortgage financing, 75%; typical debt financing cap rate: 10%; sale price: $1,950,000; before tax cash flow (BTCF): $390,000.

12.5% 75%*10 + [(390,000/1,950,000)*(1-.75)]

Added to the index of the adjustable rate is a margin, which is the lender's markup. For standard adjustable rate mortgage (ARM) loans, the average industry margin has been stable at approximately

275 basis points.

Given the following information, calculate the effective gross income multiplier: sale price: $950,000; potential gross income: $250,000; vacancy and collection losses: 15%; and miscellaneous income: $50,000.

3.6 Effective Gross Income Multiplier(EGIM) =Sale price/EGI Gross annual income = 250000 * (1 - 15%) + 50000 = 262500 Gross income multiplier = 950000 / 262500 = 3.62

Given the following information, calculate the effective gross income multiplier: sale price: $2,500,000; effective gross income: $340,000; operating expenses: $100,000; capital expenditures: $36,000.

7.35

Given the following information, calculate the effective gross income multiplier: sale price: $2,500,000; effective gross income: $340,000; operating expenses: $100,000; capital expenditures: $36,000.

7.35 Effective Gross Income Multiplier(EGIM) =Sale price/EGI

Given the following information, calculate the appropriate going-in cap rate using general constant-growth formula: overall market discount rate, 12%; constant growth rate projection: 3% per year; sale price: $1,950,000; net operating income: $390,000; potential gross income: $520,000.

9%

Most appraisers adhere to an "above-line" treatment of capital expenditures. This implies which of the following?

Capital expenditures are subtracted in the calculation of net operating income.

Known popularly by its section in the Federal Bankruptcy Code, which of the following types of bankruptcy is a court-supervised workout for a troubled household?

Chapter 13 bankruptcy

The going-in cap rate, or overall capitalization rate, is a measure of the relationship between a property's current income stream and its price or value. Which of the following statements regarding cap rates is true?

It is analogous to the dividend yield on a common stock.

Given the following information, what adjustment would need to be made to account for the living area difference between the subject property and comparable property? Adjustments Market conditions -0.50% (per month) Lot size $25,000 (per acre) Effective age (years) $1,000 (per year) Living area (sq. ft) $45.00 (per sq. ft.) Bath $1,250 (per bath) Bedrooms $3,000 (per bedroom) Subject Property Comparable Property Time sold Today 4 months ago Lot size (acres) 0.83 0.80 Effective age (years) 8 7 Living area (sq. ft) 2,197 2.383 Bath 3.5 3.5 Bedrooms 4 4 Sale price - $287,000

The price of the comparable property must be adjusted downward by $8,370.

Given the following information, what adjustment would need to be made to account for the lot size difference between the subject property and comparable property? Adjustments Market conditions -0.50% (per month) Lot size $25,000 (per acre) Effective age (years) $1,000 (per year) Living area (sq. ft) $45.00 (per sq. ft.) Bath $1,250 (per bath) Bedrooms $3,000 (per bedroom) Subject Property Comparable Property Time sold Today 4 months ago Lot size (acres) 0.83 0.80 Effective age (years) 8 7 Living area (sq. ft) 2,197 2.383 Bath 3.5 3.5 Bedrooms 4 4 Sale price - $287,000

The price of the comparable property must be adjusted upward by $750.

Adjustments for physical characteristics are intended to capture the dimensions in which a comparable property differs physically from the subject property. If the only physical difference between the subject property and the comparable is that the comparable does not have a fireplace, which of the following adjustments should take place?

The transaction price of the comparable property should be adjusted upward.

Real estate professionals have long supported strict standards of ethics and practice. Followed by all states and federal regulatory agencies, which of the following imposes ethical obligations and minimum standards that must be followed by all real estate professionals providing formal estimates of market value?

Uniform Standards of Professional Appraisal Practice (USPAP)

Since mortgages typically have multiple costs associated with them, a borrower may attempt to reduce these costs into a single measure in order to compare two or more mortgages. Which of the following measures is a popular tool for comparing the cost of several mortgages?

annual percentage rate

Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. For which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis?

apartments

While it is often sufficient to rely on informal methods of estimating the market value of real estate assets, the complexity and large dollar value of many real estate decisions dictate that formal estimates based on methodical collection and analysis of relevant market data should be utilized. The unbiased written estimate of the market value of a property is commonly referred to as a(n)

appraisal.

Real estate appraisal is often considered "more art than science," since identifying truly comparable properties is a subjective process. Therefore, it is essential that a comparable property transaction at least meets the requirement that it was fairly negotiated under typical market conditions. Which of the following types of transactions would be most appropriate for use in the sales comparison approach to valuation?

arm's-length transactions

Created by Congress to promote an active secondary market for home mortgages, Fannie Mae and Freddie Mac purchase loans that meet specific underwriting standards such as loan size, documentation, and payment-to-income ratio. The loans that Fannie Mae and Freddie Mac are eligible to purchase are commonly referred to as

conforming conventional loans.

When a borrower defaults on the payment requirements of a loan, there are several options that the lender has at its disposal. When the lender allows the borrower simply to convey the property to the lender rather than pursue a court-supervised process of terminating all of the borrower's claims of ownership of the property, this is commonly referred to as

deed in lieu of foreclosure.

Net operating income is similar to which of the following measures of cash flow in corporate finance?

earnings before deductions for interest, depreciation, income taxes, and amortization (EBIDTA)

Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as he or she produces the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Georgia, this right only extends to the date of the foreclosure sale. When this occurs, this right is more commonly referred to as

equity of redemption.

Most real estate loans have a definite term to maturity, stated in years. The majority of home loans will typically have a term to maturity between

fifteen and thirty years.

For smaller income-producing properties, appraisers may use the ratio of a property's selling price to its effective gross income. This is an example of a

gross income multiplier.

Which of the following would be categorized as a cause of external obsolescence?

increased traffic flow due to more intensive use in the local area

At the conclusion of the traditional sales comparison approach to valuation, the appraiser evaluates and reconciles the final adjusted sale prices into a single value for the subject property. This single value is commonly referred to as

indicated value.

When employing the sales comparison approach, appraisers must consider numerous adjustments to convert each comparable sale transaction into an approximation of the subject property. Adjustments are divided into two groups: transactional adjustments and property adjustments. All of the following are transactional adjustments except

location

The ability of homeowners to prepay the principal on their outstanding mortgage balance creates cash flow uncertainty for the lender. As a result, the lender may wish to prohibit prepayment on a mortgage loan for a specified period of time after its origination. This is accomplished through which of the following?

lockout provision

Since conforming loans can be much more readily bought and sold in the secondary mortgage market, they carry a(n) _______ interest rate than comparable nonconforming loans

lower

Estimating the market value of real estate is complicated by the unique characteristics of real estate markets. In contrast to stock markets, real estate markets are characterized by all of the following except

market prices are revealed almost instantaneously to prospective buyers.

In real estate markets, a transaction occurs only when the investment value of the buyer exceeds the investment value of the seller. The buyer's investment value is the ________ that he or she would be willing to pay for a particular property, while the seller's investment value is the _______ that he or she would be willing to accept.

maximum; minimum

With the arrival of subprime mortgages in recent years, a new kind of trigger event became apparent in leading households to default. Which of the following trigger events is primarily associated with most defaults that have occurred during the most recent subprime mortgage crisis?

mortgage payment spikes

When calculating the net operating income of a property, it is important to identify any expenses that will be incurred in attempts to maintain the property. All of the following would be considered operating expenses except

mortgage payments.

Suppose a homeowner is reluctant to refinance until he is reasonably sure that interest rates are not going to fall appreciably from where they currently are. In this case, the homeowner appears to be concerned about which of the following costs associated with refinancing?

opportunity cost

The starting point in calculating net operating income is the total annual income the property would produce assuming 100% occupancy and no collection losses. This is commonly referred to as

potential gross income.

The cap rate is an important metric that investors use to analyze the state of commercial real estate markets. When interpreting cap rate movements, an increase in cap rates over time would indicate that

property values have decreased.

When a buyer acquires a property having an existing mortgage loan, a decision must be made as to whether or not the subsequent owner of the property can preserve the loan. If the buyer does not add his or her signature to the note, the buyer does not take on any personal liability. In this case, the buyer is said to

purchase the property subject to the existing loan.

Based on your understanding of the risks associated with different mortgage loan types, which of the following mortgage loans would be considered the safest with respect to default risk?

qualified mortgage loans

With most standard home loans, the lender can hold the borrower personally liable in the event of a default. Such loans are commonly referred to as

recourse loans.

The cost approach to valuation assumes the market value of a new building is similar to the cost of constructing it today. Which of the following terms refers to the expenditure required to construct a building of equal utility using modern construction techniques, materials, and design that eliminates outdated aspects of the structure?

replacement cost

When a borrower defaults on a mortgage loan, his or her credit record will be adversely affected. While borrowers can recover from this reduction in their credit score, if a default goes into the borrower's records it will remain for

seven years.

In recent years, home equity loans have become a popular form of second mortgage. Their popularity has been a result of all of the following except

shorter terms than other consumer debt.

Even after a property goes into foreclosure, it is still possible for the borrower to reclaim the property as long as he or she produces the outstanding mortgage balance and all foreclosure costs incurred to that point. In a state such as Florida, this right may even extend beyond the date of the foreclosure sale. When this occurs, this right is more commonly referred to as

statutory redemption.

When a borrower decides to stop making payments on an existing mortgage loan despite having the ability to make payments (typically when the home has lost value), this is more commonly referred to as a(n)

strategic default.

The transaction price of the comparable property should be adjusted upward.

three

The distinction between market rent and contract rent is important due to differences in lease terms. Office, retail, and industrial tenants most commonly occupy their space under leases that run

three to five years.