Real Estate Finance Exam #1

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A friend has an elderly mother who lives in a house adjacent to her church. The church is growing, and would welcome the opportunity to obtain her house for its use. She would like to support the needs of her church, but she does not want to move and feels strongly about owning her own home. On the other hand, your friend knows that she will not be able to remain in the house many more years, and will be faced with moving and selling within a few years. What options can you suggest as possible plans to explore?

One possible option is to unbundle the fee simple absolute into an ordinary life estate and remainder estate. The church can purchase a remainder estate while the owner retains a life estate. The owner thereby receives either additional income or, if the remainder is donated, a tax deduction. This simplifies the eventual settlement of her estate, while assuring the continued right to occupy her home. At the time of her death the remainder estate becomes a complete fee simple absolute owned by the church. Another possible option is an outright sale to the church and the creation of a tenancy for years in which the elderly mother rents the property from the church, creating a leasehold estate for a period of time.

You have signed a new lease today to rent office space for five years. The lease payments are fixed at $4,500 per month for the first two years, but rise to $5,500 per month in years 3-5. What is the present value of this lease obligation if the appropriate discount rate is 8 percent?

Present value of $5,500 per month for five years: N = 60 I/YR = 8/12 PV = ? PMT = 5,500 FV = 0 Present value = $273,060 (this is an annuity due; use "begin" mode) Present value of $1,000 per month for two years: N = 24 I/YR = 8/12 PV = ? PMT = 1,000 FV = 0 Present value = $22,258 (this is an annuity due; use "begin" mode) Total PV of lease = $273,060 - $22,258 = $250,802.

Real estate construction is a volatile process determined by the interaction of the user, capital, and property markets. What signals do real estate producers (i.e., developers) use to manage this process? What other factors affect the volatility of real estate production?

Production cost < RE Market Price... BUILD! As supply increases... rental rates decline in the user market, lowering property value. When real estate market prices exceed the cost of production, this signals producers to build, or add additional supply. As the supply of real estate increases relative to demand, rental rates decline in the user market, which lowers property values and signals the real estate market to slow the production of real estate. Furthermore, shocks in the capital markets and the volatility of construction costs add to the volatility of real estate production. For example, higher interest rates adversely affect property values, all else equal, thereby reducing the attractiveness of new construction. Additionally, shortages of key building materials and organized labor disputes may contribute to the volatility of real estate production.

Why are restrictive covenants a good idea for a subdivision? Can they have any detrimental effects on the subdivision or its residents? For example are there any listed in the chapter that might have questionable effects on value of a residence?

Restrictive covenants are used most often in subdivision developments to ensure the quality, stability, and value of the lots. However, they can sometimes have detrimental effects on the subdivision. For example, adding a free standing garage or a chain link fence to one's residence may ideally increase the value, but the existence of restrictive covenants may limit a homeowner's ability to increase the property's value in that manner. Excessive restrictive covenants may diminish the property's value by effectively reducing the rights of the owner. Restrictive covenants may also become obsolete if the character of the neighborhood changes and hinder a property owner's rights.

Explain how rights differ from power or force, and from permission.

Rights have three characteristics. First, rights are claims or demands that our government is obligated to enforce. Second, rights are nonrevocable and cannot be canceled, ignored, or otherwise lessened by other private citizens. Third, rights are enduring and do not fade away with time. Rights are different from power because the government is obligated to honor and support the claims arising from rights. Government will not support claims without right, based merely on the use of force or threat. The government is obligated to defend property rights in subsequent generations, and it does not have the power to abandon this obligation. Unlike permission, which is revocable, rights are nonrevocable and cannot be taken away or lessened in stature by other private citizens.

1. Name at least six adverse (conflicting) claims to property or other title defects, that will not be evident from a search of property records but which might be detected by inspection of the property and its occupants.

Six adverse or conflicting claims to property that will not appear in a search of records include these: (1) claim to adverse possession, (2) easement by prescription, (3) easement of necessity, (4) easement by estoppel, (5) leasehold claim, and (6) easement for extraction of crops or mineral rights.

1. Describe the shaded property by government rectangular survey.

The East one-half of the SW one-fourth of the NW one fourth, plus the south one half of the NW one-fourth of the NW one fourth of section 14, Tier 11S and Range 21E.

Defining the following terms: (a) estates, (b) bid-rent curve, (c) fee simple, (d) location quotient.

The bid-rent model assumes that everyone travels to the central business district (CBD) to work. Because traveling is costly, one would prefer living at a locality that is near the CBD. That is, there is stronger demand and bidding for a locality near the CBD. This stronger demand leads to a higher rent, and thus a higher house value and price. The bid-rent curve is also called rent gradient.

In the United States, the bundle of rights called real property seems to have gotten smaller in recent decades. Explain what has caused this. Why is it good? Why is it bad?

The bundle of rights has gotten smaller in recent decades because of the government's increased use of its police power. The government has the duty to protect the health, safety, and welfare of the American people. Additionally, after the 1970's, the consciousness of "Spaceship Earth" alerted many Americans to environmental concerns and the potential adverse environmental and ecological effects of some land uses. On the other hand, excessive regulations interfere with property owners' rights to do as they please with their property. If the exercise of police power goes too far, it becomes a "taking," which requires just compensation.

1. The use of Torrens certificates, never large in the U.S., has diminished in recent years. Explain how marketable title laws, recently adopted in many states, might have made Torrens certificates less interesting and useful.

The idea of a Torrens certificate was to eliminate the need for a search of historical public records to affirm chain of title. Marketable title laws may have accomplished this objective in that they usually establish a "root" transaction that generally is taken for face value as the status of title at that time (say, 30 years earlier). Unless there is evidence to the contrary, title search need not reach back earlier than the "root" transaction. Thus, much of the value of the Torrens certificate is accomplished without the administrative costs of maintaining an elaborate certificate updating process.

You are thinking about purchasing some vacant land. You expect to be able to sell the land ten years from now for $500,000. What is the most you can pay for the land today if your required rate of return is 15 percent? What is the expected (annualized) return on this investment over the 10-year holding period if you purchase the land for $170,000?

The maximum amount you can spend to purchase this property is the present value of the future price, discounted at 15 percent for ten years. Using a financial calculator, this amount is $123,592.35. N = 10 I = 15 PV = ? PMT = 0 FV = $500,000 The expected annualized return on this investment can be solved using a financial to obtain for the interest rate that equates a present value of $170,000 to $500,000 in ten years. The annualized return of this investment is 11.39% N = 10 I = ? PV = -170,000 PMT = 0 FV = $500,000 Alternatively, the cash flow function can be used to calculate the IRR of this investment, whereby the initial cash outflow at time zero is $170,000, the cash flows for the time period 1-9 is zero, and the cash flow received in year 10 is $500,000. Using this approach, the IRR is 11.39%.

You are contemplating replacing your conventional hot water heater with a solar hot water heater system at a cost of $4,000. How should you define the potential benefits that you need to receive to justify the investment?

The potential benefit gained from this investment is a reduction in future utility costs. This purchase requires an analysis of the initial costs and the value of the future benefit received in the form of lower utility bills. The homeowner should consider whether to finance this $4,000 investment and, if so, how much to borrow. The homeowner should also analyze how financing this purchase impacts the present and future cash flows associated with the purchase of the solar hot water heating system.

You are able to buy an investment today for $1,000 that gives you the right to receive $438 in each of the next three years. What is the internal rate of return on this investment?

This is simply a yield calculation problem. Like any time-value-of-money problem, we are given four inputs and are asked to solve for the fifth. In this case, we must solve for the interest rate as follows: N = 3 I =? PV = -1,000 PMT = 438 FV = 0 Solving this setup tells us the above loan yields a 15 percent return.

Calculate the present value of the income stream given below assuming a discount rate of 8 percent. What happens to present value if the discount rate increases to 20 percent? Year Income 1 $3,000 2 $4,000 3 $6,000 4 $1,000

This problem is solved by entering the annual income stream and discount rate into the cash flow registers of any standard financial calculator and solving for the net present value. Assuming an 8% discount rate, the income stream is valued at $11,705.16. Alternatively, if the discount rate is 20%, the value of the income stream will be $9,232.25.

You want to buy a house for which the owner is asking $625,000. The only problem is that the house is leased to someone else with five years remaining on the lease. However, you like the house and believe it will be a good investment. How much should you pay for the house today if you could strike a bargain with the owner under which she would continue receiving all rental payments until the end of the five-year leasehold at which time you would obtain title and possession of the property? You believe the property will be worth the same in five years as it is worth today and that this future value should be discounted at a 10 percent annual rate.

This problem requires you to determine the present value of the house today if you are willing to purchase it for $625,000 five years from today. Using a 10% discount rate, the home is worth $388,075.83 today. N = 5 I = 10 PV = ? PMT = 0 FV = 625,000

Explain how title insurance works. What risks does it cover? Who pays? What common exceptions does it make?

Title insurance protects an owner (or lender) from legal challenges or complications with title. Title insurance protects a grantee (or mortgagee) against the legal costs of defending title, and against loss of the property in case of an unsuccessful defense. It cannot save a title that is genuinely false. However, it indemnifies the policyholder against litigation costs, and compensation for loss of the property, should that occur. In many localities it is customary for the seller to pay for title insurance, though this is negotiable. For a mortgage policy protecting a lender, the borrower pays. There are important limits or exceptions to title insurance. First, it is not hazard insurance; that is, it does not protect the owner from the threat of physical damage to the property. It only protects against legal attack on the owner's title. Second, title insurance typically excepts any facts that would be revealed by an inspection and survey of the property.

1. Explain how title insurance works. What risks does it cover? Who pays, and when? What common exceptions does it make?

Title insurance protects an owner (or lender) from legal challenges or complications with title. Title insurance protects a grantee (or mortgagee) against the legal costs of defending title, and against loss of the property in case of an unsuccessful defense. It cannot save a title that is genuinely false. However, it indemnifies the policyholder against litigation costs, and compensation for loss of the property, should that occur. In many localities it is customary for the seller to pay for title insurance, though this is negotiable. For a mortgage policy protecting a lender, the borrower pays. There are important limits or exceptions to title insurance.First, it is not hazard insurance; that is, it does not protect the owner from the threat of physical damage to the property.It only protects against legal attack on the owner's title.Second, title insurance typically excepts any facts that would be revealed by an inspection and survey of the property.

Calculate the IRR and NPV for the following two investment opportunities. Assume a 16 percent discount rate for the NPV calculations: Year Project 1 Cash Flow Project 2 Cash Flow 0 -$10,000 -$10,000 1 1,000 1,000 2 2,000 12,000 3 12,000 1,800

To solve this problem, simply enter each set of cash flows into the cash flow registers of your financial calculator and ask it to find the IRR. For Project 1, the internal rate of return is 16.16%, while for Project 2, the internal rate of return is 21.23%. The NPV for Project 1 is $36.29 and the NPV for Project 2 is $933.21. If these projects were independent, each IRR should be individually compared to the required rate of return to determine whether the investment should be made. However, if the projects are mutually exclusive and are of equivalent risk, Project 2 is preferred to Project 1. Addtionally, the higher NPV of Project 2 clearly makes this alternative the most attractive investment option because the investor's net worth will increase by $933.21.

You are considering the purchase of a small income-producing property for $150,000 that is expected to produce the following net cash flows: End of Year Cash Flow 1 $50,000 2 $50,000 3 $50,000 4 $50,000 Assume your required internal rate of return on similar investments is 11 percent.What is the net present value of this investment opportunity?What is the going-in internal rate of return on this investment? Should you make the investment?

Using the cash flow function on a financial calculator and entering the information provided above, the NPV of this investment is $5,122.28. Alternatively, the NPV can be solved as follows: N = 4 I = 11 % PV = ? PMT = $50,000 FV = 0 The present value of this series of payments is $155,122.28. Subtracting the amount of the cash outflow at period zero ($150,000), the present value is also $5,122.28. The going-in IRR for this investment is 12.59%. Yes, you should make the investment.

As the level of perceived risk increases...

Values decrease and expected returns increase.

1. You are asked to appraise a vacant parcel of land. Your analysis shows that if apartments were constructed, the portion of the NOI attributable to the land would be $30,000 per year. If offices were constructed, the portion attributable to land would be $25,000, and the portion contributed by a small neighborhood shopping center would be $27,500. All of these uses would be legal. If the appropriate cap rate for the land is 10.5%, what is the value of the site? a. $285,714 b. $238,095 c. $261,904 d. $250,000 e. none of the above

a ???

When the mayor of Collegeville emphasizes the quality of life in that city, the mayor tries to address the growth of the city a. from the demand side b. from the supply side c. in an effective way d. in a timely manner e. none of the above

a ????

The "highest quality" form of deed is the:

a. General warrantee deed.

1. What is the single largest asset category in the portfolio of a typical U.S. household?

a. Housing

Of these real estate investments, the riskiest is a. Raw land b. A single-family residence c. A hotel d. An apartment e. an office building

a. Raw land

Which of these forms of co-ownership could best be described as "normal ownership," except that multiple owners share identically in one bundle of rights?

a. Tenancy in common

Suppose you are going to receive $10,000 per year for five years. The appropriate interest/discount rate is 11 percent.

a. What is the present value of the payments if they are in the form of an ordinary annuity? N = 5 I/YR = 11 PV = ? PMT = 10,000 FV = 0 PV = $36,959 What is the present value if the payments are an annuity due? PV = $41,024

Mr. Jones just bought an office building in Manhattan. The going-in cap rate was 3%. Mr. Jones' expected return was 8%. Which of the following is true? a. That was a good deal for Mr. Jones. b. That was a bad deal for Mr. Jones. c. Mr. Jones expected property appreciation. d. Mr. Jones did not expect property appreciation because he is a long-term investor. e. None of the above.

b ????

You are estimating the value of a small office building. Suppose the estimated NOI for the first year of operations is $100,000. If you expect that NOI will remain constant at $100,000 over the next 50 years and that the office building will have no value at the end of 50 years, what is the present value of the building assuming a 12.2% discount rate? a. $819,672 b. $817,078 c. $5,000,000 d. None of the above e. Not enough information to arrive at the answer

b. 817,078

What portion of households owns their house?

b. Approximately two-thirds

Which of these is not a requirement of a valid deed?

b. Competent grantee.

The interest being conveyed by a deed is specified in the:

b. Habendum clause

Storm water drainage systems are best described as:

b. Improvements to the land

Factors that make it uniquely difficult to establish clear title in real estate as compared to most personal property items include:

b. Length of the ownership history in real estate.

1. Assume an investment is priced at $5,000 and has the following income stream (year 1, $1,000; year 2, -$2,000; year 3, $3,000; and year 4, $3,000). Would an investor with a required rate of return of 15 percent be wise to invest at a price of $5,000?

b. No, because the investment has a net present value of -$1,954.91. Use cash flows to solve for NPV

Which of these is a widely used form of "evidence of title"?

b. Title insurance commitment

A market where tenants negotiate rent and other terms with property owners or their managers is referred to as a:

b. user market

Which of the following is not important to the location of commercial properties?

c. Access to schools

Which of these marriage-related forms of co-ownership gives each spouse a one- half interest in any property that is "fruits of the marriage"?

c. Community property

If documents conveying interests in real property are properly recorded in the public records, then they are binding or enforceable on all persons, regardless of whether those persons are aware of the documents, by the:

c. Doctrine of constructive notice.

If a landowner sells the front part of a parcel of land, retaining the back portion as a "land-locked" parcel, and if there is an existing informal path across the front parcel to the back one, the seller is likely to retain the path as a (an):

c. Implied easement by prior use.

Rules used by courts to determine whether something is a fixture include all except:

c. Law of capture.

Which of the following attributes of a home are the most difficult to observe and value?

c. Location attributes

The most common form of legal description for urban residential property is the:

c. Plat lot and block number.

Zoning is an exercise of which type of general limitation on property rights?

c. Police power.

Which of these liens has the highest priority?

c. Property tax lien

When one use the sales comparison approach to appraise a house, which of the following adjustments is often particularly difficult to implement? a. Size adjustment b. Market condition adjustment c. Location adjustment d. Financial terms adjustment e. Non-realty items adjustment

d ????

Which of the following seems to be an ideal location for a regional shopping center? a. a clustering location b. an expensive location c. an inexpensive location d. a central place location e. a rural location

d ????

1. What is the present value of the following series of cash flows discounted at 12 percent: $40,000 now; $50,000 at the end of the first year; $0 at the end of year the second year; $60,000 at the end of the third year; and $70,000 at the end of the fourth year?

d. $171,836 (without rounding, answer is $171,835.94) CF0 = 40,000 CF1 = 50,000 CF2 = 0 CF3 = 60,000 CF4 = 70,000 I/YR = 12 NPV = ?

The market in which required rates of return on available investment opportunities are determined is referred to as the:

d. Capital market

Real estate markets differ from other asset classes by having all of the following characteristics except:

d. Homogeneous product

Which of the following is NOT a form of property right? a. Lien b. Easement c. Leasehold d. License e. Mineral rights

d. License

Of the following asset categories, which class has the greatest aggregate market value?

d. Nongovernment real estate

Which of these easements is most likely to be an easement in gross?

d. Power line easement

If a neighboring land owner drives across a person's land openly and consistently for a number of years the neighbor may acquire an easement by:

d. Prescription

A deed used mainly to clear up possible "clouds" or encumbrances to title (conflicting interests) is the:

d. Quitclaim deed.

The actions of local, state, and federal governments affect real estate values

d. Through all of the above

A comprehensive plan usually deals with which of the following elements?

e. All of the above.

Property taxes are a main source of revenue for:

e. Both local governments and school districts.

Rent (the rental rate) is determined by the supply and demand in a. the capital market b. the space market c. the stock market d. the commodity market e. the money market

space market

1. What amount invested at the end of each year at 10 percent annually will grow to $10,000 at the end of five years?

$1,637.97 How??

1. What is the present value of $500 received at the end of each of the next three years and $1,000 received at the end of the fourth year, assuming a required rate of return of 15 percent?

$1,713.37 CF0 = 0 CF1,2,3 = 500 CF4 = 1,000 I/YR = 15 NPV = ?

1. How much would you pay today for the right to receive nothing for the next 10 years and $300 a year for the following 10 years if you can earn 15 percent interest on alternative investments of similar risk?

$372.17 How??

1. If a landowner purchased a vacant lot six years ago for $25,000, assuming no income or holding costs during the interim period, what price would the landowner need to receive today to yield a 10 percent annual return on the land investment?

$44,289.03 PV = 25,000 I/YR = 10 N = 6 FV = ?

The term real estate can be used in three fundamental ways. List these three alternative uses or definitions.

1) Land & land improvements 2) "Bundle of rights" associated with ownership/use of space & location 3) Business activities related to development, construction, operation, etc. Real estate is most commonly defined as land and any improvements made to or on the land, including fixed structures and infrastructure components. The term is also used to describe the "bundle of rights" associated with the ownership and use of the physical characteristics of space and location. Finally, real estate may be described as the business activities related to the development, construction, acquisition, operation, and disposition of real property assets.

Identify and describe the interaction of the three economic sectors that affect real estate value.

1) User markets (compete for location/space) 2) Capital markets (provide financial resources necessary to develop and acquire) 3) Government (tax policy, regulations, subsidies, influences interaction between the two) The three economic sectors that influence real estate value are user markets, capital markets, and government. In real estate user markets, households and firms compete for physical location and space. This competition determines who will obtain the use of a specific property and how much will be paid for the use of this property. Capital markets provide the financial resources necessary for the development and acquisition of real estate assets. Real estate competes for resources against other investment opportunities in the capital market based on investor required rates of returns and risk considerations. Capital markets are segregated into two categories: equity interests and debt interests. Government influences the interaction between the user markets and capital markets through tax policy, regulations, provisions of services and infrastructure, subsidies and other means.

1. How much would you pay today for the right to receive $80 at the end of 10 years if you can earn 15 percent interest on alternative investments of similar risk?

19.77 Financial Calc: FV = 80 I/YR = 15 N = 10 PV = ?

1. How much will a $50 deposit made today be worth in 20 years if interest is compounded annually at a rate of 10 percent?

336.37 Financial Calculator: PV = 50 I/YR = 10 N = 20 FV = ?

1. How much would you pay today to receive $50 in one year and $60 in the second year if you can earn 15 percent interest on alternative investments of similar risk?

88.85 Financial Calc: CF0 = 0 CF1 = 50 CF2 = 60 I/YR = 15 NPV = ?

You are at retirement age and one of your benefit options is to accept an annual annuity of $75,000 for 15 years. The first payment would be received one year from today. What lump sum settlement, if paid today, would have the same present value as the $75,000 annual annuity? Assume a 10 percent annual discount rate.

: At a 10% discount rate, the present value of this series of future payments is $570,455.96. This is the lump sum equivalent of receiving $75,000 for 15 years. N = 15 I = 10 PV = ? PMT = 75,000 FV = 0

Restrictive covenants for a subdivision usually can be enforced by: d. a and b, but not c Timeshare programs can involve which of the following claims or interests? e. All of these are possible Every condominium buyer needs to know the details of which document(s): d. a and b, but not c

???

A developer of a subdivision wants to preserve the open space and natural habitat that runs along the back portion of a series of large lots in the proposed subdivision. He is debating whether to use restrictive covenants to accomplish this or to create a habitat easement on the same space. What are the pros and cons of each choice?

A developer may choose to use restrictive covenants to limit the use of the land for environmental purposes, while maintaining the quality, stability, and value of the surrounding lots. Restrictive covenants are strictly private because only parties of interest can enforce the covenant. In the case of an isolated deed restriction, the owner who created the restriction or that owner's heirs are the only persons who can enforce the restriction. Court decisions frequently follow common law, which holds that property should be used productively, and favor fewer restrictions over the use of land. Whether the restriction is in an isolated deed or part of a general set of subdivision restrictions, the courts have been reluctant to maintain them for an unreasonably long time. Even in states where no time limit exists, courts may refuse to enforce restrictions due to changing neighborhood character, abandonment (neglect of enforcement), and changing public policy. In most states, it is difficult to maintain individual restrictive covenants for more than a few decades, and several states have enacted time limits of 20 years or so. On the other hand, the developer may choose to use a habitat easement on the property. A habitat easement can limit the use of the land for the specific purpose of protecting the environment. An easement in gross, defined as the right to use land for a specific, limited purpose unrelated to any adjacent parcel, will achieve the developer's objective. The easement can be transferred to another owner without the transfer of a parcel of land. The easement is less likely to "fade away." Courts are more likely to honor and protect the easement than a neglected restrictive covenant.

1. Some real estate industry persons have suggested that it is good to require a title Insurance commitment as evidence of title for rural property, but that it satisfactory to use the less costly abstract and attorney's opinion as evidence of title for a residence in an urban subdivision. Discuss the merits or risks of this policy.

A platted urban subdivision effectively has a relatively short history in which title could become "clouded." The creation of the subdivision, by implication, represents a point in time where there was very little question about the status of title. Thus, only what has happened to the property subsequently may put marketable title at risk. This greatly shortens the portion of the title history that may contain threats to title. Thus, title insurance may not be as valuable as with unplatted land.

1. Why might it be advisable to require a survey in purchasing a 20-year-old home in an urban subdivision?

A survey can be useful, even in a fairly recent subdivision, to affirm that fences are not encroaching, or that an addition to a structure does not violate a setback. In addition, it is generally good for a purchaser to know the boundaries of the acquired property because often fences and shrubs can create false impressions of boundary locations.

The real estate value to a typical investor is called: a. Appraisal value b. Investment value c. Fundamental value d. Intrinsic value e. None of the above To a PARTICULAR investor? (Individual Specific)

Appraisal, Investment

Describe the value of U.S. real estate by comparing it to the values of other asset classes (e.g., stocks, bonds).

As of 2016, real estate (including owner-occupied housing, but excluding real estate held by non-real estate corporations) was the second largest asset class in the U.S., valued at approximately $30.8 trillion. The value of publicly traded corporate equities at that time was $35.7 trillion. The value of mortgage debt (on all property types) was approximately $13.8 trillion. This is larger than the existing stock of both corporate and foreign bonds and just slightly less than the outstanding value of U.S. Treasury Securities.

What monthly deposit is required to accumulate $10,000 in eight years if the deposits earn an annual rate of 8 percent, compounded monthly?

Assuming an 8% discount rate and a future value of $10,000, the monthly amount required to be deposited is $74.70. N = 96 I = 8/12 PV = 0 PMT = ? FV = $10,000

How much would you pay today for an investment that provides $1,000 at the end of the first year if your required rate of return is 10 percent? Now compute how much you would pay at 8 percent and 12 percent rates of return.

At 10%, an investor would be willing to pay $909.09. N = 1 I = 10 PV = ? PMT = 0 FV = 1,000 At 8%, an investor would be willing to pay $925.93. N = 1 I = 8 PV = ? PMT = 0 FV = 1,000 At 12%, an investor would be willing to pay $892.86. N = 1 I = 12 PV = ? PMT = 0 FV = 1,000

If you purchase a parcel of land today for $25,000 and you expect it to appreciate 10 percent per year in value, how much will your land be worth 10 years from now assuming annual compounding?

At a 10% discount rate, the investment will be worth $64,843.56 in ten years. N = 10 I = 10 PV = -25,000 PMT = 0 FV = ?

A family trust will convey property to you in 15 years. If the property is expected to be worth $50,000 when you receive it, what is the present value of your interest, discounted at 10 percent annually?

At a 10% discount rate, the present value of this future payment is $11,969.60. N = 15 I = 10 PV = ? PMT = 0 FV = 50,000

If someone pays you $1 a year for 20 years, what is the present value of the series of future payments discounted at 10 percent annually?

At a 10% discount rate, the present value of this series of future payments, or annuity, is $8.51. N = 20 I = 10 PV = ? PMT = 1 FV = 0

If you deposit $50 per month in a bank account at 10 percent annual interest (compounded monthly), how much will you have in your account at the end of the 12th year?

At a 10% discount rate, this series of payments, or annuity, will be worth $13,821.89 in 12 years. N = 144 I = 10/12 PV = 0 PMT = 50 FV = ?

If you deposit $1 at the end of each of the next ten years and these deposits earn interest at 10 percent compounded annually, what will the series of deposits be worth at the end of the 10th year?

At a 10% discount rate, this series of payments, or annuity, will be worth $15.94 in ten years. N = 10 I = 10 PV = 0 PMT = 1 FV = ?

If your parents purchased an endowment policy of $10,000 for you and the policy will mature in 12 years, how much is it worth today, discounted at 15 percent annually?

At a 15% discount rate, the present value of this future payment is $1,869.07. N = 12 I = 15 PV = ? PMT = 0 FV = 10,000

The U.S. represents about 6 percent of the earth's land service, or approximately 2.3 billion acres. Who actually owns this land? What is the distribution of this land among the various uses (e.g., developed land, federal, land, forest land).

Developed land, consisting of residential, industrial, commercial, and institutional land: 6% Federal lands and water areas: 23% Crop land and CRP land: 20% Pasture land comprises: 6% Remaining land is divided between range land and forest land, with each representing 21% of U.S land.

Dr. Bob Jackson owns a parcel of land that a local farmer has offered to rent from Dr. Bob for the next 10 years. The farmer has offered to pay $20,000 today or an annuity of $3,200 at the end of each of the next 10 years. Which payment method should Dr. Jackson accept if his required rate of return is 10 percent?

Dr. Jackson should choose the payment method that maximizes his net present value. If he chooses the lump sum payment, the net present value is simply the $20,000 he will receive today. If he chooses the annuity plan, the net present value will be only $19,662.61. N = 10 I = 10 % PV =? PMT = 3,200 FV = 0 Therefore, Dr. Jackson should choose the lump sum payment of $20,000.

Your grandmother gives you $10,000 to be invested in one of three opportunities: real estate, regular bonds, or zero coupon bonds. If you invest the entire $10,000 in one of these opportunities with the expected cash flows shown below, which investment offers the highest NPV? Assume for simplicity that an 11 percent discount rate is appropriate for all three investments Year 1: Real Estate = 1,300 Bond = 1,000 Zero Coupon = 0 Year 2: RE = 1,300 Bond = 1,000 Zero Coupon = 0 Year 3: RE = 1,300 Bond = 1,000 Zero Coupon = 0 Year 4: RE = 1,300 Bond = 1,000 Zero Coupon = 0 Year 5: RE = 9,000 Bond = 11,000 Zero Coupon = 18,000

Entering the annual income stream and discount rate into the cash flow registers of our financial calculator, we obtain the following net present value calculations: real estate, (625.76); regular bond, (369.5); and zero coupon bond, 682.12.

Raw land at the edge of urban development that lacks the necessary permits for development is one of the most risky kinds of real estate investment. Defend or refute this assertion.

Evaluated against the two types of investment risk confronting real estate investors, uncertainty of costs and uncertainty of value, raw land lacking permitting can be viewed as the riskiest form of real estate investment. Raw land at the edge of urban development that lacks necessary permitting for development possesses a large degree of value uncertainty because the future cash flows are not established. The value of the land is typically dependent on future growth to create market potential that is not currently in existence. Additionally, the probability of this occurring is dependent on land use regulations and the actions of the local planning authority. The total cost required to acquire and develop the raw land is unknown at the time of purchase. Only urban redevelopment projects possess comparable cost uncertainty as raw land without permitting.

Real estate assets and markets are unique when compared to other assets or markets. Discuss the primary ways that real estate markets are different from the markets for other asset that trade in well-developed public markets.

Heterogeneous (diverse & segmented) & immobile (location) & high transaction costs Real estate is unlike other asset classes because it is heterogeneous and immobile. Real estate assets have unique and distinctive characteristics, such as age, building design, and location. Real estate is also immobile; therefore, location is an important attribute. Because real estate assets are heterogeneous and immobile, real estate markets are illiquid and localized. Potential users of real property and competing real estate are typically located in the same area or region. Additionally, real estate markets are highly segmented because of their heterogeneous nature. Therefore, potential users of a specific type of real property generally do not seek to substitute one property category for another. Finally, most real estate transactions are privately negotiated and have relatively high transaction costs.

The traditional common law concept of landlord-tenant relationship was that the landlord's obligation was simply to stay off the property and the tenant's obligation was to pay the rent. Explain why this is an obsolete arrangement for apartment residents in an urban society.

Historically, the common law application of a landlord-tenant relationship centered on agrarian relationships formed in pre-industrial England. Modern society views residential tenancy as the provision of services. It can be difficult or impossible for one tenant, alone, in an apartment complex to control pests or repair a roof, etc. Thus, the obligation of the landlord must be more than merely to "stay away" from the property. States have enacted elaborate residential landlord-tenant laws that take great strides in defining the rights and obligations of both parties under a residential lease. Laws address such matters as obligations for care and repair of the premises, rights of entry, handling of deposits, notification requirements, and many other matters.

How much of the wealth of a typical U.S. household is tied up in housing? How does this compare to the role that assets and investments play in the portfolios of U.S. households?

Housing is the single largest asset in the typical U.S. household's portfolio, representing approximately 22 percent of household wealth in 2016. In comparison, the total value of corporate stocks and mutual fund shares represents 21 percent of household assets. Pension reserves, excluding stocks, also represent 21 percent of household assets. Deposits and money market funds represent 11 percent of household assets.

1. If a grantee obtains title insurance, what value, if any, is there in the covenant of seizen in a warranty deed?

If a grantee has title insurance, the covenant of seizing remains an indication that the grantor really believes that they hold good title. The title insurer can still bring action against the grantor of a false title, even though the grantee has been indemnified for loss of title and property.

Explain the role of government in real estate at the federal, state, and local level. Which has the most significant impact on real estate markets?

Local government has the most influence on real estate markets. It affects the supply and cost of real estate through zoning and land use regulations, fees on new land development, and restrictive building codes. It also affects rental rates through the assessment of property taxes. Finally, local government affects the supply and quality of real estate through the provision of community infrastructure and through building codes. The Federal government influences real estate through income tax policy, housing subsidy programs, federal financial reporting requirements, fair housing laws, and disclosure laws. State government generally has the least influence on real estate. State government affects real estate through the licensing of real estate professionals, establishment of statewide building codes, the creation of fair housing and disclosure laws, and through numerous housing related subsides for low and moderate income households. In addition, the state may protect some environmentally sensitive lands from development.

A friend has owned and operated a small recreational vehicle camp on a lake in Daytona Beach, Florida. It is close to the ocean and close to the Daytona Speedway, home of the Daytona 500 and a host of other prominent races. The occupants are very loyal, making reservations far in advance, and returning year after year. She is asking your thoughts on whether to continue the camp as a short-term rental operation, or to convert it and sell the parking spaces as condominium parking spaces, or to convert to condominium time-share lots. What thoughts would you offer?

Maintaining ownership of the small recreational vehicle camp provides the owner continued control of the property, but she also retains responsibility for property management and expenses associated with running the camp. Converting the space to condominium parking would require an effective transfer of the property from your friend to the condominium association. The land on the lake would no longer belong to your friend, and she would lose any future use of the land. In addition, bylaws and a condominium declaration must be created. Time-share lots would divide the estate into separate time intervals. By creating timeshare condominium lots in a tenancy for years, the land could revert to your friend after a set number of years.

Assume the total cost of a college education will be $310,000 when your infant child enters college in 18 years. How much you invest at the end of each month in order to accumulate the required $310,000 at the end of 18 years if your monthly investments earn an annual interest rate of 5 percent, compounded monthly?

N = 18 x 12 I/YR = 5/12 PV = 0 PMT = ? FV = 310,000 Payment = $887.74

a. Suppose you plan to invest the payments for five years. What is the future value if the payments are an ordinary annuity?

N = 5 I/YR = 11 PV = 0 PMT = 10,000 FV = ? FV = $62,278 What if the payments are an annuity-due? FV = $69,129

You are trying to accumulate a $40,000 down payment to purchase a home. You can afford to save $1,000 per quarter. If these quarterly investments earn an annual rate of 7 percent, how many quarters will it take to reach your goal?

N = ? I/YR = 7/4 PV = 0 PMT = -1,000 FV = 40,000 N = 30.57 quarters or 7.65 years


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