RE Midterm
basic idea behind income approach
Current value of a property is a function of the income stream it is expected to produce (future cash flows). objective quantitative way to measure
what determines risk
Higher risk: Higher cap rates, lower values
What is the difference between a mortgage and a promissory note?
In simpler terms, a mortgage is a lien on the property that provides security for the loan, while a promissory note is a promise to repay the loan according to certain terms both are done in purchase of property
What happens in the primary mortgage market?
In the primary mortgage market, borrowers obtain mortgage loans directly from lenders, such as banks or other financial institutions. This market involves the initial creation and issuance of mortgages, which are then sold to secondary mortgage market investors such as Fannie Mae or Freddie Mac.
What do we mean by indirect co-ownership of real estate?
Indirect co-ownership of real estate refers to a situation where multiple parties own a share or interest in a property through an intermediary entity, such as a corporation, limited liability company (LLC), or partnership. In this arrangement, the legal title to the property is held by the intermediary entity, which is owned by the individual co-owners in proportion to their respective ownership shares or interests in the entity.
How are cap rates like P/E multiples?
P/E = market price per share/earnings per share multiple on total value where as cap rate = earnings/market price dividend/percent of total value
Why do we say that property taxes are ad valorem taxes?
"Ad valorem" is a Latin phrase that means "according to value". Property taxes are typically assessed based on the assessed value of the property, which is an estimate of the property's fair market value. The tax rate is then applied to the assessed value to determine the amount of tax owed.
Why does Real Estate have value?
1) Utility - satisfy need or want - rights provided or restricted against affect value 2) Scarcity - present or anticipated supply relative to demand 3) Anticipation of benefits derived in the future
What do we mean when we say there is a "cloud on title" or a "break in the chain of title"?
A break in the chain of title occurs when there is a gap or missing link in the historical ownership records of a property. This can happen when there is a missing deed, an incomplete chain of conveyances, or an unresolved dispute over ownership.
What are the five fundamental factors of property value growth in urban markets?
All else equal, larger cities will have higher average location rents. If a city grows by increasing its density rather than area, property rent growth will be relatively greater closer to the center of the city. Declining transportation costs - all else being equal - decreases the relative value of land near the center Income growth Growth expectations
Know how to calculate the outstanding loan balance for a loan at the end of any period for both an amortizing and interest-only mortgage
Build Amortization Table Loan Amount, PMT, Interest Pmt, Principal PMT, Ending Balance FV function!
How does both user market demand and capital markets demand factor into the cost approach?
User market demand: This refers to the demand from potential buyers or renters who would use the property for their own purposes. In the cost approach, user market demand can affect the estimated cost to replace or reproduce the property. For example, if the property is in a location with high demand from users, the cost to replace or reproduce the property may be higher due to the need to pay higher construction costs, labor costs, or land costs. Capital markets demand: This refers to the demand from investors who would buy the property for investment purposes. In the cost approach, capital markets demand can affect the estimated depreciation of the property. For example, if the property is in a location with high demand from investors, the property may have lower depreciation due to the potential for higher resale value or rental income in the future.
When we say that real estate property rights are 3 dimensional, what do we mean?
We mean that real estate rights are extend across the surface, in the air, and below the ground
define real estate market
What is the product?•Who is the customer/user/tenant?•Where are the customers/users/tenants?•What do the customers/users/tenants care about?•Who and where is the competition?
What are zoning ordinances/laws?
authority of state/local government to enforce land use regulations and development standards
Bonds vs RE
both have risk, both can appreciate, both can generate returns. type of asset, level of liquidity,
What is the basic premise of the bid rent model?
explains land value as an allocation of resources between location and proximity - cost of distance opportunity cost to being further away to CBD access
hard vs soft cost
hard cost: materials Soft costs: attorney architect
What is the basic idea behind the cost approach? Why does the approach have merit?
in market equilibrium, investors should not pay more for a building than what it would cost to buy the land and build the structure today
What is challenging about valuing a foreclosed property using the sales comparison approach?
it can be challenging because there may not be much recent sales data on the value of comparable properties based on the condition of the sale being a foreclosure limited information about things like property title which could reduce value further
Why is real estate considered an inefficient asset class
it trades in private unregulated markets capital intensive supply is durable and lumpy, cant be sold quickly heterogeneity - locational characteristics, type, age, etc. make it difficult to value properties ability to have asymetric information
Who can levy property taxes?
local governments, cities, districts, etc.
Under the cost approach to valuation, the expenditure required to construct a building with equal utility as the one being valued is termed the ______________.
replacement cost - replace building but include new cost of materials etc.
What do we mean when we say that easements "run with the land"?
the easement is tied to the property itself vs the owner, if the ownership is changed then the easement remains with the next owner
My 1st rule of valuation
value is relative
How can environmental regulations affect our ownership of property?
we can be disallowed from building over certain areas because of conservation laws etc. we can be forced to incur expenses/liability to ensure the safety of the property, water contamination levels, etc.
why does land have intrinsic value?
•it is in limited supply in any given location •it is a critical input in economic development• can be used as a resource to create value people will pay a locational premium for something that satisfies their specific needs of that location. What does the location give them access to?
How could the EIR on a loan differ from the same loan's APR?
The APR is the rate you pay assuming you pay off the loan at maturity, the EIR would be different if one was to prepay the loan.
What is, in essence, the "effective interest rate" (EIR) on a mortgage loan?
The effective interest rate (EIR) on a mortgage loan is the actual interest rate a borrower pays over the life of the loan, taking into account any fees or charges associated with the loan. It's a measure of the true cost of borrowing that includes all costs associated with the loan, not just the interest rate. increasing EIR increases the IRR on debt for the lender
Understand the interaction of the real estate space and asset markets.
The interaction between the real estate space and asset markets can be complex and multi-directional. For example, changes in interest rates can affect both the real estate space market and the real estate asset market. When interest rates are low, it can make it easier for buyers to afford properties, which can drive up demand in the real estate space market. At the same time, low interest rates can also make real estate investments more attractive compared to other asset classes, which can drive up demand for real estate investment vehicles such as REITs and MBS in the real estate asset market. Similarly, changes in property prices and rental rates in the real estate space market can also impact the real estate asset market. If property prices or rental rates increase, it can make real estate investments more attractive, which can drive up demand for REITs and MBS.
What is the effect of time on the EIR?
The more time periods in the loan to more compounding that occurs. As compounding occurs the effective interest rate goes up. Since the EIR is representative of the actual cost of borrowing, the more compounding periods, the more interest that accrues which increases the overall cost of the loan.
Know how to calculate the monthly payment on a non-amortizing, interest-only mortgage
=PMT(rate, nper, pv, fv) fv = -loan amount
Know how to calculate the monthly payment on a fixed-rate amortizing mortgage
=PMT(rate, nper, pv, fv) fv = 0
What are 4 primary tools for managing those failures?
Building codes zoning and comprehensive planning ordinances Environmental regulations Power of eminent domain
How do we assess the risk of the three "C's" of traditional underwriting?
Collateral = appraised value of the home Capacity to pay = Can the borrower afford to pay the monthly cost of occupancy, look at things like Debt to Income Ratio Creditworthiness = is the borrower responsible with credit? Look at credit history, typically determined by FICO score which gives an idea of how often they may use credit and how often they pay that credit off
What are the three "C's" of traditional underwriting?
Collateral, Capacity, Credit
Why is it important to understand the allowable uses and development standards in the zoning classification for a particular property?
Compliance with regulations, it is also a helps determine if there is a development opportunity there or not. Are you allowed to build the property type you want or not, what size can that building be, is land being put to best use?
What are the primary forms of direct co-ownership of real estate, and what are the key differences between them?
Condominium Tenancy in common In a condominium, each unit owner has a separate and individual ownership interest in their unit and a shared ownership interest in the common areas of the property, such as the lobby, hallways, and recreational facilities. In tenancy in common, each owner has a fractional interest in the entire property, rather than a specific unit or portion of the property.
What are origination fees, and why do lenders charge them?
Covers the costs associated with processing and underwriting a loan application and creating a new loan. They are typically in the form of a percentage of the loan total, and since it is effectively paying off a percentage of the loan total right away, they not only recieve immediate income, but they also cover risk by making that profit up front in the case of a default. Also, since the origination fee is included in the cost of the loan, in the case of prepayment the processing fee represents a larger portion of the total cost of the debt, so in some sense they paid off more of the loan faster effectively increasing the interest rate.
What are the 4 primary types of market "failures" in real estate?
Externalities: Spillover effects of land use that effect a third parties property value i.e., school would be good, industrial plant would be bad Monopoly power: Resistance to civic land assembly effort Incomplete Information: Underlying Construction quality Uncertainty in compatability: NIMBY's
Who are the GSE's and what are their roles in the residential mortgage market?
Fannie Mae & Freddie Mac purchase mortgages in the secondary market from lenders who have created a mortgage in the primary market. This allows them to bundle together lots of mortgages and form mortgage-backed securities, which is essentially a bond formed of many different secured loans. It is beneficial because since these mortgages then become backed by the government, the original lenders almost guarantee payment as well as the bondholders in the case of mortgage defaults. It also beneficial for the original lenders because it allows them to move the debt off of their balance sheet, and recover funds quickly so they never run into lack of funds issues. This also create liquidity of mortgages which allows them to form more loans. They only do this in the case of conforming loans: which meet GSE underwriting standards, which helps create an incentive to produce high quality loans, following certain guidelines such as guranteeing the quality of credit, or collateral that is securing the loan.
What is the most common form of a possessory interest in real estate?
Fee simple ownership
Why should we be concerned about buying a property that has a lien "attached" to it?
Financial liability: If you purchase a property with a lien, you may be responsible for paying off the lien. Difficulty selling the property: A property with a lien may be more difficult to sell because the lienholder has a legal right to the property until the debt or obligation is paid. Legal complications: If you purchase a property with a lien, you may be subject to legal complications if the lienholder takes legal action to collect the debt or obligation. Potential for foreclosure: In some cases, if the debt or obligation secured by the lien is not paid, the lienholder may have the right to foreclose on the property.
Why do we need building codes/laws?
Fire materials alarms, Sanitation, Injury: Design and strength
The term real estate can be thought of in 4 different ways. What are they?
Physical property: the land and the building built on top of the land Legal concept: Refers to the bundle of rights associated with the ownership of property Industry: the industry of real estate, and everything associated with the development, acquisition, and sale of land and buildings. Asset class: Thought of an asset similar to stocks and bonds besides its tangible nature.
What is the difference between a bank that is a depository institution and a mortgage banker?
A bank that is a depository institution is a financial institution that accepts deposits from customers and holds those funds in various types of accounts, such as checking accounts, savings accounts, and certificates of deposit (CDs). These banks use the funds from deposits to make loans to customers, including mortgage loans, personal loans, and business loans. In addition to providing loan services, depository institutions also typically offer a variety of other financial services, such as credit cards, investment products, and insurance products. On the other hand, a mortgage banker is a financial institution that specializes in providing mortgage loans to borrowers. Unlike depository institutions, mortgage bankers do not accept deposits from customers. Instead, they typically fund mortgage loans using their own capital or by borrowing from other financial institutions or investors. Mortgage bankers typically sell the loans they originate to investors or other financial institutions, which allows them to free up capital to make additional loans
How can the presence of non-possessory interests in YOUR property affect the value of YOUR property, either positively or negatively?
Positive impact: In some cases, non-possessory interests can increase the value of your property. For example, if your property has an easement that allows for easy access to a popular beach or park, this could make your property more desirable and increase its value. Similarly, if your property has a conservation easement that restricts development but preserves natural features, this could make your property more attractive to buyers who value conservation and environmental stewardship. Negative impact: Non-possessory interests can also decrease the value of your property. For example, if your property has a restrictive covenant that limits the types of structures that can be built on the property, this could limit your ability to develop the property and reduce its value.
What is the order in which liens are satisfied?
Property Tax Liens: backed by governments power to collect taxes Mortgage Liens: claim on property in event of default may foreclose to recover investment Mechanics Liens: not been paid for material Judgement Liens: filed by a court in the event someone is sued over debt or other obligation
How can the government's use of eminent domain be controversial?
Property rights: Some people believe that property rights are fundamental to a free society and that the government's power to take private property for public use is a violation of those rights. Compensation: While the government is required to pay just compensation for any property taken through eminent domain, some property owners may feel that the amount offered is not fair or does not adequately compensate them for their loss. Public use: There can be disagreement over what constitutes a "public use" for which eminent domain can be used.
What is a conforming conventional mortgage?
A conforming conventional mortgage is a type of mortgage loan that meets the underwriting guidelines and loan limits established by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that purchase and guarantee conforming mortgage loans. 1)Loan amount: The loan amount must not exceed the conforming loan limit established by Fannie Mae and Freddie Mac, which varies by location and is adjusted annually. 2) Credit score: Borrowers must typically have a credit score of at least 620, although some lenders may require a higher score. 3) Debt-to-income ratio: Borrowers must typically have a debt-to-income ratio (DTI) of 43% or lower, although some lenders may allow higher DTIs in certain circumstances. 4) Property type: The loan must be for a one-to-four unit property that is owner-occupied or a second home. 5) Documentation: Borrowers must provide documentation to verify their income, assets, and other financial information.
What is amortization?
Amortization of a loan refers to the process of gradually paying off a debt over a set period of time through a series of regular payments. Each payment made by the borrower consists of both principal and interest, with the principal portion reducing the outstanding balance of the loan. The schedule is typically provided to the borrower at the time the loan is issued, allowing them to see the expected payment amounts and the timeline for paying off the loan.
Define the RE capital/asset market
RE capital markets are made up of both debt and equity investments. public debt - mortgage backed securites, public equity REIT, private debt - commercial real estate loans, backed by the property, private equity, - investment funds while there is a natural supply and demand created in the user and space markets, there is also a supply and demand in the capital markets. Since there is a limited number of real estate investments, investors compete with each other to make these diversifying investments, sometimes there is a high supply of real estate compared to the demand to invest, depending on a variety of market conditions. Real estate competes with other asset classes (stocks and bonds) so low demand can be based on an increased demand for bonds for example, if the risk premiums are not good enough to promote the decision they may go for a less risky asset like bonds, this could be due to rising risk free rate with an increase in interest rates due to things like inflation. Asset markets are made up of the properties, residential, industrial, office, retail.
What are the primary forms of indirect co-ownership of real estate, and what are the key differences between them?
REIT, LLC, Limited partnership, general partnership General Partnership: In a general partnership every partner has an equal amount of liability, as well as an equal amount of management power Limited Partnerships: In limited partnerships one or more general partners retains unlimited liability while the limited partners maintain liability only up to the amount of their investment and remain passive in management LLC: all members have limited liability REIT: Is a publicly traded company that owns real estate, or real estate assets, such as mortgage backed securities they must distribute 90% of taxable income in dividends, arent taxed twice
Under normal market conditions, should the interest rate on a hybrid ARM be higher or lower than a comparable fixed-rate mortgage? Why?
The interest rate on a hybrid ARM should be lower because it mitigates market uncertainty for the lender. If the lender is locked at a lower interest rate, and market interest rates rise, they cannot shift interest rates with the market. With an ARM they can which provides opportunity to earn a higher ROI.
How do lenders look at risk when considering the cash flow of a property? The appreciation in value of the property?
When lenders are looking at risk, they are looking at the current and potential cash flows, more specifically at NOI, because this is likely the income that will be used to make monthly payments on the loan. So if there is low cash flow & cash flow potential then it is more likely that the borrower will default on their loan. In terms of appreciation, a lender is less interested in appreciation than an equity investor as they attain no benefit from its increase in value. However, they are interested in the security of that value. They don't want its value to go down because in the case of default they are going to look to sell the property to make back their initial loan.
How is real estate as an investment asset class considered inefficient?
because of the limited market information that we have and the heterogeneous characteristics market misvaluations can occur
reproduction cost
cost of replacing exact same structure with all the same exact materials, reproduction can be more expensive because you have to pay for exact materials, so we use replacement to provide same building, same design and utility but with updated material costs
What is the key difference between using direct capitalization and using a DCF approach when valuing income?
direct capitalization derives market value for one years worth of income generation, it doesnt take into account the growth and appreciation or the time value of money
What are the 4 most common forms of non-possessory interests in real estate?
easements, liens, restrictive covenants, license agreements
How can you use the CAPM model to approximate a discount rate? What is the weakness of using this approach?
find expected market return based on historic returns and beta (sensitivity to market risk) its weak because of the imperfect re market and the use of historic data to make future projections
What is the difference between full and partial amortization?
full amortization is when the payment schedule ends at the same time as the loan period ends resulting in 0$ in principal left over. Partial is when the loan period ends prior to the end of the payment schedule and you make a balloon payment to cover the rest of principal.
What are the different forms of depreciation, and what effect can they have on property values?
physical depreciation: the building itself has deteriorated with time functional depreciation: the layout, floor plan etc. is less favorable to modern tastes economic depreciation: structure no longer serves highest and best use in market, maybe a greater need for multifamily, or perhaps it is a railway that no longer is in use
positive vs negative leverage
positive leverage= borrow at an interest rate less than the rate of return on the project without leverage such that you can make a profit greater than you would have been able to if you were investing with 100% of your own money once you are leveraged. negative leverage=Negative leverage, on the other hand, occurs when the ROI on a real estate investment is lower than the cost of borrowing the money to finance the investment. This can happen when the interest rate on the debt is higher than the rate of return on the investment, resulting in a lower ROI than the investor would have earned if they had invested their own capital without borrowing.
cost approach difficult
replacement cost and depreciation may be difficult to quantify
How can you use a cap rates to help approximate a discount rate? What is the weakness of using this approach?
rt = yt + gt rt = discount rate (TOTAL RETURN) yt= cap rate (return on income) gt = growth income therefore yt = rt - gt it is hard to make predictions about the future and the gurantee of growth
What is the term for amortization for a loan, and why can it be different than the termto maturity for a loan?
the term for amortization is considered the time it would take given the monthly payment amount to pay off the entirety of the principal of the loan. However, in the case of something like a partial amortization the amortization period may be longer than the term to maturity and on that date of maturity the borrower would make a balloon payment to pay off the rest of the principal loan amount owed.
For property rights to have value, you have to assume what?
there is demand for them
Why are amortizing payments larger than interest payments?
they include payment of principal
what adjustments are made first in the sales comparison approach
transactional adjustments -financing terms, cond of sale property adjustments - location, physical attributes
Can I change or modify the zoning classification of a property? If so, how?
yes it is a legislative issue that must be taken up with the city counsel and prove: Change will have no undue effect on surrounding land uses or community
What is the challenge of finding substitute properties when using the sales comparison approach?
you need data to find the right substitutes
What effect does competition for resources have in the bid rent model?
more scarcity of land near the city center, because people are willing to pay higher rents to be closer to the city. (scarce supply) less demand for land outside city (so less rent)
In simple terms, what is a mortgage-backed security?
A mortgage-backed security (MBS) is a type of investment instrument that is created by pooling together a group of mortgage loans and selling shares of the pool to investors. Essentially, an MBS is a way for investors to invest in a pool of mortgages rather than investing in individual mortgages themselves. When a borrower takes out a mortgage loan, they make regular payments to the lender, which includes both interest and principal payments. These payments are then passed on to investors who own shares of the mortgage pool. The interest and principal payments received by investors are based on the performance of the underlying mortgages in the pool Like bonds, investors in pass-through mortgage securities receive coupon rates of interest• BUT they also receive repayments of the security's principal over the life of the security, as the underlying mortgage loans are paid off
What is the #1 key driver of real estate demand?
Location, locational economics and locational demographics
What is the importance of FAR (Floor to Area Ratio)?
Maximum amount of a building area that can be developed on an piece of land The FAR is calculated by dividing the total floor area of all floors of a building by the total area of the lot on which the building is located. FAR can also have a significant impact on real estate values. In areas where land is in high demand and available land is limited, a higher FAR can allow developers to build more units on a given piece of land, increasing the potential return on investment. On the other hand, a lower FAR can limit development and may result in higher real estate prices due to limited supply.
What are the key acceptable forms of describing real property?
Metes and bounds Subdivision and Plat lot number: Subdivision survey maps identify lots by block and lot number •Recorded in public records for subdivision creation property surveys: Property survey: Establishes the boundaries and physical limits of a parcel's property rights
What happens in the secondary mortgage market?
Mortgages are bought from primary market and sold between investors, or pooled together and used in the formation of mortgage backed securities
When using the Income approach, why do we use Net Operating Income as the measure of "market-based" income?
Net operating income takes into account the operating expenses of the individual building and gives a direct way to measure a particular ability to generate profit.
What are some of the most commonly cited issues with property taxes?
Regressive •Based on the theory of housing prices relative to income•Uneven across geographic areas•Balancing budgets vs. tax rates•Subjective vs. objective administration•Can be argued that there is a lack of uniformity of standards in tax appraisals and protests In the context of property taxes, regressive refers to a tax system in which lower-income property owners pay a higher percentage of their income in property taxes compared to higher-income property owners.
What is unique about real estate as an asset class compared to other investment asset classes?
Relatively illiquid,•privately negotiated,•location-specific and •informationally inefficient markets every location is unique, with many different attributes to each building: heterogeneous
What are the four primary forms of deeds and the key differences between them?
Seizin, quiet enjoyment, no encumbrances: general warranty deed has the right to title and can convey it(seizin) the previous title owner will defend against other title claims (quiet enjoyment) and has no undisclosed restrictions or conflicting claims in property rights Special warranty deed has right to seizin, quiet enjoyment and limited no encumbrances to the time of ownership of property title Bargain and sale deed has implied seizin: because of foreclosure and no right to quiet enjoyment or no encumbrances and quitclaim deed does not enjoy any of these rights essentially just giving up rights to a property if they may have any general warranty deed special warranty deed Bargain and sale deed quitclaim deed
What is a hybrid adjustable-rate mortgage ("ARM")?
A hybrid adjustable-rate mortgage (ARM) is a type of mortgage loan that combines elements of both fixed-rate and adjustable-rate mortgages. Hybrid ARMs typically have an initial fixed-rate period, during which the interest rate remains fixed and the borrower's payments remain the same. After the initial fixed-rate period expires, the interest rate on the loan becomes adjustable and can fluctuate up or down based on market conditions. Here are some key features of hybrid ARMs: Initial fixed-rate period: The initial fixed-rate period for a hybrid ARM can range from one to ten years, depending on the specific loan terms. During this period, the interest rate on the loan remains fixed and the borrower's monthly payments remain the same. Adjustment period: After the initial fixed-rate period expires, the interest rate on the loan becomes adjustable and can change once a year or more frequently, depending on the loan terms. Interest rate caps: Hybrid ARMs typically have caps on how much the interest rate can change in a given period, as well as over the life of the loan. This helps to protect borrowers from large increases in their monthly payments. Index and margin: The interest rate on a hybrid ARM is typically tied to an index, such as the SOFR or the Treasury index. The lender also adds a margin to the index to determine the borrower's interest rate.
What do we mean by direct co-ownership of real estate?
Direct co-ownership of real estate refers to a situation where two or more individuals or entities jointly own a property as co-owners. In other words, the co-owners each have a legal interest in the property and share in the rights and responsibilities of ownership.
Know how to calculate the EIR of a loan at any point in time during the loan's term
Calculate the outstanding loan balance on the loan based on the time in the loans term. Rate= number of months in loans term, monthly payment on the loan, the present value (the actual loan disbursement), the outstanding loan balance on the loan at time (t)
what is the The four-quadrant model of the benefits of investing in real estate
Cash flow: Income generated from NOI on property Appreciation: Income generated from appreciated value of the building leading to a higher reversion value than initial purchase price Diversification: given that diversification helps reduce idiosyncratic risk, Real Estate is another type of asset class to diversify your portfolio Hedge against inflation: Rental Income and property values tend to increase with inflation so it eradicates erosion of purchasing power.
What are discount points, and why would borrowers consider paying them?
Discount points are up front fees paid by the borrower to the lender in exchange for a lower interest rate. If you are planning to hold the loan for a long period of time you can pay a lower monthly payment and save a lot on interest in the long run. If you prepay the loan or are looking to move quickly then you may end up paying a higher effective interest rate over the life of the loan.
Know how to calculate the Debt to Income Ratio for a borrower assuming I give you the parameters
DTI <= 36% total monthly debt payments/total gross monthly income
What are the four key rights in the "bundle" of real property interests?
DUPE: dispositon, use, possession, and exclusion
How can we prove ownership of real estate interests?
Deeds2. Contracts3. Wills4. Other property records•Liens, leases, restrictive covenants, court judgements, etc.•Key is to establish public record of all forms!
What are the basic risks of real estate assets from a lender's perspective and what arethe tools that lenders use to account for/charge for/price that risk?
Default Risk, Interest Rate Risk, Liquidity Risk, Legislative Risk (something like zoning change) Loan proceeds - make borrower committed to pay off loan because of their vested interest in the property, and can use things like debt equity ratio to decide how much proceeds they are willing to give to maintain a certain performance covenant Level and type of interest rates Payment structure - full or partial amortization Fees and penalties Performance covenants - ex. debt to equity ratio, DSCR, debt yield. Based on some of these financial calculations they may be required to maintain a minimum DSCR
what do the terms eminent domain and condemnation mean?
Eminent domain refers to the government's power to take private property for public use, with just compensation paid to the property owner. Condemnation, on the other hand, refers to the legal process through which the government exercises its power of eminent domain. It involves the government taking ownership of private property through a court proceeding, and the property owner receiving compensation for the property.
At a basic level, why do investors use debt to capitalize real estate investments?
Extend limited resources in a capital intensive asset class Seek positive leverage= borrow at an interest rate less than the rate of return on the project such that you can make a profit greater than you would have been able to if you were investing with 100% of your own money.
Gross and Net Adjustments and %
Gross adjustment = absolute value of adjustments gross adjustment percentage = absolute value of adjustments/original sale price Net adjustments = net value of adjustments adding + and subtracting - Net % = net value/ original sale price <25% for gross <15% for net
Define User/Space/Property markets
The user market is made up of individuals or business' looking to rent or purchase real estate for their own use. Space market refers to the supply of space available for rent or purchase. The property market is where the the space and user markets come together and exchange ownership of real estate.
What is title insurance, and why do we need it?
Title insurance is a type of insurance policy that protects real estate owners and lenders from financial loss due to defects or issues with the title to a property. Title defects can include things like liens, unpaid taxes, errors or omissions in deeds, and other encumbrances that could affect the owner's ability to legally own, use, or sell the property. cant gurantee through title search there are no encumbrances, breaks in chain of title, or title rights
What are the three reasons that conveying real property interests can be challenging?
Title: title reflects the complex bundle of rights that an owner has and that an owner can give away. Collect evidence of ownership rights Chain of title: the sequence of conveyances passing ownership down through time Land is a continuous surface: determining boundaries of someones ownership is difficult
Under normal market conditions, should the interest rates on 30-year fixed-rate mortgages be higher or lower than the interest rates on 15-year fixed-rate mortgages? Why?
Under normal market conditions, the interest rates on 15-year fixed-rate mortgages should be lower than the interest rates on 30-year fixed-rate mortgages. This is because 15-year mortgages have a shorter repayment term and pose less risk to lenders, who can expect to be repaid more quickly. As a result, lenders are willing to offer lower interest rates on 15-year mortgages as compared to 30-year mortgages. One of the reasons it poses less risk in the case of fixed rate mortgages is that if interest rates are to go up over the 30 year bank will hold an inefficient loan because they are now receiving less interest than the amount they may receive from bonds and other securities. Also default risk increases over time given more unpredictable market & personal conditions.
What are the challenges making adjustments to the comparable properties?
how do you determine what the right adjustments are? how do you determine what a pool or patio is worth in current market conditions or the value of depreciation over time?
How can the cost approach be used as an indicator of the feasibility of new development?
if the cost to replace building + land value > Value of comp supply exceeds demand and rents dont outweigh the cost of construction
What is the basic idea behind the sales comparison approach? Why does the approach have merit?
in competitive market close substitutes should sell for relatively similar prices
