1
Q
Two types of property
A
Tangible and intangible
2
Q
Tangible property
A
Physical assets that can be owned
Can be real or personal property
3
Q
Intangible property
A
Nonphysical assets such as stocks, bonds, mortgages, leases
4
Q
real estate as a tangible asset
A
- raw land
- improvements TO the land
- structures (improvements ON the land)
5
Q
real estate as a bundle of rights
A
- exclusive possession of the real property
- use or enjoyment
- disposition
- can be unbundled in many ways
6
Q
3 things that determine real estate value
A
- user (space) markets
- capital markets
- governmental sectors
7
Q
how much of the worlds wealth does real estate represent
A
1/2
8
Q
real estate also includes
A
area above and below the surface
9
Q
raw land
A
a larger area that does not include any improvements
10
Q
real property
A
real estate
11
Q
personal property
A
things that are movable and not permanently affixed to land
12
Q
what is the value of a bundle of rights
A
a function of the property’s physical, locational, and legal characteristics
13
Q
physical
A
age, size, design, construction, quality of structure, natural features of land
14
Q
locational
A
convenience/access to places of employment, schools, shopping, health care (residential), visibility, access to customers, suppliers, employees (commercial)
15
Q
acre
A
43,560 square feet or 209 feet square. 640 acres in 1 square mile
16
Q
how many acres is a typical single family residential lot
A
1/5-4/5 acre
17
Q
local user/space markets
A
competition among users for physical locations and space
- where rental rates are determined
- seperate markets for different property types
18
Q
capital markets
A
serve to allocate financial resources among households and firms requiring funds. Participants invest in stocks, bonds, mortgage contracts, real estate etc with the expectation of return on investment
19
Q
two categories of captial markets
A
equity interests (owners) debt interests (lenders)
20
Q
property markets
A
determine the required property, specific investment returns, property values, capitalization rates, construction feasilibility
-integrated, nOT segmented like the space market
21
Q
capitalization rate
A
the ratio of a property’s annual net income to its value
- a fundamental pricing metric in commercial real estate markets
22
Q
because of segmentation, rental prices can
A
vary widely for physically similar space across locations and property types
23
Q
in capital markets bidding by investors determines
A
- risk free rates of various maturities
- required risk premiums for risky investments
24
Q
public capital markets
A
small homogenous units (shares) of ownership in assets traded in public exchange
- many buyers and sellers
- price quotes available for all to see
- high degree of liquidity
25
equity in capital public markets
publicy traded RE investments trusts (REITs), real estate companies
26
debt in capital public markets
commerical mortgage backed securities (MBs), and mortgage REITs)
27
private capital/property markets
- absence of centralized markets (or even price list)
- assets trade infrequently in private transactions(lack of transparency)
- less liquidty than public markets
- higher transaction costs
28
equity in private captial markets
individuals, partnerships, LLCs, private equity funds, hedge funds
29
debt in private capital markets
banks, thrifts, insurace companies, fianance companies, private lenders
30
government role in real estate
affects the market, zoning codes, land use regulations, building codes, property taxes, federal insurace
31
what determines rental rates
space market equilibrium and expected cash flows
32
where are risk premiums determined
in capital markets
33
when property values are more than cost of new construction
incentive for new construction and excess profits but ultimately, rise in supply causes rents/market values to decrease
34
when property values are less than cost of construction
-overbuilt market
a combo of reduced construction, demand growth, steady obsolence of existing stock is required to push market rents and property values back to required levels to be profitable
35
hetergeonity
each property has unique features (even in suburbs)
36
immobility
not able to be moved
37
what does it mean when "real estate markets are localized"
potential users usually lie within short distance to each other
38
what is real estate segmented by
product price
39
investment grade properties
larger, more valuable commericial properties generally over 10 mil
(institutional grade real estate)
40
what are rights?
claims the gov is obligated to enforce
- nonrevocable
- enduring
41
personal rights
freedoms in the bill of rights/constitution
42
property rights
rights to things both tangible and intangible,
- exclusive possession
- enjoyment of use or benefit
- freedom to dispose as one pleases (within safety limits)
43
fixture
real property that was formerly personal property
44
rules for determining when something becomes a fixture
1. manner of attachment (will removal cause damage)
2. character of the article and manner of adaptation (custom things)
3. intention of the parties (most dominant rule, if sold: remain w/seller , if rented: remain w/owner)
4. relation of the parties
(trade fixtures [personal property], agricultural fixtures)
45
interests
a bundle of rights that is dismantled into lesser bundles or any set of rights in real property
46
estate
a real property interest that includes the right of exclusive possession
47
nonpossessory interests
- easements
- restrictive covenants
- liens
48
ownership estates (freeholds)
estate interests having unlimited duration; title interests
- fee simple absolute
- fee simple conditional
- life estate w/remainder interest
49
fee simple absolute
all possible rights, has greatest value, limited only by the powers of the government
50
fee simple conditional
all rights, but revocable if specific condition is violated (trigger event) will cause ownership to revert to previous owner
51
reverter interest
the uncertain interest held by the previous owner
52
ordinary life estate
created by the owner, the rights of dispostion of the fee simple absolute are unbundled and seperated completely.
ex: college wants to purchase neighborind home, owner wants to sell but not move
53
remainder estate
the ownership interest subsequent to a life estate which upon the death of the life estate owner becomes a fee simple absolute
ex: college will get home when she dies
54
legal life estate
created by the action of law
| -can also arise from marriage
55
leasehold estates (nonownership or nonfreehold)
the interest or rights of a lesee or tenant in a leased property, including the possessory rights that are temporary conveyance of the rights of exclusion, use/enjoyment but NOT disposition.
56
tenancy for years
specific period of time
- must be written if more than one year
- written lease contract governs entirely
57
periodic tenancy
no definite length of time
- often by oral agreement
- more risk for misunderstanding but simple and quick
- length of period is implied by payment period
58
tenancy at will
granted by landlords to tenants allowing them to remain in possession without written agreement, a short period when it suits both landlord and occupant to continue
59
tenancy at sufferance
when a tenant that is supposed to vacate does not
60
non-possessory interests in land
- easements
- liens
- restrictive covenants
61
easement
the right to use land for a specific and limited purpose
62
government limitations on ownership
eminent domain, police regulatory power, taxation
63
private limitations on ownership
liens, deed restrictions, easements, leases
64
easements appurtenant
a right of use a dominant parcel of land "enjoys" over an adjacent (servient) parcel of land
- affirmative or negative
- consrained or diminished by the easement
- runs w/ the land
65
affirmative easements
- driveway or access right of way
- sewer line
- drainage
- common wall
66
negative easements
- light and air easement
| - scenic easement
67
easement in gross
the right to use land for a specific, limited purpose unrelated to any adjacent parcel
- no dominant parcel
- transferable w/o transfer of parcel of land
68
examples of easements in gross
-right of ways for roads, railroads, irrigation, water, communication/cable lines, gas lines, billboards, mineral/oil extraction, harvest crops, wetlands preservation
69
license
permission to use the land
(the RIGHT to use the land is an EASEMENT)
-revocable
-automatically terminated at the death of the grantor or sale of the land
70
exclusive easement in gross
conveys all rights of the easement, recipient can convey access to tohers
71
nonexclusive easement in gross
rights limited to one user only
- cannot extend access to others
- only the owner can convey access to others
72
restrictive covenants (deed restrictions)
impose restrictions on the uses of land
| -created at conveyance of land to a new owner
73
examples of restrictive covenants
- height restrictions
- minimum floor area
- no freestanding structures
- no chain link fences
- no RVs or boats in view of street
- required use of professional lawn service
- no satellite dish
74
two methods of creating restrictive covenants
- restriction in a deed conveying a single parcel of land to a new owner (grantor or heirs)
- restrictions imposed on an entire subdivision at its creation (mortgage loan holders, renters)
75
enforcement of restrictive covenants
- court injunction
- only by "parties at interest"
- courts will be reluctant if changed neighborhood, public policy, abandonment
76
lien
an interest in real property that serves as security for an obligation
-usually a debt
77
general lien
arises out of actions unrelated to ownership of the property
- court awarded damages
- federal tax liens
78
specific lien
directly from events related to the property
- mortgage
- mechanics lien
- property tax
79
attach
to place a lien on
80
assesement lien
lien assessment by local governments to ensure that those who receive the primary benefit of neighborhood improvements will be charged their "fair share"
81
community development district (CDD) lien
secures finances for improvements within a private community
- not a gov lien but enjoys same priority
- tax exempt debt
82
mortgage
an interest in property as security for a debt
83
mechanics lien
arises from construction and other improvements to real estate
84
consequences of liens
can result in sale of property to compensate the creditor
85
three levels of liens on a personal residence
1. property tax/assessment liens
2. mortgages/mechanics liens
3. judgment liens
86
forms of co-ownership
direct and indirect
87
indirect co-ownership through a single entity
persons in a business organization acquire real estate
88
direct co-ownership
each co-owner holds a titled interest in the property (freehold estate)
- a house with multiple owners
89
examples of direct co-ownership
tenancy in common
joint tenancy
tenancy by the entirety
condiminium
90
tenancy in common
"normal" form of direct co-ownership, close to fee simple absolute, each co-owner retains full rights of disposition, is free to mortgage or to convey their ownership share to a new owner (like to heirs)
-bad form for owning an operating business
91
joint tenancy (survivorship)
2 or more owners hold equal shares and have equal rights of possession. the surviving partners divide the interests of a deceased partner
- difficult to create and easily disrupted
- prevented or restricted by law in some states
- restricts inheritance to heirs of last survivng owner
92
tenancy by the entirety
a form of joint tenancy for husband and wife
- simplifies effect in minor children are present
- protected against liens arising from either spouse alone
93
condomimium
a form of ownership combining single person ownership with tenancy in common
-the owner holds a fee simple interest as an individual owner to a certain space but the owner is a tenant in common in the community elements
94
examples of indirect co-ownership
```
general partnership
limited partership
LLC
corporation
trust
```
95
condomimiun bylaws
the official rules and regulations that define owner rights
- share of all obligations
- restrictions on sale or rental
- methods of altering bylaws
96
condominium declaration
the master deed creating or establishing the conominium corporation
- sets restrictions
examples: kids, ages, etc
97
cooperative
a form of individual ownership of apartments, the property is owned by a corporation of which each resident is a shareholder entitled to a proprietary lease (no term and no rent)
- cannot mortgage individual interests
- owner is mutually liable for any specific liens
98
dower
gives wife 1/3 life estate for a surviving spouse in real property of a decedent spouse
99
curtsey
husband version of dower
100
elective share
a modern subsitute for dower/curtesy which gives a surviving spouse a share of most wealth of the decedent (1/3)
101
community property
the automatic right to 1/2 interest in all property acquired "out of the fruits of the marriage"
- not property owned before the marriage
- not gifts or inheritances to one spouse
- growing in acceptance as superior arrangement to elective share
102
seperate property
excluded from community property, acquired prior to marriage or gifts of inheritance received during marriage
103
timesharing
multiple individuals have use of property but interests are not simultaneous
- buyers acquire leasehold interest for a fixed number of years
- floating time intervals
- never a financial investment
104
rights to oil, gas and minerals
can be seperated from land ownership
| -owner receives an implied easement to retrieve the minerals
105
rule of capture
the owners of an oil or gas well could claim all that is pumped from it, regardless of whether the oil or gas migrated from adjacent property
106
reasons why conveying real estate is complex
- real property is a complex bundle of rights
- rights to land are enduring
- land is a continuous surface
107
deed
a special, written contract for conveying a permanent interest in real property
- fee simple absolute
- life estate
- conditional fee
- easement
- oil, mineral, or water rights
- MUST BE IN WRITING
108
requirements of a deed
- grantor (and signature) and grantee
- words of conveyance
- covenants
- habendum clause
- exceptions and reservations clause
- acknowledgment
- delivery
109
grantor
person or entity conveying real property
- must be of legal age
- must be legally competent
- must sign deed
110
grantee
recipient of real property
- no need for legal age
- no need to be competent
- only needs to be identifiable
111
recital of consideration
a minimal statement of "for 10 dollars and other good and valuable consideration"
112
words of conveyance
-does hereby grant
-bargain
-sell
-convey
these words affirm intention to convey real property AND determine the type of deed
113
covenant
legally binding promise
114
three main covenants
- covenant of seizin
- covenant against encumbrances
- covenant of quiet enjoyment
115
covenant of seizin
grantor has good title and right to convey it
116
covenant against encumbrances
no encumbrances except as noted in deed (liens, easements)
117
covenant of quiet enjoyment
no one with better claim to title
118
habendum clause
defines interest being conveyed
| -required drafting by a knowledgable legal professional
119
in habendum clause, "for use as" implies
easement
120
in habendum clause, "so long as" implies
conditional fee with reverter
121
in habendum clause, "and his/hers heirs and assigns forever" implies
fee simple absolute
122
exceptions and reservations clause
- deed restrictions
- clauses withholding mineral or oil rights
- creation of an easement
123
property descriptions
- must be unambiguous and enduring
| - street address and tax parcel number are UNACCEPTABLE
124
acknowledgment
confirmation that grantor acted voluntarily
| -notarized or equivalent
125
delivery
observable, verifiable intent that deed is to be given to grantor
126
examples of failure of delivery
- deed found in a desk/safety deposit box and handed to named grantee
- grantors attorny hands deed to named grantee without explicit instructions to do so
127
how deeds differ
by number of covenants
128
types of deeds
- general warranty deed
- special warranty deed
- deed of bargain and sale
- quitclaim deed
129
general warranty deed
all 3 covenants: seizen, no encumbrances, and quiet enjoyment
130
special warranty deed
all 3 covenants but "no encumbrances" limited to grantor's ownership
131
deed of bargain and sale
no covenants, but still is regarded as implying ownership
132
quitclaim deed
no covenants and makes no assertions about grantor's interest
133
conveying real property voluntarily with a deed
- normal transaction
| - patent
134
conveying real property voluntarily without a deef
- implied easement
- easement by estoppel
- dedication
135
conveying real property involuntarily with a deed
- probate
- bankruptcy
- divorce
- condemnation
- foreclosure
136
conveying real proerpty involuntarily without a deed
- easement by prescription
- title by adverse possession
- action of water
137
ways title can transfer
- voluntary conveyance by deed
| - involuntary conveyance by deed
138
implied easement
not created by an explicit deed or clause. created when a subdivision map is placed in the public records
139
easement by prior use or necessity
when a path of access across part of the property to a now landlocked parcel preexists and if the sale leaves that path as the only access (prior use). if the landlocked parcel has no prior path of access of egress then this is created (necessity)
140
easement by estoppel
can occur is a landowner gives an adjacent landowner permission to depend on her land
141
easement by prescription
the acquisition of a right easement by open, notorious and continuous assertion of the right, hostile to the subservient land owners interest. the amount of time required to attain the right of easement by prescription varies by state
142
title by adverse possession
involuntary conveyance of real property rights by an individual demonstrating a use that is 1) hostile to the interests of the owner 2) actual 3) open and notorious; can be no efforts to disguise or hide the use from owners/neighbors 4) continuous [5-20 years] 5) exclusive, cannot share possession with owners or neighbors
143
action of water
(accretion) water may deposit soil which can become property of the owner
(reliction) subsiding water may leave additional land as property of the owner
144
doctrine of constructive notice
cannot be bound by what you cannot know
145
statute of frauds
contract must be written to be enforcable
146
recording statutes
a contract recorded in public records is considered known
147
title
collection of evidence indicating a particular persons as holder of the "fee"
148
title search
examining public records to construct "chain of title"
149
chain of title
the sequence of conveyances passing ownership down through time
150
possible breaks in the chain of title
- conveyance of only a partial interest
- conveyance by adverse possession
- fraudulent documents
- inconsistent property descriptions
- inferior deed
- faulty seperation of mineral or water rights
- missing spousal signature
151
evidence of title
assurance of a good or marketable title
1. title abstract
2. title insurance commitment
152
marketable title
claim to title is regarded as free from reasonable doubt
153
marketable title laws
state laws to shorten necessary title search
154
title insurance
protects a grantee (or mortgage lender) against the legal costs of defending a title and against loss of property in case of unsuccessful defense
155
methods of land description
- metes (measures) and bounds (boundaries)
- subdivision plat lot and block number
- government rectangular survey
156
basic reference points of gov rectangular survey
baseline: running east and west
principal meridian: running north and south
-range lines
-tier lines
157
property taxes
a primary source of local government revenue
158
property exempt from taxes
- religious organizations
- state property
- nonprofit organizations
- homestead
- educational institutions
159
special assessments
taxes for specific public improvements affecting a property
- street, sewer, etc
- usually charged on a per front foot basis
160
issues with property tax
- regressive
- uneven across geographic areas
- poorly administered
161
features of real estate that cause market distortions
- "spillover" effects from nearby land uses
- uniqueness of location(monopoly)
- unknown quality or condition of existing structures
- instability of land uses around residential neighborhoods
162
resulting market failures in real estate
- monopoly
- externatlities (spillover effects, traffic congestion, storm runoff, emissions, urban sprawl)
- incomplete information
- uncertainty of residential values
163
revolution in land use controls
1970s
164
urban planning is needed for
storm management
traffic management
schools/other services
165
traditional planning
- seperated uses
- automobile oriented
- uniform density
- cul-de-sac hierarchy
166
new urban planning
- mixed use
- public transportation
- pedestrian oriented
167
traditional land use controls
- building codes
- zoning
- subdivision regulations
- planning and zoning administration
- board of adjustment
- site plan review
168
newer approaches to land use control
- planned unit development
- performance standards
- impact fees
- growth restrictions
169
hazardous materials
- asbestos and fiberglass
- PCBs
- leaking underground storage tanks (LUSTs)
- radon
- mold
170
eminent domain
right of government to acquire private land, without owners consent, for public use, with due process and compensation
171
condemnation
legal procedure for exercising right of eminent domain
172
ways to minimize market risk
- avoid projects with high market risk (hotels, restaurants/entertainment)
- avoid projects with prospective major change
- study urban markets
173
linkages
the attractions or important access needs that one land use has for other land uses or the demand between one urban activity and others
174
what causes urban clustering
demand for access
175
where cities occurred
- religious center
- where the water was
- where natural resources were
176
economic base
activities that bring income into a city (why the city formed in the first place)
177
indicators of the economic base
- location quotient
| - data from gov agency
178
economic base multiplier
base export activities and services that bring money into a city which then is respent and recirculated within a city (most is recirculated through paychecks or commissions)
- large cities will draw in residents from small towns for goods and services
- employment
- tourism
179
location quotient
identifies concentrations of excessive employment and normal pattern of employment distribution
180
supply factors affecting a community economic base
- labor force characteristics
- quality of life
- leadership
181
industry economies of scale
the growth of an industry within a city can create special resources and advantages for that industry
182
agglomeration economies
-the emergence of specialized resources in a locality response to demand from multiple industries, generally associated with large cities
183
bid rent
what does it cost to travel to the city center
184
what is the central force creating cities
demand for proximity
185
bid rent model
model of how land users bid for location that reveals influences on how density of land use is determined, how competing urban land uses sort out their locations, how urban land value is determined, and why land use changes over time
186
bid rent is only based on one linkage, the reality is
based on many linkages
187
concentric ring model
the center circle is the CBD, adjacent is the zone of transition which contains warehousing and other land uses, followed by a ring of lower income residential land use followed by a ring of middle and upper income land use
188
sector model
characterized by radial corridors and wedges particularly for higher income residential land use
-valid before 1930s, now not so much
189
multinuclei city
CBD no longer the single center of aciivIty
| -BC CARS
190
technological changes from 1920
-automotive revolution
-production revolution
-advances for offices and retailing
-data processing and communications
-dispersion of employment and urban functions to suburbs
-
191
central place pattern
a location pattern in which similar economic entities such as particular type of convenience of service or retail establishment, tend to disperse evenly over the market region
-opposite=clustering
192
comparison activities
goods and services whose optimal location pattern is clustering
ex: shopping malls
193
idealized location pattern of convenience goods and services
- circles are maximum market perimeter
| - straight lines demarcate equal-access ridges between providers
194
variations on intra urban location patterns
- comparison goods and clustering
| - industry economies of scale and clustering
195
implications for real estate analysis
- location within the urban matrix is the most meaningful notion of location
- urban growth is not uniform; both emerging and declining nuclei
- transporation network and urban patterns respond to technical and market changes but very slowly
196
factors affect real estate demand
- need for access (linkages)
| - non-locational factors (housing style, design, size, commerical, offices)
197
market segmentation
differences in preferences or needs among market subgroups
198
challenges of market segmentation
- its an empirical notion
- research process must recognize this challenge
- no simple, universal procedure
199
cycle of market research
1. what is product under consideration?
2. who are customers
3. where are customers
4. what do customers care about
5. who are competitiors
200
market parameters
key numbers that characterize the current condition and trend in market
201
story approach to market research
begins with property and its market segments, and builds links to larger economy
202
conventional approach to market research
-goes from state of world, to the nation, to state, to city, to property
203
geographic info systems
computer software systems that enable one to manipulate and "map" inforatmion with great flexibility and speed
204
psychographics
a tool for sophisticated determination of market segmentation
205
when are valuations calculations required
when
- property acquisition is contemplated
- structure is modified/abandoned
- site is developed
- property is used as collateral for a loan
- litigation
206
market value
- most probable selling price, assuming "normal" sale conditions
- value for the "typical" market participant
- rests upon willing buyers/sellers
- result of interacting forces of supply and demand
207
appraisal
an unbiased written estimate of the market value of the subject property
208
appraisal report
the document the apprasier submits to the client and contains the appraisers final estimate value and the reasoning and calculations behind it
209
investment value
the value a particular investor places on a property
| -based on unique expectations of investor NOT market in general
210
transaction price
price actually paid for a specific property
- we observe this only when the investment value of a buyer exceeds the investment value of a seller
- represents the price agreed upon by one willing buyer and one willing seller
211
why do we have to estimate market value?
bc the price its worth is not necessarily the price people will be willing to pay
212
rules to comply with uniform standards of professional appraisal practice
1. identify the appraisal problem
2. determine the required scope of work
3. collect data and describe property
4. perform data analysis
5. determine value of land
6. apply 3 approaches to valuation
7. reconcile indicated values from 3 approaches
8. report final value estimate
213
how to identify problem
- client/intended users
- intended use
- purpose of assignment (type of value)
- effective date of valuation
- relevant characteristics
- important assumptions
214
highest and best use
use that is found to be 1) legally permissable 2) physically possible 3) financially feasible 4) maximally productive
215
3 approaches to valuation
- sales comparison approach
- cost approach
- income approach
216
as though vacant
land vacant or not is always valued as though vacant/available for developemt
the value=total estimated value assuming best and highest use - the estimated value of the anticipated improvements
217
of the property as improved
- used when a seperate estimate of the value of the land is not necessary
- helps determine if existing improvement should be retained, modified, or demolished
218
sales comparison approach
- value of RE can be determined by analyzing the sale prices of similar properties
- applicable to almost all 1-4 family residential properties and some income producing properties
- pro is that it is easily understood by buyers and sellers
219
steps of sales comparison
1. identify elements of comparison and value adjustment
2. select comparable sales
3. adjust comparable sale prices to approximate subject
4. reconcile adjusted sale prices; obtain indicated value of subject
220
income approach
- the dominant approach when estimating value of income producing properties
- assumes a property's value is determined by its expected future cash flows
221
cost approach
- involves estimating the cost of replacing the property, new, and then substracting the loss in value (sum of accrued depreciation)
- most relied on for valuing specialty properties- parks, monuments, bridges, etc
222
reconciliation
the process of forming a single point estimate from 2 or more numbers
-developing a final estimate, the appraiser weighs the relative reliability of value indicators
223
self-contained appraisal report
includes all the detail and information that were relevant to deriving market value or other conclusions
224
summary appraisal report
summarizes the conclusions of the appraisal
225
narrative appraisal report
longest and most formal self contained appraisal report
226
"form" reporting option
most single-family homes bc generally required by mortgage lenders
227
indicated value
-the final value estimate after appraisal
228
comparable sales data
- similar location, size, style
- recently sold
- arms length transaction
229
arms length transaction
a fairly negotiated transaction that occurred under TYPICAL MARKET CONDITIONS
230
sources of market data
public records
multiple listing services
private data services
231
adjustments to comparable sale prices
- convert characteristics of each comparable to an approximation of subject
- transactional adjustments
- property adjustments
232
transactional adjustments
concern the nature and terms of the deal
- property rights conveyed
- financing terms
- conditions of sale
- expenditures made immediately after purchase
- market conditions
233
property adjustments
recognize that the locational, physical, and economic differences between properties all can add or subtract incrementally to a base value
- location
- physical characteristics
- economic characteristics
- use
- nonrealty items (personal property)
234
1. real property rights conveyed
- if the legal estate (bundle of rights) is different than those of subject property
- really should be elimated as a comparable
235
2. financing terms
-if a special nonmarket financing program (low-income, gov sponsered, etc) was used it should not be comparable
236
3. conditions of sale
- forced sale
- personal relations
- if not arms length it is nOT comparable
237
4. market conditions
- inflations
- changes in economy
- use repeat-sale analysis
238
6. location
if one location is superior/inferior to another
239
7. nonrealty items
-items that come w/ the house
240
cost approach
- assumes the market value of a NEW building is similar to the cost of constructioning it today
- assumes the cost of creating a good equals its value
241
cost approach procedure
estimated reproduction cost of improvements - estimated accrued depreciation = depreicated cost of improvements + estimated value site = indicated value by the cost approach
242
two types of construction costs
replacement cost
| reproduction cost
243
reproduction cost
cost of an exact physical replica
244
replacement cost
cost to create something of equal utility (functionality)
- can estimate by
- quantity survey method
- cost per square foot or cubic foot
- unit in place
245
accrued depreciation
- the difference between the current market value of a building (or improvement) and the total cost to construct it new
- physical deterioration
- functional obsolescence
- external obsolescence
246
functional obsolescence
a loss in value within a structure due to changes in tastes, preferences, technical innovations or market standards
247
external obsolesence
the loss in value due to influences external to the site
248
appraisal assignments where cost approach is heavily weighted
- new buildings
- insurance appraisals
- specialty buildings
249
income approach
value of a property is the present value of its anticipated income
- income capitalization
- right now refering to EXISTING properties
250
net operating income
expected annual rental income, net of vacanies minus annual operating and capital expenses
251
income capitalization
second step in the income approach of converting the NOI forecast into an estimate of property value
1. direct capitalization models
2. discounted cash flow models
252
direct capitalization models (with an "overall" rate)
value estimates are based on a ratio or multiple of expected NOI over next 12 months.
- ratios must be from comparable properties
- analogous to the use of price-earnings ratio to value common stocks
253
discounted cash flow models
-the appraiser must identify the investment holding period, forecast the NOI for each year of the holding period, select appropriate yield rate or required internal rate of return at which to discount all future cash flows
254
potential gross income
rental income assuming 100% occupancy
| - estimated rent per unit for each year x number of units available to rent
255
reconstructed operating statement
shows the appraisers estimate of stabalized income and expenses
-the appraiser bases estimates of future cash flows on what they believe market participants are expecting, not what they expect
256
market rent
rental income the property would most likely command if placed for lease on the open market as of the effective date of the appraisal
-PGI is usually based on market rent
257
contract rent
actual rent being paid under contract
258
types of commercial leases
- straight lease
- step up or graduated lease
- indexed lease
- percentage lease
259
straight or flat lease
"level" lease payments, rent remains fixed over entire lease
260
step up/graduated lease
rent increases on a predetermined schedule
261
indexed lease
rent tied to an inflation index
262
percentage lease
rent includes percentage of tenants sales
263
natural vacancy rate
proportion of PGI not collected- even when market is in equilibrium (multiply by PGI to get vacancy collection loss)
264
effective gross income
whats left after subtracting the vacancy allowance from PGI and adding miscellanous income (fees, parking, laundry etc)
265
operating expenses
expenses to maintain and operate rental properties
- fixed (do not vary with occupancy)
- variable (vary with occupancy)
- does NOT INCLUDE: mortgage payments, tax depreciation or capital expenditures
266
capital expenditures
replacements and alterations to a building that materially prolongs its life and increases value
267
NOI is property's
dividend
268
projected stream of NOI is fundamental
determinant of value
269
direct capitalization
the process of estimating a property's market value by dividing a single year NOI by a "capitalization" rate
270
V=NOI/Ro
v=value
NOI=projected income over next 12 months
Ro=capitalization rate
271
direct market extraction
abstracting cap rates from the market
| Ro=NOI/Vo or Ro=NOI/sale price
272
cap rate
a measure of the relationship between a property's current income stream and its price or value
-NOT an interest rate, discount rate or IRR
273
IRR= Yo= Ro+ g
Ro= NOI/price g=P1-Po/price
274
effective gross income multiplier
sale price + effective gross income
- quick indicator for smaller rental properties
- best used for properties with short-term leases
275
problems with valuation by direct capitalization
- inadequate data on comparable sales
| - different prices between institutional and private investors
276
discounted cash flow analysis
the process and procedures for estimating
1. future cash flows from property operations
2. the net cash flow from disposition of the property at end of assumed investment holding period
3. appropriate holding period
4. required total rate of return
- using these to generate an indicated value
277
pro forma
a cash flow forecast prepared to facilitate discounted cash flow analysis
278
reversion
cash proceeds from a sale
279
terminal value
sale price at end of expecting holding period (Vt)
280
net sale proceeds
sale price- selling expenses
281
discounting
future cash flows converted into present values
282
fee simple estate
complete ownership of a property w/o regard to any leases
283
leased fee estate
ownership subject to leases on the property
284
effects of mortgage debt
- more households can own their home
- businesses can use their cash for core activities
- investors can leverage and diversify investments
- homeowners can obtain credit on better terms than consumer debt
285
two elements of a mortgage loan
note and mortgage (deed of trust)
286
deed of trust
secures the note, creates collateral interest on the property
287
note
details the financial rights and obligations between borrower and lender
288
note
details the financial rights and obligations between borrower and lender
-defines the exact terms and conditions
289
commercial mortgage loans
360
290
commercial mortgage loans
360 day interest
291
adjustable rate
- index rate
- US treasury constant maturity rate
- LIBOR
- thrift institution cost of funds index
- home mortgage rate index
292
index rate
market-determined rate beyond control of either borrower or lender
293
constant maturity rate
the one year constant maturity rate for example is the average of the market yield found by survey on any outstanding US treasury debt having exactly one year remaining to final repayment, regardless of original maturity
294
cost of funds index
an index based on the weighted average of interest rates paid for deposits by thrift insitutions (savings and loans assocations, savings banks)
295
LIBOR rate
a common index of interest rates for income producing property, the London Interbank Offering Rate is a short term interest rate for loans among foreign banks based in London
296
change date
the date the rate changes
| -home mortgage lenders must notify borrowers of interest rate changes at least 30 days in advance
297
margin
the lenders "markup"
- determined by the individual lender and can vary with competitive conditions and with the risk of the loan
- normally constant throughout the life of the loan
- usually around 275 basis points
298
fully index rate
index rate + margin
299
interest rate caps
limit on changes in interest rate charged
- periodic
- lifetime
300
payment caps
limit on payment changes rather than interest rate changes
| -can result in negative amortization
301
periodic caps
limit change in the interest rate from one change date to the next
302
overall caps
limit change over the life of the loan
303
teaser caps
temporarily reduced interest rate, maybe be a % point or two below the sum of index plug margin
304
negative amortization
scheduled payment is insufficient to pay all of the accumulating interest, causing some interest to be added to the outstanding balance after each payment shortfall, increasing the loan amount
305
partially amortizing
it may pay down partially over a certain number of years but may require an additional large payment of principal with the last scheduled payment
306
nonamortizing
require interest but no regularly scheduled principal payment prior to the last payment
307
right of prepayent
- no right of prepayment unless explicity provided
| - VA and FHA loans do not have prepayment penalties
308
loans with restricted right of prepayment
- subprime home loans
- jumbo home loans
- most income property mortgage loans
309
prepayment penalties
- % of outstanding balance
- yield maintenance
- defeasance
310
nonrecourse loan
no personal liability
- exculpatory clause
- single purpose, single asset, bankruptcy remote entity for borrower
311
demand clause
right of lender to require prepayment
312
mortgagor (trustor)
borrower
313
mortgagee (beneficiary)
lender
314
title theory
mortgage a temporary transfer of title
315
lien theory
mortgage a lien
316
important mortgage clauses (DOT)
- description of the property
- insurance clause
- escrow/impound clause
- acceleration clause
- due-on-sale clause
- hazardous substance clause
- preservation and maintenance clause
317
default
failure to meet requirements of the note or mortgage
318
technical default
any violation of terms
319
substantive default
three missed payments (90 Days)
320
non-foreclosure responses to default
- counseling and consumer debt reorganization
- temporary reduction of payments
- assisted sale
- short sale
- deed in lieu of foreclosure
321
foreclosure
legal process of terminating all claims of ownership and all liens inferior to foreclosing lien
322
definciency judgment
judgment against mortgagor for unrecovered balance
323
judicial foreclosure
court-administered public auction
324
power of sale
public auction conducted by trustee or mortgagee (preferred by lenders)
325
chapter 7 bankruptcy
liquidation
326
chapter 11 bankruptcy
court supervised "workout"
| -can result in delay
327
chapter 13 bankruptcy
wage earners proceeding
| -can result in delay
328
acquiring property with existing debt
"subject to" borrower does not sign mortgage note
- no personal liability for loan
- property is still subject to the mortgage
329
assumption
buyer adds signature to note
- personal liability
- property subject to mortgage
330
equal credit opportunity act
prohibits discrimination in lending
331
federal truth in lending act
- statement of annual % rate
| - disclosures
332
HOEPA
home ownership and equity protection act
333
subprime
loan to a borrower not qualifying for standard prime financing
334
Dodd-Frank Act
createss consumer financial protection bureau
335
real estate valuation
estimates all future net cash flows
| -converts into estimate of present value
336
how are investment decisions made
by comparing estimate of present value to required equity investment
337
value depends on
-magnitude
-timing
-riskiness
of expected cash flows
338
compounding operatiosn
future value of a lump sum
| future value of an annuity
339
discounting operatiosn
present value of a lump sum
| present value of an annuity
340
present value
an amount at time zero
341
future value
a single cash flow at any future time point
342
payment
a repeating amount of cash inflow or outflow, flow normally begins at end of first period, sometimes at time zero
343
ordinary annuity
another name for payment
344
lump sum
any future cash inflow or outflow occuring only once
Finance 331
flashcards
Decks in class (10)
# Cards
-
Midterm 1344
-
chapter 10: Financing Home Ownership57
-
chapter 11: Sources of Funds for Residential Mortgages44
-
chapter 12: Real Estate Brokerage and Listing Contracts42
-
chapter 13: Contracts for Sale and Closing39
-
chapter 15: mortgage calculations and decisions15
-
chapter 16: commercial mortgage types and decisions33
-
chapter 17: sources of commercial debt and equity capital35
-
chapter 18: Investment Decisions: Ratios15
-
chapter 19: Investment Decisions: NPV and IRR8
