Real estate analysis exam review

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This page is a final exam review which was taped by our professor and collaboratively transcribed by the students in Real Estate Analysis.

If answers were relevant but a little different… I added them in green…

1. Which of the following would be a basic power of government limiting private property or private property rights? (Page 145) Eminent domain= the right of government to acquire private property without the owners consent, for public use, in exchange for just 8 Know the type of index interest rate used most often with adjustable rate mortgages. What is the most commonly used interest rate index for ARMS? (Pg 248) With ARM home income ratio Example from Chapter 15 Quiz: Given the following information regarding a REIT you hold, which of the following is the best investment decision? EPS: $2.50. Shares Outstanding: 1,000,000. Share price: $20.00. Other REIT price/income multiple: 1/8. Options are to: 1. buy more of this REIT 2. sell your holdings of this REIT 3. you are indifferent since the price seems “right” 4. none of the above are true - Correct answer is that you are indifferent.  This is because the multiple should have been listed as 8/1. Our REIT is yielding $20/$2.50 = 8/1 which is why we’re indifferent.

liability fority holder, and flow-through taxation of both taxable income and cash distributions. Taxable income and losses flow through Not a legal form.

This will cover at least 2-4 questions

23 After projecting estimates of a sales value knowing the rental prices, depreciation rates, you decide that a property has a certain value. If so, what is nrived (KS THIS ONE IS MARKET VALU… ANYONE WITH A DEFINATE ANSWER, PLEASE LET US KNOW!!!) Investment value is correct because it says: “you decide e roperty has a certain value” therefore it’s not the market value, which is the value to a “typical” investor (your value might coincidentally match the market value, but investment value is the best answer choice here)

Projected value Investment value Market Probate value - The market value of a property is its most probable selling price, assuming normal sale conditions. It can be viewed as the value that the typical participant would place on the property. -The investment value is the value a particular investor places on a property. It is based on the unique expectations of the individual buyer, not the market in general (Page 190-191).

24 If we have a landlord in a lease situation that allows a provision of $x per square foot that will change the floor plan and perhaps add more electrical k, partitioning, net work capacity to a particular space. What would be the proper or referred to textbook name for this provision (Page 557) Tenant Improvement Allowance= The amount of funding the owner of commercial property must provide towards the cost of refurbishing the space to meet the tenants needs…. It is the amount of money the owner must give to the tenant or pay on the tenant’s behalf, toward the cost of refurbishing the space to meet the needs of the tenants business of a property is X$, down payment is X%, financing costs is 2 or 3%. Given these items what’s the total cash you will need at the closing of that loan?

26 the alphabet soup of the operating statement, starting at the top (PGI) and working your way down through VC, MI, EGI, Op ex., cap X, NOI, EDS, tax, CFBT, tax liability, CFAT.

27 What is the before tax equity reversion in the text if GOI less Op ex. is this the definition? NO! Before Tax Equity Reversion  Sale Price-Selling Expenses=Net Sale Proceeds

NSP-Remain Mortgage Balance=BTER

28 Leasing options that might be typical of how a commercial owner of investment real estate would handle a firm or individual to represent them for leasing. (Page 332-338)

Mortgage broker Mortgage banker

Mortgage bankers: they are full service mortgage companies. They process, close, provide funding and sell the loans they originate in the secondary market. They also typically service the loans they have sold (ex. collect monthly payments). They lend funds for home financing but are not financial intermediaries because they do not accept deposits. They combine a small portion of equity with vast amounts of borrowed capitol to originate loans. They sell the loans as rapidly as possible to institutional investors on the secondary market. The mortgage banking process creates 2 valuable financial assets: the loan and the rights to service the loan. The primary source of revenue in mortgage banking is the right to service the loans created.

Mortgage broker: specialize in the details of the loan origination. They do not provide funding (or capitol) for the loan, nor do they typically service the loans after selling them. They serve strictly as an intermediary between those who demand mortgage funds (borrowers) and those who supply the funds (lenders or secondary market investors). They do not make the loans; they serve as an intermediary between the borrower (customer) and lender (client). Many mortgage brokers serve as correspondents for large mortgage bankers who desire to do business in an area but do not feel the volume of business justifies the expense of staffing a local office.

29 rights and obligations that are contained in leases and in particular some of the fundamental landlord, tenant laws that govern most leases in most states.

Security deposits that might be required and how they are held Prohibiting children under the terms of the leases and a particular project Can you have pets or not Rights to enter premises Rights to enjoyment

30 An owner might be trying to decide whether or not to make improvements to a particular property they own. What is the value added or the value lost should these improvements done under the particular scenario. (Incremental costs and benefits in the book). we are given the current rate per square foot under a particular lease, the anticipated rate per square foot, cost of improvement and number of square feet.

31 If a deed includes the words “does hereby grant, convey, transfer,” which of the following deed elements would be resident holding these words?

Acknowledgement section of a deed Consideration section Addendum clause Acceleration clause Words of conveyance – early in the deed will be the words “does hereby grant, bargain, sell, and covey unto…” that serve to assure the grantor intends to convey interest in real property and indicate the type of deed offered by the grantor.

In addition: Chapter 18 Quiz: If a deed includes the words, “does hereby grant, bargain, sell, and convey unto…” Which of the following deed elements would these words fall into? 1. Recital of consideration 0% 2. words of conveyance 100% 3. habendum clause 0% 4. acknowledgement 0%

32 what is the highest order of deed that one would prefer in a real estate transaction. What is the name?

Bargain and sale deed Claim deed Special warranty deed Limited warranty deed General warranty deed – the highest order deed, the deed you would most prefer.

Additional information: (Pages 472-473) -General warranty deed: includes the covenant of seizing, the covenant against encumbrances, and the covenant of quiet enjoyment. It contains the full set of legal promises the grantor can make. Thus, it is considered the highest-quality deed and affords the maximum basis for suit by the grantee in case the title is defective.

-Special warranty deed: identical to the general warranty deed, except that it limits the time of the covenant of encumbrances to the grantor’s ownership. That is, the grantor asserts only that he or she has created no undisclosed encumbrances during ownership, but asserts nothing about encumbrances from previous owners.

-Deed of bargain and sale: has none of the covenants of a warranty deed. It purports to convey the real property, and appears to imply claim to ownership. It is commonly used by businesses to convey property because, while implying ownership, it commits the business to no additional covenants which are sources of liability.

-Quitclaim deed: has none of the covenants of the warranty deed. Its words of conveyance go something like, “I hereby quitclaim…” as opposed to, “I hereby grant or convey…” It is worded to imply no claim to title, only to convey what interest the grantor actually has. Courts regard a quitclaim deed as a questionable conveyance of title.

33 Know the covenants that refer to season, quiet enjoyment and others. (Page 470)

Covenant of seizin- a promise that the grantor truly has good title, and that they have the right to covey it. Covenant against encumbrances- a promise that the property is not encumbered with liens, easements, or other such limitations except as noted in the deed. Covenant of quiet enjoyment- a promise that the property will not be claimed by someone with a better claim to title.

34 There are 3 major ways for a legal description of legal property. In the state of Florida, they won’t accept a mailing address or zip code to describe a real property. Compass heading, directions, and linear measures, which of the three is this likely to come from? (Pages 481-484)

– metes and bounds approach.

Metes and bounds approach – Method of describing real estate in which a mete is a unit of measure (foot, mile) and a bound is a boundary marker. It forms a sequence of directed distances that are the boundaries of the property. Oldest form but still used. In the modern version, metes and bounds is a very precise, compass-directed walk around the boundary of a parcel. The boundary is defined by a point of beginning and a sequence of directed distances that eventually lead back to the point of the beginning. It is the most flexible of descriptions, and is capable of describing even the most irregular of parcels. Government rectangular method – For each region a baseline, running east and west and a principal meridian, running north and south, were established as reference lines. From these lines, a grid system was surveyed involving checks (24 square miles) and townships (6 square miles) and sections (1 square mile). A government rectangular description relies on townships and section numbers as the essential units of identification. Subdivision plat method – (Also known as plat lot and block number). An unambiguous means to provide a description of property that identifies each parcel in a surveyed map of a subdivision. When a platted residential or other subdivision is created, a surveyed map of the subdivision is places in the public records with each parcel identified by a plat lot and block number. It usually shows the location of various elements such as utilities, drainage, storm water retention, and bicycle paths.

Concept check 18-20:

The oldest form of the three land descriptions is metes and bounds. The most common form is subdivision plat lot and block number. The most common in most states is the government rectangular method.

35 Be able to spot the fundamental difference between the kinds of listing contracts, which is another way of saying agency agreements where brokers are being engaged by owners of property to represent and market their properties in various ways. One of the most restrictive ways on one end of the spectrum was the exclusive right of sale of contract (EROS) that has a very distinguishing characteristic that can be spotted easily. On the other end of the spectrum, there is the open listing agreement, and there is another kind of contract. What are the three kinds, and how are they different. 3 Types of Listing Contracts

1) Open Listing – contract between a property owner and a broker that gives the broker the right to market the property. Distinguishing Characteristic – lack of exclusivity -only the broker who procures a buyer will be owed commission, if owner sells him/herself no broker will be owed a commission

2) Exclusive Agency Listing – type of listing is used infrequently; owner can sell the property and avoid paying a commission, it provides far less protection the broker than the exclusive right of sale listing discussed below -brokers less willing to spend time and effort to market properties listed under this arrangement

3) Exclusive Right of Sale Listing – sellers list their property with one broker and agree to pay that broker a commission if the property is sold w/in a specified time or if not specified, w/in a reasonable time -broker owed a commission if any other brokers or even the owner sell the property during the contract period

“Seller gives broker exclusive right to sell….” is included in vast majority of brokerage arrangements due to 1) faster sales 2) brokers need the protection provided by the provision and 3) MLS only accepts exclusive right of sale listings

36 Know the fiduciary duties of an agent (495). Be able to distinguish between exclusive agents, universal agent, and transaction broker. Who is the principal, the service client, the service provider in these agency providers?

Disclosure-Be completely honest with principal. Confidentiality-Never betray confidential information about principal, their financial status, or their motivations. Accounting-Keep the principal informed about financial aspects of their assignment. Obedience-Follow the instructions of principal to limits of what is legal. Loyalty-Never subordinate the best interests of principal to the interests of others. Skill and Care-Represent the interests of principal to the best of their ability; represent in same way one would represent self.

Exclusive Agency Listing (509)-An agreement between a seller of property and a broker in which the seller agrees to pay a commission to the broker if anyone other than the owner finds a buyer, during the period of the agreement. Owner can still sell their own home without penalty. Exclusive Right of Sale Listing (510)-An agreement between a seller of property and a broker in which the broker is assured of receiving a commission if the broker or anyone else, including the owner, finds a buyer during the period of agreement. Owner can sell home but still owes fee to broker.

Universal Agent-One to whom a principal delegates the power to act in all matters that can be delegated in place of the principal. General Agent-One to whom ea principal delegates the power to act within the confines of a business or employment relationship. Special Agent-Person to whom a principal has granted authority to handle a specific business transaction or to perform a specific function. Real estate brokers and salespersons are special agents. Transaction Broker-One who facilitates a real estate transaction but who is not an agent of either buyer or seller. A transaction broker is required to deal honestly and fairly with both parties to exercise skill, care and diligence in carrying out his or her duties.

37 there are remedies that contract provide when a default of a contract occurs. Be familiar with the contractual remedies. There will be 1 or 2 questions on that regard (Page 537) When a party fails to perform (ex: breach of contract, nonperformance, or default), the other party may have one or more remedies. The non-defaulting party may: 1. Rescind the contract 2. Sue for specific performance (ex. require the defaulting party to carry out the contract) 3. Sue for damages. - An additional option for the seller is to retain the buyers deposit as liquidated damages.

38 one of the following is not a common closing costs (Chapter 20 Quiz)

Cleaning fee Appraisal fee Lenders fee Origination fee Flood certification

39 The following are legal elements for contracts, which is essential only for contracts on real estate? (Chapter 20 Quiz) -competent parties -offer and acceptance -written form -consideration

Additional Information (Page 523): Whatever the form, any contract, whether it be for real estate or for some other purpose, must contain the following elements: 1. Competent parties 2. Legal objective 3. Offer and acceptance 4. Consideration 5. No defects to mutual assent

Two additional requirements must be part of any contract for the sale of real estate: 1. Written form 2. Proper description of the property

40 There are ways the law looks at whether something is a fixture or not. There are at least 4 tests mentioned in the text. Know trade fixtures (Page 75) A fixture is defined as an object that was formerly personal property but has been converted into real property. There are 4 rules to determine whether an object has become a fixture: 1. The manner of attachment. The question in this rule is whether the removal of the object results in damage to the property. 2. The character of the article and manner of adaptation. Items that have been custom fitted tend to be regarded as fixtures. Examples include window screens, storm windows, church pews, custom bookshelves, custom draperies, and custom security systems. 3. The intention of the parties. This rule refers not to the private intentions of the parties but to the facts of the situation and the intention that an observer would reasonably conclude from them. Ex: kitchen appliances. If a kitchen range or refrigerator is in a single family home being sold, it normally is expected to remain with the seller. On the other hand, if the appliances are furnishings in a rental apartment they normally would remain with the building. Thus, the rule of intention would treat the appliances as personal property in the single family residence case, and as fixtures in the apartment case. 4. Relation of the parties. For landlord and tenant relationships, special versions of the rule of intention have evolved over time. a. Trade fixtures. Which are items installed by a commercial tenant to conduct business, are always considered personal property of the tenant unless they are abandoned at termination of the lease. So, even if removal of flood display cases and other custom fitted things injure the facility when removed, they are still regarded as property of the tenant. b. Agriculture fixtures. Such as fences, are also considered property of the tenant. Anything installed by the tenant remains personal property. c. Residential tenants also tend to be given the same protection. Any item installed in the residence by the tenant is regarded as the tenant’s personal property, at least until it’s abandoned.

41 The term that describes the tenants transfer of a portion of his/her rights to another party. In a lease context, what is that called? A lease assignment occurs when all of a tenant’s rights and obligations are transferred to another party. A sublease occurs when the original tenant transfers only a subset of his or her rights to another.

42 What is the item when you buy real property that is not depreciable? (Page 583) Principal residences are properties used as taxpayers’ homes and cannot be depreciated for tax purposes. Commercial real estate, on the other hand, may be classified for tax purposes as a dealer, trade or business, or investment property. Real property held for resale by a dealer is not depreciable for tax purposes because such property is viewed as inventory, not a long-term investment. Congress allows depreciation deductions only on assets intended to be held as long term investments rather than those held for immediate resale.

43 if property is residential, it has one life in years that you then under straight-line depreciation can ratably depreciate each year a certain abdicable amount. If it’s a multi family income property, how many years over which can it be depreciated.

Answer (27.5yrs)

Chapter 22 Quiz: Congressional legislation mandates that residential real property be depreciated over a minimum of how many years? - 27.5

In addition (Page 591): Currently, residential real property (ex. apartments) may be depreciated over no less than 27.5 years. The cost recovery period for nonresidential real property (ex. shopping centers, industrial warehouses, and office buildings) is 39 years.

44 when one wants to calculate depreciable basis, the buyer must separate personal property from real property. What is the term that best describes this process? (Chapter 22 Quiz) Cost Segregation

45 assume a non-residential income property was purchased with a depreciable basis of $X, on January first. What is the annual depreciation allowance for that year if it’s depreciated according to the straight-line method? (Chapter 22 Quiz) - Assume a residential property was purchased with a depreciable basis of $100,000 on January 1st. What is the annual depreciation allowance for that year? = 3,636

46 4 properties have various profits or losses ascribe to each. We want to know the net income the tax payer can claim in the current year if the tax payer owns those 4 properties. Property 1 and 2 have a net profit of $thousand, property 3 has a loss of $thousands, property 4 has net profit of $X. What is the net result? 9. CH22 Q9 Howard owns four properties that have the following profit or loss. How much net income will Howard claim in the current year from the four properties? Property 1 & 2 both have a net profit of $6,000 Property 3 looses $21,000 Property 4 has a net profit of $7,000

1.  -2,000 	0%      

2. 0 100% According to the quiz, this is correct, but (see below)… 3. 2,000 0% 4. 19,000 0% It appears that you can't claim negative income (the –2000 would carryover for next year). But Mr. Monroe apparently was asked about it and said it should have been –2000 (a lot of us put –2000, myself included, and I think we may have influenced him, but I think it’s wrong, 0 is correct). Decide yourself, page 585.

47 there is a term that describes the continual reconfiguration of a built environment t to meet the needs of society. What is this term describing? Development

48 We will be given activities and roles that are engineer related. We must be able to describe which engineers these are describing. Examples are engineers that does onsite sewer lines, water distribution system, design of streets, the configuration or layout of parking?

Soils engineer-determines the sufficient specifications to achieve safety and stability for a structure’s foundation Structural engineer-determines the requisite structural skeleton to maintain the building’s integrity Mechanical engineer-provides specifications and design for the HVAC system and other building systems Electrical engineer-designs the power sources and distribution system Civil engineer-designs on-site utility systems, including sewers, water, streets, parking, and site grading.

49 a developer pre-leases a space to target. The space has not been built on but the lease has been agreed upon between landlord and tenant. What would the text describe this activity as?

			Lease option

Floor loan Bundle of rights being conveyed Build to suit arrangement Design build arrangement

50 what is the percentage of GDP for the US generated by real estate? (Page 7) Real estate generates nearly a third of United States gross domestic product (GDP)

51 there is a term used to describe the ability to sell a property quickly yet for fair market value. Is it? (Page 384 and 385) Answer = Liquidity Fast switch Liquidity Transactional flexibility Flip Quick turn

52 All the following have a high degree of uncertainty risk as to their cost except. Can you spot on the spectrum where different property types lie as being high risk versus lower risk? Lowest Risk  Highest Risk: (Page 30) Purchase of new structure Purchase of good existing structure Purchase of older structure Standard Construction Project Subdivision land development, fully permitted Renovation Subdivision land development, not fully permitted Urban redevelopment

Lowest Risk  Highest Risk in terms of Cash Flow Uncertainty: (Page 33) Net lease with credit tenant Investment-grade commercial property Single-family rental Industrial Apartments Small Office Land Development, Hotel & Motel, Restaurant

Strategies that investors might use to lessen their risk? Ch. 23 (Portfolio management, risk/diversification) Diversification, judicious selection of various investment properties, market knowledge, ample due diligence upon acquisition, avoiding certain risk, etc.

This term describes the value of money at a time period in the future? (Pages 48-49) Future Value.

Land value on an unimproved property is in say 10 years, given %, how do you calculate a future value for that land?

Investing 10k, at the end of 20 years, you’ll have the largest amount of money if the money is compounded at what frequency? (Maximum gain due to the frequency of compounding) Whatever the most frequent compounding choice available is (daily is best)

What lien is superior to all others? Chapter 4 Quiz, Question 6 Property tax and assessment liens (a.k.a. government liens)

What is a mechanic’s lien? What activities? Page 83 Liens that arise from construction and other improvements to real estate or condo. If a property defaults on a construction contract, it is not realistic to expect the contractor to recover the materials and services used to improve the real estate.

Restrictive covenants…where are they found? Deed restrictions…what do they control/prohibit. (Conditions and restrictions, restrictive covenants, deed restrictions, CCR’s) Pages 81-82 Restrictive covenants impose limits on the uses of lands. They can be created when land is conveyed to a new owner by placing a restrictive clause in the deed that conveys the property. They are strictly private; they can only be enforced by those who hold a legal interest in the property. Deed restriction- the owner who created the restriction or that owner’s heirs are the only persons who can enforce the restriction

What does a restrictive covenant look like? All of the following are examples of residential subdivision restrictive covenants EXCEPT: 1. No children are allowed to play in the yard 100% 2. No freestanding garage 0% 3. No chain link fences 0%

Property located b/t highway and state beach…state wants to build a road…what is that land considered? What kind of easement would that be? Easement in gross  correct

Market fundamentals – clinic or hospital – many travel regionally to go there – people that travel there are also family/friends of patients, spending money in the local economy – economic terms, what am I describing? (Page 103) Economic base multiplier. Economic base multiplier, regional revenue multiplier, high profit regional operation, economic star, economic generator…which is correct?

Multi-nucleic city model – what is the distinctive characteristic of this model? (Page 117) The motor vehicle, combined with new technologies of production, had released the city from its absolute ties to the central business district. Since the multi nuclei model, continued advances in motor vehicles, along with waves of other technological innovations, have continued to propel urban activity away from the central business district. Some revolutions contributing to the multi nuclei city are: the urban transportation revolution, the production revolution (assembly lines), air conditioning, lighting and new forms of retailing and offices, and advances in data process and communication (which allowed separation of management from the production process for the first time).

Industry economies of scale – draw clusters of activities, complementary or not? Know the difference of what is complementary and which is not, given examples. (Stadium, warehouse, high-rise, mall, university, etc.) Warehouse doesn’t draw businesses to complement/ support warehouse users – the others do.

Homeowners/Neighborhood/Condo/Condo Rental associations – provide services – enhance quality of life. One may build a park, landscape the entrance, hold an annual event, etc. – this might contribute to some rise in property values. What describes the reason for such increase? Coincidence, teamwork, group think, positive externalities…which is appropriate? (Page 131) Positive Externalities=beneficial effects on the property value from exceptional vistas, nearby parks, and recreation facilities, quality neighborhood schools, quality architecture, attractive commercial areas, well kept landscape, etc.

Missed very often: (TEXT) What is the goal/primary objective of real estate market research? Be careful, some look correct but are not. Summary of Chapter page 184 states “The goal of the research is to determine a plausible range for critical cash flow parameters for the subject property. For rental property these parameters are projected rental rate growth and vacancy rates. For a subdivision or condo project the critical parameters are sales rates”.

Adding to the primary goal/objective of real estate market research: The one common thread I found in Ch7 on pgs. 160, 164, 169, 171 and so on was the mentioning of creating “The Market-Defining Story,” which is the crucial beginning point of the market research process. “This Market-Defining Story” is part of the cycle of market research, which asks the following questions:

1. What is the real estate product under consideration? 2. Who are the customers? 3. Where are the customers? 4. What do the customers care about? 5. Who are the competitors? …and includes the initial collection of data, evaluating results, determining if research is sufficient, if it is, end, if it’s not move to refining the research.

Market segmentation – housing – what are the factors that underlie market segmentation as to housing? Can you spot the relevant factors? (i.e., household income, ethnicity of population, # of extended family that live locally, employment status, sex/gender, age of household members…are some of these NOT part of the housing market segmentation?) Factors that DO affect housing market segmentation include: household income, household age, household size, and household lifestyle. NOT included is household unemployment status.

Developers, as they’re working on the feasibility of a particular project, might conduct interviews with people acquainted with a similar but different project to the one they intend to develop/construct…what is this called? (Trying to find likes/dislikes) Exit interview, survey research, psychographic inquiry, correspondence campaign…which is best response? (Page 182) Survey research= contact and interview owners of existing units and ask what they like or dislike about their units. From these interviews, the developers were able to identify some design features that enabled them to create a project that was distinctly more successful than others in the area.

Appraisal foundation is credited with a particular set of guidelines that have acronyms – what are they? (Pages 191-192) The Uniform Standards of Professional Appraisal Practice (USPAP) is maintained by the Appraisal Foundation and is required and followed by all states and federal regulatory agencies. USPAP imposes both ethical obligations and minimum appraisal standards that must be followed by all professional appraisers. To comply with the USPAP, real estate appraisers must follow this general process: 1) defining the problem, 2) selecting and collecting data, 3) identifying the highest and best use, 4) applying the three valuation approaches, 5) reconciling the indicated values that result from the multiple approaches, and 6) preparing the appraisal report for submission to the client.

Know ECOA, what does that pertain to? (Page 264 and Page 347) Because of what Congress perceived to be a long history of both deliberate and unconscious discriminatory practices in home mortgage lending, in 1974 it enacted the Equal Credit Opportunity Act (ECOA). This act prohibits discrimination in lending practices on the basis of race, color, religion, national origin, sex, marital status, age, or because all or part of an applicant’s income derives from a public assistance program. In addition, ECOA regulates what information can be used and what income can be excluded from the process.

FIRREA (Page 329) In 1989 Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). It took major steps to establish depository institution accountability and created long-called-for risk-based capital standards for depository institutions. FIRREA was an effort to “charge” financial institutions for risky behavior through higher net worth requirements.

RESPA (Page 265-266 and 538-539) The Real Estate Settlement Procedures Act (RESPA) is a federal law that requires federally chartered or insured lenders to provide buyers and sellers w/ information on all settlement costs. This is required whenever a buyer obtains a new first mortgage loan, when the loan is insured by the FHA or guaranteed by the VA, or when the loan will be sold to one of the federally related secondary mortgage market agencies. The requirements are as follows: 1. Special information booklet 2. Good faith estimate of settlement costs 3. Uniform Settlement Statement (HUD-1 Form) 4. Prohibition against kickbacks There are three basic, often used and later reconciled approaches to arrive @ appraisal valuations for market value of real property. The weighting we give the three approaches varies according to type and market. If you are to spot an activity that isn’t one of the three, which would it be? (P.193) 1) the income approach 2) the sales comparison approach 3) the cost approach -The sales approach is applicable to almost all 1-4 family residential properties and even to some types of income producing properties and this approach is easily understood by both buyers and sellers. -The income approach is the dominant approach when estimating the values of any income producing type of property and assumes a property’s value is determined solely by it expected future cash flows. -The cost approach is necessary when good comparable sales or good income data are absent and involves estimating the cost of the property new and then subtracting depreciation. This is also the clear order of preference for methods of appraisal.

Growth management – century commission is tasked with accessing FL growth management and compiles an annual report – who gets this report? (Governor, legislature, citizens, all of the above) ( The Century Commission makes recommendations to the Governor and Legislature regarding how they should address the impacts of population growth.

During appraisal process, extensive data is collected. Supporting market valuation – what is collected/analyzed for market valuation? What is relevant, what is not? (Page 196) The appraiser must generally search a variety of sources to obtain the necessary information on the subject and comparable properties. These sources include: public records, multiple listing services, private data services (vendors and insurance companies).

End of 70-80 exam questions.

Chapter questions from last 6 chapters

Chapter 18-24

First step in process of development? 8 distinct steps. (Ch. 24) Page 646 1) Establishing site control 2) Feasibility analysis, refinement, and testing 3) Obtaining permits 4) Design 5) Financing 6) Construction 7) Marketing and leasing 8) Operation

Various risks in construction stage of development phase and not land acquisition stage…which risks are associated with each? Page 656 - Risks of construction lending are less in a number of respects than with the land acquisition stage -Construction risks include the ability of the developer to manage and complete the construction process; risks of construction such as weather interruptions, materials shortages, work stoppages, strikes, or construction accidents; and rent-up following construction -Land Acq. Risks - environmental risks, ecological risks, title risks

There are environmental concerns that come to the surface during the due diligence period and environment assessments that developers do before they launch a project, it usually comes up when they’re doing their feasibility studies, so if I gave you a list of potential environmental concerns, would you be able to spot an exception that would not be an environmental concern when one is examining the particular environmental risks of a particular project. Page 648 -Environmental Concerns: free of soil problems, ecological complications, seismic concerns, hydrological concerns or anthropological or historical sensitivities; structural concerns, toxicity, wetlands, wildlife habitats, etc.

There is a question or two on mezzanine financing. Mezzanine Fin has some distinctive characteristics that are very unique to it as opposed to all other forms of financing. We highlight those in our discussions. What would they be? How is that different? One example is; it may or not take the form of a second mortgage or secondary financing because its focus is really not in the securing of the debt, but more in participating in the benefits like the equity investor or the developer, so to that extent, one of its distinctive then is that it shares one way or another in ownership benefits, not just fixed payments via debt like a mortgage. What are some of the characteristics of mezzanine financing (from ch. 24) Page 657 - sometimes a second mortgage but often not a mortgage; ownership shares in the development entity are pledged to the mezz lenders as security -no foreclosure procedures is necessary to exercise recourse -mezz debt more expensive than construction financing

Following the line of logic re; mezzanine financing one of the ways that we would probably test that would be “a form of financing in which ownership shares are pledged as distinguished from the pledging of the real property” under a mortgage. If we said said, “What kind of financing is being described where ownership shares are being pledged to the entity that would be a description of mezzanine financing or mezzanine debt.

(Ch 24) There’s a name for an alternative arrangement that involves the combo of an architect and a general contractor on a project. It’s an alternative to the traditional arrangement btwn those parties. That said, according to the text, the best term is: fast track const contract , construct partnership, build to suit arrangement, design to build arrangement (best answer from text). Alternative arrangement where architect and contractor are one (PAGE 659)

(Ch 22) Depreciation and depreciable bases is certainly one of the key concepts of the chapter. I gave a number of ?’s earlier about that. Knowing those depreciable terms for the various types of property, would be a key.

In order for a property to qualify for the capital gains tax rate, will give answers from a few months to a few years, what would be correct answer? Chapter 22 Quiz, Question 3 In order for a property to qualify for the capital gains tax rate in the year of the sale, it must be held for how long? 12 months

If we give you a tax rate for a tax payer. Calculate the amount of tax that is being sheltered, and the following investment situation. We say the tax rate is 25% and one property has a loss, and one property has a gain, would your answer be a positive number, a negative number or would it be “not a description of a tax shelter” 4. CH22 Q4

Calculate the amount of tax being sheltered in the following investment situation. Tax rate: 35% Property 1: $10,000 loss Property 2: $10,000 gain

1. 2,500 0% 2. 3,000 0% 3. 3,500 100% (See below) 4. none, this is not a tax shelter 0%

On the property with a 10,000 gain, you would have been taxed $3,500. Because of your 10,000 loss, you have "saved" $3,500. Page: 596.

The benefits about Real Estate exchanging, which is referred to and described in internal code and it has a number – you’ll hear “1031 Exchanges” they are referring to that section of IRS code. Complying with the definition of like kind properties, that is two properties of like kind can be exchanged and in a process of doing that the gain is not taxed, the tax is deferred, the basis is tracked from one property into another as you exchange from one to the other, but you temp. avoid and defer the taxed. A property that falls under this code would be a 1031 Asset. 8. CH22 Q8

Which of the following is NOT a requirement of the 1031 exchange?

1. any cash or personal property received in an exchange is fully taxable in the year of the exchange 0% 2. the properties must be like-kind 0% 3. the properties must be trade or business or investment properties 0% 4. the seller must own a personal residence 100%

The text also talks about 1 other. Section 1231 Asset. You need to know what kinds of assets are described in the IRS Section 1231. A question might be: “What’s the biggest advantage of a Sec 1231 Asset?” may have something to do with protection from lawsuits, depreciation taken, or the treatment of cost basis, or how losses are deductible against ordinary income. Which one and what are some other benefits of a 1231 asset. Be careful that you’re looking at a question describing exchanging within the setup within the question it says Sec 1231 that it’s a red herring and taking you down the wrong path. The section 1231 Asset does not qualify for exchange. 10. CH22 Q10

What is the biggest advantage of a Section 1231 asset?

1. any losses are fully deductible against ordinary income 100% 2. it is protected from law suits 0% 3. it does not require depreciation 0% 4. it has no original cost basis 0%

You’ll need to be able to spot examples of various kinds of income treatment, and identify it as portfolio income, passive income and active income? If we give you wages, consulting fees – is that portfolio income or earned income (which is classified as active income (according to this chapter). What is a passive income example? What is a portfolio example and how is the tax treatment different within those three major types of activities? Active Income - income earned from salaries, wages, commissions, and bonuses

Portfolio Income - income from investments in securities or unimproved land and includes interest and dividend income on investments such as stocks and bonds (ex: REITS)

Passive Activity Income - include all income generated from rental real estate investments

A homeowner, when we think about taxation, really constitutes a fourth category of tax treatment because there are so many tax benefits that are peculiar and unique to those that own a principal residence. Do you know the major differences? i.e.; can you depreciate your ownership of the principal residence? You Can’t – that would be a distinguishing characteristic of something you would not be able to do. Yet – the same property, were you to leave it as your principal residence, can be report differently on your taxes. You can now tell the IRS that the house that you were reporting the mortgage and home equity interest on is now being rented. Now you can depreciate it. You need to be able to spot that 4th category – is it passive, active, portfolio income - or a specific benefit or limitations that is because of the asset and the income derived is due to home ownership or not.

Similar to that are categories of property that are used in the income tax law, so we might talk about whether something is a capital asset or not. Is this a personal residence (in the above example) is this a passive activity property or not? Or is it a dealer property. If it’s a dealer property it’s treated differently. If you and I invest in a property and are treated one way by the IRS, or we could sell that property to someone else. If they are a RE professional, depending on how they conduct themselves, they may be excluded from the benefits that we received, because that was an investment for us, but for them it could be part of their biz activity. If so, if they are a dealer than the treatment that they’ll get is ordinary income treatment, in their tax bracket. We might have wound up with lower tax rates and hold the same property because for us it’s investment property, for them it’s dealer property. Know the types of property and the categories or treatment of income are keys to CHAPTER 21 to know.

CHAPTER 23 is the one that we’ve done a lot of edits to, because it’s so widely used at both the grad and undergrad. Know a few keys to limited pages you should study that we told you about – like – diversification of risk, how do you manage a portfolio risk, what are some of the specific activities in the selection of assets in a portfolio that you might do to minimize the risk? If we said that this is a diversification strategy and these are the risks, you should be able to pick out one of those items as not being a way to diversify the holdings – it will be fairly obvious.

The uncertainty of risk factors if rental rates and occupancy levels in a particular market – like the user market – a question like which of the following is not a demand factor in valuing the risks of rental rates and the occupancies in a user market. Give some choices, the demand for occupant services, changes in the population or the level of the unoccupied space (vacancy level) or the level of office employment. One is NOT a demand factor when you look at the uncertainty of rental rates at occupancy levels – which one would it be.

All of the following are might be strategies to mitigate risk except: Avoiding a risky project Insurance and interest rate hedging Variant selection Diversification of portfolio assets PAGE 625 Strategies to avoid risk : Avoiding risky projects, using insurance to transfer risk to others, performing due diligence and diversification

Chapter 19 – Brokerage and Listing Contracts: Know the acronyms, anti-discrimination, concerns regarding agencies, who has obligations to whom under the various forms. Knowing the duties of disclosure, loyalty, obedience – which of the arrangements require those various things. Fiduciary relationship, page 495

Chapter 20 – Remedies for the contract might be posed. 2. CH20 Q2

Which of the following is not a remedy available to the non-defaulting party in a real estate contract?

1. they may call the police 100% 2. they may rescind the contract 0% 3. they may sue for damages 0% 4. they may sue for specific purpose 0%

We discussed that it will also deal with RESPA, since most contracts deal with it and what they require. What are some of the things that come out of RESPA? Know what is contained in a HUD1 Form? What does it contain and the reason that the government wants consumers to use and be protected by it. This stuff can be found on pgs. 538-539. The RESPA requirements are 1. a special information booklet. 2. a good faith estimate of settlement costs. 3. a uniform settlement statement (HUD-1 form) and 4. Prohibition against kickbacks. The HUD-1 form contains all charges imposed by the lender; charges incurred by the buyer and seller separately and outside the closing are not required to be disclosed 3. CH20 Q3

All of the following are requirements that must be met under the Real Estate Settlement Procedures Act EXCEPT:

1. a special information booklet must be given to very loan applicant 0% 2. a good-faith estimate of settlement costs must be provided 0% 3. an inspection report must be provided 100% 4. a uniform settlement (HUD-1) must be provided 0%

Prorations – know – some of the examples as discussed this past Tuesday. Items are clearly prorated with prepaid rent, property taxes, mortgage interest, but there are some that need to be paid in whole – not in part – can you spot the difference? Look at the quizzes. It seems to me that fees are not able to be prorated and must be paid in whole. Insurance, taxes and interest can be broken down to day by day basis, or prorated, while the fees are paid all at once. 6. CH20 Q6

Which of the following will not possibly be prorated at closing?

1. appraisal Fee 100% 2. prepaid rent 0% 3. property tax 0% 4. mortgage interest 0%

A contract that had a clause that said “ this contract is dependent on the satisfactory building inspection to be made within 10 days of the final acceptance of this contract” this clause is know as what? Conditional / Performance / Professional Svces / Contract with Contingencies? Chapter 20 Quiz, Question 8

A contract states the following: “the contract is dependent upon a satisfactory building inspection to be made within 10 days of final acceptance of contract.” This is known as what? Contract with contingencies

Why do we record things in RE? Example - the recording of a deed or easement? Chapter 20 Quiz, Question 10 What is the purpose of recording in real estate? to inform anyone who may have a potential interest in the property

Notices – Public notices, Constructive notice. What are the elements of constructive notice vs. actual notice and how are they different? Page 544. Constructive notice informs anyone who may have a potential interest in the property of both the lender and owner. Page 478 – actual notice

What are the number of days in required by RESPA that a lender must provide the borrower with an estimate of the closing costs? RESPA requires lenders to provide borrowers with an estimate of closing costs when the borrower applies for a loan or within 3 business days before signing a contract for sale page: 542

Chapter 20 – First slide – what is the most document in Real Estate? The answer is in the quiz. Page 233 in lecture notes Contract for Sale: The Most Important Document in Real Estate

Ch 18 – Quiz question about the landowner that divides parcel and access to the street. Know the answer.

Chapter 18 Quiz, Question 1 A landowner divides his land into two parcels. The front parcel faces the street while the back parcel has no access to the street. The grantee of the back parcel claims he can drive across the existing road in the front parcel to access their back parcel. What is this called? Easement by prior use  Is correct according to the quiz. However, page 476 indicates that “easement of necessity” is probably better, since the question states “parcel has no access” but if this debatable question appears again, you must decide which choice you think is best.

Statute of frauds has a particular requirement with contract law. What is that requirement? Can you spot it easily? It has to be in writing in order to be enforced. Statute of Frauds - Provision adopted by all states requiring that all deeds, long-term leases and mortgages must be in writing to be enforceable. Derives from the original Statute of Frauds on 1677.

In lecture, water rights were discussed. Terms like accretion, reliction, erosion, alluvium – Know definitions.(from Lecture 11/28/06 2nd hour) Accretion: Gradual increase of land due to natural causes Reliction: Gradual receding of water uncovering additional land Erosion: Gradual loss of land due to natural forces Alluvion: Deposit of land as a result of accretion

Various ways that a seller can give evidence of title – what are the options that a seller has to offer a buyer evidence of title? Title abstract w/ attorney’s opinion (is a correct answer)/ Recording Statutes / Title Search / Paying for a series of specific inspections? (this is according to the contract terms in the text) 2 ways: 1) Title abstract, together with an attorney’s opinion of title, 2) Title insurance commitment (page 479)

There is a part promise contained in deeds and title that says that the property won’t be claimed by someone with a better claim. What is that known as? Covenant of Season / Covenant against Encumbrances / Covenant of Deed / Covenant of Quiet Enjoyment. (is a correct answer) page 470

Prof Monroe wishes us the best on the final, graduation and our careers.

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