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Real estate day 8

Terms in this set (168)

Real estate brokers and sales people may advise clients concerning the market value of their property, but under NO circumstances may this opinion be referred to as a _____
an appraisal
As of 1992, lenders who wish to make us of federal monies or the secondary market, must use ______
appraisers licensed or certified by the state in which the property is located
Who's responsibility is it to determine the listing price of the property?
The seller's responsibility
It is the real estate licensee's responsiblity to give good advice concerning an appropriate listing price for the seller's property in the current market - how do they do this?
Using a CMA - competitive market analysis
When an agent makes a CMA, what does she do?
She takes recently sold properties that are "comparable" to the subject property in order to arrive at a realistic market value for her client's property.
Define appraisal:
supportable estimate of the value of a parcel of real estate made by a qualified appraiser, as of a specific date for a specific purpose
An Appraiser:
a licensed individual who possesses the necessary qualifications to estimate the value of a parcel of real estate for a fee
Appraiser's fees are usually based on time and expenses at a percentage of the appraised value of the parcel. T/F?
False. the appraiser charges a flat fee. Fees are never based on a percentage of the appraised value of the parcel
Define Cost:
the capital outlay required to "create" improved real estate - financing, building cost, labor, overhead, and profit
Market price vs Market value
Market price is the cost of acquisition. what it sells for

Market value is the current value or worth
Reproduction Cost
The construction cost at current prices of an exact duplicate of the subject property. using same or similar materials at todays price
Replacement Cost
new building at today's cost
The Six points establishing the definition of "market value"
- market value represents the most probable price (not the average price or highest price)
- has been exposed on the open market
- buyer and seller are reasonably well informed
- "arms length transaction"
- seller has the capacity to convey marketable title
- payment is made in cash or its equivalent
What does an "arms length transaction" entail?
it means that the buyer and seller are not related and not acting under undue pressure to conclude the transaction
The most important factor that affects the value of a property is _____
location/situs
What are the essential elements of value?
- Demand
- Utility
- Scarcity
- Transferability
Highest and Best Use
The possible use of a property that would produce the greatest net income and thereby develop the highest value.
What appraisal concept gives the property its greatest current value?
Highest and Best Use
Substitution
an appraisal principle where you pay no more cost to acquire equally desirable property
Conformity
means that the maximum value is realized if the use of land conforms to existing neighborhood standards
An over-improved property in a medium-priced neighborhood will decrease in value according to what finance principle?
Conformity
Increasing and Diminishing Returns
improvements add value only to the property's maximum value, beyond that improvement will not increase value.
As long as money spent on improvements produces an increase in value, the "law of _____ is applicable"
Law of increasing returns
As long as money spent on improvements no longer produces a proportionate increase in value, the "law of _____ is applicable"
Law of diminishing returns
Anticipation
a person will buy a property based on the benefit they expect to receive in the future
Contribution
an improvement on real property is only worth whatever it adds to the market value (as a whole)
Regression
better homes decrease in value by association w/ modest homes
Progression
a modest home being valued up when located in a neighborhood of more expensive homes
Define Growth:
the development stage where improvements are made and demand and property values are typically increasing
Define equilibrium:
stage in a neighborhood/property when there are few vacancies left and the property enjoys a long, stable period of high value
What are the three stages that a single property (and whole neighborhood) typically go through?
(1) Growth
(2) Equilibrium
(3) Decline
Define decline:
the stage when the property experiences increasing deterioration, the need for upkeep increases, and demand and value decrease
Why must appraisers be aware of past and present changes in the real estate market?
appraisers must be aware in order to predict possible future change as accurately as possible
The principle of competition:
holds that increased or excessive profits tend to attract customers
Unearned Increment:
Value added to land due to increased development and demand, none which the owner is responsible for
What are the six steps in The Appraisal process
1. Define the problem
2. Inspect the property
3. Gather, Record, and verify the data
4. Apply the three approaches to value: market approach, cost approach, and income approach
5. Reconcile the estimates of value - NOT an average of the three values
6. Prepare the appraisal report
The first step in the appraisal process is to Define the problem:
consider the subject property, the kind of value to be estimated, and the most valid appraisal approach for that kind of property must be selected
The second step in the appraisal process is to ______:
Inspect the property
The third step in the appraisal process is to _________:
Gather, Record, and verify the data
The fourth step in the appraisal process is to Apply the three approaches to value :
(1) Market approach
(2) Cost approach
(3) Income approach
*They must all be calculated separately
The fifth step in the appraisal process is to Reconcile the estimates of value:
The reconciliation is NOT an average of the three approaches. Because each subject property is different, certain value approaches are more appropriate and are thus weighted more heavily.
Therefore, the results of the three approach reconciliation are weighted according to the appraiser's judgement.
The sixth step in the appraisal process is to Prepare the _____-:
Prepare the appraisal report- it contains the appraiser's opinion of value and the factual basis for their opinion
The URAR is required by many governmental agencies. What is it an acronym for?
The Uniform Residential Appraisal Report
The Market Approach:
...
The Three steps in the Market Approach
-
-
-
Step one in marketing approach: Locating comparables.
The comparable must be...
...
Define arm's length transaction
a transaction in which a buyer and a seller deal from equal positions in a formal manner without solely trusting the other's fairness and integrity
Step two in marketing approach: The adjustment process.
List the 4 steps to the adjustment process
-
-
-
-
Step three in marketing approach: ___________
Define it.
...
The Cost Approach:
...
The four steps to the Cost approach
-
-
-
-
The three methods of estimating reconstruction cost
-
-
-
Define Depreciation:
the loss of value for any reasono
Define Accrued Depreciation:
the toal loss of value during the life of the building
Remember that only ___-- depreciate, but never the _____
improvements; land never depreciates
Three categories of depreciation
-
-
-
Physical deterioration is less concerned with "can it be fixed" and more concerned with _______
"would it make economical sense to fix it"
What do the principles of increasing/decreasing return mean in the case of physical deterioration?
Increasing return: a curable physical deterioration where it makes economical sense to fix something
Decreasing return: an incurable physical deterioration
Functional obsolescence;
...
External Obsolescence
...
Write out the formula for the Cost Approach to Valuation
...
Too few electrical outlets or lack of air/heat would be considered ___(curable/noncurable) as opposed to an inadequate number of bathrooms or poorly designed floor plans that are ____(curable/noncurable)
curable ; noncurable
These are examples of Functional Obsolesce
The Income Approach:
...
List the five basic steps of the Income approach
-
-
-
-
-
Write out the formula for Estimated Gross Income (EGI)
...
Write out the formula for Net Operating Income (NOI)
...
What is NOI?
...
What is EGI?
...
Define Capitalization rate:
the desired percentage rate of return
used to tell investors what they are currently making by comparing the sales price of similar properties
Write out the formula for finding the Capitalization Rate
...
Write out the formula for finding the market value using the Cap Rate
...
What method of property valuation makes no allowance for property tax, vacancies, uncollectible rents, management fees, or similar complicated situations?
The Gross rent multiplier
Gross Rent multiplier Method:
quick, crude estimate of property value
Define ad valorem tax:
a tax levied on the assessed value of real and personal property
List the two types of taxes:
...
Define Special assessment taxes:
...
State the steps in The Ad Valorem Process
-
-
-
-
Whats the formula to determine the tax rate?
...
What is a mill?
its 1/1000 of a dollar (0.001)
Appropriation in the Ad valorem process:
...
Assessment in the Ad valorem Process:
...
Tax Sale in the Ad valorem process
...
How is the net amount of needed ad valorem taxes calculated?
The expenses minus the income expected from fees and other levels of government
Due dates for taxes are set by _____
statute/ the state law
Licensees must know local tax payment schedules in order to do what?
compute the real estate taxes due from buyer or seller at closing
Equitable right to redemption
The right to redeem a property before a foreclosure sale by paying the full debt plus interest and accrued charges.
Statutory Right of Redemption
The right of a defaulted property owner to recover the property after its sale by paying the appropriate fees and charges.
A _______ is issued to a buyer if there is a redemption period extending after the sale.
Certificate of sale
If a property is not redeemed within the statutory period allowed, the buyer who currently holds a certificate of sale, can then apply for a ___
tax deed
Taxable income is ____income minus ____
...
Why would real estate investors should make sure that they maximize their allowable deductions in order to...
In order to reduce their taxable income
Appreciation:
An increase in the value or worth of a property
Most investors buy real property for its ______-- and secondarily for its appreciation potential
income production
Depreciation for tax purposes
an allowable expense deduction that can be taken even if the property in question increases in value
Depreciation for appraisal purposes
a loss in actual property value due to any cause
Depreciation is allowed on both income-producing property and personal residences. T/F?
...
Useful life of income producing property:
...
How do you calculate the adjusted basis of a property?
...
Economic Life:
...
Economic Value:
...
The property basis price is increased by _____
...
The property basis price is decreased by _____
...
Define Leverage:
the use of borrowed funds
Define Equity:
The amount of paid back leverage
When does "Equity buildup" occur?
as an investor pays back her leverage and as property appreciates in value over time
Owners of income-producing properties include property taxes as operating expenses (expenditures) in order to...
reduce their taxable gain
increase business loss deduction
Real property taxes are full deductible against ordinary income for all homeowners who itemize(who subtract expenses from their gross income). T/F?
True
What does it mean to itemize?
You are subtracting expenses from the gross income in order to lower taxes you must pay
List the tax benefits of Real estate ownership
- deduction of real property taxes for homeowners who itemize
- reduction of taxable gain/increase of business loan deduction for income producing property by including property tax as operating expenses
- deduction of interest paid on a mortgage for owners of personal residence
Owners of personal residence can only deduct the interest paid on the mortgage up to ________ dollars. Homeowners can only deduct the interest on the first _______dollars of home equity debt.
First $1 million dollars for owners of personal residence

First $100,000 dollars for home owner's home equity debt
If a person owns two residences, the $1 millino dollar and $100,000 dollar deduction applies to the total interest paid on both residences. What about if the person owns 3 or more residences?
the tax payer can only deduct up to two homes
List the different types of investment property:
-
-
-
-
-
-
When real estate is held for more than one year (366 days), any gain on sale is taxed at long-term capital gains rate. T/F?
True
_____ gains are taxed at significantly lower rates than short-term gains or ordinary income
Capital gains
Straight line approach
depreciation of residential rental property and commercial properties which means that there is an equal deduction for depreciation each year of ownership
Sale of Principal Residence for married couples filing jointly:
- can exclude up to $500,000 in profit on the sale of their primary home
- must have occupied the house as primary residence for at least 2 of the 5 years
- can take advantage of this exclusion every two years
Sale of Principal Residence for singles:
- can exclude up to $250,000 on sale of their primary home
- must have occupied the house as primary residence for at least 2 of the 5 years
- can take advantage of this exclusions every two years
When a property is sold a 1099 for will be sent to the seller showing the sale will be reported to the IRS. What will it show?
- seller's name
- social security number
- sale price of the property
The 1099 that a seller recieves after aproperty is sold will show whather the sell qualifies for a sale of principal residence exclusions and what the taxable capital gain would be. T/F?
False. It will not show either of those. Only:
- seller's name
- social security number
- sale price
Like-Kind Exchange
An investor can exchange real estate for real estate- an apartment house for an office building. Being a like-kind Exchange qualifies the sale as a tax deferred exchange.
Any additional cash or personal property given with the property in a like-kind exchange is considered boot and (is/is not) taxable.
Boot from a like-kind exchange is taxable
A closing, also known as a _____, is the time when a buyer gives the seller the agreed upon monies and in return the seller gives the buyer the deed that transfers title.
a settlement
Phases of a real estate closing:
(1) loan closing between lender and borrower
(2) real estate sales closing between the buyer and seller
Escrow closing
A closing in which a disinterested third party acts as escrow agent, but also acts as the closing agent and coordinates all closing agent and coordinates all closing activities
What does the closing agent do?
prepares the closing statements and conducts the proceedings at closing
A closing statement:
A detailed cash accounting of a real estate transaction showing all cash received, all charges and credits made, and all cash paid out in the transaction.
Who must the closing statement be prepared for?
the buyer
the seller
the real estate brokers involved
Closing statements must be prepared for the lender, buyer, and seller. T/F?
False. It is needed for the buyer, seller, and brokers involved but not the lender
What is the purpose of a closing statement?
to determine exactly how much money is due the seller at closing
The buyer receives credits for _____, owed by the seller.
receives credits for accrued expenses
The buyer must _____ the seller for prepaid expenses.
reimburse
What does the closing statement list?
- sales price
- the earnest money deposit
- all adjustments and prorations
RESPA was enacted in _____ and amended in _____
enacted in 1974
amended in 1976
What is the purpose of RESPA?
to ensure that buyer and seller are fully informed as to all settlement costs and to standardize real estate settlement practices
RESPA is administered by
HUD
RESPA is a federal law, meaning it covers most institutional loans. T/F?
True.
When does not apply to...
transactions financed solely by the seller (PMM), a buyer's assumption of a seller's existing loan, a land contract/contract for deed/installment sales contract, or residential property consisting of more than four family units.
RESPA was designed to set settlement prices. T/F?
False - its purpose is to ensure that the buyer and seller are fulling informed to all settlement cost
All lenders whose loans are covered by RESPA must give out a pamhplet that says "_______"
"Your Home loan Toolkit- A Step by Step Guide "
RESPA is not required for refinancing. T/F?
True - it is only required for loans used to purchase a residence
RESPA Doesn't Apply To
- Installment contracts/contract for deed/land contract
- residential property of more than four units
- buyer's assumption of a loan
- transactions financed by seller only (PMM)
List the three things RESPA prohibits
(1) prohibits kickbacks or unearned fees (lender cannot accept money for suggesting a certain company)
(2) prohibits seller from requiring a buyer to use a specific title insurer
(3) prohibits lender from collecting excessive amount of monies
Lenders may collect the amount needed to meet the buyer's share of taxes and insurance accrued prior to settlement, PLUS a five-month reserve that must be placed in an escrow. T/F?
False. This is a violation of RESPA.
They can only request a 2 months reserve
Loan estimate form
combination of the Good Faith Estimate (GFE) and Initial Truth in Lending (TIL)
What did the Good Faith Estimate (GFE) form disclose?
disclosed the estimated settlement costs
What did the Initial Truth in Lending (TIL) form disclose?
disclosed the anticipated loan costs
What is the purpose of the Loan Estimate?
to give an accurate estimation of the costs associated with the mortgage and settlement cost
List the three categories of estimates
-
-
-
Settlement costs are grouped by their "error tolerances", meaning..
it refers to the amount by which the actual costs at settlement can vary from these initial estimates
Zero Tolerance estimates
actual costs cannot exceed estimate AT ALL
items in which the lender has full control
10% Tolerance estimates
recording costs and charges for service
the consumer can shop and the borrower selects a recommendation by the lender
Unlimited Tolerance estimates
no limit to how much actual costs can exceed estimated costs
consumer does not use lender recommendation
If the actual costs exceeds the estimated costs by more than the permitted error tolerances, what must the lender do?
Refund any excess to the borrower
Loan Estimates can be revised when there is a commutational or clerical error on the part of the lender. T/F?
False..
When can a loan estimate be revised?
-
-
-
The loan estimate must be sent to the borrower no later than _____ business days after the lender's reciept of the loan application.
Three
The loan cannot close until at least ____ business days after the lender's receipt of the loan application.
Seven
The Loan expires _____ business days after it was delivered or mailed UNLESS the borrower indicates an intent to proceed with the loan
Ten
The Closing Disclosure:
shows the actual loan and settlement costs
If the closing disclosure is hand-delivered, it must be sent ____ business days before consummation of the loan
Three
If the closing disclosure is sent by mail/email, it must be sent ____ business days before consummation of the loan
Six
The seller must receive the Closing disclosure no later than:
no later than at the settlement date
The closing cannot occur until 3 business days after the borrower receives the Closing Disclosure under what circumstances
- APR changes by more than 1/8th of a percent
- loan product was changed
- a prepayment penalty is added
A credit is when
you are receiving the money
A debit is when
you are giving the away the money/owe money
Closing Costs:
all the numerous costs and adjustments involved in a real estate tranaction
The decision to which party owes what on the closing statement can be done by agreement or custom. Which has more authority?
An agreement amongst the parties
The TRID rule does not apply to:
- mobile homes
- reverse mortgages
- Home Equity Lines of Credit (HELOCs)
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