Real Estate mod 7& 21

7- Legally Enforceable Agreement
•Contract - legally enforceable agreement to do or not to do something
•Express Contract - parties declare intentions either _____ or in ___________
-Lease: lessor agrees to convey possession / use, while lessee agrees to pay full rent timely
•____________ Contract - created by actions of parties, not orally or in writing
-Taxi ride or dining in a restaurant
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7- Legally Enforceable Agreement
•Contract - legally enforceable agreement to do or not to do something
•Express Contract - parties declare intentions either _____ or in ___________
-Lease: lessor agrees to convey possession / use, while lessee agrees to pay full rent timely
•____________ Contract - created by actions of parties, not orally or in writing
-Taxi ride or dining in a restaurant
orally or in writing
implied
7- Legally Enforceable Agreement
•Bilateral - promise exchanged for a promise
-Buyer promises to pay agreed price
-Seller promises to deliver F&C title
•____________-- promise exchanged for performance
-"If you do X, then I will do Y"
•Forbearance - agreement NOT to do something
-Ex: Mortgagee agrees NOT to foreclose if borrower meets all obligations
unilateral
Express Contract - parties declare intentions either _____ or _____
orally or in writing
Ex- Lease: lessor agrees to convey possession/ use, while lessee agrees to pay full rent timely
_______ Contract- created by actions of parties, not orally or in writing
Implied
Ex: taxi ride or dining in a restaurant
•________ - promise exchanged for performance
Unilateral
Ex:-"If you do X, then I will do Y"
________- may have been valid at an earlier time, but now enforcement is barred
unenforcable
Ex: -Beyond Statute of Limitations
-Beyond expiration date of option
Contract Essentials
1.Competent parties
2.Mutual agreement
3.Lawful objective
4.Consideration
5.In writing
1. Competent Parties- must be of legal age (18) and _____ _______
sound mind
1. competent parties- Corporations - person contracting on behalf of corporation must have authority and be _____ ______
legally competent
2. Mutual Agreement - Offeree accepts, rejects or ______-_____
counter-offer

means offeree makes changes to original offer and submits new offer
2. Mutual Agreement- •Fraud - act intended ______, so as to have other party convey something of valuedeceive2. mutual agreement •Innocent Misrepresentation - not redact NOT intended to deceive, but provided wrong information (e.g., DART service canceled)2. mutual agreement- Mistake - (not red)ambiguity in negotiations (e.g., wrong parcel) or mistake of fact (e.g., reduced parking spaces via condemnation.2 Mutual Agreement- •Duress - no party is forced, threatened or put in an unfair advantage -If so, offer can be _______ by harmed partyvoided•3. Lawful Objective - (not red)Contract cannot call for performing illegal act (e.g., paying rent with weed)3-5. Lawful Objective; Consideration; In Writing- •4. Consideration - each party must provide _______ _____ ______to prove a bargain has been madesomething of value•5. In Writing - Statute of Fraud and UCC require all RE transactions be in ________and _______ by all partieswriting and signedElectronic Transactions- ____-_____ electronic signature legalE-signElectronic Transactions- Texas requires writing under old Statute of Frauds for severe transactions like _______ and ______foreclosure and evictionsBreach of Contract- -_______ ________ = sue to force other party to performSpecific PerfomanceStatute of limitations: _____ contracts have __ years to (discover fraud)Written contracts have 4Statute of limitations: ____ contracts have __ years limitoral have 2Appraisal- _____ clarifies the valuation process standards (not in red)USPAPReal Estate Valuation: 1. All parties have ______ _____adequate timeReal Estate Valuation: 5. all parties are _____informedReal Estate Valuation : Investment value - what a property is worth to the _______investorReal Estate Valuation: 1. Invest if one's investment value > ____-_____ _____ ______FMV- fair market valueReal Estate Valuations Price vs. Costs. vs Value Cost= historical figure whose relation to value _____ over timediminishesReal Estate Valuation: •Salvage value - a "fire sale" value to sell an _____ ______ property immediately0.il liquidityReal Estate Valuation: Condemnation value - amount the government will pay for property via ______ _______eminent domainReal Estate Valuation •Price = amount agreed upon by two parties not in redReal estate vlauation: Value= Not in red•generally defined as FMV in this context- book value= historical cost minus cumulative depreciation - Depreciated Value- FMV minus cumulative depreciation Real Estate Valuation: When will BV = DV? when_____ ______ = _____ _____ ____historical cost = fair market value1.Highest and Best Use: (MCA, Income & Cost) A. ______ _______- satisfy zoning laws, building codes, fire codes, safety codes, etc.legally permisible1.Highest and Best Use: (MCA, Income & Cost) D. Maximally productive - choose the use that satisfies the three criteria above and maximizes _____R.O.I- return on investmentFour Appraisal Principles 2. Substitution: (MCA) When assets provide the same utility, the lower priced one should sell ____firstFour Appraisal Principles 2.Contribution: (Cost) The value of a component part of a property equals the amount it contributes to ______ ________overall valueThree Appraisal Approaches MCA: ...the sale prices of comps that have sold recently and are in ______ _______ to the subject, + / - adjustments for dissimilaritiesclose proximityThree Appraisal Approaches Income:....The PV (present value) of the anticipated income streamThree Appraisal Approaches Cost: the value of the land as though vacant, plus the _____ value of the improvementsdepreciatedMCA: ...the sale prices of comps that have sold recently and are in _____ ______ to the subject, + / - adjustments for dissimilaritiesclose proximity21 Market Comparison Approach •Indicated value of the subject property equals: The sale prices of comps that have sold recently and are in close proximity to the subject, +/- adjustments for ______ characteristicssimilar21 6 steps of the MCA Step 1: Gather comparable ______ ______sales data6 steps of the MCA Step 2: choose the comps from step 1 that are most _______ to the subject propertysimilar21- 6 steps of the MCA Step 3: Adjust the comps from Step 2 for dissimilarities - Quantify the adjustment ________ (means dollar amount)magnitude21- Six Steps of the MCA Step 3 (continued): - Determine the adjustment ________ (+ or -) - theoretically transform the comps to be just like the subject via adjustments - always adjust the _______ sale prices, not the _____ price - define the preferred characteristics - adjust _______ if the comp has the preferred characteristic - adjust _______ if the subject has the preferred characteristicdirection comp's not the subjects downward upward21- 6 steps of the MCA step 3 continued: - five most common adjustments: A. conditions of sale= special sales concessions offered by the _________seller6 steps of the MCA Step 3 (continued): B. Financing Terms= special below market or third party financing - most of the PV (price value) of the financing saving will be capitalized into a higher _____ ______sells price6 steps of the MCA Step 3 (continued): - C. Market Conditions = changes in the _______ __________ that affect value (e.g., interest rates, unemployment rates, S&D factors) - D. Location = adjust for the comps and the subject being in different locations - E. Physical Characteristics = adjust for the comps and the subject having different __________ - e.g., LA, BR, baths, fireplace, lot size, view, quality, parking, age, amenities, site improvementsoverall economy amenities6 steps of MCA Step 4: Determine the Adjusted Market Price (AMP) for each comp AMP = each comp's sale price, +/- the dollar adjustments from Step 3 The range of the comps' AMPs should be much _______ than the range of the comps' sale prices - AMPs theoretically represent the transformed comps' values, as though they were the ______ ______smaller subject property21- 6 steps of mca Step 5: _________ weight the comps' AMPs - Comps more similar to the subject receive a higher weight - These subjective weights are a function of the _______ and the magnitude of adjustments from Step 3value number21- 6 steps of mca Step 6: Determine the subject's indicated value - Calculate the products of the AMPs and weights - Sum these products - This sum equals the________ __________of the subject propertyindicated value21- limitations of the mca •Based on passed trends •May be a lack of sales data (i.e., properties that have sold recently) •Inadequate number of comps similar enough to the subject •Appraisals become _______ very rapidly •Value weighting the AMPs can be subjectiveobsolote ( old and useless)21* income approach •Indicated value of the subject property equals: -PV of the anticipated future income stream •Based on the Principle of _________ -Value is a function of the present worth of the anticipated income stream produced by the propertyanticipation21- limitations of the income approach •Cannot be used for non-income producing properties •Forecasting cash flows can be __________ and inaccurate •Formulating cap rate inaccurately can cause large variations in the indicated valuesubjective21- Direct Capitalization •OER = ___ / ____ (so, ___ = OER x ___)OE (operating expenses) EGI (expense gross income) OE EGI21- Overall capitalization rate •Ro: Capitalization = conversion of future income into _______ -Reflects an investor's return "_____" investment and return "_____" investment •Assumes no debt and no taxes •A before-tax calculationvalue on off3 methods of calculating Ro 1. Theoretical Approach •Ro= r(f) + In(p) + σ + r(r) • •∙ r(f) = risk-free rate •∙ In(p) = inflation premium •∙ σ = cash flow risk premium •∙ r(r) = reinvestment risk premium •3 methods of calculating Ro 2. Market Extraction Approach •Cap rate equals the ________ of other investors' cap rates on comps within close proximity • •Extract comps' cap rates from the market • •Very low __________ costs • •Not emphasized by appraisers because it assumes the investor is "average"average information21- 3 methods of calculating Ro21- Band-of-Investment Approach •Identical to _____ _____ _____ ____ ____ in finance: -Ro = (wd x kd) + (we x ke) •In real estate, the BOI equation is: -Ro = (LTV x AMC) + (ETV x EDR)weighted average cost of captial3. Band-of-Investment Approach (cont.) •The most reliable method of estimating cap rates •Tailored to the ________i •Most commonly used method because easy to apply and explaininvestor21- cost approach •Indicated value of the subject property equals: The value of the land as though vacant, plus the depreciated value of the improvements •Based on the Principle of _________ • The value of a component part equals how much it contributes to overall value • •"Method of Last Resort" when MCA and Income approach are not indicatedcontribution21- limitations of the cost approach •Difficult to measure costs accurately •Difficult to measure land values in built-up areas •Depreciation estimates are ___________ •Cannot be used for raw land or older improved properties •__________- values distressed propertiessubjective over21- limitations of the cost approach •Ignores buyer / seller interaction •Ignores future benefits to be derived -Favorable forthcoming zoning -Improving economy •May falsely assume property is held in a _______ ___________ estatefee simple21- 5 steps of the cost approach •Step 2: Estimate improvements' reproduction and replacement costs new •Reproduction = a _______ with construction materials identical to the subject •Replacement = an improvement with utility equal to the subjectreplica21- step 3: accrued depreciation categories •Unrelated to 27.5 / 39 year straight-line depreciation • _________ Deterioration -Curable - immediate (deferred maintenance) - Incurable •Short-lived items •Long-lived items •____________ Obsolescence -Curable -Incurable •External Obsolescence -Locational -______________________physical functional economic21- Step 3 accrued depreciation •___________ ______________: "wear and tear" resulting from use and aging •Examples: peeling paint, worn flooring and countertops, normal wear on HVAC, leaky roof •Curable = deferred maintenance that will be cured immediately upon taking title -PV of benefits must be _____ _____ __ ____ ___ to PV of costs •Incurable = deficiencies are not feasible to correct -PV of benefits < PV of costs -Physically possible, but economically _____ _____Physical Deterioration greater than or equal to not feasible21- Step 3: Accrued Depreciation •Short-lived incurable physical deterioration: -Components with some RUL, but whose RUL < the structure's RUL -Example: Roof has five year RUL, but structure has a 20 year RUL •Long-lived incurable physical deterioration: -Components whose RUL is _____ ____ ___ ___ ___ structure's RUL ( remaining useful life) -Example: Framing and slab will last at least as long as the improvement's RULgreater than or equal to21- step 3 accrued depreciation •______ _________: loss in value due to design, structure or materials •Often based on current _____ & ______ •Not necessarily a function of _____ •Examples: outmoded HVAC / wiring/ plumbing systems, poor lighting, awkward floor plan, small rooms, outdated decoration, inadequate storage •Curable → new lighting, new faucets •Incurable → raise ceiling height, change wiring to copperFunctional obsolescence taste & preferences age21- step 3 accrued depreciation •______ ___________________: loss in value due to adverse factors exogenous •Examples: pollution, foul odors, unsightly objects, noise, dust, poor access •Caused by outside factors → only ______ •_________ = adverse influence on only a few surrounding parcels being in a fixed location •Because the site (land) already capitalizes the adverse influence, only the improvement is adjusted for this factor → avoids double counting •Examples: Airplane noise, water tower, HVTL, paper mill, sewer treatment plantExternal Obsolescence incurable locational21- step 3 accrued depreciation •Economic = _________ ________ adverse affect •Examples: Changing interest rates, rising taxes, excess supply, rising unemploymentmarket wide21- appraisal regulations •The Appraisal Foundation - establishes and approves uniform appraisal standards and appraiser qualifications •Federal Regulation - relies on The Appraisal Foundation for appraisal standards and appraiser qualifications •Developing the Appraisal - created ______ standards •Appraisal Licensing Requirements - must use State certified or licensed appraiser for all RE related financial transactions •Reporting Standards (12) - set forth by USPAP (p. 279)USAP (uniform standards for professinal appraisal practice)21- formats of appraisal reports 1. Letter report - 1-5 page informal report where appraisal details are not needed 2. Form report - appraisal on preprinted form with checklists 3. Narrative report - longest and most formal appraisal report 4. Review appraisals - report on an existing appraisal's adequacy and appropriateness 5. Real Estate Analysis - provides information, recommendations and conclusions about subject property, but does NOT _____ ______indicate value21- texas regulations' •If you have not followed USPAP guidelines then include this statement: -THIS IS AN OPINION OF VALUE OR COMPARATIVE MARKET ANALYSIS AND SHOULD NOT BE CONSIDERED AN APPRAISAL. •Broker's Price Opinion - opinion of value given by a __________ to seek a listing agreement •Comparative Market Analysis - price comparison of similar properties to determine a listing, selling or rental pricelicensee