Real Estate Test 2 Review Chapter 12 3 approaches to estimating value Sales comparison Cost approach The income capitalization approach Sales comparison and cost approaches are both for residential property The income capitalization approach is for residential and commercial Sales comparison approach great for houses Identify 3 comparable properties that have been sold recently Adjust each properties sales price to account for its differences from the subject property o This yields final adjusted price for each comparable property Reconcile the comparable properties final adjusted sale prices to determine a single indicated value Types and sequences of adjustments o Transaction price Conditions of sale Financing terms below market non market Normal sale price Market conditions Market adjusted normal sale price location physical characteristics legal characteristics use nonreality items o final adjusted sale price In reconciliation the appraiser may put more weight on one or more sale because he believes it represents the property better Cost approach Cost estimate the value of a new building equals the cost to reproduce today o Estimate the current reproduction cost of the improvement as if new estimate the total physical functional and external depreciation the depreciated value of the improvements estimate the value of the land including the site improvements indicated value using the cost approach reproduction costs the cost to construct the building today replicating it in exact detail Replacement costs denotes the cost required to construct a building of equal utility using modern construction techniques materials and design Accrued depreciation estimate o Physical deterioration Curable short live items are those whose cost of replacement will be no greater than the value added by replacing them The estimated physical deterioration of these items is equal to the cost of replacing them You get your money back Incurable short lived items are those whose cost of replacement will be greater than the value added by replacing them Long lived components consist of the main parts of the building itself o Functional obsolescence when the usefulness of the building is limited when compared to newer buildings o External obsolescence denotes the loss of a buildings value through influences external to the property It is always deemed incurable Chapter 13 The income approach Fundamental equation V I R V value I income R capitalization rate V I NOI R R NOI AP Direct Market Extraction This is the most straightforward method for estimating R Refer to this is the target packet A projects NOI is calculated by deducting all expenses and allowances from the property s effective gross income Chapter 14 Recourse financing when you sign a promissory note Homestead extension protects 10 000 cash and 1 vehicle You can protect acre in the city and 160 acres out of the city Mortgages real estate financing involves two separate obligations the promissory note and the mortgage The borrower who gives the mortgage is the mortgager the landowner The lender who receives the pledge is the mortgagee the bank The story of a mortgage typically an 18 page contract The primary mortgage market money flows to the lender in from deposits insurance policy premiums and pension contributions In addition money flows to lenders from entities which purchase mortgages in the secondary market The secondary mortgage market mortgages may be transformed from a pool of mortgages into a mortgage backed security and sold to multiple investors Mortgage theory 3 different types of states in the US Title theory states lenders receive title to property in mortgage contracts The lender can only exercise his property rights if the borrow is in default Mortgage contracts carry power of sale clauses that allow lenders to expedite the foreclosure process o Georgia and also in London o The landowner is pledging the mortgage The land is collateral Lien theory states lenders do not receive titles but instead get security interests that grant them the right to force the sale of the property in the event of borrower default o Florida o The bank has to sue Capital flow to mortgages The four quadrants of real estate finance EQUITY MORTGAGE DEBT PRIVATE Individual pension funds Banks insurance companies PUBLIC Equity REITs real estate corps Mortgage backed securities Clauses found in mortgage documents Requirements of value and enforceable mortgages o Must include the essential elements of a standard contract o Must be in writing and property describe the property o In addition the mortgage instrument must include the following Identify the property rights being pledged Include the words of conveyance Include the signature of the mortgagor Be delivered to the mortgagee and recorded Contain reference to the note or obligation Common mortgage clauses include o The acceleration clause if you keep not paying o The prepayment and lock out provisions for commercial and late payment penalties clause o Due on sale clause how much you owe o The property tax and hazard insurance clause o The interest escalation and adjustment clause Nonuniform clauses may be included for the lender to comply with respective state laws equity right of redemption Purchase money mortgage occurs when the owner takes the role of both the seller of the property and the first mortgage lender Land contract when seller financing is provided and the title to the property changes hands when some percentage of the loan is repaid ex You have paid 50 of the mortgage so you now hold the title Single family residential mortgages Existing properties permanent contracts for single family homes fall into the following three general categories convential FHA VA and owner financing Construction if house hasn t been built yet the development of the site and construction of improvement during the construction period o Forward commitment when a lender agrees to provide a long term loan upon the completion of construction and often the fulfillment of other conditions o Construction loans granted once forward commitments are in place are termed covered loans Construction loans granted without forward commitments are termed uncovered or open end loans Chapter 15 The primary mortgage market is the loan origination market the location where borrowers and lenders negotiate mortgage terms The secondary mortgage market is where mortgage loans are purchased from local originators The largest purchasers