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Real Estate Test 2 ReviewChapter 12Chapter 13Chapter 14Chapter 15Real Estate Test 2 ReviewChapter 123 approaches to estimating value:- Sales comparison- Cost approach- The income capitalization approachSales comparison and cost approaches are both for residential property.The income capitalization approach is for residential and commercialSales 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 asingle indicated value- Types and sequences of adjustmentso 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 itemso =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 equalutility using modern construction techniques, materials, and design.- Accrued depreciation estimateo 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 itselfo Functional obsolescence: when the usefulness of the building is limited when compared to newer buildingso External obsolescence: denotes the loss of a buildings value through influences external to the property. It is always deemed incurable. Chapter 13The income approach- Fundamental equation: V = I / R- V: value I: income R: capitalization rate- V = I(NOI)/R- R = NOI/APDirect Market Extraction- This is the most straightforward method for estimating R- Refer to this is the target packetA projects NOI is calculated by deducting all expenses and allowances from the property’s effective gross incomeChapter 14Recourse financing: when you sign a promissory noteHomestead extension protects $10,000 cash and 1 vehicle. You can protect ½ acre inthe city and 160 acres out of the cityMortgages: 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 bankThe 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 poolof mortgages into a mortgage-backed security and sold to multiple investorsMortgage 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 expeditethe foreclosure process.o Georgia and also in Londono 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 Floridao The bank has to sueCapital flow to mortgages- The four quadrants of real estate financePRIVATE PUBLICEQUITY Individual pension funds Equity REITs real estate corps.MORTGAGE DEBT Banks, insurance companiesMortgage backed securitiesClauses found in mortgage documents- Requirements of value and enforceable mortgageso Must include the essential elements of a standard contracto Must be in writing and property describe the propertyo 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 payingo The prepayment (and lock out provisions—for commercial) and late payment penalties clauseo Due on sale clause: how much you oweo 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 redemptionPurchase money mortgage: occurs when the owner takes the role of both the seller of the property and the first mortgage lenderLand 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 periodo Forward commitment: when a lender agrees to provide a long-term loan upon the completion of construction and often the fulfillment of other conditionso Construction loans granted once forward commitments are in place are termed covered loans. Construction loans granted without forward commitments are termed uncovered or

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