Frl 306 Midterm Study Guide

FRL 306 Study Guide

Chapter 1

• Different characteristics of being a Real Estate Market?

• The two primary characteristics of RE assets are their heterogeneity and immobility
• Because of these two factors, the market for buying, selling, and leasing real estate tends to be illiquid, localized and highly segmented, with privately negotiated transactions and high transaction costs
• 1. Heterogeneous Products

• RE tends to be heterogeneous, meaning that each property has unique features
• Age, building design, and especially location combine to give each property distinctive characteristics

1. Even in residential neighborhoods with very similar houses, the locations differ (ex: corner lots, park access, busy street, etc.)
2. The most influential site and structural attributes of a home are typically observable and amenable to valuation (ex: pools, bedrooms, and garages)

• Each parcel of land has a unique location-value signature (LVS) and particularly critical for retail properties
• Drastic value differences can depend on whether the property is on the "going-home" or "going-to-work" side of the street

1. Most business prefer to be on the going home side of the road

• 2. Immobile Products

• RE is immobile

1. It is possible to move a building but it is normally not feasible

• Another term for location is access

1. For households it is access to school, shopping, work, etc.
2. For commercial properties it is access to customers, suppliers, workers, etc.

• 3. Localized Markets

• RE markets tend to be localized

1. Meaning that the potential users of a property, and competing sites, generally lie within a short distance of each other
2. The market for a neighborhood shopping center is very localized

1. Such centers usually draw majority of their customers from within a five-mile radius

1. Users of other commercial property types may be more "footloose"
2. They do not depend so heavily on access for a particular location

• 4. Segmented Markets

• RE markets tend to be highly segmented due to the heterogeneous nature of the products

1. Households that search for single-family detached units do not consider condos for example

• RE is segmented by product price
• Commercial property markets are segmented by both users and investors
• Commercial properties (> $10 million) = investment-grade properties or institution-grade real estate

1. This is the segment of the property markets targeted by institutional investors such as pension funds, publicly trade RE companies, and real estate funds
2. Individual private investors typically do not compete directly with institutional investors for properties

• 5. Privately Negotiated Transactions with High Transaction Costs

• Final distinctive feature of RE is the complexity of property and transactions
• The property interest to be conveyed cannot be standardized and therefore must be carefully assessed to determine what rights it actually contains
• The current claims of ownership must be confirmed by examining the past history of the property
• Property parcels are contiguous, so the problem of accurate description requires unique and elaborate systems of delineation
• The negotiation process between buyers and sellers can be length, and the final transaction price and other important details such as lease terms are not usually observation

1. In almost every transaction involving RE there are time requirements and costs not present in most non-real estate transactions

1. This can affect RE values and risks and must be recognized by investors

• Investors and lenders seem to get into trouble most commonly when they lose sight of these unique characteristics of RE

• What is cap rate? How does it relate to risk? Example?

• Capitalization rate: also the ratio of a property’s annual net income to its value, is a fundamental pricing metric in commercial real estate markets
• A comparatively higher cap rate for a property would indicate a greater risk associated with the investment (decreasing demand for the product, and the corresponding value), and a comparatively lower cap rate for a property might indicate less risk (increased demand for the product).
• For example, if a RE investment provided $160,000 a year in NOI and similar properties have sold based on 8% cap rates, the subject property can be roughly values at $2,000,000 because $160,000 divided by the .08 = 2,000,000.

• All women love diamonds—5 c’s?

• 1. Cut
• 2. Color
• 3. Clarity
• 4. Carat
• 5. Certificate

Chapter 2

• What is a fixture?

• It is an object that formerly was personal property but has become real property
• Four rules to determine whether an object has become a fixture:

• 1. The manner of attachment
• 2. The character of the article and manner of adaptation
• 3. The intention of the parties→ this is the most recent and dominant rule. This rule refers to the facts of the situation and the intention that an observer would reasonably conclude from them.
• 4. Relation of the parties

• Ownership Estates: more substantial or complete estates are those that are indefinite in length. Aka ownership

• 1. Fee Simple Absolute: the most complete bundle of rights possible and has the greatest value. Subject to the limitations imposed by the government or by prior owners, all possible rights of exclusive possession, use and enjoyment, and disposition and possessed by the owner.
• 2. Fee Simple Conditional: Ownership is subject to a condition or trigger event. The owner’s bundle of rights is complete unless the trigger event occurs, which may cause ownership to revert to previous owner.
• 3. Ordinary Life Estate and Remainder: the rights of disposition of the fee simple absolute are unbundled and separated completely. Homeowner retains all rights for her lifetime while university gains right of disposition. At the time of death, the complete fee simple absolute owned by the univ.
• 4. Legal Life Estate: Created by the action of law. If one spouse dies, the law gives the surviving spouse a life estate and gives the children “vested reminder” interest in the residence.
• 5. Other Life Estates: Can arise out of marriage.

• Leasehold (non-ownership) Estates: 1. Limited in time 2. The right of disposition is diminished because the property ultimately reverts to the landlord 3. They are not titled interests

• *1. Tenancy for Years (Estate for Years): a leasehold interest for a specific period of time. If the term is for more than one year it must be in writing.
• *2. Periodic Tenancy: Any lease that has no definite term at the start. Is usually oral and therefore informal.
• *3. Tenancy at Will: Sometimes at the end of a lease there is a short period of time when it suits both landlord and tenant for occupancy to continue
• *4. Tenancy at Sufferance: occurs when a tenant that is supposed to vacate does not. Differs from trespassing only in that the tenant previously occupied the property under a legitimate leasehold interest.

• Easements

• Definition: the right to use land for a specific and limited purpose (access to a view, street right of way, etc.)
• Easements appurtenant:

• 1. Involves a relationship between two adjacent parcels of land
• 2. Easement appurtenant “runs with the land”, it becomes a permanent and inseparable feature of both parcels involved

• Easement in gross: is the right to use land for a specific, limited purpose unrelated to any adjacent parcel. May be one or more servient parcels but there is not dominant parcel. Examples: rights of way for roads, railroads, irrigation water, electrical cords, etc.

• Liens: is an interest in real property that serves as security for an obligation. General lien arises out of actions unrelated to ownership of the property. Specific lien derives directly from events related to a property. Specific liens include property tax and assessment liens, mortgages, and mechanics’ liens.

• 1. General Liens: If a property owner is successfully sued for damages for any reason, the court, in awarding damages, normally with attach available real property of the defendant as security for payment of the damage. A second source is from unpaid federal taxes. A lien is imposed after the taxpayer has been billed and has failed to pay.
• 2. Property Tax and Property Assessment Liens: governments are able to exercise an automatic property tax lien on the benefiting properties to assure payment. Ex: street paving, properties that receive the primary benefit will be charged a “fair share” assessment, usually based on the street frontage. PROPERTY TAX LIENS AND ASSMENT LIENS HAVE TOP PRIORITY AMONG LIENTS.
• 3. Community Development District Liens: secures financing for improvements within a private community. CDD liens secure financing for storm water management, streets, parks, etc.
• 4. Mortgages: Is an interest in property as security for a debt. A property can have multiple mortgages which are ordered in priority by the date of their recording.
• 5. Mechanics Lien: arise from construction and other improvements to real estate. If a property owner defaults on a construction contract, it is not realistic to expect the contractor to recover the materials and service used to improve the real estate. Following completion of a contract, a contractor has a period of time to perfect a claim of a lien on the property improved.

• Direct Co-Ownership: each direct co-owner holds a titled interest in the property. Each owner holds a freehold estate, but without exclusive possession with respect to the other co-owners.

• Tenancy in common: the “normal” form of direct co-ownership and is as close to the fee simple absolute estate as is possible. Each co-owner retains full rights of disposition and is free to mortgages, or to convey his or her ownership share to a new owner.
• Joint Tenancy: a distinctive feature is the right of survivorship → the interest of a decedent co-owner divides equally among the surviving co-owners, and nothing passes to the heirs of the decedent.
• Tenancy by the Entirety: is a form of joint tenancy for husband and wife. I general neither husband nor wife alone can pledge the property held in tenancy by the entirety.
• Condominium: is a form of co-ownership combining single person ownership with tenancy in common. The owner holds a fee simple interest to a certain space. The owner is a tenant in common in the “community” elements of the property.
• Cooperative: Each roommate has their own lease to the property. Each owners holds a “proprietary lease” for some designated space.
• Timeshare: multiple individuals have use of the property but not simultaneous. The estate is divided into separate time intervals.

Chapter 3

• What is a deed: a special form of written contract used to convey a permanent interest in real property. Depending on its wording, it can convey the full fee simple absolute or a lesser interest such as a life estate, a conditional fee, or an easement. The deed can also carve out restrictions, easements, etc.
• Requirements of a deed:

• 1. Grantor (with signature) and grantee: The person conveying the real property interest is the grantor, while the recipient is the grantee. Only the grantor must be legally competent and of legal majority age for a deed.
• 2. Recital of consideration: Only the grantor needs to perform with a deed. Consideration is not important to a valid deed. When a grantor conveys property, the event is done, and details of the grantee’s financial obligation to the grantor are spelled out elsewhere.
• 3. Words of conveyance: “does hereby grant, bargain, sell, and convey unto…” 1. They assure that the grantor clearly intends to convey an interest in real property 2. They indicate the type of deed offered by the grantor.
• 4. Covenants: legally binding promises for which the grantor becomes liable. If the promises prove to be false, the grantee can sue for damages.
• *5. Habendum clause: Defines or limits the type of interest being conveyed. The legal tradition recognizes certain words and phrases as signals of various real property interests.

• “to John Smith and to his heirs and assigns forever,” → a fee simple interest from a life estate
• “to John Smith for use in growing timber” → conveyance of a timber easement
• “so long as” → reverter clause

• *6. Exceptions and reservations clause: can contain a wide variety of limits on the property interest convey. This clause may contain any deed restriction” the grantor wishes to impose on the use of the property. May carve out mineral rights, timber rights, water rights, etc.
• 7. Description of land: Must be unambiguous.
• 8. Acknowledgement: this purpose is to confirm that the deed is, in fact, the intention and action of the grantor. Not always required
• 9. Delivery: this refers to an observable, verifiable intent that the deed is to be given to the grantee.

• Types of Deeds (highest quality?):

• *General Warranty Deed: includes the full set of legal promises the grantor can make. Warrants against any and all competing claims that may arise from the chain of title that are not spelled out in the deed. Is considered the highest quality deed and affords the maximum basis for suit by the grantee.
• *Special Warranty Deed: Identical to the general warranty deed, except that it limits the time of the grantor’s warranties to her time of ownership. The grantor asserts only that 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 of ownership. Commonly used by businesses to convey property but commits the business to no additional covenants which are sources of liability.
• *Quitclaim Deed: “I hereby quitclaim”. Worded to imply no claim to title, only to convey what interest the grantor actually has, if any.
• *Judicial Deeds and Trustee’s Deeds: Judicial deed is one issued as a result of court-ordered proceedings. It may include deeds issued by administrators of condemnation proceedings or foreclosure sales. Trustee’s deed is issued by the trustee in a court-supervised disposition of property—for example, by an executor and administrator of an estate, a guardian of a minor, a bankruptcy trustee, or an attorney in divorce proceedings.

• Involuntary Conveyance by a Deed:

• Probate: At the death of a property owner, the property will convey in one of two modes: testate—in accordance with a will, or intestate—without a will. Either way, under state laws of probate, where the property is located will govern the disposition procedure. The final conveyance of property in the probate process is by either a judicial deed or a trustee’s deed.
• Bankruptcy: Real property of the debtor may be included in other assets to be liquidated on behalf of the creditors. The court will appoint a trustee to conduct the liquidation, and the property will be conveyed by a trustee’s deed.
• Divorce Settlement: Real property may transfer by a “final judgement of dissolution,” instead of a deed. Often the disposition will be directed by a “property settlement agreement”
• Condemnation: By the power of eminent domain, government can take private property for public purpose through due process, and with just compensation.
• Foreclosure: Can be either judicial or power of sale. Judicial foreclosure: the process is administered by court. Under power of sale the process is administered by a trustee, subject to state law that specifies the procedure.

• Voluntary Conveyance without a Deed:

• Implied easements: is not created by an explicit deed or an explicit caluse in a deed. It is often created when a subdivision map is placed in the public records. The prospective grantee must realize that they may only be dectable by examination of the map or by careful inspection of the property.
• Easement by Estoppel: can occur if a landowner gives an adjacent landowner permission to depend on her land. Courts may subsequently enforce that claim against the landowner (even if they change their mind0 or against any subsequent purchasers of the land.
• Dedication: when a developer creates a subdivision, it is common to dedicate the street rights-of-way and open spaces. This is done simply through statements in a subdivision play map with no deed involved.

• Land Descriptions:

• 1. Metes and Bounds: the oldest of the 3 major forms of land description. Metes referred to measures and bounds referred to the identifiable boundaries of surrounding parcels of land. In its modern version, metes and bounds is a very precise, compass-directed walk around the boundary of a parcel. This is the most flexible of descriptions, and is capable of describing even the most irregular of parcels.
• 2. Subdivision Plat Lot and Block Number: most urban property is part of a platted subdivision. When a platted residential or other subdivision is created, a surveyed map of the subdivision is place in the public records with each parcel identified by play lot and block number. Usually shows the location of various easements and a list of restrictive covenants.
• 3. Government Rectangular Survey: relies on townships and section numbers as the essential units of identification. Townships are numbered east or west from the principle meridian. A section (which contains 640 acres) is subdivided. It is typically quarter (160 acres) and each quarter section can be again quartered (40 acres) and so on.

Chapter 4

• Nonconforming uses:

• Usually when a zoning ordinance is revised some existing land uses then fall outside the new zoning classification. These are called nonconforming uses; they may continue to exist, despite the change in classification, provided that they are never discontinued and the structure is not destroyed or altered.

• Variance:

• A zoning ordinance must provide some relief mechanism for cases where the regulations impose exceptional hardship and loss of value. This relief is called variance. For example is setback requirements render a lot too narrow to build on, it may be reasonable to waive a setback line by a small amount in order to make the land usable and restore its value. Have to meet these three conditions:

• 1. The owner must show true hardship in terms of inability to use the lot as zoned
• 2. The condition must be unique to the lot and not a condition common to other parcels in the vicinity
• 3. The variance must not materially change the character of the neighborhood

Chapter 9

• LIBOR: a common index of interest rates for income producing property, the London Interbank Offering Rate is a short-term interest rate for loans among foreign banks based in London.

• Teaser rates: Most ARM home loans have been marketed with a temporarily reduced interest rate known as a teaser rate. This reduction, which may be a percentage point or two below the sum of index plus margins, usually applies for a short amount of time.
• Term: Most real estate loans have a definite term to maturity, usually state in years. Term for amortization determines the payments, and the schedule of interest and principle payments. Term to maturity that is shorter and determines when the entire remaining balance on the loan must be paid in full.
• Personal liability: When borrowers sign a note, they assume personal liability, for fulfillment of the contract. If the borrowers fail to meet the terms of the note, they are in a condition of default, and can be sued.
• Clauses:

• 1. Insurance clause: requires a borrower/mortgagor to maintain property casualty insurance acceptable to the lender, giving the lender joint control in the use of the proceeds in case of major damage to the property.
• 2. Escrow clause: Requires a borrower to make monthly deposits into an escrow account of money to pay such obligations as property taxes, CDD obligations, etc. The lender can use these escrowed funds only for the purpose of paying the expected obligations on behalf of the borrower.
• 3. Acceleration clause: In the event a borrower defaults on the loan obligation, an acceleration clause enables the lender to declare the entire loan balance due and payable.
• 4. Due-on-Sale clause: this gives the lender the right to “Accelerate” the loan, requiring the borrower to pay it off.

• Deficiency Judgement: Because a mortgage loan involves both a note and a mortgage, the lender may have the option, in addition to foreclosure, of simply simply the defaulting borrower on the note. In principle, funds not recovered through foreclosure can be recovered through a deficiency judgement.

Chapter 10

• Private Mortgage Insurance (PMI): protects a lender against losses due to default on the loan. It gives no other protection (legal threat or physical hazards). The net effect of PMI from the lender’s perspective is to reduce default risk.
• Government-Sponsored Mortgage Programs: many housing experts have argued that an inadequate level of housing production would occur if government policies and programs were not in place to help middle and lower middle income households obtain mortgages and purchase homes. The predominant approach to making better housing available has been through intervention in the private mortgage markets. The most prominent gov. sponsored housing finance programs that operate in the primary market at the national level are the Federal Housing Administration (FHA) default insurance program and the Veterans Affairs (VS) program that provides guarantees on loans made by private lenders to qualified veterans.
• Mortgage Insurance Premium (MIP):  FHA insurance requires two premiums: the UFMIP (up-front mortgage insurance premium) and the annual mortgage insurance premium (MIP).

Chapter 11

• Traditional Home Mortgage Underwriting (3 C’s of mortgage underwriting)

• 1. Collateral: to evaluate the loan collateral, an appraisal of the residence is required. The appraisal is important because the loan-to-value ratio always has been recognized as an important factor in mortgage loan risk.
• 2. Creditworthiness: Until the 1990s, evaluation of borrower creditworthiness was perhaps the most complex and uncertain element in underwriting. This process began to be replaced by the use of statistical credit scoring during the mid 1990’s.
• 3. Capacity (Ability to Pay): Two payment burden rations were important elements of underwriting.

• 1. Housing expense ratio, or “front-end” ratio

• Housing expense ratio= PITI / GMI
• PITI is the monthly payment of principle and interest on the loan plus monthly payments into an escrow account toward property taxes and hazard insurance
• GMI is the borrowers gross monthly income

• 2. Total Debt Ratio or “back-end” ratio

• Total Debt Ratio= (PITI + LTO) / GMI
• LTO is long-term obligations and is the sum of payments for all other obligations that extended for more than 10 months.

Chapter 12

• Types of Agents:

• Universal agent: to whom a principal delegates the power to act in all matters that can be delegated in place of the principal
• General agent: delegated by the principal to act within the confines of a business or employment relationship
• Special agent: authorized by the principal to handle only a specific business transaction or to perform only a specific function

• Subagency: Brokers who are members of the MLS can make their listing available to be sold by other broker members, and the commission is split between them. If the listing broker is an agent, then it becomes a subagency arrangement, and the chain of agency becomes rather long, but clear.
• Dual Agency: In this situation the broker is an agent of both a seller and a buyer, and the broker owes equal loyalty to both. A dual agency must be disclosed to all parties in the transaction, and both principals must give their informed written consent.
• Commercial Brokerage: Relative to residential transactions, commercial transactions are larger and the parties are more knowledgeable. In short, they will want a completed and detailed cash flow analysis and certifications of inspections and compliance with all relevant laws and regulations.
• Residential Brokerage: Potential customers usually choose a brokerage firm on the basis of the firm’s reputation in the community, personal acquaintance, or recommendation.
• Types of Listing Contracts:

• Open Listing: is a contract between a property owner and a broker that gives the broker the right to market the property. The property owners are not precluded from listing the property with other brokers. If they do list the property with two or more brokers, only the broker who procures a buyer will be owed a commission.
• Exclusive Agency Listing: This type of listing requires the sellers to pay a commission to the broker if the property is sold by anyone other than the owners.
• Exclusive Right of Sale Listing: The sellers list their property with one broker and agree to pay that broker a commission if the property is sold within a specific time or within reasonable time. Broker gets commission even if the owner sells the house.

• Deriving a Gross Selling Price to Achieve a Target Net Price (pg. 328)

• Often a seller has a target net price in mind, and the listing broker needs to know what gross price will achieve the seller’s target after payment of the commission. As an example, if the seller’s target price is $200,000, and the broker’s commission is 6%, then the broker can derive the gross price as follows:

Chapter 13

• Requirement of a Contract for Sale: a legally binding contract for sale can take many forms. Must contain the following elements:

• 1. Competent parties
• 2. Legal objective
• 3. Offer and acceptance
• 4. Consideration
• 5. No defects to mutual assent
• 6. Written form
• 7. Proper description of the property

• Legal Title versus Equitable Title

• Legal title means the ownership of a freehold estate
• Equitable title is the right to obtain a legal title
• The importance of this distinction is that when a contract for sale is signed, the buyers immediately obtain equitable title, and the sellers cannot sell the property to someone else

• Remedies for Nonperformance

• When a party fails to perform the other party has a variety of remedies. An aggrieved seller may 1. Sue for damages 2. Retain the earnest money deposit as liquidated damages 3. Agree to rescission of the contract. An aggrieved buyer may 1. Sue for damages 2. Agree to rescission of the contract 3. Sue for specific performance.