What is actually performed by a property manager?
-Maintaining the Physical Asset
-Tenant Acquisition
-Rent Collection
-Lease Negotiation
-Keeping Financial Records
Leased Fee
landlord's interest in the property
Leasehold
the tenant's interest
Ground Lease
lease on land
Tenancy for years (Estate for years)
normal lease, lease for a stated period of time
Periodic Tenancy (Estate from year to year)
month-to-month lease; can get out if give 30-60 days notice
Tenancy at will
have a lease and you go month-to-month after the lease expires
Tenancy by sufferance
can stay after your lease runs out; holdover tenant; they can evict you
Tenant selection criteria
-occupancy period expectation
-credit rating
-housekeeping habits (references)
-compatibility characteristics (certain situations)
Is the offer and acceptance similar to real estate sales?
Yes and no. You still sign a contract (lease) but generally a lease can be executed much quicker (don't have to wait for loans and such, just give security deposit).
Consideration
A financial asset, the rent, for rights to the space, the real estate. These are written clearly in the lease.
What are typical rent concessions given to tenants?
-Rent abatements
-Get something for signing your lease
The lease usually declares a stated time period of possession for the tenant. Why usually?
Some are month-to-month
Can be used for any legal purpose, but what are typical limitations of use in leases?
Pets
Fire hazards - grills
No running a business out of it - more traffic
In most cases, renters can exclude anyone from the property. What are 3 reasons the Landlord can enter the property without asking?
To make repairs
To collect unpaid rent
To inspect for waste (heard you haven't been keeping your place clean)
Who is responsible for repairs in most cases?
The landlord
When a third party is injured on the property the law can hold either the landlord or the tenant liable.
Why would it be either?
if you fail to get something fixed, if you have a dog against the wishes of the landlord and it bit someone you would be liable
An invitee
people that work on the property (NOT A GUEST) (maintenance, mailman, utilities)
A licensee
your guest you invite over
A trespasser
you don't want on your property - even a trespasser can still sue you if they get hurt on your property
Assignment
new tenant is found and is liable for the monthly bill
Subletting
you found a new tenant but you are still liable for the bill to the land lord
What is the difference between the right to assign and sublet?
Who is liable to pay the money
Security Deposit
give the landlord money to make repairs if needed
Utility payments
sometimes they will pay part of your utilities
Landlord's Right to Show the Property
they have the right to show your property in the last 30 days to try to get a new tenant
Notification of Renewal
amount of time when you have to tell them if you're staying or not; often 30-90 days
Transfer Clause
transfer clauses for the military; if they get transferred they can break a lease
There are several ways to terminate a residential lease:
Expiration of the Term
Mutual Agreement to Terminate
Merger of the Leasehold and the Freehold - you buy the place that you're renting
Breach of Covenants by Tenant or Landlord
Tenant's Abandonment of the Property
Gross Rent
you pay the landlord a base rent and they pay operating expenses
Net Rent
-tenant pays a base rent and the tenant themselves pay the operating expenses
-Tenant pays a flat rent to the owner plus the entire property tax bill for the property in a single tenant building, or prorated share in a multiple tenant building
Percentage Rent (Retail, Restaurants)
malls, you pay a base rent and a percentage of gross sales - use gross sales instead of percentage profits b/c can manipulate profits
Graduated Rent
sometimes leases go up in steps (once every year or two years); equal increments each year
Escalated or Indexed Rent
escalated - have an increase built in (not always a step pattern like graduated); index - indexed with CPI (inflation) (common for triple net)
Net-Net Rent
Tenant pays a flat rent to the owner plus the entire property tax and property insurance bills for the property in a single tenant building, or a prorated share in a multiple tenant building
Net-Net-Net
Tenant pays a flat rent to the owner plus the entire property tax bill, the property insurance bill, and the CAM (common area maintenance) for the property in a single tenant building, or a prorated share in a multiple tenant building - the way most comme
% rent with a minimum
Tenant pays a minimum rent with an additional % of the gross sales.
Right to Inspect the Tenant's Books
landlord can inspect the tenant's books
Agreement on Competitive Space
no compete clause if tenants don't want competitors
Landlord's Right to Relocate the Tenant
landlords can relocate the tenant if there's a tenant that uses a whole floor and needs more space so may move smaller tenant; take care of bigger tenants first
Hours of Business
malls can limit your hours
Signage
retail can limit your signage (traffic problems)
Debt Capital
something you owe
Equity Capital
something you own; how much you own of the house (paying down the mortgage)
Loan-to-Value Ratio - (LTV)
how much the bank will loan you versus how much your down payment is
Mortgage loan
a loan on real estate
Mortgagor - (borrower) - 3 issues
-Creates the debt by borrowing money (Mortgage)
-Creates an obligation to repay the money (Promissory Note)
-Gives a security instrument to the lender (Security Deed or Deed of Trust)
Mortgagee - (lender)
Accepts the instrument to repay and lends the money
Unsecured Loan
no collateral
Secured Loan
got collateral
Amortization
schedule showing principle and interest repayment
Prepayment
-so you won't go refinance with someone else; loyalty
-The right to retire a mortgage before maturity. The right of prepayment will depend on the law of the state where the property is located and on the particular mortgage contract.
Closing Costs
3-5%, in addition to down payment, seller can pay these
Points
1% of the loan
Discount points
pay of 1% to get your rate discounted
Prepayment Penalty
-prepayment on the loan, used on commercial loans
-Charges, designed to discourage prepayment, incurred when a mortgage is repaid before maturity.
Default
120 days late (4 months), haven't been making your payments
Equitable right of redemption
have one month after those 120 days to redeem yourself and catch up on the payments (never lose house)
Judicial foreclosure
judge allows your house to be sold on the courthouse steps
Deficiency judgment
bank can petition the court to come after you for the difference in the loan and the foreclosure sale
Statutory right of redemption
right to pay the foreclosure sale and any improvements the purchaser made, buy back house within a year
Acceleration Clause
-Allows the lender to call all future payments due in full if payments are missed or covenants broken (defaults)
-Accelerate the money due, they can foreclose
Loan Renewal
renew your balloon note
Loan Assumption
a buyer assumes the seller's loan; if interest rate is lower
Loan Extension
get your loan extended; not good b/c ruins credit
Deed in Lieu of Foreclosure
give up real estate instead of foreclosure; but bank doesn't want to be in real estate business
Short Sale
bank allows a sale of the house for less than the loan
Recourse Loan
if you default they come after your other assets
Non-recourse loan
if you default they do not come after your other assets
secondary mortgage
Like the first mortgage lien, a second mortgage is secured by the borrower's property that has been pledged as collateral for the loan. However, the lender holding a second mortgage is second in line behind the holder of the first mortgage to receive the
Is the interest rate higher or lower than the first mortgage?
Yes, taking more risk to get repaid
What happens when a secondary mortgage starts foreclosure?
They are second in line behind the first mortgage
Why do people have secondary mortgages?
Things like renovations, getting a lower interest rate than a credit card, getting a pool
Home Equity Line of Credit
Similar to a second mortgage, a line of credit, something you can draw on over time, draw out in increments
How is HELOC different from a second mortgage?
Get all the money up front with a second mortgage, take the money out as you want with a HELOC
What is the Demand Clause?
They can cut off your equity line any time they want
Covenants the Borrower gives
-To pay taxes
-Against removal
-Insurance
-Good repair
-Acceleration Clause or Demand Clause may be used if these are broken.
Conventional loan
the name for your typical loan (FRM, Balloon Note, ARM, etc.)
What is the "maximum" LTV that many conventional lenders prefer?
80%
Can a conventional mortgage have higher LTVs? Why or why not?
Yes, have to have a really good credit score
What is Private Mortgage insurance for?
-There to cover in case of a default on any portion over 80% LTV
-Cover a portion of the mortgage due to defaults
When do we pay PMI?
If we don't have 20% down payments
Who provides PMI?
Insurance companies that right them
How do people avoid PMI?
-Have a 20% down payment
-Government loan but very expensive
-Get a second mortgage
Does FHA lend money?
No, you still go to your mortgage company, they just make FHA loans and the FHA insures them
Who obtains FHA loans?
-1st time homebuyers
-People with small "issues" - high debt-to-income (>43%) - lesser credit (<630 FICO score) - low down payment
How much do borrowers invest with an FHA loan?
96.5% LTV; 3.5% down payment
Veterans Administration
-They do not lend money. They guarantee the loans of "qualified" veterans.
-Borrower must have a Certificate of Eligibility from the VA and must pay a funding fee ranging from 1.25% to 3.30%.
What determines the funding fee for the VA?
How much down payment the veteran has and how many times they obtain a VA loan
What LTV can veterans borrow under the program?
100%, no down payment
What is the maximum loan amount for veterans?
Whatever they can afford
Do any veterans not have to pay the funding fee?
Yes, disabled veterans and veterans' widows
What types of people get USDA Rural Development loans and what locations are these made in Alabama?
Low-income rural citizens; will only be loaned in about 50 out of 67 counties in Alabama
What will the government do for people with USDA loans compared to other loan types?
-Subsidy - help them with their payment
-Forbearance - give you up to two years to find a new job while faulting your payments and they won't foreclose
USDA Rural Development Loan
This is a guarantee program similar to VA. The maximum loan amount is based upon income and the funding fee is 1.0% up front and 0.35% per year in the payments.
What LTV can be borrowed under the USDA program?
100%, no down payment
What is the maximum USDA loan term?
33-38 years
Typical Commercial Loans
These are typical conventional loans from commercial banks.
What is a CMBS?
Commercial mortgage backed security, 25% sold to investors (75% buy residential mortgage b/c commercial mortgages are riskier and a lot more money)
What is a typical amortization for commercial loans?
20 or 25 years
SBA Commercial Loans
-Most of these are guarantee programs for banks.
-These are business loans
-Very low closing costs
-Very high prepayment penalties
-SBA charges a guaranty and servicing fee
Certified Development Company (CDC) loan (bank loans)
Typically, economic development branches for counties. (non-profit)
Farm Credit
-Provides long term loans on rural acreage.
-May loan up to 90% on land. Why is this worth noting?
-34 Retail branches in Alabama
Fixed Rate Mortgage. What does this mean for the payment?
-Mortgage term (time period) and the interest rate are fixed.
-Payments are flat, can budget well
Are interest rates higher or lower on longer mortgages such as a 30 year loan?
Longer term risk, 15 extra years to mess up
Balloon Note
Mortgage payments cover a short period of time (i.e. 5 years). Term examples are 2, 3, 5 and 7 years.
How are Balloon Notes amortized?
Amortized 20 years but the term may be 2-7 years
Who makes Balloon Note loans?
Commercial banks; to eliminate interest rate risk
Are interest rates higher or lower on these balloon notes?
Higher, banks are more risk averse
Why would a borrower use a balloon note loan for commercial and residential?
You can't qualify for a mortgage or you're going to live somewhere for a short time (3-5 years)
Construction Loan
-Mortgage covering a fixed very short period of time (i.e. 6, 9, or 12 months).
-Interest can be fixed or variable
Construction Loan Payoff Options:
-Pay interest in full at the end.
-Pay interest monthly over the term.
-Interest is added to the original loan at the end of construction while converting the loan to a permanent mortgage.
What is a "takeout commitment" that is involved in the construction loan process.
somebody is committing to take out that construction loan; b/c bank wants short term loan
Who makes construction loans?
commercial bank
How is the construction loan money given to the borrower?
piecemeal, don't get all money upfront, get in pieces
What are "draws"?
the pieces of the piecemeal construction loan
Adjustable Rate Mortgage
-Mortgage covers a fixed period of time. (i.e. 5, 15, 20, 25 and 30 years.)
-Interest is variable and attached to an index (i.e. CPI, LIBOR, 1 Year Treasury Rate) over the loan term.
-Each time the interest rate "adjusts", the payment changes on the mortg
How often do ARM interest rates change?
once a year
What is an "Hybrid ARM"?
3|1 - 3 years fixed then adjusts once a year
5|1 - 5 years fixed then adjusts once a year
7|1 - 7 years fixed then adjusts - once a year
Both fixed and variable rate
Why would a borrower want an ARM?
if you think interest rates are going down; if you want to live somewhere for a short period of time, b/c you get a low introductory rate
Why would a lender want an ARM?
less interest rate risk
Teaser Rate
low introductory rate; teasing you into getting an arm
Index
makes the interest rate move/change
Margin
profit to the bank
Annual Rate Cap or Periodic Cap
how much your interest rate can change; if 1 then can only change 1% a year at most
Lifetime Cap or Overall Cap
how much interest rate can move over a lifetime
The term appraisal is referred to in two ways.
-The process by which an appraiser reaches certain conclusions.
-The written report that the conclusions are stated upon.
Definition of Appraisal
-An Estimate or OPINION of value
-An UNBIASED estimate or opinion
-A KNOWLEDGABLE or a LEARNED opinion of value
-A DOCUMENTED estimate of a defined value
-An unbiased, knowledgeable, supported estimate of value
Valuation
value of physical property and the legal rights of ownership in that real estate
These four elements create value in real estate:
-Demand - somebody's gotta want the house/building
-Utility - the purpose of the real estate; use it to live in (residential) or use it for a business (commercial, industrial)
-Scarcity - land is a scarce resource (waterfront)
-Transferability - gotta hav
Influence on real estate value
-Physical and Environmental - tornado, hurricane, transportation network
-Economic - unemployment, interest rate changes, stock market crashes
-Government and Legal - zoning, military bases, tax incentives for industry
-Social - population growth, "baby b
Market value
Most probable sales price
How are values considered arms length?
-Buyer and seller are typically motivated.
-Both parties are well informed and acting in their best interests
-The property has a reasonable exposure time on the market.
-Payment is made in cash or financial arrangements that are comparable.
-Creative fin
Investment value
a value based on a specific return to an investor
Assessed value
the value for property taxation
Liquidation
Quick sale value
Book value
a value of cost minus depreciation (for capital gains taxes)
Business value
real estate value and other assets (how much you could rent the property for) (real estate value is what you can do with the building)
Valuation of a particular site
-We must examine the "Use" of the site and decide which is best to find the maximum market value.
-The principle behind this is "Highest and Best Use." We examine the property in two ways:
As improved
As if vacant
The four tests for Highest and Best Use are as follows:
-Physically possible - will it fit, access, parking, utilities
-Legally permissible - has to pass zoning and building codes
-Financially feasible - does it make money, can you collect rent or would a bank loan on it and make yield, is it worth something t
How do neighborhood values change over time?
-Growth - values increase, demand
-Equilibrium - still increasing b/c inflation & people still want to be there (still demand)
-Decline - gets too old and people don't like it
-Revitalization - investors (house flippers) realize they can make money
-There
Why does the property life cylce matter to an appraiser?
Appraisers have to realize if their values are going up or down. Can't price it too high or too low based on what stage it's in
Cost Approach
Value is derived by reproducing a new subject property and depreciating it to be comparable to the subject.
Direct Cost
hard cost, materials and labor
Indirect Cost
soft cost, engineering, surveys, profit and overhead
Physical deterioration
normal wear and tear, normal use and age
Functional obsolescence
stuff that's outdated or doesn't have as much utility anymore
-Central heat and air
-Asbestos
-Walk in closets
External obsolescence
loss in value from externalities, living next door to a railroad or airport
Cost approach uses
-Special purpose commercial properties - properties with one use only
-New residential homes - not going to build it if can't sell it for what it costs to build
-Fire or hazard insurance purposes
Sales Comparison Approach
Value is derived by comparing the subject property through adjustments made to units of comparison to sales of similar properties in the area.
Steps in the Sales Comparison Approach
-Select comparable properties.
-Adjust the sale prices of comparable properties.
-Reconcile the adjusted prices into an indication of the value of the subject property.
CPA:
if comparable is poorer, add.
CBS:
if comparable is better, subtract.
2 Types of Adjustments:
Dollar
Percentage
Make the comparable property like the subject.
Sales Comparison Approach Uses
-Residential homes - banks want it, they want to know what the market tells you
-Land and/or Lot appraisals
-Commercial properties in an active market. - if there are other sales of that business
Income Approach
Value is derived by analyzing a property's capacity for earnings and capitalizing the income into an indication of present value.
Direct Capitalization:
Used to convert a single year's cash flow (CF) estimate into an indication of value.
Yield Capitalization :
Used to convert a stream of income estimates, including reversion from resale, into an indication of value. This is often called Discounted Cash Flow Analysis (DCF).
Income Approach Uses
Commercial income producing properties (i.e. Hotels, Storage, etc.)
Apartments
Rental homes
Income producing properties
When a third party is injured on the property the law can hold either the landlord or the tenant liable.
Why would it be either?
if you fail to get something fixed, if you have a dog against the wishes of the landlord and it bit someone you would be liable
What is actually performed by a property manager?
-Maintaining the Physical Asset
-Tenant Acquisition
-Rent Collection
-Lease Negotiation
-Keeping Financial Records
Leased Fee
landlord's interest in the property
Leasehold
the tenant's interest
Ground Lease
lease on land
Tenancy for years (Estate for years)
normal lease, lease for a stated period of time
Periodic Tenancy (Estate from year to year)
month-to-month lease; can get out if give 30-60 days notice
Tenancy at will
have a lease and you go month-to-month after the lease expires
Tenancy by sufferance
can stay after your lease runs out; holdover tenant; they can evict you
Tenant selection criteria
-occupancy period expectation
-credit rating
-housekeeping habits (references)
-compatibility characteristics (certain situations)
Is the offer and acceptance similar to real estate sales?
Yes and no. You still sign a contract (lease) but generally a lease can be executed much quicker (don't have to wait for loans and such, just give security deposit).
Consideration
A financial asset, the rent, for rights to the space, the real estate. These are written clearly in the lease.
What are typical rent concessions given to tenants?
-Rent abatements
-Get something for signing your lease
The lease usually declares a stated time period of possession for the tenant. Why usually?
Some are month-to-month
Can be used for any legal purpose, but what are typical limitations of use in leases?
Pets
Fire hazards - grills
No running a business out of it - more traffic
In most cases, renters can exclude anyone from the property. What are 3 reasons the Landlord can enter the property without asking?
To make repairs
To collect unpaid rent
To inspect for waste (heard you haven't been keeping your place clean)
Who is responsible for repairs in most cases?
The landlord
When a third party is injured on the property the law can hold either the landlord or the tenant liable.
Why would it be either?
if you fail to get something fixed, if you have a dog against the wishes of the landlord and it bit someone you would be liable
An invitee
people that work on the property (NOT A GUEST) (maintenance, mailman, utilities)
A licensee
your guest you invite over
A trespasser
you don't want on your property - even a trespasser can still sue you if they get hurt on your property
Assignment
new tenant is found and is liable for the monthly bill
Subletting
you found a new tenant but you are still liable for the bill to the land lord
What is the difference between the right to assign and sublet?
Who is liable to pay the money
Security Deposit
give the landlord money to make repairs if needed
Utility payments
sometimes they will pay part of your utilities
Landlord's Right to Show the Property
they have the right to show your property in the last 30 days to try to get a new tenant
Notification of Renewal
amount of time when you have to tell them if you're staying or not; often 30-90 days
Transfer Clause
transfer clauses for the military; if they get transferred they can break a lease
There are several ways to terminate a residential lease:
Expiration of the Term
Mutual Agreement to Terminate
Merger of the Leasehold and the Freehold - you buy the place that you're renting
Breach of Covenants by Tenant or Landlord
Tenant's Abandonment of the Property
Gross Rent
you pay the landlord a base rent and they pay operating expenses
Net Rent
-tenant pays a base rent and the tenant themselves pay the operating expenses
-Tenant pays a flat rent to the owner plus the entire property tax bill for the property in a single tenant building, or prorated share in a multiple tenant building
Percentage Rent (Retail, Restaurants)
malls, you pay a base rent and a percentage of gross sales - use gross sales instead of percentage profits b/c can manipulate profits
Graduated Rent
sometimes leases go up in steps (once every year or two years); equal increments each year
Escalated or Indexed Rent
escalated - have an increase built in (not always a step pattern like graduated); index - indexed with CPI (inflation) (common for triple net)
Net-Net Rent
Tenant pays a flat rent to the owner plus the entire property tax and property insurance bills for the property in a single tenant building, or a prorated share in a multiple tenant building
Net-Net-Net
Tenant pays a flat rent to the owner plus the entire property tax bill, the property insurance bill, and the CAM (common area maintenance) for the property in a single tenant building, or a prorated share in a multiple tenant building - the way most comme
% rent with a minimum
Tenant pays a minimum rent with an additional % of the gross sales.
Right to Inspect the Tenant's Books
landlord can inspect the tenant's books
Agreement on Competitive Space
no compete clause if tenants don't want competitors
Landlord's Right to Relocate the Tenant
landlords can relocate the tenant if there's a tenant that uses a whole floor and needs more space so may move smaller tenant; take care of bigger tenants first
Hours of Business
malls can limit your hours
Signage
retail can limit your signage (traffic problems)
Debt Capital
something you owe
Equity Capital
something you own; how much you own of the house (paying down the mortgage)
Loan-to-Value Ratio - (LTV)
how much the bank will loan you versus how much your down payment is
Mortgage loan
a loan on real estate
Mortgagor - (borrower) - 3 issues
-Creates the debt by borrowing money (Mortgage)
-Creates an obligation to repay the money (Promissory Note)
-Gives a security instrument to the lender (Security Deed or Deed of Trust)
Mortgagee - (lender)
Accepts the instrument to repay and lends the money
Unsecured Loan
no collateral
Secured Loan
got collateral
Amortization
schedule showing principle and interest repayment
Prepayment
-so you won't go refinance with someone else; loyalty
-The right to retire a mortgage before maturity. The right of prepayment will depend on the law of the state where the property is located and on the particular mortgage contract.
Closing Costs
3-5%, in addition to down payment, seller can pay these
Points
1% of the loan
Discount points
pay of 1% to get your rate discounted
Prepayment Penalty
-prepayment on the loan, used on commercial loans
-Charges, designed to discourage prepayment, incurred when a mortgage is repaid before maturity.
Default
120 days late (4 months), haven't been making your payments
Equitable right of redemption
have one month after those 120 days to redeem yourself and catch up on the payments (never lose house)
Judicial foreclosure
judge allows your house to be sold on the courthouse steps
Deficiency judgment
bank can petition the court to come after you for the difference in the loan and the foreclosure sale
Statutory right of redemption
right to pay the foreclosure sale and any improvements the purchaser made, buy back house within a year
Acceleration Clause
-Allows the lender to call all future payments due in full if payments are missed or covenants broken (defaults)
-Accelerate the money due, they can foreclose
Loan Renewal
renew your balloon note
Loan Assumption
a buyer assumes the seller's loan; if interest rate is lower
Loan Extension
get your loan extended; not good b/c ruins credit
Deed in Lieu of Foreclosure
give up real estate instead of foreclosure; but bank doesn't want to be in real estate business
Short Sale
bank allows a sale of the house for less than the loan
Recourse Loan
if you default they come after your other assets
Non-recourse loan
if you default they do not come after your other assets
secondary mortgage
Like the first mortgage lien, a second mortgage is secured by the borrower's property that has been pledged as collateral for the loan. However, the lender holding a second mortgage is second in line behind the holder of the first mortgage to receive the
Is the interest rate higher or lower than the first mortgage?
Yes, taking more risk to get repaid
What happens when a secondary mortgage starts foreclosure?
They are second in line behind the first mortgage
Why do people have secondary mortgages?
Things like renovations, getting a lower interest rate than a credit card, getting a pool
Home Equity Line of Credit
Similar to a second mortgage, a line of credit, something you can draw on over time, draw out in increments
How is HELOC different from a second mortgage?
Get all the money up front with a second mortgage, take the money out as you want with a HELOC
What is the Demand Clause?
They can cut off your equity line any time they want
Covenants the Borrower gives
-To pay taxes
-Against removal
-Insurance
-Good repair
-Acceleration Clause or Demand Clause may be used if these are broken.
Conventional loan
the name for your typical loan (FRM, Balloon Note, ARM, etc.)
What is the "maximum" LTV that many conventional lenders prefer?
80%
Can a conventional mortgage have higher LTVs? Why or why not?
Yes, have to have a really good credit score
What is Private Mortgage insurance for?
-There to cover in case of a default on any portion over 80% LTV
-Cover a portion of the mortgage due to defaults
When do we pay PMI?
If we don't have 20% down payments
Who provides PMI?
Insurance companies that right them
How do people avoid PMI?
-Have a 20% down payment
-Government loan but very expensive
-Get a second mortgage
Does FHA lend money?
No, you still go to your mortgage company, they just make FHA loans and the FHA insures them
Who obtains FHA loans?
-1st time homebuyers
-People with small "issues" - high debt-to-income (>43%) - lesser credit (<630 FICO score) - low down payment
How much do borrowers invest with an FHA loan?
96.5% LTV; 3.5% down payment
Veterans Administration
-They do not lend money. They guarantee the loans of "qualified" veterans.
-Borrower must have a Certificate of Eligibility from the VA and must pay a funding fee ranging from 1.25% to 3.30%.
What determines the funding fee for the VA?
How much down payment the veteran has and how many times they obtain a VA loan
What LTV can veterans borrow under the program?
100%, no down payment
What is the maximum loan amount for veterans?
Whatever they can afford
Do any veterans not have to pay the funding fee?
Yes, disabled veterans and veterans' widows
What types of people get USDA Rural Development loans and what locations are these made in Alabama?
Low-income rural citizens; will only be loaned in about 50 out of 67 counties in Alabama
What will the government do for people with USDA loans compared to other loan types?
-Subsidy - help them with their payment
-Forbearance - give you up to two years to find a new job while faulting your payments and they won't foreclose
USDA Rural Development Loan
This is a guarantee program similar to VA. The maximum loan amount is based upon income and the funding fee is 1.0% up front and 0.35% per year in the payments.
What LTV can be borrowed under the USDA program?
100%, no down payment
What is the maximum USDA loan term?
33-38 years
Typical Commercial Loans
These are typical conventional loans from commercial banks.
What is a CMBS?
Commercial mortgage backed security, 25% sold to investors (75% buy residential mortgage b/c commercial mortgages are riskier and a lot more money)
What is a typical amortization for commercial loans?
20 or 25 years
SBA Commercial Loans
-Most of these are guarantee programs for banks.
-These are business loans
-Very low closing costs
-Very high prepayment penalties
-SBA charges a guaranty and servicing fee
Certified Development Company (CDC) loan (bank loans)
Typically, economic development branches for counties. (non-profit)
Farm Credit
-Provides long term loans on rural acreage.
-May loan up to 90% on land. Why is this worth noting?
-34 Retail branches in Alabama
Fixed Rate Mortgage. What does this mean for the payment?
-Mortgage term (time period) and the interest rate are fixed.
-Payments are flat, can budget well
Are interest rates higher or lower on longer mortgages such as a 30 year loan?
Longer term risk, 15 extra years to mess up
Balloon Note
Mortgage payments cover a short period of time (i.e. 5 years). Term examples are 2, 3, 5 and 7 years.
How are Balloon Notes amortized?
Amortized 20 years but the term may be 2-7 years
Who makes Balloon Note loans?
Commercial banks; to eliminate interest rate risk
Are interest rates higher or lower on these balloon notes?
Higher, banks are more risk averse
Why would a borrower use a balloon note loan for commercial and residential?
You can't qualify for a mortgage or you're going to live somewhere for a short time (3-5 years)
Construction Loan
-Mortgage covering a fixed very short period of time (i.e. 6, 9, or 12 months).
-Interest can be fixed or variable
Construction Loan Payoff Options:
-Pay interest in full at the end.
-Pay interest monthly over the term.
-Interest is added to the original loan at the end of construction while converting the loan to a permanent mortgage.
What is a "takeout commitment" that is involved in the construction loan process.
somebody is committing to take out that construction loan; b/c bank wants short term loan
Who makes construction loans?
commercial bank
How is the construction loan money given to the borrower?
piecemeal, don't get all money upfront, get in pieces
What are "draws"?
the pieces of the piecemeal construction loan
Adjustable Rate Mortgage
-Mortgage covers a fixed period of time. (i.e. 5, 15, 20, 25 and 30 years.)
-Interest is variable and attached to an index (i.e. CPI, LIBOR, 1 Year Treasury Rate) over the loan term.
-Each time the interest rate "adjusts", the payment changes on the mortg
How often do ARM interest rates change?
once a year
What is an "Hybrid ARM"?
3|1 - 3 years fixed then adjusts once a year
5|1 - 5 years fixed then adjusts once a year
7|1 - 7 years fixed then adjusts - once a year
Both fixed and variable rate
Why would a borrower want an ARM?
if you think interest rates are going down; if you want to live somewhere for a short period of time, b/c you get a low introductory rate
Why would a lender want an ARM?
less interest rate risk
Teaser Rate
low introductory rate; teasing you into getting an arm
Index
makes the interest rate move/change
Margin
profit to the bank
Annual Rate Cap or Periodic Cap
how much your interest rate can change; if 1 then can only change 1% a year at most
Lifetime Cap or Overall Cap
how much interest rate can move over a lifetime
The term appraisal is referred to in two ways.
-The process by which an appraiser reaches certain conclusions.
-The written report that the conclusions are stated upon.
Definition of Appraisal
-An Estimate or OPINION of value
-An UNBIASED estimate or opinion
-A KNOWLEDGABLE or a LEARNED opinion of value
-A DOCUMENTED estimate of a defined value
-An unbiased, knowledgeable, supported estimate of value
Valuation
value of physical property and the legal rights of ownership in that real estate
These four elements create value in real estate:
-Demand - somebody's gotta want the house/building
-Utility - the purpose of the real estate; use it to live in (residential) or use it for a business (commercial, industrial)
-Scarcity - land is a scarce resource (waterfront)
-Transferability - gotta hav
Influence on real estate value
-Physical and Environmental - tornado, hurricane, transportation network
-Economic - unemployment, interest rate changes, stock market crashes
-Government and Legal - zoning, military bases, tax incentives for industry
-Social - population growth, "baby b
Market value
Most probable sales price
How are values considered arms length?
-Buyer and seller are typically motivated.
-Both parties are well informed and acting in their best interests
-The property has a reasonable exposure time on the market.
-Payment is made in cash or financial arrangements that are comparable.
-Creative fin
Investment value
a value based on a specific return to an investor
Assessed value
the value for property taxation
Liquidation
Quick sale value
Book value
a value of cost minus depreciation (for capital gains taxes)
Business value
real estate value and other assets (how much you could rent the property for) (real estate value is what you can do with the building)
Valuation of a particular site
-We must examine the "Use" of the site and decide which is best to find the maximum market value.
-The principle behind this is "Highest and Best Use." We examine the property in two ways:
As improved
As if vacant
The four tests for Highest and Best Use are as follows:
-Physically possible - will it fit, access, parking, utilities
-Legally permissible - has to pass zoning and building codes
-Financially feasible - does it make money, can you collect rent or would a bank loan on it and make yield, is it worth something t
How do neighborhood values change over time?
-Growth - values increase, demand
-Equilibrium - still increasing b/c inflation & people still want to be there (still demand)
-Decline - gets too old and people don't like it
-Revitalization - investors (house flippers) realize they can make money
-There
Why does the property life cylce matter to an appraiser?
Appraisers have to realize if their values are going up or down. Can't price it too high or too low based on what stage it's in
Cost Approach
Value is derived by reproducing a new subject property and depreciating it to be comparable to the subject.
Direct Cost
hard cost, materials and labor
Indirect Cost
soft cost, engineering, surveys, profit and overhead
Physical deterioration
normal wear and tear, normal use and age
Functional obsolescence
stuff that's outdated or doesn't have as much utility anymore
-Central heat and air
-Asbestos
-Walk in closets
External obsolescence
loss in value from externalities, living next door to a railroad or airport
Cost approach uses
-Special purpose commercial properties - properties with one use only
-New residential homes - not going to build it if can't sell it for what it costs to build
-Fire or hazard insurance purposes
Sales Comparison Approach
Value is derived by comparing the subject property through adjustments made to units of comparison to sales of similar properties in the area.
Steps in the Sales Comparison Approach
-Select comparable properties.
-Adjust the sale prices of comparable properties.
-Reconcile the adjusted prices into an indication of the value of the subject property.
CPA:
if comparable is poorer, add.
CBS:
if comparable is better, subtract.
2 Types of Adjustments:
Dollar
Percentage
Make the comparable property like the subject.
Sales Comparison Approach Uses
-Residential homes - banks want it, they want to know what the market tells you
-Land and/or Lot appraisals
-Commercial properties in an active market. - if there are other sales of that business
Income Approach
Value is derived by analyzing a property's capacity for earnings and capitalizing the income into an indication of present value.
Direct Capitalization:
Used to convert a single year's cash flow (CF) estimate into an indication of value.
Yield Capitalization :
Used to convert a stream of income estimates, including reversion from resale, into an indication of value. This is often called Discounted Cash Flow Analysis (DCF).
Income Approach Uses
Commercial income producing properties (i.e. Hotels, Storage, etc.)
Apartments
Rental homes
Income producing properties
When a third party is injured on the property the law can hold either the landlord or the tenant liable.
Why would it be either?
if you fail to get something fixed, if you have a dog against the wishes of the landlord and it bit someone you would be liable