Priciples II

Residential Appraisals Highest and Best Use

The highest and best use of a property is defined as the legal use that gives the greatest return in money and/or amenities.

Principle of Contribution

That the value of a property is equal to the sum of the contributory value of each of its components parts. cost does not equal value. (Pool)

Principle of Substitution

At the core of appraisal is a basic economic concept. Pay no more for an item than he or she would to acquire an equally desirable substitute. Therefore, the prices at which similar items are sold in a market tend to be similar, and the value of one item

Principle of Regression

The presence of lower-priced properties in the area will cause a decline in the value of the subject property (Pulling value down)

Principle of Progression

Where the value of the subject property is increased by the value of surrounding properties (Raising value)

4 Characteristics of Value:

1. Demand (value) - must be sufficient demand
2. Utility (need) - The property must be able to fulfill a need.
3.Scarcity (Too much property for sale) - If a type of property in a market area is too abundant, it has reduced value.
4. Transfer-ability (is

Appraisal Process

The value of a property may be affected by social, economic, governmental and environmental influences. An appraiser must always be aware of these influences and possible changes in them that could affect market value.

Three Approaches to Value

1.Sales comparison approach
2.Cost approach
3.Income approach

Comparable or "comps

The sales comparison approach is used as the best indicator of value for existing properties. The appraiser focuses on recent sales in determining the value of the subject

Functional Obsolescence

The loss in desirability of the style, layout, or function of an element of a property over time.

External Obsolescence

The loss in value of a property caused by factors outside of the property itself.

Gross Rent Multiplier (GRM)

Used for investment/rental properties
GRM = Sales Price (Divided )Monthly Rent

Income Capitalization IRV formula

I=Income, R=Return, V=Value

(RESPA)

Real Estate Settlement Procedures Act

(CFPB)

Consumer Financial Protection Bureau's

Real Estate Settlement Procedures Act (RESPA)

Ensures that consumers throughout the nation are provided with more helpful information about the cost of the mortgage settlement and protected from unnecessarily high settlement charges caused by certain abusive practices.

Consumer Financial Protection Bureau's

Responsible for enforcing "federal consumer financial law

(TILA)

Truth in Lending Act

(FCRA)

Fair Credit Reporting Act

(RESPA)

Real Estate Settelment Procedure Act

(ECOA)

Equal Credit Opportunity Act

Equal Credit Opportunity Act (ECOA)

All consumers are given an equal chance to obtain credit. It prohibits discrimination in any aspect of a credit transaction on the basis of: Race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance, the go

Truth In Lending Act (TILA) / Reg Z

Protects consumers in credit transactions by requiring clear disclosures of key terms of the lending arrangement and all costs

Secondary Mortgage Market

Exists for the purchase and sale of existing mortgages to investors. It is designed to provide greater liquidity to the residential real estate market by providing for a steady supply of funds from investors.

Fannie Mae (Finance)

Financing mortgages and increasing home ownership opportunities. Fannie Mae began in 1938 as an agency of the federal government and was created to bring stability to the U.S. housing market.

Fannie Mae helps accomplish the following important housing objectives

1;It addresses imbalances of mortgage credit among regions of the US by making funds available to capital-deficient areas of the country in order to finance new mortgage origination.
2;It allows lenders to originate mortgages for sale, rather than for por

Freddie Mac

Purchasing mortgages in the Secondary Market. It is a stockholder owned corporation.

Loan Pre-Qualification/Pre-Approval Under ideal circumstances, the buyer has been pre-qualified or pre-approved for a loan prior to beginning the search for a home.

Buyers are able to be more realistic when setting their pricing goals.
The buyer's agent has a better understating of the buyer's ability to pay.
The buyer's agent can avoid showing properties that the buyer cannot afford.
Sellers are somewhat reassured t

All pre-qualification and Pre-Approval Letters

Subject to underwriting approval.

Loan-To-Value Ratio (LTV)

The percentage of the appraised value or sales price that the lender will lend.

Private Mortgage Insurance (PMI)

PMI Required when the LTV of a conventional loan exceeds 80%. PMI basically insures the difference between the borrower's down payment and 80% LTV.

FHA

Is a mortgage insurance program that protects the lender from loss in the event of defaults by the borrower by insuring the full amount of the loan

Government Rights in Land: PETE

Police Power - zoning, buffer zone, variances, setbacks, etc.
Eminent Domain - Condemnation
(Inverse Condemnation - buyer/owner sue the government for damages)
Taxation - Ad Valorem taxes, highest priority lien
Escheat - No will, no heirs - reverts to sta

Interstate Land Sales Full Disclosure Act

Passed by Congress in 1968. The act was passed to protect consumers from fraud in the sale or lease of land

Environmental Protection Legislation

Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). CERCLA gives the authority to recover natural resource damages caused by releases of hazardous substances.
Authority for cleanup under the Act is granted to:
Federal natural r

Commissions

Always Sales Price - Never asking price

Lender Points

Always Loan amount - never sales price

T-formula

Part = % * total; % = Part/total; total = part/%

REO

Real Estate Owned. When a lending institution becomes the owner of a property through a foreclosure, the property becomes an asset of the company.

Finance

Under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), residential mortgage lenders must be either licensed or registered with the Texas Department of Saving and Mortgage lending.

Sponsoring broker

Required to create competency standards for supervised license holders.

Competency Standard for supervised licence holders

Evidence of competency standards might include completion of required education or demonstration of experience in specific transactions.

License Holder's Competency

A sponsoring broker must maintain written policies and procedures to ensure that a sponsored sales agent is competent to conduct authorized activities. The sponsoring broker also must ensure that each sponsored sales agent receives educational instruction

The Investment

Appreciation is the "passive" increase in the value of a parcel due to market forces.

Investing in Real Estate - The Benefits and Risks

The decision to own or invest in real estate is made for many reasons, both personal and business.
Personal advantages include:
A hedge against inflation
A higher than average rate of return
The ability to leverage (use borrowed money to make money)

Tax Benefits

Investment in real estate includes certain tax advantages, including:
Tax-sheltered income
Favorable capital gains tax treatment
Deferred taxation on exchanges

Tax advantages

Considered the main incentive to investment in real estate

Real estate syndicates

A method of raising funds for the purchase of real estate investment

Real estate syndicates may be organized

limited partnership
general partnership
a corporation

Real Estate Investment Trusts (REIT)

today there are 2 forms
1. Equity
2. Mortgage

Real Estate Mortgage Investment Conduits (REMIC)

An indirect investment in mortgage through the sale of securities. Two large issuers Freddie Mac & Fannie Mae.

Leaseholder Estates

1. Estate for years
2. Periodic tenancy
3. Tenancy at sufferance
4. Tenancy at will

Requirements of a Valid Lease

Competent parties
Let and take agreement
Adequate consideration
Legal purpose
Description of the property (street address is sufficient)

Right of First Refusal

A tenant has the right to match or better any offer the landlord may receive on the property before the property will be sold to someone else.

Property Management

The role of a property manager is established by a written agreement called a management agreement.
Some managers are off-site while others are resident

Buyer's Temporary Residential Lease

PROMULGATED BY THE TEXAS REAL ESTATE COMMISSION (TREC)
NOTICE: for use only when BUYER occupies the property for no more than 90 days PRIOR the closing.

Sovereignty of the soil.

The government is the original owner of all land

General warranty deed from the grantor.

Offers the purchaser the greatest degree of protection. A deed is a document used to convey an interest n real estate

Title commitment

Document by which a title insurer discloses to all parties connected with a particular real estate transaction all the liens defects and burdens that affect the subject property. (statement of the condition of title at a moment of time)

Voluntary Alienation

Any change in the ownership of real property

Deeds

Consideration must be given by the grantee to the grantor

Quitclaim deed

One with no guarantees, warranties, or covenants. The grantor does not even claim to own the property.

Closure Disclosure

Form is a statement of final loan terms and closing costs. Compare this document with your Loan Estimate.

Lis Pendens

common issues discovered (pending lawsuits affecting the property) Unpaid taxes or other assessment.