Questions and Answers of Real Estate Principles

How are interest rates determined on HUD/FHA loans? On VA loans?
What charges must a borrower pay for a HUD/FHA-insured commitment?
Explain the difference between loan underwriting commitments made by the VA and those made by HUD/FHA?
In HUD/FHA settlement requirements, what rules apply to the handling of the down payment? To the handling of the closing costs?
Explain the two different dollar limits that apply to HUD/FHA-insured commitments?
How has the FHA achieved the goals for which it was established?
Describe the FHA/HUD reverse mortgage program?
What is a home equity line of credit?
Discuss the advantages and disadvantages found in shorter-term mortgage loans?
What is the difference between a permanent and temporary buy down mortgage?
Distinguish between the two types of balloon mortgages?
What is the difference between amortization and negative amortization?
What are the limitations on reserve deposits that may be held by a lender for a residential mortgage loan?
Discuss requirements of the Truth-in-Lending Act as it relates to finance charges for mortgage loans?
Describe at least three RESPA requirements that call for disclosure of information to a borrower?
What information is normally furnished to the settlement agent (closer) by the mortgage lender just prior to closing?
What is the reason for a prepayment of interest at the time of settlement procedures?
Describe the essential elements of a HUD-1 settlement statement?
Discuss the importance of a survey in the settlement procedure?
Why should a listing agent obtain a preliminary title report on the listed property?
Explain what is meant by the double taxation of income.
How have equity REITs, measured in terms of total returns, performed in recent years relative to alternative stock investments?
State, in no more than one sentence, the condition for favorable financial leverage in the calculation of NPV.
State, in no more than one sentence, the condition for favorable financial leverage in the calculation of the IRR.
You are considering the acquisition of a small office building. The purchase price is $775,000. Seventy-five percent of the purchase price can be borrowed with a 30-year, 7.5 percent mortgage.
You are considering the purchase of an apartment complex. The following assumptions are made:• The purchase price is $1,000,000.• Potential gross income (PGI) for the first year of operations is
The expected before-tax IRR on a potential real estate investment is 14 percent. The expected after-tax IRR is 10.5 percent. What is the effective tax rate on this investment?
Why do investors generally care whether the IRS classifies cash expenditures as operating expenses rather than capital expenditures?
How are the discount points associated with financing an income property handled for tax purposes?
Over the entire five-year holding period, how much were your taxes from rental operations reduced by the annual depreciation deductions? Ignore the increased taxes due on sale.
What are the four classifications of real estate holdings for tax purposes? Which classifications of property can be depreciated for tax purposes?
You are considering the purchase of a small apartment complex.a. Calculate the mortgage payment, the interest deduction, the depreciation deduction, and the amortized financing costs for the first
Compute the after-tax cash flow from the sale of the following nonresidential property.a. Compute the annual depreciation expense.b. Compute the adjusted basis at the time of sale (after two
A real estate investor is considering the purchase of a small office building. The following assumptions are made:Answer the following questions for the first year of operations:a. What is the equity
An investor purchased a property with an equity investment of $100,000 and an $800,000 mortgage. She has held the property for five years, and the mortgage now has a balance of $750,000. The market
What should be included as costs to be matched by value added after rehabilitation?
What factors can change after rehabilitation of a property to produce a higher “after” value than “before” value?
What does the property management agreement accomplish?
Define deferred maintenance and list some examples.
How is the financial compensation for property managers usually determined? What “agency” problem does this seem to create?
Why is the tenant mix critically important to the performance of shopping center investments?
In the real estate asset management/investment advisory business, why has performance-based management replaced, or at least partially supplemented, the “traditional” scheme for compensating some
In the context of asset management agreements in the private commercial real estate industry, what is a benchmark index? What is the most typical benchmark index?
With respect to complying with applicable landlord-tenant laws, is it easier to manage an apartment complex or an office building? Explain.
Using the following information, compute net operating income ( NOI ) for the first year of operations. Use an “above-line” treatment of capital expenditures.• Number of apartments: 10• Rent
What is the basic shortcoming of most ratios and rules of thumb used in commercial real estate investment decision making?
What distinguishes an operating expense from a capital expenditure?
You are considering purchasing an office building for $2,500,000. You expect the potential gross income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9
Why do Class B properties generally sell at higher going-in cap rates than Class A properties?
Of the more than $3.2 trillion in outstanding commercial real estate debt, what percent is traded in public markets? What percent is traded in private markets? What institutions or entities are the
What are the major restrictions that a REIT must meet on an ongoing basis in order to avoid taxation at the entity level?
Explain how affordable housing loans differ from standard home loans.
If a closing occurs on September 1 of a 365-day year, how will the year’s property tax of $900 be prorated? (Note: the day of closing “belongs” to the buyer.)
How would the hazard insurance premium be prorated?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her
How would the water and sewer charges be prorated?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her
How will the mortgage assumption be entered?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her three-year
How will the monthly mortgage payment be prorated?Rosie Malone sold her house to D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017. Rosie had prepaid her
The owner of a parcel of land containing approximately 25 acres contracted a debilitating disease and decided to sell his real estate as quickly as possible. Within a week, he received an offer of
A couple decided to sell their house in Washington, D.C., without the aid of a real estate broker. Their asking price was $425,000, which they believed was about $15,000 less than the price they
Dr. Bob Jackson owns a parcel of land that a local farmer has offered to rent from Dr. Bob for the next 10 years. The farmer has offered to pay $20,000 today or an annuity of $3,200 at the end of
Calculate the present value of the income stream given below assuming a discount rate of 8 percent. What happens to present value if the discount rate increases to 20
What monthly deposit is required to accumulate $10,000 in eight years if the deposits earn an annual rate of 8 percent, compounded monthly?
Assume the total cost of a college education will be $310,000 when your infant child enters college in 18 years. How much you invest at the end of each month in order to accumulate the required
You are trying to accumulate a $40,000 down payment to purchase a home. You can afford to save $1,000 per quarter. If these quarterly investments earn an annual rate of 7 percent, how many quarters
You have signed a new lease today to rent office space for five years. The lease payments are fixed at $4,500 per month for the first two years, but rise to $5,500 per month in years 3-5. What is the
Suppose you are going to receive $10,000 per year for five years. The appropriate interest/discount rate is 11 percent. a. What is the present value of the payments if they are in the form of an
Calculate the original loan size of a fixed-payment mortgage if the monthly payment is $1,581.59, the annual interest is 5.0%, and the original loan term is 15 years.
For a loan of $100,000, at 4 percent annual interest for 30 years, find the balance at the end of 4 years and 15 years assuming monhly payments.
On an adjustable rate mortgage, do borrowers always prefer smaller (tighter) rate caps that limit the amount the contract interest rate can increase in any given year or over the life of the loan?
Consider a $75,000 mortgage loan with an annual interest rate of 4%. The loan term is 7 years, but monthly payments will be based on a 30-year amortization schedule. What is the monthly payment? What
Give some examples of up-front financing costs associated with residential mortgages. What rule can one apply to determine if a settlement (closing) cost should be included in the calculation of the
A homeowner is attempting to decide between a 15-year mortgage loan at 3.5 percent and a 30-year loan at 4.00 percent. Assume the up-front costs of the two alternatives are equal. What would you
Suppose a one-year ARM loan has a margin of 2.75, an initial index of 3.00 percent, a teaser rate for the first year of 4.00 percent, and a cap of 1.00 percent. If the index rate is 3.00
Assume the following:Loan Amount:.............$100,000Interest rate:.................10 percent annuallyTerm:.............................15 years, monthly paymentsa. What is the monthly payment?b.
For a 30-year loan with a face value of 150,000, 5 percent annual interest, and monthly payments find the monthly payment and remaining mortgage balance at the end of year 5 and 20, and 30.
Consider a 20-year loan with a monthly payment of $1,897.95 and an annual interest rate of 4.5 percent. What was the original loan size?
You are considering buying a $200,000 house with a 5 percent down payment, a 30-year mortgage, a fixed annual rate of 4.5 percent, and monthly payments. What is the monthly payment? What is the
Consider a $200,000 mortgage loan with an annual interest rate of 7 percent. The loan term is 8 years but the monthly payment is based on a 25-year amortization period. Find the monthly payment and
Assume a $175,000 mortgage loan and 10-year term. The lender is charging an annual interest rate of 6 percent and 4 discount points at origination. What is the monthly payment assuming that it based
Briefly explain a commingled real estate fund. Who are the investors in these funds and why do these investors use commingled funds for their purchases?
Assume that you have purchased a home and can qualify for a $200,000 loan. You have narrowed your mortgage search to the following two options: Mortgage ALoan term: 30 yearsAnnual interest rate:
Consider a 25-year loan with an annual interest rate of 7 percent and monthly payments of $1,201.53. The discount points charged by the lender at origination are 3 percent and the cost of borrower
Consider a one-year, $150,000 ARM with a 30-year amortization period. The index rate is currently 3.75 percent and you estimate that it will increase by 25bp (0.25%) each year for the following 2
Consider a $150,000 loan with an annual interest rate of 6.5 percent and a 30-year term. Discount points are equal to 2 percent. All other up-front financing costs to be paid by the borrower total
Consider the stand-alone locations favored by Walgreens for locating their drugstores. In most cases, Walgreens does not own these properties. Instead, they lease the properties on a long-term basis
Consider the following table of annual mortgage rates and yields on 10-year Treasury securities.a. What was the average annual spread on mortgage rates relative to the 10-year Treasury securities
List and briefly describe the typical items included in a commercial mortgage loan submission package.
What is the difference in the present value of these two loan alternatives? Assume the appropriate discount rate is 6 percent.
You are considering the purchase of an industrial warehouse. a. Calculate the overall rate of return (or “cap rate”)b. Calculate the debt coverage ratio.c. What is the largest loan that you
Distinguish among land acquisitions loans, land development loans, and construction loans. How would you rank these three with respect to lender risk?
Discuss the potential advantages of a miniperm loan from the prospective of the developer/investor, relative to the separate financing of each stage of the development.
For what debt in a general partnership is each of the general partners liable?
What are the potential advantages of investing in commercial real estate through intermediaries instead of direct investment? What are the potential disadvantages?
Approximately 88 percent of private commercial real estate equity (on a value- weighted basis) is owned by “noninstitutional” investors. Who are these investors?
Discuss the role life insurance companies play in financing commercial real estate.
If you purchase a parcel of land today for $25,000 and you expect it to appreciate 10 percent per year in value, how much will your land be worth 10 years from now assuming annual compounding?
If you deposit $1 at the end of each of the next ten years and these deposits earn interest at 10 percent compounded annually, what will the series of deposits be worth at the end of the 10th year?
If you deposit $50 per month in a bank account at 10 percent annual interest (compounded monthly), how much will you have in your account at the end of the 12th year?
If your parents purchased an endowment policy of $10,000 for you and the policy will mature in 12 years, how much is it worth today, discounted at 15 percent annually?
A family trust will convey property to you in 15 years. If the property is expected to be worth $50,000 when you receive it, what is the present value of your interest, discounted at 10 percent

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