Basic Real Estate Principles

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Assignment for next Mon.
• Read pgs. 39-50 in materials.
• Find an article on Explanation of the Mortgage
Crisis on the web or in a magazine or
newspaper. Read it and be ready to share!
Basic Real Estate Principles –
cont.
You want to buy an apartment
complex….
Talked about the first thing you do
• F
• Important factors to consider?
Once you find the bldg. you want….
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What’s next?
Inspections
Financing
Title Report
Rent Rolls
Occupancy rate
Estoppel certificates
What gives buyer right to do these
things?
• PURCHASE CONTRACT:
• Offer
– Includes price
– Financing terms
– Inspection rights
– Condition of title
– Other terms?
• Seller – accepts, rejects or most likely, ?
• Counters
Terms
• Equity
– Examples:
• Own my home - no mortgages. How much equity if the
house has a Fair Market Value of $1 million?
• Apartment building - FMV = $5 million. Seller has a loan
on it = $3 million. How much equity?
• Apt. bldg. FMV = $5 million. Loans against it for $6
million. Equity? Sellable?
• Definition?
• Advantages to having equity?
Terms
• Leverage
$100,000 cash in pocket.
– Could buy 1 property with $100,000. Appreciates
10% in one year. Now worth $110,000.
– Could buy 2 properties, each FMV = $100,000.
$50,000 down, loan on each for $50,000. Each
appreciates 10% in one year. How much have you
made? [Remember though you make mortgage
payments too.]
• Definition of “Leverage” (modified from
Investopedia)
– Use of borrowed capital to increase the potential
return of an investment.
Down payment
• Define
• Where does it come from?
• Why does lender (generally) require buyer to put
in $?
• “Cushion”
• Assume FMV = $500,000
• Assume Down Pymt. = $100,000
• Assume loan = $400,000
• How much would property have to depreciate
before lender at risk?
Once “in contract”….
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Financing – What kind of loan?
List various possibilities:
Interest only: advantages? Disadvantages?
Fully amortized loan
ARM
100+ variations
Found the loan you want….
• Bank – lender
• What steps will (should) bank
take (due diligence)?
• Appraisal
• Credit check
• Verify employment/income
• Verify other assets
such as down pymt.
At closing (Close of Escrow)
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First –
How does buyer get title?
Lender will require buyer/borrower to sign ?
What does the note include?
What does the mortgage do?
Property encumbered by a mortgage
Buyer gets
title
[Seller gets $ from buyer and
lender – pays off loans.]
Buyer signs
promissory note
in favor of lender
secured by a
mortgage on the
bldg.
Before getting into greater depth..
• Articles you found on real estate financing….
Promissory Note - pg. 33
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“jointly and severally”
What type of loan is this? How can you tell?
Prepayment
Acceleration
Due-On-Sale
Attorneys’ Fees
Security
And where did the process get offtrack? Then we’ll examine why
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Financing process – pg. 27
Loan application
Loan analysis
Approval and processing
Closing
Servicing
Subprime Loans – pg. 34
• Application process: No documentation
• Loan analysis – low credit scores; no
verification
• Higher interest rates
• Negative amortization
• Where does equity come into play?
– “High debt-to-equity” ratio
Loan Analysis
• Appraisal – what was happening in the mid2000s?
http://www.youtube.com/watch?v=MS5X8bo
UACI
Mortgages (called Deeds of Trust in some places)
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Your understanding?
Why does lender require this?
Bought car on credit?
Can a property have more than one
mortgage?
• Why?
More than one mortgage…
• Assume Buyer buying apt. house for $3
million.
• Has $500,000 down.
• Qualifies for $2 million loan
from Bank – what security?
• $500,000 short.
• Solution?
$500,000 down
Second mortgage [junior]
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Goes to another lender – or even same lender
Why would someone lend additional $500k?
What would first mortgage holder allow this?
What is the cushion (margin of security) for
1st?
FMV = $3,000,000 (purchase price)
Down = 500,000
1st = $2,000,000
2nd =
500,000
Any cushion for 2nd [junior]?
• FMV = $3,000,000 (purchase price)
Down = 500,000
1st = $2,000,000
2nd =
500,000
Would 2nd be “safe”?
What happens if property
values decline?
Seller Carry-Backs
• Assume same facts:
• FMV
= $3,000,000
• Down payment
= $ 500,000
• 1st
= $2,000,000
And buyer can’t find a lender to loan the rest
but seller wants/needs to sell. Solution?
How structured?
Term: “Under Water”
• Assume FMV declines from $3,000,000 to
$2,000,000.
• First mortgage – balance of $2,000,000
• Second
- balance of $ 500,000
How much would you pay for the property?
In order
to sell what
has to happen?
Will discuss why borrowers defaulting
– but let’s first look at the process
• Foreclosure
– What does this mean?
– What gives lender the right?
– And – what’s the process?
• Same facts:
• Value at time of default = $2,000,000
• 1st loan
= $2,000,000
First forecloses; what is the highest bid?
Another Term: Deficiency Judgment
Assume same facts
Value = $2,000,000 at time of default
1st has balance due of $2,000,000
High bid = $1,500,000.
Now what?
And what about 2nd? (balance due = $500,000)
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