real estate exam 2 csu (copy)

universal agent

nearly unlimited authority - like somoene holding your full power of attorney

general agent

broad authority within a specific area, like a property manager who handles everything for a building

special agent

hired for one specific task only. this is the most common type in real estate - your buyer’s agent agent or listing agent

disclosure

must share information that affects your decision

accounting

must handle ur money properly and separately

confidentiality

cant share priv info w/ the other side that hurts your position

obedience

must follow your lawful instructions

loyalty

must put ur interests first,, not their comission

skill & care

must perform at a professional standard

dual agency

happens when one agent/brokerage represents BOTH the buyer and the seller in the same transaction

problem with dual agencies

seller and buyer have direct conflict b/c seller wants highest price, buyer wants lowest….. agency cannot advocate for both (also dual agency is illegal in colorado)

exclusive right-to-sell (most common)

brokerage earns commission no matter who finds the buyer

exclusive agency

seller can find their own buyer and pay no commission unless the broker finds the buyer, then they get paid. agents put less work in bc they might not get paid

open listing (least common)

multiple brokers can list the property. whoever finds the buyer first wins the commission. if seller finds buyer, no commission is paid. agents rarely invest time

contract for sale

controls price, timeline, contingencies, n what happens if someone backs out. MOST IMPORTANT DOCUMENT

5 elements of valid contract

competent parties, legal objective, offer & acceptance, consideration, written form + property description

competent parties

both buyer and seller must be of legal age and sound mind

legal objective

transaction must be lawful

offer & acceptance

both parties must agree to the exact same terms

consideration

something of value must be exchanged (earnest money)

written form + property description

real estate contracts must always be in writing

equitable title

• transfers at contract signing

• gives buyer the right to purchase

• buyer remedy: specific performance

• SELLER LOCKED IN - cant sell to anyone else

legal title

• transfers at closing

• gives buyer actual ownership

• full property rights transferred

• seller remedy if buyer backs out: keep earnest money (liquidated damages)

contingencies - safety net

This deal only goes through IF…. protects buyers from being locked in bad situations

financing contingency

deal proceeds only if buyer gets approved for the loan. if denied, buyer walks away and gets earnest money back

inspection contingency

buyer can renegotiate or exit if inspector finds major problems. without this, you buy house AS IS. bad roof and all

appraisal contingency

if bank appraised the property below purchase price, buyer can renegotiate or cancel without penalty

home sale contingency

buyer’s purchase depends on selling their current home first. if their home doesnt sell in time, the deal falls apart

closing

final step where money changes hands, documents are signed, and ownership officially transfers. usually happens at a title company

seller @ closing

signs the deed; receives net proceeds after paying off mortgage and commissions

buyer @ closing

signs the loan documents and pays down payment and closing costs'; receives the keys

lender @ closing

wires the loan funds; reviews final documents

closing agent (title co.)

collects and distributed all funds; records the deed; ensures RESPA compliance

RESPA Rule (real estate settlement procedures act )

requires lenders to provide buyers with a loan estimate within 3 business days of application and a closing disclosure at least 3 days before closing. no surprise fees allowed

commercial real estate financing vs residential loans

fundamentally different from home mortgage. understanding differences helps you understand why commercial deals are more complex - sometimes more risky

home loan

• standardized ( fannie/freddie )

• personal liability for borrower

• fully amortized over 30 years

• simpler underwriting procedures

• 30 year term = 30 year payoff

commercial loan

• non-standardized .. every deal is unique

• recourse OR non recourse (negotiated)

• amortized over 20-25 years, but matures in 5-10 years

• complex, property-focused underwriting

• balloon pmt due at maturity

non-recourse loan

if borrower defaults, lender can only take property, not the borrower’s personal assets like savings accounts or a home

bad boy clauses

eliminated the protection for borrowers if borrower acts badly… can be due to fraud, unpaid taxes, waste/destruction, bad faith bankruptcy

fraud

misrepresenting income, occupancy, or condition to get the loab

unpaid taxes

failing to pay property taxes on the collateral

waste/destruction

deliberately damaging or neglecting the property

bad faith bankruptcy

filing bankruptcy solely to delay a rightful foreclosure

balloon mortgage

most common structure in commercial real estate. monthly pmts calculated as if loan amortizes over 20-25 yrs, BUT loan actually matures (or is due) in just 5, 7, or 10 yrs. at maturity, balance due in full

senior debt (1st mortgage)

paid first in default, lowest risk and return. ~60-65% of deal value, lowest int. rate

mezzazine debt

paid AFTER senior debt. higher risk, higher yield. ~15% of deal value, rate is higher than senior

equity (owner)

paid last. highest risk, highest potential reward. ~ 20-25% of deal value; profits after everyone else is paid

loan to value ratio LTV

loan divided by property value. max 66-75% for most commercial loans

debt coverage ratio DCR

NOI divided by Annual Debt Service. Minimum: 1,20-1.30x (most lenders require 1.25x)

debt yield

NOI divided by Loan Amount. minimum 9-10% for most lenders

Leverage

amplifies returns IN BOTH DIRECTIONS

positive leverage

occurs when cap rate is higher than the loan constraint (interest rate)

construction loans

finance a building that doesn’t exist yet. riskiest loan b/c no income to underwrite

TRUE OR FALSE

There is no amortization during construction

TRUE

TRUE OR FALSE

There is only interest during construction

TRUE

TRUE OR FALSE

Cap Rate = NOI divided by Property Value

TRUE

Market value

what mkt says its worth, based on comparable sales or income approach, objective/quantifiable, what appraisers use for lendingi

investing value

what property is worth to a specific investor in the mkt, shaped by tax situations, RROR, and alternatives, different for every investor - subjective, varies based on depr benefits, opportunity costs, goals

financial sequence MEMORIZE!!

• Gross Potential Rent + Other Income - Vacancy & Credit Loss = Effective Gross Income - operating expenses = NOI - annual debt service = Before tax cash flow - Income tax = After tax cash flow

Cap rate formula

NOI divided by Property Value

TRUE OR FALSE

Cap rate is the least-used single ratio in commercial real estate

FALSE

Cap rate

Tells you return on property as if you paid all cash - NO DEBT

Low cap rate (4-5%)

Premium mkts, higher demand and limited supply, investors like low risk/rent growth/depr and tax benefits

high cap rate (8-10%)

secondary mkts or higher-risk properties, less liquidity and more risk, investors needing current income yield, value add

critical limitation of cap rates

single period snapshots. ignore rent growth, future vacancy changes, capital improvements needed, and taxes

cash-on-cash return formula

BTCF divided by equity invested

cash on cash reutrns

tells u actual cash yield on equity investment yr 1

Effective Gross Income Multiplier

Purchase price divided by Effective Gross Income

Operating Expense Ratio (OER)

Operating Expenses ÷ EGI

Loan-to-Value (LTV)

Loan Balance ÷ Property Value

Debt Coverage Ratio (DCR)

NOI ÷ Annual Debt Service

Debt Yield

NOI ÷ Loan Amount

what ratios do well

• quick and easy to calculate

• useful for comparing properties side by side

• standard lang across industry

• great for spotting early red flags

• good starting point for due diligence

what ratios miss

• single period only - ignore future cash flows

• no formal decision rule

• before tax measures

• can be games w/ manipulated pro formulas

• dont capture lease expirations or rollover risk

property manager

• markets vacancies and screen tenants

• collects rent and enforces leases

• coordinates repairs and maintenace

• handles landload tenants disputes

• reports financials to owners

• focused on operations

asset managers strategic

• identifies acquisition opportunities

• evaluated/arranges mortgage financing

• sets long-term hold or sell strategy

• oversees capital improvement budgets

• performance-based compensation tied to returns

• focused on wealth creation

TRUE OR FALSE
A management contract creates an agency relationship

TRUE

Landlord’s retain ___ after they get the property back when the lease ends

Reversion Interest

site control

buy or option the land. lock in control before spending on studies

key risk of site control

paying too much, miscalculating the market demand, environmental surprises

feasibility analysis

mkt research, soil tests, environmental review, financial modeling

key risks of feasibility analysis

GO or NO-GO decision. Cheapest time to stop

obtain permits

work with city zoning, planning, and environmental agencies

key risks of obtaining permits

city council can reject even a solid project

design

architects, engineers, and landscape architects develop full plans

key risks of designing

design changes get extremely expensive

financing

land loan → construction loan → permanent mortagess

key risk of financing

rising rates, mkt turn, or lender pullback can kill a deal

construction

general contractor coordinates dozens of subcontractors

key issues of construction

cost overruns, weather delays, labor shortages

marketing and leasing

usually begins before constructions complete

key issues of mkting and leasing

slow lease-up = high burn rate and slower permanent financing

operation

property stabilized with tenants'; management takes over

key issues with operation

poor management erodes returns after build

developmental budgets include:

land cost, hard costs, soft costs, financing costs, and a contingency reserve

hard costs

construction

soft costs

architect fees, permits, legal

financing costs

interest during construction

what it takes to be a developer

vision, analytical skill, communication and negotation, projects take 2-5 yrs, network

analytical fees

finance modeling, mkt analysis, construction budget review