REE3043 Exam 2

FSU Professor Bailey

Adjustment for missing fireplace in comparable property

The transaction price of the comparable property should be adjusted upward.

Buyer and Seller Investment Values

The buyer’s investment value is the maximum they are willing to pay, while the seller’s is the minimum they are willing to accept.

External Obsolescence Example

Increased traffic flow due to more intensive use in the area.

Accrued Depreciation

The difference between a building’s current market value and the total cost to reproduce it new.

Indicated Value

The final value estimate for the subject property reached after adjusting and reconciling comparable sales data.

Reconciliation

The appraisal process of evaluating the relative reliability of different value indicators to arrive at a final value.

Cost Approach

A valuation method estimating the replacement cost of a property minus depreciation due to physical, functional, and external obsolescence.

Income Approach Use

Most applicable for valuing retail, office, or income-producing properties.

Typical Lease Term for Commercial Tenants

Three to five years.

Terminal Value Estimation with Direct Capitalization

Divide the projected NOI for one year beyond holding period by the going-out cap rate.

Potential Gross Income

Total annual income the property would produce assuming 100% occupancy with no losses.

Market Rent

Rental income a property would command under current conditions with full occupancy.

Capital Expenditure Example

Roof replacement.

Pro Forma

A cash flow forecast prepared for valuation using discounted cash flow analysis.

Gross Income Multiplier (GIM)

Ratio of a property's selling price to its effective gross income.

Dodd-Frank Act

Created an agency to oversee consumer protection laws and monitor financial risks post-2007 crisis.

Redlining

Illegal practice of avoiding lending in certain neighborhoods regardless of applicant creditworthiness.

Typical Mortgage Term

15–30 years.

Substantive Default

Occurs when a payment is overdue by 90 days.

Due-on-Sale Clause

Gives lender the right to demand full loan repayment if the property is sold.

Chapter 13 Bankruptcy

Court-supervised workout for a troubled household.

Acceleration Clause

Allows lender to declare full loan balance due upon default.

Note

The legal document that outlines financial terms of a mortgage loan.

Exculpatory Clause

Releases borrower from personal liability for the mortgage.

Index Rate

The market-determined interest rate used in adjustable-rate mortgages.

Option ARM Loan

Allows borrower to choose among payment options throughout the loan term.

Secondary Mortgage Market

Where mortgage originators sell loans to investors.

Conforming Loan Interest Rate

Typically lower than non-conforming loans.

Fully Amortizing Loan

FHA’s key contribution: a level-payment, fully amortizing loan.

PMI Requirement

Typically required when loan-to-value ratio is greater than 80%.

Strategic Default

When a borrower stops paying a mortgage despite being able to.

Conventional Home Loan

A standard loan not insured or guaranteed by the U.S. government.

Portfolio Lenders

Institutions that fund and hold mortgage loans using savings deposits.

Collateral

Underwriting characteristic most associated with loan default.

Fannie Mae's Role in the Mortgage Market

Fannie Mae does not lend money directly to homebuyers; instead, it operates in the secondary mortgage market by purchasing loans from lenders.

Capacity

Evaluated using housing expense ratio; part of the “three C’s” of underwriting.

Mortgage Banker

Provides origination services and initial funding for loans.

Interest Rate Risk

Risk that interest rates rise before selling newly originated loans.

Fallout Risk

Risk of borrowers walking away when market rates fall before closing.

Loan Underwriting

Evaluation of mortgage loan default risk.

External Obsolescence Adjustment

Loss in value due to external factors like neighborhood safety (e.g., $22,214 loss).

Value of Additional Bedroom

Use paired data of comparable properties to isolate bedroom impact.

Net Sale Proceeds Calculation

Terminal value minus selling expenses.

Direct Capitalization Value

Divide first-year NOI by overall capitalization rate.

Projected Sale Price Calculation

Divide Year 6 projected NOI by going-out cap rate.

Monthly MIP Payment

Annual premium (loan balance × 0.99%) ÷ 12.

Monthly UFMIP Allocation

UFMIP amount ÷ loan term in months.

NPV of Refinancing

Present value of new loan savings minus refinancing costs.

Monthly Servicing Fee

Annual fee percentage × loan balance ÷ 12.

Pass-Through Income

Monthly mortgage payment minus servicing fee (basis points of loan amount).