Real Estate Valuation, Financing, and Market Analysis Concepts

Which approach for calculating market value involves projecting future expected cash flows?

Income approach

The cost approach to valuation is most likely used for which type of property?

Education facility

What is a characteristic that distinguishes real estate markets from stock markets?

Market prices are revealed almost instantaneously to prospective buyers.

What adjustment should be made if a comparable property had favorable financing terms?

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

If a comparable property does not have a fireplace, what adjustment should be made?

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

What refers to the loss in market value due to deterioration of the subject property's neighborhood?

External obsolescence

What best describes the concept of market value?

It is an estimate of the most probable selling price of a property in a competitive market.

Which approach involves estimating the dollar value associated with replacing the property new?

Cost approach

What is the proper sequence for adjustments involving percentage adjustments?

Financing terms, market conditions, location.

What type of transactions is most appropriate for the sales comparison approach to valuation?

Arm's-length transactions

What rate should be used to determine the present value of the forecasted cash flow stream in DCF models?

Required internal rate of return

What is the fundamental element needed to determine market value for an income-producing property?

Net operating income

What is the expected relation between the going-in cap rate and the going-out cap rate?

The going-in cap rate will be lower than the going-out cap rate.

What does an increase in cap rates over time indicate?

Property values have decreased.

What are the ordinary expenditures owners expect to incur that keep the property competitive?

Operating expenses

What is the method of estimating a cap rate from comparable properties called?

Direct market extraction

For which property type is a gross-income multiplier most appealing?

Apartments

What are the expected costs to make improvements that increase a building's value called?

Capital expenditures

What does a 'below-line' treatment of capital expenditures imply?

Capital expenditures are subtracted from net operating income to obtain a net cash flow measure.

What is the ratio of a property's selling price to its effective gross income called?

Gross income multiplier

Why is foreclosure considered the ultimate recourse of the lender?

It allows the lender to bring about the sale of the property to recover the outstanding indebtedness.

What happens when a lender forecloses on a property?

It extinguishes all superior liens, bringing about a free and clear sale of the property.

What is the lender known as in a mortgage agreement?

Mortgagee.

How long does a default on a mortgage loan remain on a credit record?

7 years.

What is the market determined interest rate in an adjustable rate mortgage called?

Index rate.

What clause allows a bank to demand full payment of a loan?

Demand clause.

What are states like Georgia that have a temporary transfer of title to the lender called?

Title theory states.

What are the two components of standard mortgage loan payments?

Interest and principal repayments.

What happens when scheduled mortgage payments are insufficient to cover accumulating interest?

The loan is said to be negatively amortizing.

What is the temporarily reduced interest rate in most adjustable rate mortgages called?

Teaser rate.

What are prepayment restrictions on first mortgage home loans?

Prepayment restrictions are prohibited in most cases.

What clause gives the lender the right to accelerate the loan if a property is sold?

Due-on-sale clause.

What is the market called where borrowers and lenders come together to provide financing for property purchases?

Primary mortgage market.

What is a qualified mortgage?

A loan that has specific features and meets designated underwriting requirements.

What are loans that meet all general underwriting standards except for the dollar size limit called?

Jumbo loans.

What is the predominant form of prime conventional mortgage?

Fixed rate level payment mortgage (LPM).

What are the loans that Fannie Mae and Freddie Mac are eligible to purchase called?

Conforming conventional loans.

What are loans that fail one or more underwriting standards established by government sponsored enterprises called?

Nonconforming loans.

How do conforming loans compare to nonconforming loans in terms of interest rates?

Conforming loans carry a lower interest rate.

Why does the annual percentage rate (APR) often understate the true cost of borrowing?

It assumes the loan always goes to maturity.

What is it called when a borrower replaces an old mortgage loan with a new one?

Refinancing.

What is the single value determined at the conclusion of the traditional sales comparison approach called?

Indicated value.

What is the difference between the current market value of a building and the total cost to reproduce it new called?

Accrued depreciation.

What is the value that a particular investor places on a property called?

Investment value.

What imposes ethical obligations and minimum standards for real estate professionals providing market value estimates?

Uniform Standards of Professional Appraisal Practice (USPAP).

What is the process called in which an appraiser weighs the reliability of value indicators?

Reconciliation.

How many comparable sales are considered adequate for an appraisal assignment?

Three

What is the natural vacancy rate?

The proportion of potential gross income not collected in the rental market.

What is income capitalization?

The process of converting periodic income into a value estimate.

What best describes the direct capitalization method?

Value estimates are based on a multiple of the expected first year net operating income.

What is the going-out cap rate used for?

To estimate the terminal value of a property.

What is market rent?

The rental income a property would command if all space were continuously leased at current rates.

What exemplifies a fixed expense?

State and local property taxes.

What type of bankruptcy is a court-supervised workout for a troubled business?

Chapter 11 bankruptcy.

What type of bankruptcy is a court-supervised workout for a troubled household?

Chapter 13 bankruptcy.

What clause enables a lender to declare the entire loan balance due upon default?

Acceleration clause.

Can a secured real estate loan exist without a mortgage?

Yes, through a contract for deed.

When does title to the property pass to the buyer in a contract for deed?

After the buyer takes possession.

What is the equity of redemption?

The right to reclaim a property after foreclosure by paying the outstanding mortgage balance.

How many days must a payment be overdue for lenders to treat it as a serious default?

90 days.

What are FHA loans typically considered?

Assumable loans.

What is Chapter 7 bankruptcy?

The traditional form of bankruptcy where the court liquidates the debtor's assets.

What act prohibits discrimination in lending practices?

Equal Credit Opportunity Act (ECOA).

What are piggyback mortgage loans?

Second mortgages created simultaneously with the first mortgage to avoid PMI.

What are home equity loans?

Second mortgage loans borrowed against the accumulated equity in a home.

What methodology is criticized for not accounting for variations in refinancing benefits?

Interest rate spread.

What is true about FHA insurance?

It is paid by the borrower and protects the lender against loss due to borrower default.

What scenario results in a higher mortgage insurance premium?

Higher loan-to-value ratio.

What type of loan offers additional monthly income to homeowners in exchange for equity?

Reverse mortgage.

What is a strategic default?

When a borrower stops making payments despite having the ability to do so.

What is a purchase money mortgage?

A transaction where a buyer pays part in cash and signs a note for the remaining amount.