FINC 349 MIDTERM

A compilation of key concepts from the lecture on Real Estate Finance and Investments, focusing on essential legal rights, financial instruments, and valuation methods.

What are property rights in real estate?

The legal rights associated with the ownership of real estate, including freehold and leasehold estates.

What is a freehold estate?

Ownership title of real estate with no predetermined time limit.

What does a leasehold estate grant?

Possession of property for a specific period via a lease agreement.

What is title assurance?

Methods used to minimize the risk of defects in title.

What is an abstract of title?

A historical summary of documents affecting a property's title.

What is a deed?

An instrument used to convey title from one party to another.

What is a promissory note?

The legal instrument detailing the terms of a debt including amount borrowed and repayment terms.

What is a mortgage?

The legal instrument securing a loan on real estate.

What does loan assumption mean in real estate?

A buyer taking over the seller's mortgage obligations.

What does a workout refer to in real estate finance?

The process used to resolve mortgage default before foreclosure.

What are alternatives to foreclosure?

Voluntary conveyance, short sale, and prepackaged bankruptcy.

What is bankruptcy?

A legal proceeding that can have serious consequences for secured lenders regarding collateral.

What is an adjustable-rate mortgage (ARM)?

A mortgage with variable interest rates that can change during the loan term.

How is risk allocated in ARMs?

ARMs shift interest rate risk to the borrower.

What factors determine the composite rate in ARMs?

The sum of the index and the margin.

What is a teaser rate?

An initial interest rate that is significantly lower than the regular composite rate.

What is negative amortization?

When loan payments do not cover accrued interest, causing the loan balance to increase.

What are caps in mortgage loans?

Limitations on interest rate changes or payment adjustments.

What are two key ratios for measuring default risk?

Loan-to-Value Ratio (LTV) and Payment-to-Income Ratio (P/I).

What is the purpose of underwriting in real estate finance?

To assess the total risk of lending to a specific borrower.

What does credit scoring measure?

A borrower's creditworthiness based on a statistical model.

What is RESPA?

The Real Estate Settlement Procedures Act that regulates settlement costs disclosure.

What is the Annual Percentage Rate (APR)?

The cost of borrowing expressed as an annual rate.

What is the pro forma cash flow in investment analysis?

A statement calculating net operating income from rental income minus expenses.

What is effective rent?

A measure to compare leasing alternatives based on net rental streams.

What is a sales comparison approach in appraisal?

An appraisal method that compares a property with similar, recently sold properties.

What drives house prices according to economic analysis?

Factors like income and employment.

How is value determined using the income capitalization approach?

By converting income into value through approaches like direct capitalization.

What is a Gross Income Multiplier (GIM)?

A method used to calculate property value based on current gross income.

What is a terminal cap rate?

A cap rate applied to estimate the reversion value of a property.

What does highest and best use determine?

The optimal use of land and whether existing improvements should remain.

What are lease provisions?

Clauses in leases that specify rent adjustments and expense recoveries.

What is a step-up lease?

A lease that specifies periodic rent increases.

What are common area maintenance (CAM) charges?

Expenses shared by tenants for maintaining common areas.

What is the appraisal process?

A systematic approach used to estimate a property's market value.

What needs to be assessed for the appraisal of a property?

The property rights to be appraised and the effective date of the estimate.

What does the term 'economic base analysis' refer to?

An analysis technique used to forecast housing prices based on economic demand.

In the context of ARMs, what does initial interest rate refer to?

The starting interest rate for the adjustable-rate mortgage, usually lower than fixed rates.

What are the consequences of filing for bankruptcy for secured lenders?

Secured lenders may face losses if collateral value is less than the debt.

What does the primary market for space refer to?

The market where properties are leased to tenants for income generation.