Real Estate Finance

Real Estate Finance

Real Estate Finance

The application of economic techniques in the real estate markets and its effects to other drivers of economy known as the

Real Estate Finance

It deals with the allocation, generation and use of monetary resources over time, which is invested in the real estate business

Real Estate Economics

The application of economic techniques to real estate markets.

It tries to describe, explain, and predict patterns of prices, supply, and demand.

Real estate transfers

usually involve the use of money as opposed to other assets (i.e., exchange, donations, inheritance, etc.)

Mortgages

are generally considered to be capital instruments because payback are usually 10 years or more.

Discount Rates

is the rate at which member banks can borrow funds from the BSP to loan to other customers. Banks compete in the market and need to charge higher to their customers to gain a profit

Monetary Policy

is the function of BSP to control the flow of money in the market.

Fiscal Policy

is the function of government to management revenues (Taxes) expenses (appropriations.)

Money Markets

are financial vehicles and investment periods of less than 1 year

Capital Markets

financial vehicles that more than 1 year

Real Estate Investment

It involves critical investment decision that requires substantial funds outlay with the expectation of financial benefits generally over a long period or time horizon.

Supply & Demand

price varied inversely with supply and directly with demand; abundant supply = low price; abundant demand = high price (ceteris paribus – all other things constant)

Anticipation

value is a function of the present worth of future benefits; basis of income approach

Balance

value is maintained when all elements are in proper proportion (equilibrium).

Conformity

value is maintained when there is reasonable conformance; (e.g. land is at its highest value when there is balance in the 4 agents of production

LLCE

Land, Labor, Capital, Entrepreneurship

Change

value changes when there is change in the supply and demand, time and market conditions.

Substitution

the value of subject property is equal to the cost of producing an equally desirable comparable property; “Buyers will pay no more for a property that it would cost him to replicate it or buy a similar one.

Highest and Best Use (HABU)

the use that is physically possible, legally permissible, financially feasible, and maximally productive.

Competition

success breeds competition and this will affect value. attracts consumers but too much of it ruins profit.

Public Funding

funds obtained from the public by a listed company.

Traditional Financing

funds borrowed from banks and financial institutions.

Interest Rate

the rate of return earned by an investor which does not include allowance for capital recovery

Equity

funds that are inherently part of the company’s capital.

Amortizing Loan

The type of loan wherein the lender has some or complete control over the project and the income for a certain period, part or all of which is assigned to him to amortize the project.

Syndication

funds are pooled together between a developer and several other parties.

Pre-Selling

these are funds generated from prospective buyers.

Money

To pay for purchases and store wealth

Financial Instruments

To transfer resources from savers to investors and to transfer risk to those best equipped to bear it.

Financial Markets

To buy and sell financial instruments

Financial Institutions

To provide access to financial markets, collect information & provide services

Regulatory Agencies

To provide oversight for financial system.

Central Banks

To monitor financial Institutions and stabilize the economy.

INTEREST

The cost of money is also known as

Interest Rate

Interest is expressed as portion of the sum of money involved and this is called the

percentage

The units used for interest rates is called the

period

Since the cost of money is time-dependent, interest rates must always be accompanied by a

Simple Interest

means that the interest rate is applied only to the principal sum year after year.

Compound Interest

means that the interest rate is applied to both the principal sum and the accumulated interest year after year. Interest not withdrawn is added to the principal, or "compounded" and becomes the base of the next period's interest.

Risk Management

- is an uncertain event that may have a positive or negative impact on the project

 

- is the process of identifying and mitigating risk

Real Estate as Business

In the boom, many investors became rich but during bust many also lost money.

Buy and Sell

investors suffer financial risk if the property is stuck in the market especially if the cash flow was leveraged or when market value declines.

Buy and Lease

- if you fail to rent-out for long period of time, maintain to upkeep the property is a financial loss

Private Real Estate Deal

investing in someone else property

Titling

investing for titling of property or a return of investment

Development or Redevelopment

sharing in the development or redevelopment of property of others

Joint Venture

as a financial investor, risk if the development is delayed or not finished.

Real Estate Risks

There are many critical aspects of real estate perils today in the course of acquiring, selling, managing, developing or redeveloping properties.

Real Estate Risks

is the perils that a real estate company. 

Credit Risks

is the risk of loss following a change in the factors that drive real estate asset prices or increase in cost of leverage.

Home Mortgages

FRM and ARM are secured by RE properties.

Home Equity Loans

a hybrid between a consumer loan and a mortgage loan secured by residential properties.

Installment Loans

credit line, credit cards, auto loan, revolving credit secured by real estate properties.

Market Risks

the risk of losses arising from changes in economic conditions affecting real estate.

Operational risks

potential operational breakdowns in terms of people, process, and technology risk.

Financial Risks

it deals with the probability of shareholders will lose money when they invest in a company that has debt or cash flow inadequate to meet financial obligations.

Richter scale

measures magnitude

Mercalli scale measures intensity

using personal reports and observations

Real Estate Investment Trust (REIT)

is a corporation that earns recurring income from properties they own and manage.

Maker

one who makes the promise.

Payee

one to whom the promise is made.

Note

evidence of debt and promise to pay.

Without recourse” endorsement

Means future payment is only between the maker and the third party the instrument is endorsed to.

Holder in due course

Someone who buys a negotiable instrument for value, in good faith, and without notice of defenses.

Straight note

1.     periodic payments are interest only, with principal due on maturity date.

Installment note

periodic payments include both principal and interest.

Foreclosure

lender forces sale of property and collects debt out of sale proceeds.

Historical background

Personal property used as collateral for early forms of secured lending.

Hypothecation

Pledging property as collateral without giving up possession of it.

Legal title

when title is transferred only as collateral, without possessory rights.

Equitable title

property rights retained by the borrower, without legal title.

Mortgage recording

After execution, mortgagee records document to establish priority of mortgagee’s security interest.

Satisfaction of mortgage

Document given to mortgagor by mortgagee, after mortgage is paid off, releasing property from mortgage lien.

Deeds of trust

Like mortgage, but involves three parties, rather than two.

Trustee

independent third party, who arranges for release of property or foreclosure, as necessary.

Acceleration of debt

If mortgagor defaults, mortgagee notifies mortgagor that entire outstanding loan balance is due

Foreclosure lawsuit

If mortgagor can’t pay off entire debt, mortgagee files foreclosure action in county where property is located.

Defendants

mortgagor and junior lienholders

Lis pendens

document recorded to give notice to prospective buyers of property

Sheriff’s sale

Public auction, usually held at county courthouse, where property is sold to highest bidder.

Rights of purchaser

Purchaser at sale may be entitled to either take possession or collect rent from debtor during redemption period.

Sheriff’s deed

deed given to purchaser at end of redemption period

Subordination clauses

gives mortgage recorded earlier lower priority than another mortgage that will be recorded later on.

Partial release clauses

obligates lender to release part of property from lien when part of debt is paid.

Acceleration clauses

allows lender to declare outstanding loan balance due immediately in event of default.

Alienation clauses

(due-on-sale clause) is designed to limit borrower’s right to transfer title to property without lender’s permission.

Assumption

New owner takes on primary liability for repaying loan.

Estoppel letter

Acknowledges transfer of ownership and waives lender’s right to accelerate loan.

Junior mortgage

Mortgage with lower lien priority than another mortgage or deed of trust against same property.

Senior mortgage

Mortgage with first lien position.

Home equity loan

is loan secured by mortgage against borrower’s equity in home she already owns.

Home equity line of credit (HELOC)

Line of credit with a limit and minimum monthly payments that homeowners can draw upon as needed.

Refinancing

refers to a new loan used to pay off existing mortgage against same property.

Cash-out refinancing

New loan amount is more than amount of existing mortgage balance, so borrowers receive cash from refinance lender.

Bridge loan

provides cash for purchase of new home pending sale of old home.

Budget mortgage

is mortgage in which monthly payments include property taxes and hazard insurance.

Impound account

lender places tax and insurance payments in account and pays premiums out of it

Package mortgage

is secured by personal property as well as real property.

Blanket mortgage

is secured by more than one parcel of land and contains a partial release clause.

Wraparound mortgage

is new mortgage that includes existing first mortgage on property.