Real Estate

• Distinction between real property and personal property. 

• Real property- land or any building there on

  • Ex. Kitchen cabinets: attached to the real estate

• Personal property- everything not fixed to the real property

  • Items such as

• Title to the house gives you ownership

• Ownership is given through the deed

• File deed to the registrar in the county where it’s located where they record the deed

  • Recorded - becomes public info. to tell the world that you have ownership and so no one else says it belongs to them

• In writing = recorded

When you want to buy a house:

• You give the house the collateral when you get a loan from the bank

• Give the bank a mortgage- document which says the bank has the house as the collateral to secure the loan

• The bank is then going to record the mortgage to tell the world that they have a lean on this piece of property

  • They do this so no one else lends them

• Lessor- owner of the building, landlord

  • Always maintains ownership rights

• Lessee- tenant in the building

  • No ownership rights to building

• Mortgagor/Mortgagee

• Mortgagor – Homeowner (borrower) of the funds to buy the house

• Mortgagee- the bank (recipient)

• Classifications of estates:

  • Fee simple- the complete form of ownership of the property

  • Leasehold- right to use the property for a very long period such as 50 yrs +

    • Ground lease

  • Life estate- person who owns the estate sells it to someone else but retains the right to live on the property until they want to move out or entire life

  • Future- will come to the property at some point in the future and the title will pass onto that person

• Title-

• Deed-

• Covenant of a deed is there forever

  • Will occur if it is against the law (statute)

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• Types of deeds –

  • General Warranty Deed- most comprehensive form

• Special Warranty Deed- owner of the property is making from the point of time they

• Bargain and Sale Deed- seller (grantor) makes no warranty about the property

• Sheriff’s Deed- taken from you to the bank in the case of foreclosure- process to get tile of the collateral

• Quitclaim Deed- transfers the title of a property from one person to another, with little to no buyer protection

• Executors Deed- property transferred from someone who has died

• Recording

• Title Insurance- protects you against a cloud of title (defect in the property)

•  Promissory Note- signed document containing a written promise to pay a stated sum of money to a specified person or the bearer at a specified date or on demand

  • Includes: term of the loan, amount to pay interest rate, number of payments, penalties, amount borrowed, maturity date, events of default

  • Bank then has right to accelerate the loan to be due today, adding all interest into what is due today 

  • In commercial you typically cannot prepay the loan without penalty  

  • Recourse clause- the ability of the bank to come after you if you default like personal assets 

  • In commercial they’re non-recourse 

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• Pre-payments- you can do this in a residential without penalty

  • Cannot on commercial loan- only pre-payable prior to 30 days to maturity

• Recourse clause- ability of the bank to come after you if you default

  • Commercial loans are non-recourse

• Mortgage- a loan used to purchase or maintain a home, plot of land, or other real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments divided into principal and interest. 

• Subordinate- all leases are subordinate to their lean

• Common Mortgage Clauses:

• Taxes in insurance 

• If something happens to property bank has insurance to fix property? 

• Homeowners policy doesn’t cover big damages such as a flood? 

• The banks is going to want to make sure you have insurance 

• Maintenance- letter of repair 

• Restriction of transfer of property- bank must approve first 

• Due on sale clause 

• Assignability  

• Subordination- all leases are subordinate to our loan--  so leases can’t say they don’t have to pay  

• Assumption of Mortgage- buyer assumers the mortgage and the seller is relieved of all responsibilities

• “Subject to” - seller of property is still liable to terms and conditions of the note if the buyer defaults 

• Seller Financing- seller of property acts as the bank (lessor) and gives the buyer the financing to get the property

• Default- when you can’t pay loan

• Workouts- a contract mutually agreed between a lender and borrower to renegotiate the terms on a loan that's in default, often in the case of a mortgage that is in arrears. Generally, the workout includes waiving any existing defaults and restructuring the loan’s terms 

• Foreclosure  - the action of taking possession of a mortgaged property when the mortgagor fails to keep up their mortgage payments.

• Compound Interest – the growth of a given dollar amount at a specified interest rate for a specific number of periods.

• If you invest $1 at 6% in one year you will have $1.06

• 94 cents today is the same as getting a dollar tomorrow

  • All things equal = indifferent

• Annuity - series of cash flows overtime

• Discounted cash flow-price your going to pay for the asset

• Interest rate could be the cost of borrowing,

• Ammonization- death of a loan

• As the amortization period increases, the loan constant goes down as you have more time to pay it off

• Regardless of the amount of money you borrow you will have the same exact loan constant

• Real estate investors want to pay as little amortization as possible

• Interest Rate- the amount a borrower is charged for the privilege of being loaned money

• Types of fixed rate mortgages:

• Constant amortization mortgage- pay the same amount of ammonization over the term of the loan

• Constant payment mortgage- the payment stays constant throughout the term of the loan

• Loan Constant- factor that gives real estate investors an idea of how much amortization they are paying at the given interest date and given amortization period schedule

  • As the amortization period increases, the loan constant goes down as you have more time to pay it off

  • Regardless of the amount of money you borrow you will have the same exact loan constant

• Loan Closing Costs- fees paid when finalizing a real estate transaction and obtaining a loan

• Loan fees and prepayments

  • Third party costs- inspection, survey, appraisal

  • Statutory fees- fees that are governed by law

  • Additional financing costs- points (pre-paid interest), application fees, loan document preparation fees deducted out of the loan proceeds

• Interest Only Loans- only paying interest on the loan, paying nothing in amortization

• Negative Amortization-  the loan balance increases over time because the amount your paying

• Balloon Payment- the term of the loan is shorter is shorter than the amortization period

  • Term is a ten-year loan w 30 yr amortization schedule which calculates out the monthly payment

• Reverse Mortgage- for older Americans with close to no debt at all

  • Bank will give you a lump some amount of money which accrues interest over time with no payments, but the bank gets re-paid the money plus accrued interest

  • Based on your gender and age

  • The younger you are (ex. 65) the less they will give you 4on the loan

·       Classifications of Real Estate

o   Single Family-

o   Income Producing

§  Multi-Family- 5 or more residential units owned by one entity

§  Commercial- muti-tenant office space

o    

§  Retail- covers a wide array of property types such as single storefronts, strip/shopping centers,

regional shopping center/mall- drawing from a smaller area

neighborhood center- local

strip center- mom and pop stores, individual

specialty stores – built for a certain tenant

big box center- Costco, BJ, Home Depot

§  Hotel/Motel- business centers, convention centers, restaurants, hotel rooms

Full-service hotel- lounge, restaurant, concierge, spa

Limited-service hotel- Residence Inn, Hilton Garden Inn

Suite hotel- sleeping area, room, kitchen area, table

Extended stay hotel- extended stay America, staying for over a month

Biggest expense in operating a hotel: payroll/housekeeping, food, utilities

§  Industrial/Warehouse

§  Heavy industrial- large machines

§  Light industrial- no heavy manufacturing, less electricity consumption

§  Distribution centers-

§  Flex space- office space and manufacturing warehouse in the back

Industrial properties- hospitals, universities

§  Recreational- country clubs, golf courses, sporting centers

§  Institutional- college/ university

Ex. parking space,

If you buy a house and rent it out it’s an investment piece of property

·       Rental rate for space- determined by supply and demand

o   Dollars (y) and quantity(x)

·       Factors affecting Supply- rent subsidy/ rent control

·       Leasing v. Owning- People shift from leasing to owning is when the net cost of home ownership is less than renting or leasing

·       Lease Conditions –a written contract that outlines the terms and conditions of your rental arrangement with the landlord

Sub-letting clause- who you can assign the lease to

Maintain and repair, who is responsible for what 

Rentable square footage-

Useable square footage- what you can physically put carpeting on

·       Rentable Area

·       Usable- allowable use clause

·       Loss Factor- paying rent on total square footage but you can only put carpet on a certain amount of it, it is the difference between rentable and usable square footage, expressed as a percentage

o   Ex. Hallways, common area

CAM charges- expense pass throughs

• Gross Potential Rents-

• Gross potential rent income- maximum rent you can collect if you rent out 100% of the units 100% of the time

• Vacancy Loss- vacancy factor x GPRI

• Income you aren’t going to gain because the unit is not being rented out

• Net Rent – GPRI – vacancy loss

• Operating Expenses- cost of operating a property

Ex. Insurance, utilities (gas, electric, water), maintenance (repair), payroll/payroll taxes, supplies, legal fees, real estate taxes,

• Net Operating Income- the income you get when you subtract operating expenses from rent that you collect; interest income

• Market Value/Capitalization Rate- the interest that you demand on a particular investment

• Loan-to Value- the most a bank will give you in relation to a loan

• Loan Constant- factor to see how much you’re paying in terms of amortization/ interest rates

-        Monthly payments/ loan amount

• Debt Coverage Ratio- a measure of the cash flow available to pay current debt obligations.

• Maximum Allowable Loan- total amount of money that an applicant is authorized to borrow

• Lending- the act of providing money to purchase or refinance a property

Cap rate- the interest rate you demand on that investment

To have positive leverage - cap rate is greater than your cost of capital

Cash on cash return- cash in your pocket over the cash you have invested in the property

Free and clear return- free and clear of any debt on the property

Financial Leverage- using debt to enhance your return positively or negatively

If your cost of capital (loan constant) is less than your cap rate you have positive leverage.

If your cost of capital (loan constant) is greater than your cap rate you have negative leverage.

Appraisal- an estimate of the market value of a property

• Lockout Clause- prohibited from prepaying that loan for a period of time

 Underwriting Loans- the process used by lenders and insurers to evaluate risk. For lenders, it is used to determine how likely a borrower is to be able to pay back the loan

• Mortgage Covenants- a promise by the borrower to abide by certain terms and conditions outlined in the Loan Agreement.

• Prepayment Penalty- you can prepay the loan with a penalty

• Types of Risk:

Interest rate risk- fluctuation of rates

Market risk- the possibility of a decline in property values or income due to changes in market conditions

Liquidity risk- not easily convertible to cash

Legislative risk- zoning regulations,

Business risk-the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail.

Financial risk- price fluctuations for the property, value may go up or down

Management risk- property management (ex. Utilities)

Environmental risk – ex. Contaminated soil underneath property, oil leaks, lead

• Due Diligence- process of thoroughly investigating and analyzing information about a company, person, or asset before making a significant business decision

• Renewal Leasing Assumptions- estimates used to project future leasing activity in commercial real estate.

• Vacancy- money lost

• What is the market rent? What will it be in the future?

• Commissions, tenant improvement allowance

• Market Value- what a willing seller is willing to sell it at and what the buyer is willing to purchase it for

  • Price the willing buyer and willing seller agree to

• Appraisal – estimate of value at a given point in time

• Methods of Valuation

  • Sales Comparison Approach: subject (your) property gets compared to other similar properties

  • Trying to determine your value

• Income Approach:

• Taking the estimate of future cash flows of the property + value of the property at some point in time + market value x amount of years down the road

• Cost Approach: the cost of the vacant land plus the construction costs to arrive at the best and highest use for the land

• FAR- floor area ratio

 Market Value- what a willing seller is willing to sell it at and what the buyer is willing to purchase it for

• Price the willing buyer and willing seller agree to

• Appraisal – estimate of value at a given point in time

• Appraisal Process:

• Appraiser- describes the physical and legal characteristics of the property

  • Legal description- metes and bounds- tells exact location

• Identify the rights being appraised-

• Lease hold interest- a contract in which an individual or entity, or in real estate terms, a lessee, leases a parcel of land from an owner or lessor for a set period of time

• Partial interest- when two or more individuals own a separate portion of an undivided property, ownership is broken up

• Purpose of the appraisal- for state, tax, refinancing purposes

• Date of the appraisal