USP 25 final

Real Estate Market & Financial Concepts

  1. Market Influences (PESTEL)

    • Political: Government policies, tax rates, and stability.

    • Economic: Inflation, employment rates, and economic growth.

    • Social: Demographics, lifestyle preferences, and social attitudes.

    • Technological: Advances in technology, building materials, and processes.

    • Environmental: Sustainability concerns, green building standards, climate change.

    • Legal: Regulatory laws, zoning, property laws, environmental laws.

  2. Accrued Depreciation

    • Physical Deterioration: Value loss due to wear and tear, aging, and decay.

    • Functional Obsolescence: Depreciation caused by changes in market standards or preferences.

    • External (Economic) Obsolescence: Depreciation due to outside factors like neighborhood changes or environmental issues.

  3. Valuation Approaches

    • Cost Approach: Value based on the cost of replacing improvements.

    • Income Approach (Direct Capitalization): Value based on the expected income stream (Net Operating Income - NOI) from the property.

    • Sales Comparison Approach: Value based on comparable sales in the market.

  4. Capitalization Rate (Cap Rate)

    • Formula: Cap Rate = NOI / Property Value

    • A higher cap rate indicates higher potential return but also higher risk.

    • Influenced by market conditions, location, and property specifics.

  5. Effective Gross Income (EGI)

    • Total income from the property after accounting for vacancy and credit loss.

    • Formula: Potential Gross Income - Vacancy & Credit Loss + Miscellaneous Income (e.g., parking, laundry).

  6. Operating Expenses

    • Fixed Expenses: Do not vary with occupancy (e.g., property taxes, insurance).

    • Variable Expenses: Vary with occupancy (e.g., utilities, maintenance).

    • Capital Expenditures: Large expenses for improvements or acquisitions (not part of operating expenses).

  7. Net Operating Income (NOI)

    • Formula: NOI = Total Income - Operating Expenses

    • Measures the profitability of a property, before debt service and taxes.

  8. Effective Gross Income Multiplier (EGIM)

    • Formula: EGIM = Sale Price / Effective Gross Income

    • A quick indicator of property value, especially useful for smaller properties with short-term leases.

  9. Loan-to-Value (LTV)

    • Ratio of the loan amount to the appraised value of the property.

    • Higher LTV increases risk for the lender and may require private mortgage insurance (PMI).

  10. Debt Service Coverage Ratio (DSCR)

    • Formula: DSCR = NOI / Debt Service

    • A ratio greater than 1.0 indicates the property generates enough income to cover debt obligations. A minimum of 1.3 DSCR is typical for commercial properties.


Real Estate Law & Agency

  1. Law of Agency

    • The legal relationship between an agent and principal (client).

    • Agents must act in the best interests of their clients and disclose any conflicts of interest.

  2. Fiduciary Duties:

    • Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable Care.

  3. Real Estate Broker

    • Facilitates the buying, selling, or renting of real estate.

    • Brokers are paid commissions, typically 3-6% of the transaction price.

  4. Dual Agency

    • When a broker represents both the buyer and the seller.

    • Must disclose and get consent from both parties.

    • Banned in some states due to conflicts of interest.

  5. Deeds

    • Recorded Deeds: Provide legal evidence of ownership and protect the title.

    • Quitclaim Deed: Transfers ownership interest but does not guarantee the title is clear.

    • Grant Deed: Transfers ownership and guarantees that the grantor holds clear title.


Loan & Financing Concepts

  1. Mortgage Types

    • Amortizing Loan: A loan where the borrower makes regular payments to reduce both principal and interest over time.

    • Partially Amortized Loan: Similar to an amortizing loan but ends with a balloon payment.

    • ARM (Adjustable Rate Mortgage): A mortgage with an interest rate that may change periodically based on an index.

  2. Loan Risk

    • Highest Risk Loan: Typically a subprime loan, which is offered to borrowers with lower credit scores.

  3. Government-Backed Loans

    • VA Loan: No required down payment for qualified veterans, backed by the government.

    • FHA Loan: A government-backed loan designed to make homeownership more accessible with lower down payments.

    • GI Bill: Provides veterans with the ability to purchase homes with no down payment through VA loans.

  4. Credit Scores

    • FICO: A credit scoring model widely used by lenders.

    • VantageScore: Another scoring model used by some lenders, less commonly than FICO.

  5. Default and Foreclosure

    • Default: Failure to meet the terms of the mortgage.

    • Foreclosure: Legal process where the lender takes possession of the property due to the borrower’s failure to make payments.


Property Rights & Land Use

  1. Eminent Domain

    • The government's power to take private property for public use with just compensation.

  2. Encroachments

    • When a property owner’s structure or improvements extend beyond their property line.

  3. Easements

    • A non-possessory right to use another person's land for a specific purpose (e.g., a right-of-way).

  4. Entitlements

    • Rights granted by a government body to use land for a specific purpose (e.g., zoning approvals, building permits).

  5. Nonpossessory Interest

    • A legal right to use or benefit from another’s property without owning it (e.g., easements).


Real Estate Development & Investment Terms

  1. Hard vs Soft Costs

    • Hard Costs: Direct costs of construction (e.g., materials, labor).

    • Soft Costs: Indirect costs, such as permits, design fees, and legal expenses.

  2. Mezzanine Financing

    • A hybrid form of financing that is a mix of debt and equity, typically used for high-risk projects.

  3. Absorption Rate

    • Gross Absorption: The total space leased or sold in a given period.

    • Net Absorption: The amount of space leased or sold after accounting for vacated space.

  4. HOEPA (Home Ownership and Equity Protection Act)

    • A law designed to protect homeowners from abusive lending practices, especially regarding high-cost mortgages.

  5. RESPA (Real Estate Settlement Procedures Act)

    • A federal law that provides guidelines for real estate transactions, ensuring transparency in closing costs and processes.

  6. Amendments

    • Changes or additions to a contract, typically after it has been signed by the parties involved.


Miscellaneous Concepts

  1. Bid Rent Curve

    • Describes how the demand for land changes relative to its distance from a central business district (CBD).

    • Working from home: In this scenario, there’s less demand for proximity to the CBD, leading to a flatter bid rent curve.

  2. Future Value

    • The value of a property or investment at a specified time in the future, accounting for interest, inflation, or appreciation.

  3. Debt Yield

    • The ratio of NOI to the loan amount. Higher yields indicate a more secure loan.

  4. Taxation & Calculations

    • Tax Brackets: Rates applied to taxable income, which are divided into ranges (e.g., 10%, 20%, 30%).

    • Debt to Income (DTI): A ratio used by lenders to assess a borrower's ability to manage monthly payments.

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