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.