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.
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.
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.
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.
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).
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).
Net Operating Income (NOI)
Formula: NOI = Total Income - Operating Expenses
Measures the profitability of a property, before debt service and taxes.
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.
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).
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.
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.
Fiduciary Duties:
Obedience, Loyalty, Disclosure, Confidentiality, Accounting, Reasonable Care.
Real Estate Broker
Facilitates the buying, selling, or renting of real estate.
Brokers are paid commissions, typically 3-6% of the transaction price.
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.
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.
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.
Loan Risk
Highest Risk Loan: Typically a subprime loan, which is offered to borrowers with lower credit scores.
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.
Credit Scores
FICO: A credit scoring model widely used by lenders.
VantageScore: Another scoring model used by some lenders, less commonly than FICO.
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.
Eminent Domain
The government's power to take private property for public use with just compensation.
Encroachments
When a property owner’s structure or improvements extend beyond their property line.
Easements
A non-possessory right to use another person's land for a specific purpose (e.g., a right-of-way).
Entitlements
Rights granted by a government body to use land for a specific purpose (e.g., zoning approvals, building permits).
Nonpossessory Interest
A legal right to use or benefit from another’s property without owning it (e.g., easements).
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.
Mezzanine Financing
A hybrid form of financing that is a mix of debt and equity, typically used for high-risk projects.
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.
HOEPA (Home Ownership and Equity Protection Act)
A law designed to protect homeowners from abusive lending practices, especially regarding high-cost mortgages.
RESPA (Real Estate Settlement Procedures Act)
A federal law that provides guidelines for real estate transactions, ensuring transparency in closing costs and processes.
Amendments
Changes or additions to a contract, typically after it has been signed by the parties involved.
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.
Future Value
The value of a property or investment at a specified time in the future, accounting for interest, inflation, or appreciation.
Debt Yield
The ratio of NOI to the loan amount. Higher yields indicate a more secure loan.
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.