Real Estate 306 Final Exam Questions With
Correct Answers.
Market where tenants negotiate rent and other terms with property owners as their managers is: -
answer✔✔the user market
market in which required rates of return on available investment opportunities is: - answer✔✔the
capital market
the actions of local, state and federal governments affect real estate values: - answer✔✔through
user markets, capital markets and taxation
what portion of households own their house? - answer✔✔2/3
which asset category has the highest market value? - answer✔✔non-gov't real estate
storm water drainage systems best described as: - answer✔✔improvements to the land
single largest asset category in portfolio of typical U.S. household? - answer✔✔housing
real estate markets differ from other asset classes in that they're: - answer✔✔-localized
-high transaction costs
-segmented
-heterogenous
which attribute of a home is most difficult to observe & value? - answer✔✔location attributes
rules to determine whether something is a fixture - answer✔✔intention of parties
manner of attachment
character of article/manner of adaption
relation of the parties
fee simple conditional - answer✔✔ownership subject to condition/trigger event
legal life estate - answer✔✔created by action of law, meant to protect families but creates
problems
nonownership/nonfreehold/leasehold estates - answer✔✔limited in time, no right to disposition,
not titled interests:
tenancy for years, periodic tenancy, tenancy at will, tenancy at sufferance
tenancy for years - answer✔✔must have written formal lease to be enforceable
periodic tenancy - answer✔✔no definite term at the start, oral & informal, length of period
implied by payment period, more risk
tenancy at will - answer✔✔agreement that tenant will stay beyond end of lease until they or
landlord gives notice
suits if building being sold or renovated in near future
tenancy at sufferance - answer✔✔tenant is supposed to leave but doesn't
not trespassing until landlord accepts a rental payment
nonpossessory interests - answer✔✔bundles of real property rights that don't include possession:
easements
restrictive covenants
liens
easement - answer✔✔right to use land for specific and limited purpose
easements appurtenant - answer✔✔servient parcel gives up benefit to dominant parcel, that
benefit becomes permanent & inseperable feature of both parcels
2 docs borrow must always create in a mortgage loan - answer✔✔note & deed of trust
(mortgage)
note - answer✔✔defines exact terms & conditions of loan
actual interest charged/month on RE loans = - answer✔✔annual stated contract interest rate / 12
x the beginning of the month balance
ARM - answer✔✔mortgage w/ adjustable interest rate
most common index rates - answer✔✔1. U.S. treasury constant maturity rate (1 yr in maturity)
2. cost-of-funds index (for depository lenders)
3. LIBOR (London Interbank Offering Rate- for income producing property)
margin - answer✔✔lender's "markup" determined by individual lender & varies with
competitive conditions & with risk of loan
-avg. industry margin stable around 275 Bps
-lower for home equity loans
rate caps - answer✔✔limits that restrict change to an ARM interest rate, typically binding for
both increases & decreases in index
1. periodic or
2. overall
periodic rate cap - answer✔✔limit from one change date to the next
overall rate cap - answer✔✔limit change over life of loan
teaser rate - answer✔✔temporarily reduced interest rate (most ARMs marked w/ it)
-may be a % pt or 2 below sum of index + margin
-usually applies for short time, like 1 yr
-cap could apply to only index + margin or also to teaser rate, depends on note
payment caps - answer✔✔some lenders offer ARM home loans w/ caps on payment instead of
interest rate
-even if interest rate changes, payment caps at certain %
-enables lender to enjoy advantage of unconstrained interest rate adjustments while protecting
borrow against large payment changes
-gets complicated if interest charges increase more than payment cap will allow, b/c the unpaid
interest will be added to original balance, resulting in negative amortization
partially amortizing loan - answer✔✔may pay down partially over a certain number of yrs, but
require additional large payment w/ last scheduled payment
non-amortizing loan - answer✔✔require interest but no regular scheduled principal payment
prior to last payment
term for amortization - answer✔✔determines payments & schedule of interest + principle
payments
term to maturity - answer✔✔determines when entire remaining balance on loan must be paid in
full
-often called balloon loan (dominant form of mortgage loan for income producing property)
right of prepayment possibilities - answer✔✔NOTE
1. note may be silent
2. note is explicit on right
note silent on right of prepayment - answer✔✔right will depend on law of state where property
is
-under common law there's no right to prepay a mortgage before its term unless explicitly stated,
but some states have reversed this & said borrower automatically has right unless explicitly
prohibited
note is explicit on right of prepayment - answer✔✔provisions of the note will prevail
-most home loans give borrower right to prepay at anytime w/ out penalty
--except subprime loans, which commonly have very costly penalties to "lock in" borrower to
very high interest rate
prepayment penalties - answer✔✔contraint on right of prepayment for commercial real estate
-very severe for first few years, declines in latter half of loan
prepayment penalties: % of remaining balance - answer✔✔for earlier generation income
producing property loans
yield maintenance prepayment penalty - answer✔✔balance + lump sum representing the value of
the interest income that lender will loose (most recent practice)
defeasance requirement prepayment penalty - answer✔✔borrow must provide lender w/ some
combo of U.S. treasury securities producing interest income that replaces lost cash flows (even
more recent practice & most demanding penalty)
home loan late fees - answer✔✔standard typically ~4-5% of monthly payments
-assessed after the 15th of the month the payment is due
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