Real Estate Investment Analysis

Assignment – A

1. Explain how a purchase money mortgage is sometimes used by a builder so that he may reduce the amount of cash necessary.
2. How and when is an estoppels certificate used?
3. Discuss the actions available to the Central Bank to raise or lower interest rate.
4. Explain the impact of interest rate on secondary mortgage market.
5. How is the real estate market different from commodity market?

Case Study

1. Economists often refer to credit situations as being “easy,” “taut,” or “tight.” The term “taut” seems to be used to indicate an area between easy and tight and moving in the direction of tight.

Assume you are a mortgage banker with an opportunity of placing $300,000 worth of mortgages. You have a large life insurance company to whom you can look as a permanent investor for this money.

Indicate  the probable flow of funds in each of the above three situations suggesting the various type commitments, warehousing, etc., that would logically be necessary. You might also assume that you can deliver your “package” (the entire lot of mortgages) in about 18 months.

2. The following excerpt is from a recent issue of Realtor’s Headlines:

“Secondary market purchase prices for government-backed 4½ per cent mortgages were cut, and advance commitments to buy them were discontinued last week by the Federal National Mortgage Association.( FNMA). FNMA, which buys Federation of Housing Association (FHA) -insured and government-guaranteed mortgages from lenders thus renewing their cash resources, said that its prices for FHA and government insured 4½ per cent mortgages would range from 90 to 92, depending upon the area and amount of mortgagor’s equity. The previous price range was 92 to 94.

. . . Unaffected by the order were FHA mortgages bearing interest rates of 5 and 5¼ per cent. Their price schedules have not been changed, and they will continue to be eligible for stand-by commitments.”

1. Explain the terms “advance commitments” and “standby commitments” as used above.

2. Why should the price of mortgages vary with the “area” or geographical location of the mortgage?

3. Can any conclusion be drawn from this with regard to the direction in which the interest rate is moving?

Assignment – C

1. Restrictions and limitations on real estate imposed by both private and public entities are collectively known as
2. Easements.
3. Encroachments.
4. Eminent domain.
5. Encumbrances.

 

2. A _______ refers to a lien on all of the assets of a debtor, while a _______ refers to a lien on carefully identified assets of the debtor.
3. Mechanics lien, special lien
4. General lien, mechanics lien
5. Special lien, mechanics lien
6. General lien, special lien

 

3. In an easement appurtenant, the property that benefits from the easement is known as
4. Servient estate.
5. Dominant estate.
6. Gross estate.
7. Encroachment.

 

4. Utility companies that have rights to place electric lines, phone lines, cable tv, gas lines, etc. hold
5. Easements in gross.
6. Easements appurtenant.
7. Gross estates.
8. Servient estates.

 

5. In an _______, the holder has the right to remove natural resources from another person’s property.
6. Easement
7. Profit
8. License
9. Encroachment

 

6. When a person wins a monetary award from a lawsuit, the loser’s property can be used as a security towards paying a debt. The security interest is known as a
7. Settlement lien.
8. Tax mortgage.
9. Judgment lien.
10. Mechanic’s lien.

 

7. A lien is best described as a claim that
8. Permits a creditor to take possession of the debtor’s real estate.
9. Amounts to a financial security interest in the real estate.
10. Represents the creditor’s right of ownership in the real estate.
11. Allows a third party to use one’s real estate in a prescribed manner.

 

8. Jones has an easement for an access road across Smith’s property. _______ has the servient estate; _______ has the dominant estate.
9. Smith, Jones
10. Jones, Smith
11. Smith, Smith
12. Jones, Jones

 

9. Private restrictions that limit ownership interests in real property include all of the following except
10. Zoning.
11. Easements.
12. Adverse possession.
13. Licenses.

 

10. Although ownership and possession of real estate are not synonymous, through_______ one might gain ownership by possession.
11. Zoning
12. Easements
13. Adverse possession
14. Liens

 

11. The mortgage document used as an encumbrance on an owner’s title is an example of a
12. Special lien.
13. Broad lien.
14. General lien.
15. Judgment lien.

 

12 Suppose that Ralph and Ed are neighbors. Each wants to have a paved driveway. To save money; Ralph and Ed decide to share one driveway which will be built partially on each lot. Which of the following statements is incorrect?

1. Ralph’s lot is a servient estate.
2. Ed’s lot is a servient estate.
3. Ralph’s lot is a dominant estate.
4. Ed’s lot is an easement in gross.

 

13. The owner of the property being encroached upon has the right to force the removal of the encroachment, but if that owner fails to force removal, the other party may claim the legal right to continue encroaching by
14. Adverse possession.
15. Eminent domain.
16. Condemnation.
17. License.

 

14. Congress has regularly used the President’s yard as a short-cut for countless years without permission. The President put up a fence to stop the traffic. A judge says the fence must come down, an easement has been created. What method has been used to create the easement?
15. Prescription
16. Appointment
17. Implication
18. Reservation

 

15. A revocable right to temporarily use real estate for a specific purpose is an
16. License.
17. Encroachment.
18. Profit.
19. Easement.

 

16. If a person dies intestate and has no heirs, the state receives title to his or her property through the power of
17. Easement.
18. Escheat.
19. Estoppel.
20. Hypothecation.

 

17. The lender in a mortgage arrangement is known as the
18. Grantee.
19. Grantor.
20. Mortgagor.
21. Mortgagee.

 

18. Promises made by a landowner or predecessor in title about how the land will or will not be used are known as
19. Zoning laws.
20. Restrictive covenants.
21. Deed restrictions.
22. b and c only.

 

19. An original title is the title obtained through discovery.
20. True
21. False
22. Inadequate
23. Irrelevant

 

20. A purchase money mortgage is sometimes used by a builder so that he may reduce the amount of cash necessary.
21. True
22. False
23. Inadequate
24. Irrelevant

 

21. A mortgage can be taken back as purchase money mortgage.

 

1. True
2. False
3. Inadequate
4. Irrelevant

 

22. The partial release cause is generally used in conjunction with a blanket mort­gage.
23. True
24. False
25. Inadequate
26. Irrelevant

 

23. A situation where the borrower retains posses­sion of the property while the lender has a secu­rity interest is called

 

24. Jack Miller makes a very small down payment and borrows the balance needed to purchase real property. This is called using
28. Equitable title.

 

25. The largest providers of mortgage loans for one-family to four-family units are
26. Pension funds.
27. Investment trusts.
29. Banks and thrifts.

 

26. In order to qualify for the $500,000 exemption from capital gains tax on the sale of their home, a couple must have
27. Lived there the two years prior to selling.
28. Lived there an aggregate of two years of the past five years.
29. Lived there two years plus be at least 55 years old.
30. Never used the residence as a rental property.

 

27. A fiduciary relationship is primarily based on
28. The amount of money involved.
29. Personal relationship with the agent.
30. Trust and confidence in the integrity of the agent.
31. Type of organization involved.

 

28. All of the following are usually short-term mortgage loans EXCEPT
29. Construction loans.
30. Home improvement loans.
31. Single-family home loans.
32. Manufactured home loans.

 

29. Frank Mahoney, a local builder, wishes to obtain financing to build four houses. His best source would be a

 

1. Savings association.
2. Commercial bank.
3. Credit union
4. Life insurance company

 

30. Which is NOT a prominent role of life insur­ance companies in real estate?

 

1. Purchasing blocks of mortgages on the sec­ondary market
2. Financing large commercial projects like office buildings or shopping centers
3. Originating individual home mortgage loans
4. Financing major industrial projects

 

31. The primary obligation of all financial fiducia­ries is to their
34. Government regulators.
35.  State administrators.
36. Which circumstance would create a voluntary lien?
37. Mortgage on the property
38. Overdue property taxes
39. Unpaid contractor who installed a swim­ming pool
40. Judgment from an unpaid hospital bill

 

 

33. A lender may prefer to have a deed of trust instead of a mortgage because
34. Foreclosure is accomplished more easily and quickly.
35. A deed of trust takes less paperwork.
36. A deed of trust has no redemption period.
37. A deed of trust does not require fore­closure.

 

34. Which statement regarding a note is NOT true?
35. A note is a promise to pay a debt.
36. A note is a complete contract.
37. A note must be tied to either a mortgage or deed of trust.
38. A note is a fully negotiable instrument.
39. When the mortgage loan is fully paid, the bor­rower (mortgagor) regains full and clear title to the property based on which clause in the mortgage?
40. Acceleration clause
41. Power-of-sale clause
42. Satisfaction clause
43. Exculpatory clause

 

1. Determine the rate of return on a $ 10,000 investment that generated cash flows of $2,500 per year for 8 years.

1. 20.53 percent
2. 17.59 percent
3. 21.77 percent
4. 18.62 percent

 

1. Mary Williams would like to have an annual annuity of $40,000 for 20 years when she retires in 25 years. How much will Mary need at the end of each year to achieve her goal? Assume an 8 percent rate of return.

1. $6491
2. $5372
3. $7219
4. $6204

 

1. Assume that you are an investment adviser who has introduced one of your clients to invest their $100,000 in  Treasury Notes due to mature in 2 years. If you client becomes worried that a general increase in the level of interest rates will reduce the market value of his bond portfolio, what should you say to allay your client’s fears?

1. You could assuage your client’s fear by claiming you foresee only stable interest rate ahead.
2. You could instruct your client to liquidate their portfolio of Treasury notes and reinvest the proceeds in an  insured bank.
3. Both a and b are true
4. You could tell your client not to worry because the market prices of short – term bonds do not fluctuate very much.

 

1. Assume you are an investment counselor and one of your clients read something about interest rate risk and is worried that if market interest rates declined her coupon interest income will likewise decline. Her bond investments have maturities ranging from 15 to 30 years. What advice is appropriate for this client?

1. Tell the investor to liquidate her coupon paying bonds and reinvest the money in zero coupon bonds.
2. Tell your client not to worry: her coupon income will not vary until her coupon bonds mature in 15 to 30 years.
3. Both a and B are true
4. The client need not worry if market interest rates are expected to rise because coupon rates vary inversely with market interest rates and therefore her coupon interest could increase.

 

1. A zero coupon bond purchased for $80 will grow to $1000 when it matures in 20 years giving the buyer a 13.46 percent annual rate of return over the 20 years. However, if the rate of inflation is 5 percent per year, what real return will the investor earn over the 20 years? [Hint: Determine the purchasing power of the $1000 bond at today’s prices (i.e. find the present value at 5 percent) and use this value when real return is calculated]

1. 7.05 percent
2. 8.06 percent
3. 9.25 percent
4. 10.01 percent