Questions and Answers of Real Estate Principles

Why is refinancing often done in conjunction with renovation?
Suppose both the NOI and property value growth rate are 5 percent instead of 3 percent. How would this change the marginal rate of return for years 1 to 10? Does the MRR increase or decrease for the
What factors should be considered when deciding whether to renovate a property?
Why might the after-tax internal rate of return on equity (ATIRRe) differ for a new investor versus an existing investor who keeps the property?
What causes the marginal rate of return to change over time? How can the marginal rate of return be used to decide when to sell a property?
Richard Rambo presently owns the Marine Tower office building, which is 20 years old, and is considering renovating it. He purchased the property two years ago for $800,000 and financed it with a
Lonnie Carson purchased Royal Oaks Apartments two years ago. An opportunity has arisen for Carson to purchase a larger apartment project called Royal Palms, but Carson believes that he would have to
What is the marginal rate of return? How is it calculated?
Refer to problem 1. The owner determines that if the property were renovated instead of sold, after-tax cash flow over the next year would increase to $60,000 and the property could be sold after one
Why might the actual holding period for a property be different from the holding period that was anticipated when the property was purchased?
A property could be sold today for $2 million. It has a loan balance of $1 million and, if sold, the investor would incur a capital gains tax of $250,000. The investor has determined that if it were
What factors should an investor consider when trying to decide whether to dispose of a property that he has owned for several years?
How does the use of scenarios differ from sensitivity analysis ?
What is meant by the term ‘overage’ for retail space ?
Refer to the Westgate Shopping Center example. Use ARGUS to replicate the assumptions for the “pessimistic scenario” discussed in the chapter. What inputs did you have to change in order to get
What is meant by a ‘ real option’ ?
Why is the variance (or standard deviation) used as a measure of risk? What are the advantages and disadvantages of this risk measure?
A developer plans to start construction of a building in one year if at that point rent levels make construction feasible. At that time the building will cost $1,000,000 to construct. During the
Use the same information as in problem 3. Now assume a loan for $1.5 million is obtained at a 10 percent interest rate and a 15-year term.a. Calculate the expected IRR on equity and the standard
An investor has projected three possible scenarios for a project as follows:Pessimistic—NOI will be $200,000 the first year, and then decrease 2 percent per year over a five-year holding period.
What are some of the types of risk that should be considered when analyzing real estate and other categories of investment?
Mike Riskless is considering two projects. He has estimated the IRR for each under three possible scenarios and assigned probabilities of occurrence to each scenario.Riskless is aware that the
What is a risk premium? Why does such a premium exist between interest rates on mortgages and rates of return earned on equity invested in real estate?
Two investments have the following pattern of expected returns:Investment A requires an outlay of $110,000 and Investment B requires an outlay of $120,000.a. What is the BTIRR on each investment?b.
What is meant by partitioning the internal rate of return? Why is this procedure meaningful?
How can the effect of below-market rate loans on value be determined using investor criteria?
What is the traditional cash equivalency approach to determine how below-market rate loans affect value?
What criteria should be used to choose between two financing alternatives?
Refer to the Monument Office Building example. What is the leveraged IRR if the loan-to-value ratio is increased to 80 percent?
What is the motivation for a sale-leaseback of the land?
How do you think participations affect the riskiness of a loan?
A borrower and lender negotiate a $20,000,000 interest-only loan at a 9 percent interest rate for a term of 15 years. There is a lockout period of 10 years. Should the borrower choose to prepay this
Why might a lender prefer a loan with a lower interest rate and a participation?
Refer to problem 6. Assume that another alternative is a convertible mortgage (instead of a participation loan) that gives the lender the option to convert the mortgage balance into a 60 percent
Why might an investor prefer a loan with a lower interest rate and a participation?
A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 3 percent per year thereafter. The appraised value of the property is currently $1 million and the
What is meant by a sale-leaseback? Why would a building investor want to do a sale-leaseback of the land? What is the benefit to the party that purchases the land under a sale-leaseback?
What is meant by a participation loan? What does the lender participate in? Why would a lender want to make a participation loan? Why would an investor want to obtain a participation loan?
First Bank Company holds a note from Jason Black and a first mortgage on real estate owned by Jason Black to secure it. Mr. Black sold his property to Robert Frasca, and Robert Frasc assumed the
A builder is offering $100,000 loans for his properties at 9 percent for 25 years. Monthly payments are based on current market rates of 9.5 percent and are to be fully amortized over 25 years. The
Assuming the borrower is in no danger of default, under what conditions might a lender be willing to accept a lesser amount from a borrower than the outstanding balance of a loan and still consider
An investor has owned a property for 15 years, the value of which is now to $200,000. The balance on the original mortgage is $100,000 and the monthly payments are $1,100 with 15 years remaining. He
Why might a wraparound lender provide a wraparound loan at a lower rate than a new first mortgage?
What is a buydown loan? What parties are usually involved in this kind of loan?
You have a choice between the following two identical properties: Property A is priced at $150,000 with 80 percent financing at a 10.5 percent interest rate for 20 years. Property B is priced at
Why might a borrower be willing to pay a higher price for a home with an assumable loan?
Secondary Mortgage Purchasing Company (SMPC) wants to buy your mortgage from the local savings and loan. The original balance of your mortgage was $140,000 and was obtained 5 years ago with monthly
Why might the market value of a loan differ from its outstanding balance?
An investor obtained a fully amortizing mortgage 5 years ago for $95,000 at 11 percent for 30 years. Mortgage rates have dropped, so that a fully amortizing 25-year loan can be obtained at 10
An investor has $60,000 to invest in a $280,000 property. He can obtain either a $220,000 loan at 9.5 percent for 20 years or a $180,000 loan at 9 percent for 20 years and a second mortgage for
What factors must be considered when deciding whether to refinance a loan after interest rates have declined?
A mortgage for $100,000 is made with initial payments of $500 per month for the first year. The interest rate is 9 percent. After the first year, payments will increase to an amount that makes the
A borrower can obtain an 80 percent loan with an 8 percent interest rate and monthly payments. The loan is to be fully amortized over 25 years. Alternatively, he could obtain a 90 percent loan at an
What are the primary considerations that should be made when refinancing?
A $100,000 loan can be obtained at a 10 percent rate with monthly payments over a 15-year term.a. What is the after-tax effective interest rate on the loan, assuming the borrower is in a 30 percent
Suppose the index goes to 18 percent in year 5. What is the effective cost of the ARM? Does the payment cap keep the effective cost from rising?
Suppose the index goes to 18 percent in year 5. What is the effective cost of this ARM? What cap affected the rate in year 5?
If an ARM is priced with an initial interest rate of 8 percent and a margin of 2 percent (when the ARM index is also 8 percent at origination) and a fixed rate mortgage (FRM) with constant payment is
A floating rate mortgage loan is made for $100,000 for a 30-year period at an initial rate of 12 percent interest. However, the borrower and lender have negotiated a monthly payment of $800.a. What
MakeNu Mortgage Company is offering a new mortgage instrument called the Stable Mortgage. This mortgage is composed of both a fixed rate and an adjustable rate component. Mrs. Maria Perez is
Distinguish between the initial rate of interest and expected yield on an ARM. What is the general relationship between the two? How do they generally reflect ARM terms?
Assume that a lender offers a 30-year, $150,000 adjustable rate mortgage (ARM) with the following terms:Initial interest rate = 7.5 percentIndex = 1-year TreasuriesPayments reset each yearMargin = 2
What are forward rates of interest? How are they determined? What do they have to do with indexes used to adjust ARM payments?
An ARM is made for $150,000 for 30 years with the following terms:Initial interest rate = 7 percentIndex = 1-year TreasuriesPayments reset each yearMargin = 2 percentInterest rate cap = NonePayment
A borrower has been analyzing different adjustable rate mortgage (ARM) alternatives for the purchase of a property. The borrower anticipates owning the property for five years. The lender first
What is the difference between interest rate risk and default risk? How do combinations of terms in ARMs affect the allocation of risk between borrowers and lenders?
An interest only ARM is made for $200,000 for 30 years. The start rate is 5 percent and the borrower will (1) make monthly interest only payments for 3 years. Payments thereafter must be sufficient
List each of the main terms likely to be negotiated in an ARM. What does pricing an ARM using these terms mean?
An ARM for $100,000 is made at a time when the expected start rate is 5 percent. The loan will be made with a teaser rate of 2 percent for the first year, after which the rate will be reset. The loan
Why do adjustable rate mortgages (ARMs) seem to be a more suitable alternative for mortgage lending than PLAMs?
A 3/1 ARM is made for $150,000 at 7 percent with a 30-year maturity.a. Assuming that fixed payments are to be made monthly for three years and that the loan is fully amortizing, what will be the
How does the price level adjusted mortgage (PLAM) address the problem of uncertainty in inflationary expectations? What are some of the practical limitations in implementing a PLAM program?
A basic ARM is made for $200,000 at an initial interest rate of 6 percent for 30 years with an annual reset date. The borrower believes that the interest rate at the beginning of year (BOY) 2 will
How do inflationary expectations influence interest rates on mortgage loans?
A price level adjusted mortgage (PLAM) is made with the following terms:Amount = $95,000Initial interest rate = 4 percentTerm = 30 yearsPoints = 6 percentPayments to be reset at the beginning of each
In the previous chapter, significant problems about the ability of borrowers to meet mortgage payments and the evolution of fixed interest rate mortgages with various payment patterns were discussed.
Comprehensive Review Problem: A mortgage loan in the amount of $100,000 is made at 12 percent interest for 20 years. Payments are to be monthly in each part of this problem.a. What will monthly
A $50,000 interest only mortgage loan is made for 30 years at a nominal interest rate of 6 percent. Interest is to be accrued daily, but payments are to be made monthly.a. What will the monthly
A fully amortizing CAM loan is made for $125,000 at 11 percent interest for 20 years.a. What will be the payments and balances for the first 6 months?b. What would payments be for a CPM loan?c. If
A borrower and lender agree on a $200,000 loan at 10 percent interest. An amortization schedule of 25 years has been agreed on; however, the lender has the option to “call” the loan after 5
A reverse annuity mortgage is made with a balance not to exceed $300,000 on a property now valued at $700,000. The loan calls for monthly payments to be made to the borrower for 120 months at an
A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the
A lender is considering what terms to allow on a loan. Current market terms are 8 percent interest for 25 years for a fully amortizing loan. The borrower, Rich, has requested a loan of $100,000. The
What is partial amortization?
John wants to buy a property for $105,000 and wants an 80 percent loan for $84,000. A lender indicates that a fully amortizing loan can be obtained for 30 years (360 months) at 8 percent interest;
What is negative amortization?
A loan for $50,000 is made for 10 years at 8 percent interest and no monthly payments are scheduled.a. How much will be due at the end of 10 years?b. What will be the yield to the lender if it is
A mortgage loan is made to Mr. Jones for $30,000 at 10 percent interest for 20 years. If Mr. Jones has a choice between a CPM and a CAM, which one would result in his paying a greater amount of total
A partially amortizing loan for $90,000 for 10 years is made at 6 percent interest. The lender and borrower agree that payments will be monthly and that a balance of $20,000 will remain and be repaid
An expected inflation premium is said to be part of the interest rate, what does this mean?
An “interest only” mortgage is made for $80,000 at 10 percent interest for 10 years. The lender and borrower agree that monthly payments will be constant and will require no loan amortization.a.
What is the accrual rate and payment rate on a mortgage loan?
A partially amortizing mortgage is made for $60,000 for a term of 10 years. The borrower and lender agree that a balance of $20,000 will remain and be repaid as a lump sum at that time.a. If the
A fully amortizing mortgage is made for $80,000 for 25 years. Total monthly payments will be $900 per month. What is the interest rate on the loan?
What is meant by the “nominal rate” on a mortgage loan?
What is the effective borrowing cost (rate)?
A fully amortizing mortgage is made for $100,000 at 6.5 percent interest. If the monthly payments are $1,000 per month, when will the loan be repaid?
What is the connection between the Truth-in-Lending Act and the annual percentage rate (APR)?
A 30-year fully amortizing mortgage loan was made 10 years ago for $75,000 at 6 percent interest. The borrower would like to prepay the mortgage balance by $10,000.a. Assuming he can reduce his
Why do lenders charge origination fees, especially loan discount fees?

Showing 600 - 700 of 1064