Texas Principles of Real Estate II Study Guide, Exams of Real Estate Management

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Texas Principles of Real Estate II Study

Guide Questions and Answers (

Terms)

Mixed Numbers - Answer: A number containing both a whole number and a fraction (examples: 1⅓; 9⅞)

Improper Fractions - Answer: a fraction with its numerator equal to or greater than its denominator Commission Calculation - Answer: Sales price X rate of commission = total commission Solving for the Commission Rate - Answer: Commission Rate = Commission ÷ Price Solving for the Property's Price - Answer: Price = Commission ÷ Commission Rate Profit - Answer: Profit (or Loss) = Selling price - Original cost Profit Percentage - Answer: Percentage of profit = Profit ÷ Original cost Profit Margin - Answer: Profit margin = Profit ÷ Selling price Interest - Answer: the price paid for the use of borrowed money 3 types of interest calculations - Answer: Simple interest, add-on interest, and compound interest Simple interest - Answer: Interest = principal x rate x time Add-on interest - Answer: loan amount x contracted interest rate x number of payments

Add-on interest APR - Answer: APR = 2 x number of payment periods in one year x total financing charges ÷ (principal, or amount borrowed x (number of scheduled payments +1) Compound interest - Answer: interest which is computed on the principal amount plus the accrued interest. Compound Interest Formula - Answer: Compound amount = Initial deposit (1 + Interest rate)n Points - Answer: a one-time service charge to the borrower for making the loan Two types of points - Answer: origination fee and discount points Loan-to-Value Ratio (LTV) - Answer: expresses the relationship between a property's purchase price and its loan amount. Loan-to-Value formula - Answer: LTV ratio = (Loan amount ÷ Value) Area of a rectangle - Answer: Area = length x width Area of a square - Answer: Area = side x side Area of a triangle - Answer: Area = ½ base x height

Perimeter - Answer: a lot or other shape is the sum of the length of all its sides. Acre - Answer: A measure of land equal to 43,560 square feet. Hectare - Answer: is equal to 10,000 square meters or approximately 2.47 acres. To convert acres to hectares - Answer: divide the total acres by 2. Appraisal - Answer: is an unbiased estimate of the nature, quality, value or utility of an interest in or aspect of identified real estate and related personalty as of a certain date. Specific data - Answer: This is information and details about the subject property, as well as data (used for comparison) about comparable properties' costs, income and expenses, sales and other relevant information General data - Answer: This is information about the property's location - its country, region, city, and, most importantly, its neighborhood Steps in Appraisal Process - Answer: 1. Define problem and scope of work

2. Collect, record, and verify the required data
3. Determine the property's highest and best use
4. Estimate the land value
5. Use ALL THREE approaches to estimate value

6. Reconcile the estimated values to determine the final value estimate
7. Communicate the final value estimate Highest and Best Use - Answer: Legally permissible Physically possible Financially feasible Maximally productive Describe the difference between specific and general data - Answer: Specific data is information and details about the subject property and the comparables. General data is information about the property's location - its country, region, city, and neighborhood. Direct sales comparison - Answer: sales of comparable vacant parcels are analyzed and adjusted to indicate a value for the subject land Allocation - Answer: a typical ratio of land value to total value is derived from comparable properties and applied to the subject Extraction - Answer: land value is estimated by deducting the depreciated cost of improvements on a property from the total sale price of the property. Subdivision development analysis - Answer: costs and profit are deducted from estimated gross sale prices of subdivided and finished lots, and net sales proceeds are discounted to present value

Land residual - Answer: net operating income attributable to the land is capitalized at market rates to obtain land value Ground rent capitalization - Answer: ground rent of subject is capitalized at market rates In the cost approach to value - Answer: the appraiser estimates a property's value by adding the land value to the depreciated value of any improvements to the property The income approach - Answer: (sometimes called the "income capitalization approach") is used by appraisers who need to value commercial and investment properties In the sales comparison approach - Answer: an appraiser examines the price (or price per unit area) of similar properties recently sold or currently being sold in the marketplace to come up with comparable value assessments In the reconciliation step - Answer: the appraiser looks at each approach to value and all the data used to determine Communicating the Appraisal - Answer: 1. Short- or Long-Form Narrative Reports

2. Reports
3. Letter or Oral Reports

Valuation - Answer: is the process of estimating the value of an identified interest in specific property as of a given date Types of Value - Answer: Investment Value Insured Value Use Value Investment value - Answer: is the amount of the return on an investment that an income-producing property will produce Insured value - Answer: is the face amount a casualty or hazard insurance policy will pay in case a property is deemed unusable Use value - Answer: (also known as value-in-use) of a property is the value the property holds for the owner. Several factors contribute to this value Mortgage value - Answer: is the value the lender places on a property as collateral for the loan, especially in the event of a foreclosure when the lender must recover the debt through the sale of the property Market value - Answer: The amount you could realistically sell an asset for today Explain the difference between market value and market price - Answer: Market value is an opinion of the value of a property based on analyzing data collected

about the property. The market price of a property is the actual sales price and can in some circumstances be greater or lesser than market value What does the term anticipation mean as it relates to property value? - Answer: The benefits a buyer expects to receive over the period of time he or she holds the property Explain the principle of substitution - Answer: says a buyer will not pay more for a home than what he or she would pay for another home that is equally desirable and available Sales Comparison Approach - Answer: is based on the principle of substitution - which says that a buyer will not pay more for the subject property than he or she would pay for a property that is similar in characteristics and amenities Cost approach steps - Answer: Step 1 - Estimate Land Value Step 2 - Estimate Cost of Improvements Step 3 - Estimate Depreciation Income Approach Steps - Answer: Step 1: Estimate the potential gross income Step 2: Estimate the effective gross income Step 3: Estimate the net operating income Step 4: Select a capitalization rate Step 5: Apply the capitalization rate

What's the difference between reproduction cost and replacement cost? - Answer: Reproduction cost is the cost at today's prices of producing an exact duplicate of the current building, including its improvements and its flaws. Replacement cost is the construction cost at today's prices of producing a similar or equivalent structure. The income approach is based on which two principles of value? - Answer: Anticipation and substitution The formula for determining the gross rent multiplier (GRM) is - Answer: Sales Price ÷ Gross Rent = Gross Rent Multiplier The formula for determining the gross income multiplier (GIM) is - Answer: Sales Price ÷ Gross Annual Income = Gross Income Multiplier 5 levels of real property appraisal classification - Answer: Appraiser Trainee Provisional Licensed Real Estate Appraiser Licensed Real Estate Appraiser Certified Residential Real Estate Appraiser Certified General Real Estate Appraiser For what types of property would an appraiser use a gross rent multiplier? - Answer: single-family homes and duplexes that could produce income, but are not primarily income-producing properties

What is the Uniform Standards of Professional Appraisal Practice (USPAP)? - Answer: The Uniform Standards of Professional Appraisal Practice (USPAP) is a set of standards, guidelines and provisions for the appraisal industry Who may perform appraisals in Texas? - Answer: Only persons who are licensed or certified appraisers or who are approved as appraiser trainees What is the major component of the total property value that does not depreciate? - Answer: The land value Comparative Market Analysis - Answer: is an estimate of the value of a seller's property in comparison to nearby properties with similar features that are for sale or have recently sold When getting ready to do a Comparative Market Analysis (CMA), a licensee will do the following: - Answer: 1. Collect and analyze information about the seller's property.

2. Choose comparable properties in the area.
3. Compare the seller's property to the comparables and do some adjusting to the value of the comparables.
4. Estimate a reasonable and realistic selling price for the seller's property. When collecting information about the seller's property for analysis, the licensee should focus on: - Answer: The neighborhood The home site

Existing property improvements What appraisal method is generally most appropriate to use in appraising residential properties? - Answer: Sales comparison approach What kinds of site data would a licensee collect regarding a property? - Answer: Property width Frontage Depth Area of the lot Shape of the lot Landscape Position and orientation Evidence of easements or encroachments Where can a licensee find most of the information he or she needs to do a good analysis? - Answer: From a multiple listing service What are the two most important areas for a licensee to focus on when choosing comparables for every category -active, sold, pending and expired listings? - Answer: Location and physical characteristics When choosing sold properties as comparables, within what time frame should they have sold? - Answer: They should have sold within the last three to six months. Any sale older than one year should not be used

After choosing comparable properties and making your adjustments, what will be your next steps to complete the CMA? - Answer: Estimate a price range. Present the data to the seller. A listing agent helps the sellers set a realistic selling price by considering the: - Answer: Sellers wishes Market Conditions via a CMA Timing of the sale The two common methods that can help determine a reasonable asking price for a property are: - Answer: Appraisal Comparative Market Analysis (CMA) A commercial bank is - Answer: a financial institution that is designed to act as a depository for funds and as a lender for commercial activities - usually short-term loans Credit unions are - Answer: nonprofit financial institutions into which members place their money, usually through direct deposit Who makes up the primary mortgage market? - Answer: Savings Associations Commercial Banks Credit Unions Insurance Companies

Investment Groups Mortgage Bankers Mortgage Brokers What is a mortgage? - Answer: A mortgage is a financing instrument that creates a lien against a property. What is a promissory note and what does it do? - Answer: A document that describes the amount of money borrowed, the terms under which it will be repaid, and any conditions that relate to either the borrowing of the money, or the consequences in event of default. This document establishes legal evidence of the debt incurred. What is the clause that requires the borrower to pay off the entire mortgage debt when the property is sold? - Answer: Due-on-sale or alienation clause Underwriting - Answer: The evaluation process used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral Several types of repayment plans exist. The most common are: - Answer: Straight (Interest-only) Amortized Balloon payment Adjustable-rate

Straight Loan - Answer: Mortgage with payments of interest only Amortized Loan - Answer: a borrower makes a periodic (usually monthly) payment of principal plus interest Balloon Payment - Answer: is a loan that has one large final payment due when the loan matures. What is the major difference between prequalification and preapproval? - Answer: Prequalification is an informal process that a lender or an agent can do. Preapproval is a formal process that only a lender can do and it involves an actual loan application. What risks do lenders face when making a mortgage loan? - Answer: The borrower will not be able to repay the loan. If the borrower defaults on the loan, the property will be worth less than what is still owed on the loan. What kind of problem can result from a straight loan? - Answer: A straight loan is an interest-only loan. If the property doesn't appreciate in value over time, the borrower could end up with less in proceeds on the sale than what he needs to pay off the loan.

What kinds of limits are placed on the interest rate in an adjustable rate mortgage? - Answer: Interest rate caps limit the amount of interest the borrower can be charged. Periodic caps limit the amount the rate can change at any one time. Overall (or aggregate) caps limit the amount the interest can increase over the life of the loan. 2 types of loans - Answer: conventional loans and government-backed loans. Government-backed loans include those loans offered by: - Answer: The Federal Housing Administration (FHA) The Department of Veterans Affairs (DVA) - sometimes simply referred to as VA Rural Housing Service (RHS) Texas Department of Housing and Community Affairs (TDHCA) Texas Veterans Land Board (VLB) Conventional Loans - Answer: require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property's sale price. What are the two distinct features of fixed-rate fully amortized loans? - Answer: The interest rate remains fixed for the life of the loan. The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term What does federal law say about the termination of private mortgage insurance? - Answer: Federal law requires that any loans originated after July of 1999 must

have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments. However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI Graduated Payment Mortgage (GPM) - Answer: the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. A Pledged Account Mortgage (PAM) is - Answer: a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender A Buydown - Answer: the lump sum payment that is made to the lender at closing usually comes from a builder as an incentive to the buyer or from a family member trying to help out An open-end loan is - Answer: an expandable loan which gives a borrower a limit up to which he or she may borrow A blanket mortgage loan - Answer: covers more than one piece of property. Land developers commonly use blanket mortgages when they buy a plot of land and divide it into many separate lots.

A wraparound mortgage - Answer: allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan A bridge loan is - Answer: a short-term loan that covers the period between the end of one loan and the beginning of another Purchase Money Mortgage - Answer: a technique in which the buyer borrows from the seller in addition to the lender Construction Mortgages - Answer: finance the construction of improvements to property, such as homes, apartments and office buildings Home Equity Loan - Answer: a loan secured by equity value in the borrower's home Homeowners can use a home equity loan for - Answer: Purchasing high dollar items Taking a vacation Consolidating other loans or credit card debt Paying medical expenses Paying college tuition Making home improvements Package Mortgage - Answer: Mortgage covering both real and personal property

Reverse Annuity Mortgage (RAM) - Answer: the lender is making payments to the borrower A shared equity mortgage is - Answer: a form of participation mortgage in which the lender shares in the appreciation of a mortgaged property if and when the property sells Sale and Leaseback - Answer: used by commercial enterprises to free up money that has been tied up in the real estate to use as working capital in the business. FHA and VA loans differ from conventional loans in what important way? - Answer: FHA and VA do not loan funds directly. FHA insures loans and VA guarantees loans, but the loans themselves are made by approved, qualified lenders. What kind of insurance does FHA require borrowers to pay? - Answer: The borrower must pay two insurance premiums. The first is the "upfront" Mortgage Insurance Premium (MIP) which is a percentage of the loan amount. The second premium, called Mutual Mortgage Insurance (MMI) is a monthly premium that is paid with the monthly principal, interest, taxes and insurance payment. What is a Certificate of Reasonable Value and what is it used for? - Answer: A Certificate of Reasonable Value (CRV) shows the value of a property in relation to

its sales price. It is issued by an approved VA appraiser when a veteran is seeking a DVA loan. How much money can a veteran get through the Texas Veterans Home Improvement Program? - Answer: Veterans may get up to $25,000 for a 20-year loan or up to $10,000 for a 10-year loan. The secondary mortgage market - Answer: consists of holding warehouse agencies that purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors. Important players in the secondary mortgage market are: - Answer: Ginnie Mae - Government National Mortgage Association (GNMA) - a government agency Fannie Mae - Federal National Mortgage Association (FNMA) - a former government agency that became a private corporation in 1968 Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMC) - a quasi- government agency How is Freddie Mac different from Ginnie Mae and Fannie Mae? - Answer: Ginnie Mae and Fannie Mae were created to deal primarily with the purchase of FHA and VA loans. Freddie Mac deals with conventional loans Why was Farmer Mac created? - Answer: To establish a secondary market for agricultural real estate and rural housing mortgage loans and to increase the

availability of long-term credit at steady interest rates to American Farmers, ranchers and rural homeowners. What is the basic purpose of Truth in Lending- Regulation Z? - Answer: Give buyers information about the true cost of obtaining credit, so that borrowers can compare the costs of various lenders. What is the right to rescind and what is not covered by this rule? - Answer: The borrower has a right to cancel the transaction by notifying the lender within three days. This does not apply to residential first mortgage loans. What does ECOA prohibit? - Answer: Discrimination against applicants on the basis of race, color, religion, national origin, sex, marital status, age or dependency on public assistance Why was the Community Reinvestment Act passed? - Answer: To prevent redlining What does ECOA stand for? - Answer: Equal Credit Opportunity Act Define the term predatory lender. - Answer: is one that literally preys on the customers who may fall into the below "A paper" lending categories, particularly those who do not speak English, are poorly educated or are elderly

What is loan flipping? - Answer: Encouraging a borrower to refinance a loan so that the lender can charge high points and fees for the new loan What is the penalty for knowingly making a false statement to obtain a loan? - Answer: Imprisonment for a term of 2 years to 99 years and fine not to exceed $10,000 The Department of Veterans Affairs (DVA) - Answer: provides loans to veterans in which the VA agrees to guarantee the top portion of the loan. The amount is calculated as 25% of the home loan amount up to $104,250 Rural Housing Service (RHS) - Answer: has numerous programs available to aid low- to moderate-income rural residents to purchase, construct, repair or relocate a dwelling and related facilities Texas Veterans Land Board (VLB) - Answer: provides another alternative in the form of special assistance programs for home and land purchases to assist Texas veterans in purchasing a home with a low interest rate loan with little or no money down. Veterans may get up to $417,000 for the home purchase. Deed Restrictions - Answer: Clauses in a deed limiting the future uses of the property. Restrictive covenants - Answer: are limitations placed on the use of land by the developer of a residential subdivision

Define "as of right zoning." - Answer: uses that are automatically allowed by the zoning code. They are allowed "as a matter of right." What are restrictive covenants? - Answer: Restrictive covenants are limitations placed on the use of land by the developer of a residential subdivision. What is the Doctrine of Laches? - Answer: This doctrine states that if a property owner is lax in protecting his or her rights, the property owner may lose those rights. Police power - Answer: gives a government entity the ability to fulfill its responsibility to provide for the health, safety and welfare of the public Escheat - Answer: If a property owner dies with a valid will in place (testate), the property will be distributed as the will specifies. And if the property owner dies without a valid will (intestate), the property will be dispersed to the heirs according to the laws of the state and based on the relationship of those heirs to the deceased. Public ownership - Answer: is defined as government ownership of lands, streets, public buildings, utilities, and other business enterprises. Building codes - Answer: allow the county and municipality to protect the public against the hazards of unregulated construction.

Building Permit - Answer: which gives permission for the construction or renovation of a building or improvement Certificate of Occupancy - Answer: building inspectors inspect a new development or improvement for code compliance What are some examples of the exercise of police power? - Answer: Zoning ordinances Building codes Subdivision regulations Eminent domain Environmental restrictions Sunshine Law - Answer: also known as open meeting law, mandate that meetings of governmental agencies and departments be open to the public. Cluster Zoning - Answer: is a type of zoning in which density is determined for an entire area, rather than on a lot-by-lot basis. Transfer of development rights (TDR) - Answer: refers to a method for protecting land by transferring the "rights to develop" from one area and giving them to another. A moratorium - Answer: a suspension of development of property

Spot zoning - Answer: occurs when a small area of land or section in an existing neighborhood is singled out and placed in a different zone from that of neighboring property Give an example of a legal and illegal nonconforming use. - Answer: Legal: A motel is situated in a residential area that no longer allows commercial activity. The zoning board rules that the motel may continue to operate until it is sold, destroyed or used for any other commercial purpose. Illegal: That same motel is sold, and the new owner continues to operate the property as a motel. What is the difference between a use variance and an area variance? - Answer: A use variance gives permission to use the land for a purpose not allowed by the current zoning. An area variance permits the variance of one or more of the dimensional or physical requirements of the applicable zoning law, code or ordinance in connection with some proposed construction. The Interstate Land Sales Full Disclosure Act - Answer: authorizes a nationwide program of registration of subdivisions marketed in interstate commerce. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) - Answer: created a tax on the chemical and petroleum industries and provided broad Federal authority to respond directly to releases or threatened

releases of hazardous substances that may endanger public health or the environment. What does Texas require of any home that has been cleaned of mold? - Answer: must provide that information in a disclosure for the next five years after the remediation. What is meant by CERCLA's innocent landowner defense? - Answer: This was based on the idea that in some cases a landowner in the chain of ownership could have been innocent of any wrongdoing and should not be held liable. What does the TREC promulgated contract addendum for environmental inspections allow a buyer to do? - Answer: To obtain an environmental inspection of the property and to terminate a contract if there has been a discovery indicating an environmental hazard that would affect the use of the property. The property manager has four major areas of responsibility: - Answer: Financial and Marketing Tenant and Occupancy Facility Administration and Risk Management Two basic types of farms exist in the United States: - Answer: family farms and corporate farms