Influences on

1
Chapter 8

• Influences on
• Real Estate Values

2
Chapter 8 Objectives

• After completing this chapter, students will be
  able to
• Identify the differences between the four broad
  forces and how these forces and perceptions
  affect the value of real estate

3
Key Terms

• Asbestos
• Clean Air Act
• Clean Water Act
• Comprehensive Environmental Response,
  Compensation, and Liability Act (CERCLA)

• Electromagnetic Fields (EMFs)
• Environmental Hazard
• Environmental Protection Agency (EPA)

4
Key Terms
cont.

• External Environmental Hazards
• External Obsolescence
• Internal Environmental Hazards

• Lead-Based Paint Hazard Reduction Act (Title X)
• Linkages
• Methamphetamine
• Mold
• National Environmental Policy Act (NEPA)
• Nuisance
• Radon

5
Key Terms
cont.

• Stigmatized Property
• Underground Storage Tanks (USTs)
• Urea-Formaldehyde
• Urea-Formaldehyde Foam Insulation (UFFI)
• Wetlands

• Resource Conservation and Recovery Act (RCRA)
• Safe Drinking Water Act (SDWA)
• Sick Building Syndrome

6
Four Forces InfluencingReal Estate Values

• PEGS
• Physical forces
• Economic forces
• Governmental forces
• Social forces

7
Physical Forces

• May also be referred to as environmental and
  geographic forces
• May include conditions
• On a property (specific)
• External to the property (broad)

8
(Physical)Environmental Forces

• Many are controlled at the federal level through
  federal laws and regulations
• Other environmental issues are controlled at the
  state or local level
• Certain inspections and/or disclosures may be
  required

9
Environmental Protectionat the Federal Level

• National Environmental Policy Act (NEPA)
• Environmental Protection Agency (EPA)
• Clean Air Act (CAA)
• Clean Water Act (CWA)
• Comprehensive Environmental Response,
  Compensation, and Liability Act (CERCLA)
• Superfund Amendments and Reauthorization Act
  (SARA)Resource Conservation and Recovery Act
  (RCRA)
• Safe Drinking Water Act (SDWA)

10
EnvironmentalProtectionWetlands

• Ecosystems where the land is permeated with
  water, and are commonly referred to as swamps,
  bogs, and marshes
• Protected under the federal Clean Water Act
• Enforced by the U.S. Army Corps of Engineers
• Some activities are prohibited and require a
  permit if they could permanently change or
  destroy the wetland habitat

11
Environmental ProtectionProperty Hazards

• Internal and external hazards
• Nuisance Anything emitting from the outside of
  the property that interferes with the owners
  right of quiet enjoyment
• If a nuisance is permanent, it is an external
  obsolescence
• Environmental hazard A situation that exists
  with potential for harm to persons or property
  from conditions that exist outside or within a
  property

12
CommonEnvironmental Hazards

• Asbestos
• Electromagnetic fields (EMFs)
• Lead
• Methamphetamine
• Poor air quality (sick building syndrome)
• Underground storage tanks (USTs)
• Urea-formaldehyde
• Mold
• Radon

13
(Physical) Geographic Forces

• Characteristics related to the environment
  surrounding the property that either can
  contribute or detract from value
• Topography
• Soil conditions
• Water
• Location and view (linkages)
• Climate
• Natural features and barriers

14
Work Problem

• What are some uses or locations where various
  types of natural features and barriers can either
  be a benefit or a hindrance to property value?

Possible examples include (but are not limited
to) Ski slopes Mountain resorts Waterfront
businesses and housing sites Nature
preservations and resorts
15
Economic Forces

• World events
• Energy costs
• War
• Terrorist activities
• Cost and availability of credit

• Employment levels
• Availability of employment
• Earnings levels
• Taxes
• Inflation

16
Government Forces

• Government services
• Revenue generating law (right of taxation)
• Right to regulate laws (police power)
• Governmental fiscal and monetary policies
• Secondary mortgage markets and government
  mortgage programs

17
Social Forces

• Demographic changes
• Migrations of the population
• Social trends
• Buyers tastes and standards

18
Stigmatized Properties

• Properties held to be undesirable by most people
  because of a past event or condition
• Crime, murder, suicide, drug activity, past
  environmental hazards (methamphetamine, fire,
  chemical spill)
• Determining value influence can be time intensive
  and require significant knowledge of market
  reaction
• Being objective is ultimately important

19
Chapter 8 Quiz

• 1. Radon gas
• can indicate the presence of a toxic uranium dump
  close to the property.
• can present a problem indoors if allowed to build
  up to dangerous levels.
• is a man-made waste byproduct.
• makes a house worthless because it must be
  condemned by the EPA.

20
Chapter 8 Quiz

• 2. What statement about electromagnetic fields is
  FALSE?
• They are created by moving electrical currents.
• They can affect other charged objects.
• They can be produced by high-tension power lines.
• They have been proven to cause cancer.

21
Chapter 8 Quiz

• 3. It is well known that a murder took place in a
  house 40 years ago. This could be an example of
• an internal obsolescence.
• neighborhood decline.
• a stigmatism.
• social force.

22
Chapter 8 Quiz

• 4. A trend of moving to a new suburban area is an
  example of
• economic forces
• locational forces
• physical forces
• social forces

23
Chapter 8 Quiz

• 5. The states housing finance authority has just
  issued a low-interest, first-time homebuyer
  mortgage program. Sales are spurred as a result
  of this
• governmental force.
• physical force.
• social force.
• supply and demand.

24
Chapter 8 Quiz

• 6. Which is an example of the governmental force
  of revenue generating laws?
• cost of credit
• earnings levels
• permissibility of zoning
• specific tax policies

25
Chapter 8 Quiz

• 7. Wetlands are protected under what federal Act?
• Clean Water Act
• Federal Wetlands Protection and Wildlife Act
• SARA
• U.S. Army Corps Act

26
Chapter 8 Quiz

• 8. Sick building syndrome is a result of
• a former traumatic act.
• inadequate soil composition.
• linkages to toxic waste dumps.
• poor air quality.

27
Chapter 8 Quiz

• 9. The Comprehensive Environmental Response,
  Compensation, and Liability Act primarily
  addresses
• abandoned waste sites.
• air quality in public buildings.
• properties ridden with mold.
• safe drinking water.

28
Chapter 8 Quiz

• 10. Which is an example of linkages?
• estimated driving time from populated areas to
  major interstate highways
• known relationship of environmental concerns and
  terminal illness
• proximity of hazardous substances to populated
  areas
• relationship of household members when analyzing
  social forces

29
Chapter 9

• Economic Principles
• and Applications

30
Chapter 9 Objectives

• After completing this chapter, students will be
  able to
• Apply economic principles when forming value
  opinions

31
Key Terms

• Amenity
• Anticipation
• Balance
• Buyers Market
• Change
• Competition
• Conformity
• Contribution
• Excess Land

• Four Agents of Production
• Highest and Best Use
• Interim Use
• Law of Diminishing Returns
• Law of Increasing Returns
• Market Equilibrium

32
Key Terms
cont.

• Market-Use Property
• Opportunity Cost
• Principle of Consistent Use
• Progression
• Regression
• Sellers Market

• Single-Use Property
• Special-Use Property
• Substitution
• Supply and Demand
• Surplus Land
• Surplus Productivity

33
Four Agents of Production

• C E L L
• Capital
• Entrepreneurship
• Land
• Labor

34
FundamentalEconomic Principles

• Anticipation
• Change
• Supply and demand
• Substitution

• Competition
• Balance
• Contribution
• Conformity
• Externalities

35
Economic Principles Exercises

• 1. Value constantly fluctuates due to the
  principle of _______.
• 2. When demand exceeds supply, prices will
  _____.
• 3. Property uses that compliment each other are
  evidence of the theory of __________.
• 4. Value is created through the expectation of
  future benefits according to the theory of
  ____________.

change
rise
conformity
anticipation
36
Economic Principles Exercises

• True or False
• 5. To an investor, the greater the expectation of
  benefits from a property, the less valuable it is
  to the investor.
• 6. Surplus productivity is realized after various
  agents of productivity have been satisfied.

FALSE
TRUE
37
Economic Principles Exercises

• 7. Contribution, whether more or less than cost,
  is measured by the law of __________ and
  ____________ returns.
• 8. Name the four agents of production (hint
  C-E-L-L)
• a. Capital
• b. Entrepreneurship
• c. Land
• d. Labor

increasing
decreasing
38
Highest and Best Use

• There is only one highest and best use for land
  at a given point in time.
• Land not devoted to highest and best use results
  in a loss of income.
• Highest and best use gives the owner maximum
  economic advantage.

39
Highest and Best Use
cont.

• Highest and best use allocates land resources
  efficiently maximizing economic return.
• Highest and best use gives economic benefits to
  surrounding land (conformity).
• Highest and best use gives economic benefits to
  the community (conserves a scarce resourceland).

40
Four Tests ofHighest and Best Use

1. Is the ideal use legally permitted?
2. Is it physically possible for the ideal structure
   to be built on the property?
3. Is the ideal use economically (financially)
   feasible on the property?
4. Is the ideal use the maximally productive use for
   the property?

41
Value of a Vacant Site orAs If the Land Were
Vacant
42
Value of theLand as Improved
43
Application Illustration 1

• A corner lot with commercial zoning currently is
  improved with a residential dwelling. Determine
  the appropriate highest and best use
  recommendation if demand for the commercial site
  is recognized immediately.
• Improved value185,000
• As vacant205,000
• Demolition cost12,000
• Recommendation Raise the dwelling to make the
  site vacant.
• 205,000 12,000 (demolition cost) 193,000
• 193,000 185,000 8,000 higher value

44
Application Illustration 2

• A single-family residence is currently valued at
  58,000. The majority of properties within close
  proximity to the subject are duplexes with
  typical values in the range of 79,000. If the
  cost of converting the subjects single-family
  residence into a duplex has been estimated at
  20,000, and the interior demolition is estimated
  to be 1,000, what is the highest and best use
  conclusion?
• Conclusion The highest and best use of the
  property remains as a single-family residence,
  since there is no entrepreneurial reward for the
  owner upon completion of the conversion.
• 58,000 20,000 1,000 79,000

45
Application Illustration 3

• A real property appraiser is performing a highest
  and best use analysis for a vacant parcel. The
  appraiser has determined that the highest and
  best use of the parcel is for a two to four unit
  apartment building with (per maximum lot
  coverage) exterior dimensions of 4,000. Which
  improvement should the appraiser suggest?
• Two, four-bedroom, three-bath units which could
  each rent for 1,250 per month. Indicated value
  by the income approach is 42.50 per square foot
  and cost of the 4,000 square foot building will
  be 67.00 per square foot.
• Three, three-bedroom, two-bath units which
  could each rent for 950 per month. Indicated
  value by the income approach is 50.59 per square
  foot and cost of the 4,000 square foot building
  will be 49.00 per square foot.
• Four, two-bedroom, two-bath units which could
  each rent for 750 per month. Indicated value by
  the income approach is 44.25 per square foot and
  cost of the 4,000 square foot building will be
  45 per square foot.

46
Application Illustration 3
continued

• Suggested unit type and mix Three three-bedroom,
  two-bath units
• Two, four-bedroom, three-bath units
• 4,000 42.50 170,000
• 4,000 67.00 268,000
• Three, three-bedroom, two-bath units
• 4,000 50.59 202,360
• 4,000 49.00 196,000
• Four, two-bedroom, two-bath units
• 4,000 44.25 177,000
• 4,000 45.00 180,000

47
Application Illustration 4

• A 20,000 square foot residential lot zoned for
  single-family or two-family use is the subject of
  an appraisal assignment. The lot is currently
  improved with a 1,800 square foot single-family
  residence. What is the indicated highest and best
  use?
• Vacant land value0.75 per square foot
• Razing cost8,000
• Present value of single-family dwelling from
  paired data80 per square foot.
• Potential monthly rent if converted to
  two-family800 each
• Indicated value by the income approach per
  square foot96
• Conversion cost to two-family28,000

48
Application Illustration 4

continued

• Indicated highest and best use Converted to
  two-units
• Vacant 20,000 square feet 0.75 per square
  foot 15,000
• Razing cost 8,000
• 15,000 8,000 7,000
• As is 1,800 square feet 80 144,000
• Converted 1,800 square feet 96 172,800
  28,000 conversion 144,800

49
Application Illustration 5

• A single-family dwelling contains 1,860 square
  feet and is situated on a commercially zoned lot
  that is 155 x 220.
• If, through paired-data, the improved property
  has a per square foot value of 58 and the
  commercial land value in this area is 150,000
  per acre, what is the highest and best use if the
  razing cost is estimated to be 20,000?
• Highest and best use conclusion as-improved
• As-improved 1,860 58 107,880
• Vacant 155 220 34,100 43,560 0.7828
  acre
• 0.7828 150,000 117,424 20,000 97,424

50
Interim Use

• A temporary use of property while it awaits
  conversion to its highest and best use
• E.g., waiting for a zoning change or accumulation
  of investment dollars
• Appraiser must observe the principle of
  consistent use
• Land cannot be valued for one use while the
  improvements are valued for another use

51
Final Determinationof Highest and Best Use
52
Special Uses

• Single-use property
• Multiple-use property
• Special-use property

53
Surplus and Excess Land

• Surplus land
• Portion over and above what is necessary for the
  highest and best use of the subject property and
  does not have a stand-alone highest and best use
• Excess land
• Land (or site) area that is not necessary to
  support the use of the existing improvements
  situated on the subject property

54
Highest and Best Use Application Exercise

• 1. For an improved property, highest and best use
  analyzes whether the current improvements should
  be
• 2. Zoning is one consideration of
• 3. Highest and best use gives the property owner
  maximum
• 4. As a(n) use, the property could
  be held for future development.
• 5. The four tests of highest and best use are
• 1. Legally permissible
• 2. Physically possible
• 3. Financially feasible
• 4. Maximally productive

razed, converted, or left as is.
legally permissible.
economic advantage.
interim
55
Case Study 9.1Corner Commercial Site with Use
and Non-Compete Restrictions
56
Case Study 9.1

• Certified general appraiser, Max Riley, was
  performing a highest and best use analysis of a
  high-visibility corner commercial site that is
  located on Hightowns primary commercial strip.
  Three major shopping malls and strip centers are
  across the street from the subject. Another is
  located adjacent to it on the same side of the
  street.
• The subject parcel contains approximately one
  acre and is improved with a 1960s automotive
  service station that has not operated for a
  number of years. The site has been rented
  throughout recent years to various vendors
  selling flowers, fruits and vegetables, and other
  seasonal products. The fuel storage tanks have
  been removed from the site and the property has
  been certified to be environmentally sound. The
  property owner, a private individual, realizes
  the property is too valuable to continue its
  present use and has asked appraiser Riley to
  determine its value for marketing purposes.
• Appraiser Riley surveys the area and the market
  and has found no other sites immediately
  available in this highly desirable area. His
  research has revealed that the last similar
  comparable one-acre parcel sold approximately two
  years ago for 850,000. The comparable parcelan
  interior lot without the corner influencewas
  located approximately 1,000 feet from the
  subject. On inquiry with the broker facilitating
  that transaction, he found the comparable
  property went under contract to a restaurant
  enterprise, soon after being offered to the
  market. The broker also noted that he received
  two additional backup offers for the property.
  One was for 850,000, and the other was for
  900,000. Both of these offers were from similar
  restaurant developers.

57
Case Study 9.1
cont.
Point Break Of the characteristics effecting
value, which characteristics have been identified?

• Demand
• Utility
• Scarcity

58
Case Study 9.1
cont.

• Further information obtained from the real estate
  broker indicated that all offers for the
  comparable parcel were from restaurants that
  required a site for which a liquor license could
  be obtained. The broker also had interest from
  other non-liquor food service users including
  fast-food facilities. But, none of these
  non-liquor vendors would be willing to pay as
  much as those requiring a liquor license.
  Appraiser Rileys research confirms this trend
  with non-liquor restaurants paying up to 50 less
  than those requiring a liquor license.
  Additionally, appraiser Riley confirms with the
  state liquor control board that a liquor license
  would be available for the site.

59
Case Study 9.1
cont.
Point Break From this information, what
conclusion could be drawn about the highest and
best use of the subject property?

• Restaurant desiring to sell alcohol

60
Case Study 9.1
cont.

• After performing a highest and best use analysis
  of the property, appraiser Riley has determined
  that a restaurant use that requires a liquor
  license would be the highest and best use of the
  property. The use as a site for a non-alcohol
  restaurant was analyzed after considering they
  typically pay substantially less for a commercial
  site that option was eliminated. Alternative
  users, such as most retail, typically pay up to
  50 less than a non-alcohol product restaurant.
  After considering supply and demand patterns,
  historic sales data, and the physical
  characteristics of the subject parcel, the
  appraisers value opinion is a range of
  1,200,000 to 1,500,000.
• Appraiser Riley holds a meeting with the property
  owner. After a presentation of the marketability
  and value opinion of the property, the property
  owner offers that there may be a problem. The
  property owner inherited the property from his
  mother, a conservative lady who was strongly
  opposed to alcohol. He believes there may be some
  restriction relating to alcohol and the use of
  the property. Following up on this information,
  appraiser Riley finds a deed restriction stating
  the property may never be used for the sale or
  consumption of alcohol.

61
Case Study 9.1
cont.
Point Break How does this deed restriction impact
the use and value of the property?

• The number of interested users has been affected
  by the restriction.
• Based on the data given, the property's value
  diminishes by at least 50.

62
Case Study 9.1
cont.
Point Break Are there potential remedies or
alternatives?

• Since the owner inherited the property and
  the restriction, he might be able to file for
  a court action to have the restriction
  removed

63
Case Study 9.1
cont.

• Appraiser Riley suggests that the property owner
  seek legal counsel to discuss the restriction and
  any potential solutions. Legal counsel suggests
  that, in this particular case, a court action
  could be filed to seek removal of the restriction
  claiming it is unreasonable and has a significant
  and unreasonable impact on the property value as
  alternative highest and best uses could result in
  up to a 50 downward impact on it.
• After deep consideration, the property owner was
  not willing to challenge his mothers request.

64
Case Study 9.1
cont.
Point Break How does this information affect the
highest and best use?

• Changes the highest and best use to an
  establishment that does not sell liquor, such as
  fast food

65
Case Study 9.1
cont.

• With this decision, the appraiser now deems the
  highest and best use to be as a food service
  facility that does not sell liquor. At this
  point, the property owner tells appraiser Riley
  that he also owns the land and building
  immediately next door to the subject. It was
  built for and leased to a fast-food facility
  specializing in roast beef sandwiches about 25
  years ago. He also inherited this property. The
  restaurant has been a good tenant and is
  currently engaged in a lease with 10 years
  remaining. Appraiser Riley asks to review the
  fast-food restaurants lease.

66
Case Study 9.1
cont.
Point Break What type of information is appraiser
Riley looking for?

• A non-compete agreement

67
Case Study 9.1
cont.

• In the course of reviewing the lease, appraiser
  Riley finds what he suspectedthe non-compete
  agreement. The agreement states that during the
  term of this lease, no property owned by the
  lessor, within a three mile radius, shall be sold
  or leased for the sale or consumption of roast
  beef, hamburgers, chicken, and fish.

68
Case Study 9.1
cont.
Point Break How has the information impacted
highest and best use and the value of the
property? What vital characteristic of value is
at issue, or not present?

• Eliminates most fast food users
• As the uses of a property diminish, so does the
  propertys value

The property was sold to chain of doughnut shops.
They paid 375,000 for the site.
69
Chapter 9 Quiz

• 1. Highest and best use
• allocates land resources efficiently.
• always considers the intended use of the owner.
• can be several different uses at any given time.
• results in a minimal loss of income.

70
Chapter 9 Quiz

• 2. Externalities can be a positive or negative
  influence on value, primarily due to the property
  characteristic of
• balance.
• immobility.
• level benefits.
• surplus productivity.

71
Chapter 9 Quiz

• 3. An interim use might be determined when
• the appraiser is unable to make a determination
  due to limited data.
• the owner cannot make up his mind on what to do.
• a reasonable and probable change in circumstances
  is forthcoming.
• waiting for a volatile market to settle before
  deciding.

72
Chapter 9 Quiz

• 4. Regarding physically possible, which would
  NOT be considered?
• building materials
• building set back lines
• parking requirements
• size of the building

73
Chapter 9 Quiz

• 5. A school building might be an example of a(n)
  __________ property.
• commercial-use
• multiple-use
• special-use
• utility-use

74
Chapter 9 Quiz

• 6. When the highest and best use of the property
  is vacant, the current improvements are
• in a state of equilibrium.
• lending no value to the vacant site.
• taking away from the value of the vacant site.
• taking away from the vacant site value by more
  than the cost to raze the improvements.

75
Chapter 9 Quiz

• 7. When a buyer will not pay more for something
  than its cost, the buyer is influenced by
• contribution.
• opportunity cost.
• substitution.
• supply and demand.

76
Chapter 9 Quiz

• 8. Which is NOT one of the four agents of
  production?
• capital
• gross profit
• labor
• land

77
Chapter 9 Quiz

• 9. The law of diminishing returns is most
  directly linked to which economic principle?
• change
• competition
• contribution
• substitution

78
Chapter 9 Quiz

• 10. When properties are listed at a certain price
  in the neighborhood, that price tends to set the
  limits of value for other properties around it,
  according to the concept of
• balance.
• competition.
• contribution.
• Substitution.

79
Chapter 9 Quiz

• 11. Which economic principle suggests that value
  is created through expectation of future
  benefits?
• anticipation
• balance
• contribution
• surplus productivity

80
Chapter 9 Quiz

• 12. Which of the following is likely to
  contribute the most value?
• adding 500 square feet to a 1,200 square feet
  house, where 1,200 square feet is the predominant
  square footage
• adding a fence where fences are prohibited
• adding a second bath to a three-bedroom house,
  where three bedrooms, two baths is the norm
• changing granite countertops to laminate

81
Chapter 9 Quiz

• 13. The largest and most expensive house in the
  neighborhood could likely be experiencing
  regression through which economic principle?
• anticipation
• conformity
• substitution
• surplus productivity

82
Chapter 9 Quiz

• 14. When might a residual physical segment of a
  land parcel be considered surplus site?
• if it is needed for future expansion of the
  subjects improvements
• if it would be legally permissible to have
  another house built on it
• when it cannot be legally sold separately from
  the subject property
• when it could freely transfer and be made
  available to the open market

83
Chapter 9 Quiz

• 15. Which is included within the test of legally
  permissible?
• allowable to zoning
• hazard insurance could be obtained
• police protection is available
• title is free of encumbrances

84
Chapter 10

• Overview of
• Market Fundamentals

85
Chapter 10 Objectives

• After completing this chapter, students will be
  able to
• Identify supply and demand model as part
  governmental and part economic
• Describe the role of money and capital markets

86
Key Terms

• Adjustable Rate Mortgages (ARMs)
• Amortization
• Amortized Loans
• Balloon Mortgage
• Command Economic System
• Conforming Loan
• Conventional Loan

• Debt
• Deficit Spending
• Discount Rates
• Economics
• Equity
• Federal Budget Deficit
• Fed Funds Rate

87
Key Terms
cont.

• Federal Home Loan Mortgage Corporation (Freddie
  Mac)
• Federal National Mortgage Association (Fannie
  Mae)
• Federal Open Market Committee (FOMC)
• Federal Reserve Banks

• Federal Reserve Board
• Fiscal Policy
• Government Loan
• Government National Mortgage Association (Ginnie
  Mae)
• Inflation
• Monetary Policy
• Moral Suasion

88
Key Terms
cont.

• Mortgage
• Mortgagee
• Mortgagor
• Nonconforming Loan
• Open Market Operations
• Portfolio Lenders
• Primary Mortgage Markets

• Private Mortgage Insurance (PMI)
• Purchase Money Mortgage
• Reserve Requirements
• Secondary Mortgage Markets
• U.S. Treasury Department

89
Broad Economic Concepts

• Economics The study of how resources are
  allocated
• Fiscal policy
• Monetary policy

90
Command Economyvs. Market Economy

• Command economic system
• Government or other central authority makes all
  decisions about production and distribution
• Market economic system
• Individual people and businesses are free to make
  their own decisions about production and
  distribution

91
Supply-Side vs.Demand-Side Economics

• Supply-side economics
• Seeks to create economic activity by having the
  government lower taxes
• Allow market forces to determine where the most
  productive investment and job creation should
  take place
• Demand-site economics
• Seeks to create economic activity through
  government spending aimed at job creation
• Keynesian economics

92
Money Supply

• Fiscal policy
• U.S. Treasury Department, IRS
• Deficit spending, taxation
• Monetary policy
• Federal Reserve Board
• Prices, interest rates, financial markets

93
Monetary Policy Implementation

• Four tools used by the FED (D O R M)
• Discount rates
• Open market operations
• Reserve requirements
• Moral suasion

94
Role of Moneyand Capital Markets

• Competing investments
• Debt investors Conservative and passive favor
  bonds and mortgages with a certain return and
  repayment of principal
• Equity investors Aggressive and open to more
  risk venture capital
• Sources of capital
• Debt and equity
• Cash, REITs, partnerships, syndications, joint
  ventures, pension funds, insurance companies

95
Mortgage Markets

• Primary mortgage markets
• Lenders who make mortgage loans directly to
  borrowers
• Portfolio lenders
• Secondary mortgage markets
• Private investors and government agencies that
  buy and sell real estate mortgages

96
Function of Secondary Mortgage Markets

• Buy and sell mortgages from primary market
  lenders
• The primary lenders (e.g., local banks) then have
  more money to lend to other potential borrowers
• Local banks invest surplus funds in real estate
  investments from other regionsreal estate cycles
  are then moderated by stable investments from
  areas going through different phases of the cycle
• Standardization loan criteria

97
The Agencies ofSecondary Mortgage Market

• Federal National Mortgage Association (Fannie
  Mae)
• Government National Mortgage Association (Ginnie
  Mae)
• Federal Home Loan Mortgage Corporation (Freddie
  Mac)

98
Conforming vs. Nonconforming Loan

• Conforming loan
• General terms of the mortgage loan application
  meet the requirements of the secondary markets
  underwriting guidelines or a private investors
  lending policy
• Considered low risk for the investor
• Nonconforming loan
• Have one or more underwriting indicators that
  fall outside the acceptable range of guidelines
• Considered higher risk for the originating lender

99
Underwriting Standards

• Loan-to-value (LTV) ratios
• Income-expense ratios
• In order to sell mortgages on the secondary
  market, lenders must conform to underwriting
  guidelines
• Implements quality control
• Increases quality of the loans lenders make

100
Overview of Mortgages

• First mortgage
• A security instrument that has a first mortgage
  lien position has priority over all other
  mortgages
• Second mortgage
• A security instrument in second lien position
• Also called junior mortgages
• Amortization
• The principal and interest of a loan is repaid in
  installments

101
Types of Mortgages

• Conventional loans
• May have private mortgage insurance (PMI)
• Government loans
• FHA loans, VA loans
• Adjustable rate mortgages (ARMs)
• Purchase money mortgages
• Balloon mortgages

102
Chapter 10 Quiz

• 1. The federal government influences the money
  supply through
• fiscal and monetary policy.
• physical and social factors.
• rules of equilibrium.
• supply and demand.

103
Chapter 10 Quiz

• 2. The Treasury Department is NOT responsible for
• federal spending.
• managing the federal deficit.
• tax collection.
• secondary mortgage markets.

104
Chapter 10 Quiz

• 3. The Federal Reserve System has how many
  regional Federal Reserve Banks?
• 6
• 8
• 12
• 14

105
Chapter 10 Quiz

• 4. Tools used by the Fed to implement monetary
  policy include
• Congressional Acts.
• discount rates and reserve requirements.
• fiscal assertiveness.
• prime rates and subprime rates.

106
Chapter 10 Quiz

• 5. The U.S. Treasury is responsible for
  __________ policy.
• economic
• fiscal
• monetary
• social

107
Chapter 10 Quiz

• 6. The amount a commercial bank must keep on
  deposit is known as
• equilibrium.
• monetary policy.
• reserve requirements.
• supply and demand.

108
Chapter 10 Quiz

• 7. If the federal government spends less money
  than revenue, which would likely occur?
• Interest rates would rise sharply for mortgage
  loans.
• Federal Reserve Board would not meet.
• Market equilibrium would occur in the Federal
  Reserve.
• More funds would be available for real estate
  loans.

109
Chapter 10 Quiz

• 8. Tax credits, such as those created through the
  American Recovery and Reinvestment Act of 2009,
  are an example of which force influencing the
  value of real property?
• economic
• governmental
• physical
• social

110
Chapter 10 Quiz

• 9. Which is NOT a source of equity used as
  capital for acquisition of investment real
  estate?
• joint ventures
• mortgages
• partnerships
• pensions funds

111
Chapter 10 Quiz

• 10. What is the lump-sum remaining principle
  balance referred to that is payable when a
  mortgage loan is not fully amortized?
• balloon balance
• deficit balance
• discount balance
• passive balance

112
Chapter 10 Quiz

• 11. In general, conforming conventional mortgage
  loans represent
• less risk of loss to the lender.
• a loan avenue for borrowers who have a high debt
  to income ratio.
• loans that are insured or guaranteed by the
  government.
• an opportunity to charge a higher interest rate.

113
Chapter 10 Quiz

• 12. Which is an advantage of the secondary
  mortgage market?
• Lenders can sell existing lower interest rate
  loans to free-up money.
• The lender is only lending funds from their
  institutions deposits.
• Secondary market loans are only for home equity
  loans, so there is less risk.
• There are no national requirements for the
  secondary market.