Summary for the course Real Estate Finance of the Handelshøyskolen BI (BI Norwegian Business School), based on the book Real Estate Finance and Investments by Brueggeman & Fisher, 14th edition. With help of this summary I got an A on the exam.
Real Estate Finance - Summary
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Based on Real Estate Finance and Investments (14 edition)
Chapter 1 – Basic legal concepts
Real = Realty = land + all things permantly
attached.
Personalty = intangibles and movable things.
Estate = all that a person owns
Written and signed contract became
necessary because the number of disputes
increased and real estate was very import (the
land and houses you live in).
Parallel developments: (1) a system whereby
land locations and boundaries could be more
accurately surveyed and described in
contracts (2) an elaborate system of public
record keeping whereby ownership of all
realty within a political jurisdiction could be
catalogued.
Real property = ownership rights
Property rights = the right of a person to possession, use, enjoyment, and disposal of
his/her property.
Value of particular parcel = total price individuals are willing to pay for the flow of
benefits associated with all of these rights.
Lessee = a person who leases land, has the right to use the property in return of rent.
Lender = Holder of mortgage, has the right the repossess if the borrower defaults on
mortgage loan. (secured interest)
Classifications of Estate
- Based on rights
o Estate in possession
Immediate enjoyment of the rights .
o Future possession
- Based on possession and use
o Freehold
Last for indefinite period of time
Ownership rights
Examples: Fee simple estate, Life estate (until death reverts to
original grantor)
o Leasehold estate
Expires on a definite dates
Only the right to posses and use the property
Interest = right or claim on real property, its revenues and production.
Title = a link an individual or entity who owns property to the property itself.
Deeds = written instrument where a title is conveyed from one person (grantor) to
another (grantee)
,Title is good and marketable:
- Provide a warranty as part of the deed
- Search for relevant recorded documents
- Purchase a title insurance
Chapter 2 – Notes and Mortgages
Mortgage = a loan which your house functions as the collateral.
Not paid back: foreclosure.
Promissory note = document which serves as evidence that debt exist between a
borrower and a lender and contains terms of repayment and the responsibilities of
both parties. Made with recourse = personally liable for payments.
- Amount borrowed
- Rate of interest
- Maturity date
- Reference to real estate (security)
- Application of payments
- Default
- Penalties for late payment
- Early payments (privilege not a right)
- Notification of default and acceleration clause
- Nonrecourse clause (not private liable)
- Loan assumability
- Assignment clause
- Future advances
- Release of lien by lender
ARM = Adjustable Rate Mortgages = Loans that adjust every year for the life of the
mortgage (yield is important)
Chapter 3– Time value of money
PV = Present value
FV = Future value
N = Number of years
I/Y = Interest rate per year
CF = cashflow
PMT = payment
Annuity = Series of deposits or payments
- Ordinary Annuity = all deposits are
made at the end of each year.
- Annuity due = all deposits are made
at the beginning of a period
, Chapter 4– Fixed Interest Rate Mortgage Loans
Demand side: Derived demand or is determined by the demand for real estate.
Real rate of interest = the minimum rate of interest that must be earned by savers to
induce them to divert the use of resources from present consumption to future
consumption.
Also take into consideration
- the inflation rate expectation
- default risk
- interest rate risk (Changes in the market: future supply of savings, demand for
housing, and future levels of inflation
- Prepayment risk: forgo the opportunity to earn interest when the interest rates
fall below the loan contract
- Other risks: Liquidity risk and legislative risk
i = interest rate
p = default risk and other risks’
f = premium for expected inflation
Fixed Interest Rate Mortgage = FRM shifts all interest (inflation) rate risk to
lender – thereby minimizing the default risk
Accruel rate = i/12
Pay rate = the ratio of payments to the loan amount
Principal = original loan amount
CPM = Constant Payment Mortgage
- Every year same amount/annuity
- Annual payment less in the beginning
Fully amortizing CPM loan
Partially amortizing CPM loan
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