Chpt. 10 Multiple Choice & True/False Questions

Multiple Choice

1) Which one of these is not a requirement of a promissory note?

a) Contains the borrower's promise to repay

b) Must be signed by the borrower

c) Must be delivered by the lender and signed by the borrower

d) Parties must have contractual capacity

2) Which of these items isn't included in a promissory note?

a) Reference to a mortgage

b) Prepayment clause

c) Due on sale clause

d) Unsecured debt

3) To calculate the mortgage balance, what three things must you have in order to do this?

a) Contract rate

b) Remaining mortgage payments

c) Monthly payment

d) Monthly debt service

True/False

1) A prepayment clause gives the borrower's the right to prepay the entire loan balance without a penalty. T/F

2) Unsecured debt is a personal promise to pay back a loan. T/F

3) Deed of trust is a document transferring legal title to a trustee. T/F

4) Lien theroy is a state's view that a mortgage is simply a lien on real property, with the mortgagor holding legal title to the collateral. T/F

5) Mortgage underwriting is a process of evaluating the risk associated with taking on a mortgage loan. T/F

Answers

1)C

2)D

3)D

1)T

2)T

3)T

4)T

5)T

Consumption Activities

Identifying Critical Components While Selecting a Home

Prepared by: Kent Sakamoto

Americans will consume and eventually own real estate at some point in their life. After all, it is the “American Dream”. There are multiple steps that need to be taken into consideration when contemplating on buying a home. The consumer should first determine if it is beneficial to buy versus rent in their current economy. Next they should consider a specific geographic location in which to purchase. By specific, meaning a precise location within a city needs to be selected. Lastly, they should distinguish between the various mortgage products and learn to understand them in their entirety. If the consumer takes time and carefully examines every facet of purchasing a home, it can be enjoyable and exhilarating.

A critical component while selecting a home occurs before the actual selection process. Potential homeowners should carefully scrutinize the pros and cons of buying a home versus renting a home. Most Americans like the stable payments, tax deductions, and the opportunity to build equity while owning a home. The cons of owning a home include maintenance costs, liquidity risk, and possible fluctuation in value. For most Americans, the benefits far outweigh the risks in purchasing a home. That is why home ownership in the United States is nearing 69%.

Determining a specific location to purchase a home is as important now as it ever has been. Consumers should take into consideration cities with declining markets, as well as neighborhoods beleaguered by foreclosures, and vacant properties. In Michael King’s article “Housing Bust Makes Location More Important for Home Buyers”, he states that lenders are more likely to favor plentiful neighborhoods because of the abundant information they provide in helping lenders gauge future clients. Thus meaning, they also tend to steer away from the foreclosure plagued neighborhoods. Other reasons to consider when purchasing a home within a city is the home location in relation to consumer activities, (i.e. grocery stores and points of interest) as well as school districts in which the consumers might bring their children through.

Understanding the various mortgage products while going through the application process for purchasing your home is vital. A very few percentage of Americans have the cash flow to make an “all cash” purchase, so it is essential to evaluate the loan market and possible risk involved. It is also crucial to interview different loan officers who might originate your loan, not for the lowest interest rates, but an individual who will put your best interest before their own. With a plethora of different loan types available, a fixed-rate, 30 year loan is often deemed the most popular and likely the safest for a homeowner looking to stay put for lengthy duration. Further research into different loan types for what is suitable for a specific consumer’s need might determine otherwise. Overall, an extensive knowledge of home lending is crucial to protect the consumer of numerous risks and possibility of default.

The aforementioned tips are only a basic foundation of the overall consumption activity. There are many other underlying factors that might swing the decision of where, when and why to purchase a home. Consumers should be aware of job security in relation with the duration of the mortgage payment. Simply put, if you predict there is a possibility of struggle in making the mortgage payments throughout the life of the mortgage, maybe it is not the appropriate time for you to buy.

References;

Hansz, Andrew J, and Julian Diaz III. “Real Estate Analysis: Environments and Activities”. Dubuque, Iowa: Kendall Hunt, 2010. Chapter 13.

King, Michael. “Housing Bust Makes Location More Important for Home Buyers”. Total Mortgage Services. January 6, 2010. Retrieved 4/19/2011.

“Owning vs. Renting”. Home Loan Learning Center. Mortgage Bankers Association, 2008. Retrieved 4/19/2011.

Chapter 9 Questions: Cheyenne Ison

1. The risk that the purchasing power of investment incomes and values does not keep up with the cost of other goods and services is known as:
A. Financial Risk
B. Liquidity Risk
C. Management Risk
D. Inflation Risk
Answer is D- Inflation risk

2. The likelihood of an occurrence of an unwanted event is known as:
A: Opportunity Cost
B: Risk
C: Cash Flow
D: Market Risk

Answer is B-Risk

3. The increase in asset value over a certain period is known as:
A: Tax shelter
B: Appreciation
C: Depreciation
D: Adjusted Basis

Answer is: B- Appreciation

1. The difference between the return on the underlying assets and the cost of borrowed funds is known as Spread.

Answer:True

2. The reduction or amortization of the mortgage balance over time is known as Leverage.

Answer: False- Known as Mortgage Reduction

3. Investing in a variety of assets to spread risk and hopefully avoid large losses is known as pride of ownership.

Answer: False-known as diversification

4. A psychic benefit is a perk to owning real property that is difficult to quantify.

Answer: True

5. An oligopoly is one supplier in a particular market that has control over market prices since there is no competition.

Answer: False- Known as a Monopoly

Chapter 8 Questions-Cheyenne Ison

1. The stages of the development process which occur before the developer has committed significant resources to the project are known as postcommitment.

Answer: False-Known as Precommitment

2. A Conventional loan is a short-term loan issued to a developer to fund the construction stage of a project.
Answer: False- Known as a Construction loan.

3. A commitment made by a permanent lender to extinguish the collateral interest a construction lender has in a real estate project by loaning the funds used by the developer to pay off the construction loan is known as the takeout loan commitment.

Answer: True

4. An analysis which aims to estimate how much of the total demand in a competitive market can be captured by a particular property is known as the highest and best use analysis.

Answer: False- known as the marketability study.

5. Permitting is the process of obtaining the necessary government permits to begin and sustain a construction project.

Answer: True

1. Which of the following is not a stage in The Dynamic Process of Real Estate Development:
A. Construct the Design
B. Manage the Asset
C. Refine the Concept
D. Define a Tax Shelter

Answer: D is not part of the model

2. An assurance made by a third party, that the original party will perform according to contract is known as a:
A. Bridge Loan
B. Certificate of Occupancy
C. Performance Bond
D. Takeout loan commitment

Answer is C- Performance Bond

3. In which of the following Real Estate Development steps does an investor formalize relationships and prepare documents, secure investor capital, and acquire site and post-acquisition activity:
A. Stage One: Conceive a Development Project
B. Stage Two: Examine the Feasibility of a Project
C. Stage Three: Refine the Concept
D. Stage Four: Design the Project

Answer is D-Stage four: Design the Project

Chapter 9

Kasper Hovannisian

Chapter 9

1. The likelihood of an occurrence of an unwanted event is:

A. Investing

B. Risk

C. Opportunity Cost

D. Financial Risk

2. The value of the next best alternative investment when faced with mutually exclusive investment choices is:

A. Opportunity Cost

B. Liquidity Risk

C. Appreciation

D. Tax Shelter

3. What is the use of borrowed funds by the investor with the anticipation of increasing investment returns?

A. Spread

B. Appreciation

C. Leverage

D. Inflation

4. Investing in a variety of assets to spread risk is Diversification.

T / F

5. Oligopoly is a control over a market by a single supplier.

T / F Oligopoly is a few suppliers with control over a market. Monopoly is a single supplier that has control over a market.

6. Psychic benefit is the pride associated with real property ownership.

T / F Pride of ownership is the pride that goes with real property ownership where psychic benefit is a perk to owning real property.

7. An increase in normal prices is known as inflation.

T / F

8. The increase in an assets value is known as depreciation.

T / F An increase in an assets value is known as appreciation.

Chapter 8

Kasper Hovannisian

Chapter 8

1. What is it called when a developer commits significant resources to a project?

A. Postcommitment

B. Precommitment

C. Commitment

D. Phase 1

2. Who contracts with a developer to construct real estate improvements?

A. Analysis

B. Broker

C. General Contractor

D. Agent

3. A short term loan issued to a developer to fund the construction stage of a project is:

A. Takeout Loan

B. Construction Loan

C. Bridge Loan

D. Permanent Loan

4. A marketability study is an analysis that aims to estimate how much of the total demand can be captured by a particular property.

T / F

5. The economic and locational enviorment in which a particular property competes and trades is the competitive market.

T / F

6. There is no need to obtain a permit when beginning a construction project.

T / F One must obtain a permit on most construction projects.

7. The process which occurs before the developer has committed significant resources to a project is the precommitment stage.

T / F

8. The use that results in the greatest productivity for a site is called highest and best use.

T / F

CHAPTER 8-9

Fin 180
Erica Mendoza
Chapter 8

1. Which of the following is part of the ordinances enforceable through the exercise of police powers?
A. Materials
B. Construction
C. Design
D. Occupancy
E. All of the above. ANSWER E
2. Which of the following defines an analysis which aims to estimate how much of the total demand in a competitive market can be captured by a particular property.
A. Takeout loan commitment
B. Marketability Study
C. Certificate of occupancy
D. Construction loan commitment
E. None of the above. ANSWER B
3. Which of the following defines that economic and locational environment in which a particular property competes and trades.
A. Competitive market
B. Permitting
C. Productivity analysis
D. Precommitment ANSWER A
4. A takeout loan commitment is a commitment made b a permanent lender to extinguish the collateral interest a construction lender has in a real estate property by loaning the funds used by the developer to pay off the construction loan? TRUE
5. Is the process of obtaining the necessary government permits to begin and sustain a construction project a general contractor? FALSE
6. A bridge loan is also known as the gap loan? TRUE
7. A construction loan is a long-term loan issued by a developer to fund the construction stage of a project? FALSE Short-term
8. Developers are eager to avoid early commitment to their projects in the beginning? TRUE

Chapter 9

1. Which of the following defines the risk that the investor cannot sell and convert the real estate investment into cash?
A. Leverage
B. Investing
C. Cash Flow
D. Liquidity risk
E. None of the Above. ANSWER D
2. In step four which of the following is not used to obtain the before-tax equity?
A. Less selling Costs
B. Less loan balance
C. Future sale price
D. Net proceeds from sale
E. All of the above. ANSWER E

3. In step 2 which of the following is not part of the taxable income?
A. Plus reserves
B. Less depreciation (S/L)
C. Taxable income
D. NOI
E. Less operating expenses, part of step 1. ANSWER E

4. The increase in asset value over a certain period is called appreciation? TRUE
5. A business or market risk is the risk that business or market conditions may change unexpectedly and unfavorably, reducing the investor’s return? TRUE
6. The spread is the likelihood of an occurrence of an unwanted event? FALSE (RISK)
7. A reduction usually mortgage interest and tax depreciation for real estate investments, in taxable income is the tax shelter? TRUE
8. Management risk is the reduction or amortization of the mortgage balance over time? FALSE (Mortgage Reduction)

Chapter 9

1.) Only if an investor borrows money but does not have any financial liens then there is no financial risk. F-borrows no money and no liens p233

2.) Real estate investors are also allowed to depreciate property improvements. T-p239

3.) FEMA is an agency for collateral in flood-prone areas where flooding can destroy real estate. T-p235

4.) Management fees are paid out through escrow and usually at a percentage between 20%-25% of effective gross income. F-paid out of rental collections at 3%-18% p233

5.) The two major tax benefits that are found in real estate investing are:

a) Mortgage principle deduction & taxable income deduction

b) Book value deduction & noncash deduction

c) Mortgage interest deduction & taxation depreciation deduction –p238

d) None of the above

6.) Which of the following are reasons why investors are not against depreciation:

a) They can control when capital gains are paid and if they get paid

b) Tax deduction tone day rather than the same deduction in the future

c) Lower capital gains tax rates than income tax rates

d) All of the above –p239-240

7.) The return to the equity investor is influenced by:

a) Overall rate of return

b) Effects of leverage

c) None of the above

d) Both a&b -p241

8.) The following are all risks of real estate:

a) Inflation

b) Opportunity cost

c) Assets

d) Both a & b – p231

Chapter 8 & 9

David Mueller-Flores
Fin 180- M W @ 2

Chapter 8 – Entrepreneurial Activity

The process of real estate development has six steps which are conceive a project, examine project feasibility, refine the concept, design the project, construct the design, and finally manage the asset. True or False? True pg. 201

Every project begins as sites in search of a use concept. True or False? False Pg. 203

In the case of a site in search of a use the idea is to figure out which of the candidate uses will provide the highest and best use. True or False? True Pg. 203

The two things that developer needs to make sure of when examining the feasibility of a project are that the market will support the project’s vision and that the site itself is suitable, both physically and legally, to accommodate it. True or False? True Pg. 204

Obtaining information that sheds light on the legal and physical suitability of the site for the project concept is termed conducting due diligence. True or False? True Pg. 206

At which point in the process of real estate development does a developer reach the “point of no return”?
A) Examine the project feasibility
B) Refine the concept
C) Design the project
D) Construct the design
Answer is C “design the project” Pg. 201

What is the final step in the process of real estate development?
A) Manage the Asset
B) Construct the Design
C) Refine the Concept
D) Conceive a project
Answer is A “Manage the Asset” pg. 201

The two sets of activities that developers place operations during a project are?
A) Entrepreneurial, Investing
B) Entrepreneurial, Government
C) Precommitment, Postcommitment
D) None of the Above
Answer is C “Precommitment, Postcommitment” Pg. 200 &201

Chapter 9 – Investing Activity

Opportunity cost is the value of the next-best investment choice. True or False? True Pg. 232

It is impossible for property to have negative cash flow. True or False? False Pg. 235

The analysis of every potential risk leads to overanalysis and analysis paralysis. True or False True Pg. 234

A reserve account is used to account for the period replacement of improvement’s short lived components, such as a roof. True or False? True Pg.236

In an investment problem, ATCF represents the bottom line and money in the investor’s pocket. True or False? True Pg. 253

The Cap. Rate is which ratio?
A) NOI/Vo
B) NOI/Ro
C) Total Operating Expenses/EGI
D) EGI/Vo
Answer is A “NOI/Vo” Pg. 269

Out of the choices below which is the best DSCR ratio?
A) 1
B) 1.3
C) .7
D) .1
Answer is B “1.3” pg. 268 & 269

A risk or risks of investing in real estate include:
A) Opportunity Cost
B) Inflation
C) Mortgage Reduction
D) A & B only
E) All of the Above
The answer is D “ A & B only” Pg. 231 & 234

Chapter 9

1) Risk is the likelihood of an occurrence of a wanted event.

True / False

2) The pursuit of a future return by delaying consumption and taking an anticipated, desired level of risk is called investing.

True / False

3) The decrease in asset value over a certain period is called appreciation.

True / False

4) Tax shelter is a reduction, usually mortgage interest and tax depreciation for RE investment, in taxable investment income.

True / False

5) Leverage is teh use of borrowed funds by the investor with the anticipation of decreasing investment returns.

True / False

6) Which of the following is not a risk?

a) Management

b) Inflation

c) Financial

d) None of the above.

7) Diversification is

a) Investing in a variety of assets to spread risk.

b) Investing in one stock to maximize risk.

c) Investing in one stock to minimize risk.

d) Investing in a variety of assets to maximize return.

8) An oligopoly market has following characteristic.

a) Many suppliers with full control over the market.

b) A few suppliers that have some control over the market.

c) One supplier with no control over the market.

d) None of the above.

Answers:

False, True, False, True, False, d), a), b)