California Real Estate Finance

1. 1 California Real Estate Finance Sixth Edition

2. 2 Nature and Cycle of California Real Estate Finance Chapter 1

3. 3 Historical Perspective Might and power English feudal system Allodial system

4. 4 Nature of Real Estate Finance Ownership of property Property Real property Personal property Commercial fixtures

5. 5 Estates in Realty  Freehold estate Fee simple absolute Time-shares Legal title; equitable title Concurrent ownership Tenants in common and partnerships Community property Leasehold estate

6. 6 Real Estate Characteristics Physical Economic Social Police powers Eminent domain Condemnation

7. 7 Mortgage Lending Activities Savings associations Credit system economy Financing relationships Local markets National markets

8. 8 Real Estate Cycles Supply and Demand Real estate Money Population Characteristics Political attitudes

9. 9 Money and the Monetary System Chapter 2

10. 10 What is Money? Medium of exchange or means of payment Storehouse of purchasing power Standard of value

11. 11 The Use of Paper Money As long as the public can exchange symbolic paper money for commodities of like value, the system works.

12. 12 The Supply and Cost of Money M1 includes cash and checking accounts M2 adds savings and time deposits of less than $100,000 M3 adds large time deposits at all depository institutions Creating money

13. 13 The Federal Reserve System (FED) A central banking system that provides a rising standard of living through controlled growth of money and credit.

14. 14 Organization of the FED Twelve Federal Reserve districts Each district includes Federal Reserve Bank Directed by board of governors Membership

15. 15 Functions of the FED Reserve requirements to protect depositors Discount rates to regulate the cost of funds Federal Funds Rate at which the Fed lends money to member Open market operations Truth-in-Lending Act (Regulations Z)

16. 16 The United States Treasury Balances government�s income against its long-term and short-term debt instruments has a direct effect on the monetary and credit climate of the country. The Office of the Comptroller of the Currency (OCC) Nation�s Fiscal Manager The Treasury�s Role The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) The Federal Deposit Insurance Corporation (FDIC) The Deposit Insurance Fund

17. 17 The Federal Home Loan Bank System (FHLB) Organization Office of Thrift Supervision Activities Provides its members a national market for their securities

18. 18 California Financial Agencies Department of Savings and Loans California Housing Finance Agency (CHFA) Department of Banking Department of Insurance Department of Corporations (DOC) Department of Real Estate (DRE) Office of Real Estate Appraiser (OREA)

19. 19 Institutional Lenders for Real Estate Finance Chapter 3

20. 20 Commercial Banks Origins Goldsmiths and money lending Advent and evolution of checking system Underwriting Organization and operation Mortgage loan activities Interim financing (construction loans) Home improvement loans Manufactured home loans Equity loans Mortgage banking Trust department activities

21. 21 Savings and Loan Associations/Savings Banks Origins and development Organization Mortgage lending activities California chartered savings and loan associations

22. 22 Life Insurance Companies Seek safety and long-term stability of an investment. Participation financing Purchase of blocks of single-family mortgages or securities from the secondary mortgage market

23. 23 Pension and Retirement Programs Pension monies collect routinely, usually from payroll deductions, and are held in trust until needed at retirement. Pension fund managers invest assets from accounts.

24. 24 Credit Unions Members deposit savings, usually through payroll deductions. Members borrow at interest rates below competition. Expanding in real estate finance.

25. 25 Noninstitutional Lenders Chapter 4

26. 26 Mortgage Brokers and Bankers Mortgage brokers match up borrowers and lenders Mortgage bankers are intermediaries (known as correspondents) originate new loans, collect payments, periodically inspect the collateral, and supervise foreclosure, if necessary. Development; Interest only loans with balloon payments High level of defaults during Great Depression Formation of Federal Housing Administration (FHA) in 1934 New plans for mortgage payback system�amortization Operation Servicing a Loan Assignment of Loan Activities

27. 27 Real Estate Trusts Designed to provide vehicles by which real estate investors can enjoy the special income tax benefits granted to mutual funds and other regulated investment companies.

28. 28 Trust Qualifications (1 or 2) Trust must not hold property primarily for sale to customers in the ordinary course of business. Trust must be owned beneficially by at least 100 investors. Trust must not have fewer than five persons who own more than 50 percent of the beneficial interest. Trust�s beneficial interests must be evidenced by transferable shares or certificates of interest Ninety-five percent of the trust�s gross income must be derived from its investments.

29. 29 Trust Qualifications (2 or 2) Seventy-five percent of the trust�s gross income must be derived from real estate investments. No more than 30 percent of the trust�s gross income may result from sales of stocks and securities held for less than 12 months or from the sale of real estate held for less than four years. Ninety-five percent of the trust�s gross income must be distributed in the year it is earned. All trust income must be considered passive by the IRS.

30. 30 Real Estate Investment Trusts (REITS) Invest in improved income properties Income derived from rents and capital gains Individual investors pay income tax only at participant level

31. 31 Real Estate Mortgage Trusts (REMTs) Expand their financial bass with strong credit at their commercial banks. Make mortgage loans on commercial income properties. Income from mortgage interest, origination fees, and profits made from buying and selling mortgages.

32. 32 Balanced Trusts Combine REIT with REMT, earning profits from rental income and increased property values as well as mortgage interest and placement fees.

33. 33 Syndicates Organizations of investors pooling capital for real estate investments Can be corporations, general partnerships, or limited partnerships Investment conduits that pass profits and losses through to investors in proportion to their ownership shares

34. 34 California Syndication Controlled by the California Department of Corporations Limited partners may become liable for the total debts of the partnership if they take an active role in the management of the partnership Limited liability company (LLC) combines single-level tax benefit of partnership with organizational structure and limited liability of limited partnerships and corporations.

35. 35 Real Estate Bonds Can be used to secure funds for financial real estate projects through 1) issuance and sale of mortgage bonds and 2) issuance and sale of municipal, county, or state bonds for purposes of financing community improvements.

36. 36 Nature of Bonds Secured and unsecured (debentures) Coupon; registered coupon Classification by nature of issuer, nature of security, or by maturity date Issuance of banks Market prices of bonds Ratings

37. 37 Uses for Bond Issues Use has faded since depression of 1930s Many companies today use debenture bonds as a source of raising long-term funds

38. 38 Bonds General obligation bonds Tax privilege of exempting interest income earned on state and local securities Revenue bonds Industrial revenue bonds Mortgage revenue bonds Zero coupon bonds Mortgage loan bonds

39. 39 California Bonds Issued by Community Redevelopment Agencies Money used to make below-market interest rate loans to qualified developers of low-income and medium-income residential projects Mortgage-backed bonds issued by savings associations

40. 40 Endowment Funds Provides a permanent source of income Managers responsible to develop income while preserving capital Perfect vehicle for real estate finance�REMIC

41. 41 Private Loan Companies Usually deal in junior finance Often charge higher than market interest rates Must adhere to Truth-In-Lending laws

42. 42 California Real Property Loan Law Limits on amount of commission and fees that can be charged for making or arranging a hard money loan.

43. 43 Individuals Sellers as lenders Families as lenders Other lenders

44. 44 Conventional, Insured, and Guaranteed Loans Chapter 5

45. 45 Conventional Loans (1 or 2) Fixed-Rate Loans Interest-0nly Loans Private Mortgage Insurance (PMI) Permanent/Temporary (Escrow) Buydown Plan Borrower�s Qualifications Other Conventional Loan Programs Zero Money Down Payment

46. 46 Conventional Loans (2 or 2) Reduced Paperwork Jumbo Loans Home Equity and Home Equity Line of Credit (HELOC) Automatic Rate Reduction Subprime Loans

47. 47 Predatory Lending Flipping Packing Charging excessive fees

48. 48 Home Ownership and Equity Protection Act of 1994 Addresses deceptive and unfair practices in home equity lending.

49. 49 Refinancing Existing Conventional Loans Costs of refinancing are unregulated and vary dramatically among lenders.

50. 50 Electronic Real Estate Loan Services Borrower can arrange for a residential loan on the computer Still requires filing of a loan application and the probably submission of ancillary documents such as bank statements and annual income tax reports.

51. 51 FHA Organization and Requirements Lenders must grant long-term, self-amortizing loans at market interest rates All properties must meet minimum standards of acceptability Careful loan application review Comprehensive written appraisal report on property Borrower required to receive and sign a form entitled �For Your Protection: Get a Home Inspection�

52. 52 FHA Program Summary Not a direct lender Reduced the down payment obstacle for cash-short borrowers Helps stabilize the mortgage market

53. 53 Existing FHA Programs Title I�light or moderate rehabilitation of properties; manufactured homes, developed lot, or combination of lot and home. Title II Section 203(b)�Mortgage Insurance for One-Family to Four-Family Section 203(k)�Rehabilitation Mortgage Insurance Section 234(c)�Mortgage Insurance for Condominium Units Section 251�Insurance for Adjustable Rate Mortgages Other Title II programs

54. 54 Special HUD/FHA Programs Energy Efficient Mortgage (EEM) Home Equity Conversion Mortgage (HECM) Officer Next Door Teacher Next Door Homeownership Vouchers Native American Housing

55. 55 Underwriting Guidelines Maximum Loan Limitations Down Payment Requirements Borrowers� Income Qualifications Mortgage Insurance Premium (MIP) Allowable Closing Costs Second Mortgage/Buydowns

56. 56 Frequently Used FHA Loans Section 203(b): One-Family to Four-Family Mortgage Insurance Section 234(c): Mortgage Insurance for Condominium Units Section 251: Insurance for Adjustable-Rate Mortgages Section 203(k): Rehabilitation Mortgage Insurance Streamline Refinance

57. 57 Additional FHA Issues Direct Endorsement and Coinsurance Advantages of FHA Mortgage FHA Contributions to Real Estate Finance

58. 58 The U.S. Department of Veterans Affairs Real Estate Loan Guarantee Program Program Application Eligibility/Entitlement Certificate of Eligibility Partial Entitlement Certificate of Reasonable Value Interest Income Qualifying Requirements Closing costs�may not be included in DVA loans Funding Fee Second Mortgages Buydowns Assumptions Release of Liability/Novation

59. 59 Additional DVA Loan Guarantee Programs DVA Adjustable-Rate Mortgage (ARM) DVA Streamline Refinance Cash Out Refinance Conventional to DVA Mortgage

60. 60 California Veterans Home and Farm Purchase Program (CAL-VET) Funding and title Eligibility requirements All veterans are eligible 90 days active service or meet other qualifications Honorable discharge Active service within designated periods Veteran receiving approved medals during peacetime may also qualify Unremarried spouses of veterans killed in active duty also eligible

61. 61 California Veterans Home and Farm Purchase Program (CAL-VET) Qualifying procedures Maximum property values on single family homes, condos and mobile homes on owned lots Maximum for manufactured homes Maximum for self-supporting farms and ranches Downpayment differs depending on type of loan Most loans amortized over 30 years Fixed an variable rate loans available Insurance against floods and earthquakes required Special Conditions New construction Funds for Refinancing Junior financing Occupancy Others

62. 62 Financial Agencies and Lending Programs Chapter 6

63. 63 Agricultural Lending Need for flexibility Open-end mortgages Moratorium on payments

64. 64 The Farm Credit System (FCS) Farm Credit Administration (FCA) Federal Agriculture Mortgage Corporation (Farmer Mac) Farm Credit Leasing Services Farm Credit Council The U.S. Department of Agricultural Rural Development Program (USDA Rural Development)

65. 65 U.S. Department of Housing and Urban Development (HUD) U.S. Department of Housing and Urban Development (HUD) Supervises the Federal Housing Administration (FHA) Directs Ginnie Mae Oversees Fannie Mae and Freddie Mac operations Enforces fair housing and RESPA regulations Manages the Housing Choice Voucher Program Manages the Indian Housing Act Regulates interstate land sales registration, urban renewal, and rehabilitation programs Supervises public housing projects

66. 66 HUD Strategic Plan Increase home ownership opportunities Promote decent affordable housing Strengthen communities

67. 67 HUD: Additional Responsibilities Regulation of Fannie Mae and Freddie Mac Urban renewal Subsidized housing Community Development Block Grants (CDBG) Public Housing

68. 68 The Real Estate Settlement Procedures Act (RESPA) Disclosures under RESPA Disclosures before Settlement Closing Disclosures at Settlement Disclosures after Settlement

69. 69 The Federal Equal Credit Opportunity Act (ECOA) Prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, or dependency on public assistance.

70. 70 Interstate Land Sales Established criteria for the dissemination of vital information to potential buyers of residential land.

71. 71 Federal Legislation Fair Housing Act Uhruh Civil Rights Act (Civil Code Section 51) Community Reinvestment Act The Home Mortgage Disclosure Act Truth-in-Lending (Regulation Z) Advertising Right of rescission Usury Laws Usury Laws Federal California

72. 72 State Financing Agencies Industrial Development Agency Community Redevelopment Agency (CRA) Tax-increment financing Mortgage revenue bonds Special assessments

73. 73 The California Housing Finance Agency (CHFA) Programs provide below-market, fixed-rate financing for first-time homebuyers. The Home Purchase Assistance Program The Matching Down Payment Program Other CHFA Programs

74. 74 City Of Los Angeles Home Mortgage Program Provides mortgage loans to low-income and moderate-income first-time homebuyers who wish to purchase from selected new homes and condominiums.

75. 75 The Housing Financial Discrimination Act of 1977 (Holden Act) Offsets illegal practice of redlining Prohibits discrimination

76. 76 Junior Loans in Real Estate Finance Chapter 7

77. 77 Junior and Senior Liens Distinguishing first and junior lien by date and time of recording Increase of junior financing by thrifts and commercial banks Secondary market for junior finance Junior financing provides funds for land developers to pay for offsite improvements

78. 78 Anatomy of a Second Mortgage/Deed of Trust Second deed of trust is in junior position to an existing senior loan Junior loan holder in higher-risk position In event of default, senior lender will usually give junior lender a chance to make delinquent payments Causes protect junior lien holder�s position against that of senior lender Junior loan risks Junior Loan interest rates and usury

79. 79 Home Equity Loans Offered by many lenders Interest is tax deductible, unlike interest on consumer debt, which is not Attractive interest rates, sometimes for only short period of term Face high default rates when economy slows Freddie Mac has program for purchase of secured home improvement loans

80. 80 Loan Terms and Note Payments Chapter 8

81. 81 Interest Simple Interest�paid only on the amount of principal still owed. Term Loan�requires payments of interest only with the entire principal being repaid at a specified time. Amortization�payments include portions for both principal and interest. Distribution of Principal and Interest

82. 82 Variations in Payments and Interest Rates Graduated-Payment Mortgage (GPM) Adjustable-Rate Mortgage (ARM) Adjustment periods Initial rate Note rate Qualifying rate Index Margin Interest rate caps Payment caps

83. 83 Innovative Payment Plans The 15-Year Mortgage Reverse Annuity Mortgage (RAM) Fannie Mae Senior Housing Program Fannie Mae�s Two-Step Mortgage Plan

84. 84 Variations in Formats Open-End Mortgage Construction Mortgage Blanket Mortgage Release Clauses Leasehold Mortgage Package Mortgage Manufactured Home Mortgages Purchase-Money Mortgage Hard-Money Mortgage (Equity Mortgage) Bridge Loan Wraparound Encumbrance (Wrap) Mortgage Participation

85. 85 Tax-Deferred Mortgage Lending Installment Sales Option to Buy Lease with Option of Buy Exchanges�Internal Revenue Code Section 1031

86. 86 Instruments of Real Estate Finance Chapter 9

87. 87 Terminology Encumbrance�right or interest in a property held by one who is not the legal owner of the property. Lien is a financial encumbrance. Lien�defined as a charge against a specific property wherein the property is made the security for the performance of a certain act, usually the repayment of a debt. Voluntary liens and involuntary liens; general and specific liens.

88. 88 Interests Secured by a Real Estate Loan Fee simple ownership; Less than fee simple ownership; Personal property, trade fixtures Title and Lien Theories Equitable rights Title theory Redemption right Statutory redemption period Lien theory recognizes the rights of lenders in collateral property being equitable rights, while borrowers retain their legal rights in the property. California has taken modified position between the title and lien theories. General Requirement for a finance instrument

89. 89 Note and Deed of Trust (Trust Deed) Deed of Trust�evolved to become the dominant security instrument for financiers of California real estate. Advantage of trust deed over mortgage is shorter foreclosure period. Judicial foreclosure; nonjudicial foreclosure; power-of-sale clause; naked title; beneficiaries.

90. 90 Note Secured by Deed of Trust Date signed Participants� identities Promise to pay Payment due dates Amount and terms Reference to security Signatures and endorsements Cosigners

91. 91 Deed of Trust Executed by the trustor to transfer a form of legal fee ownership to the trustee to be held for the beneficiary, while the trustors maintain their equitable ownership.

92. 92 Covenants of California Deed of Trust Preservation and maintenance Fire insurance Legal action Taxes and assessments Beneficiary and trustee expenditures Condemnation Late payments Reconveyance

93. 93 Note and Mortgage Note Secured by a Mortgage Mortgage Recording information Participants Pledge Property description Covenant of seisin Note attachment Mello-Roos disclosure Property taxes Insurance Defeasance clause and acceleration Maintenance of the collateral Signatures and acknowledgement Release of mortgage

94. 94 Real Property Sales Contract (Land Contract) Single, complete financing and sales agreement executed between buyer and seller.

95. 95 Special Provision in Real Estate Finance Instruments Late payment Penalty Prepayment Privilege Prepayment Penalties Lock-In Clause Due-On-Sale Clause Assumption Versus Subject To Subordination Clause Release Clause Extensions and Modifications

96. 96 Contracts Used in the Real Estate Business (cont.) Listing agreements Sales contracts Offer and acceptance Equitable title Destruction of premises Earnest money deposits Cooperative apartment contracts Condominium sales Option agreements Land contracts Local forms Recission

97. 97 Real Estate Loan Underwriting Chapter 10

98. 98 Underwriting Estimating the value of the property being pledged as collateral to guarantee repayment and determining the ability of a borrower to repay the loan.

99. 99 Definition of Value  Value in use Value in exchange Subjective value Objective value Market value

100. 100 Appraisal Estimate of property�s value at a specific point in time.

101. 101 The Appraisal Process Drive-by appraising Defining the appraisal problem Determining the purpose for the appraisal Examining the neighborhood and property being appraised Collecting the pertinent data Applying approaches to estimate value Reconciling values estimated Preparing the report

102. 102 Appraisal Approaches Direct Sales Comparison Approach Cost Approach Income Capitalization Approach Gross Rent Multiplier (GRM) Reconciliation of Data and Opinion of Value

103. 103 Qualifying the Borrower The loan application Financial statement Assets Liabilities Net worth Data verification Deposits Employment Credit report Credit evaluation Credit scoring Loan qualifying income ratios

104. 104 Processing Real Estate Loans Chapter 11

105. 105 Qualifying the Title Notices�constructive notice and actual notice Abstracts and Opinion of Title Title Insurance Title Faults Surveys

106. 106 Disclosures in California Real Estate Transactions Real estate transfer disclosures Delivery of a pest control inspection report Disclosure of geological hazards Disclosure of hazardous waste deposits Thermal insulation disclosure Special flood area disclosure Special city and country ordinances Foreign investment real estate tax Condominium documents disclosure Disclosure for real property loans

107. 107 Costs of Securing a Loan RESPA requires good-faith estimate Points Placement or origination fee Impound funds (escrow accounts) Property taxes Hazard insurance Title insurance Mortgage insurance Assessment liens Interest adjustments Prepayment penalties

108. 108 Additional Costs Prorations Interest Property taxes Insurance premiums Additional prorations

109. 109 Additional Processing Concerns Closing Statements Servicing the Loan Assignment of the Loan

110. 110 The Secondary Mortgage and Trust Deed Markets Chapter 12

111. 111 Introduction to Secondary Market Originators of new loans are called primary lenders Most loans created by primary lenders are sold in the secondary market Lenders acquire money for new loans; avoid the risk of holding long-term fixed interest loans Some keep loan servicing responsibilities; high tech approach has removed personal interaction between lenders and borrowers Emergence of securitization of pools of mortgage loans

112. 112 Fannie Mae (formerly the Federal National Mortgage Association) Originally a government agency Created to buy FHA-insured loans issued in the Depression Bought loans at par to stimulate economic recovery

113. 113 Fannie Mae Charter of 1954 Allowed Fannie Mae to sell as well as to buy loans Financed by private capital National secondary mortgage market operations to provide liquidity for mortgage investments

114. 114 Housing and Urban Development Act of 1968 Fannie Mae reorganized as a private corporation Creation of Ginnie Mae, established for special assistance programs Administered price system allows Ginnie Mae to adjust its required yields daily in accordance with market factors and its financial needs Fannie Mae Mortgage-Backed sold on international markets

115. 115 Underwriting Standards for Conventional Loans Sold to Fannie Mae Conforming and nonconforming loans Automated underwriting system Credit scoring

116. 116 Other Fannie Mae Programs Fannie Mae Mortgage Solutions Community Lending Mortgage Products Office of Federal Housing Enterprise Oversight

117. 117 Freddie Mac Created in 1970 to offset credit crunch for the savings associations

118. 118 Organization of Freddie Mac Established with an initial subscription from the 12 Federal Home Loan district banks Under direction of three members of Federal Home Loan Bank Board Authorized to raise additional funds by floating its own securities Since 1989, became independent stock company in direct competition with Fannie Mae

119. 119 Freddie Mac Mission To make it possible for Americans to obtain affordable mortgage loans; dedicated to expanding minority home ownership in the United States.

120. 120 Freddie Mac Operations Purchases conventional loans; FHA-insured and VA-guaranteed loans Obtains funds by selling securities, referred to as participation certificates (PCs), and debt instruments to investors worldwide.

121. 121 Freddie Mac Systems and Programs Underwriting Standards Electronic Underwriting System Risk-Based Loan Pricing Fixed-Rate Mortgages Adjustable-Rate Mortgages (ARMs) Affordable Housing Products and Programs

122. 122 Ginnie Mae Government National Mortgage Corporation, created in 1968 to provide financing for special assistance programs and operate the securities pool.

123. 123 Ginnie Mae Operations and Programs Works with issuers of mortgage-backed securities and investors/sponsors of mortgage-backed securities Does not buy or sell loans or issues mortgage-backed securities Guarantees that investors will receive timely payments of principal and interest primarily on MBS�s based on FHA or VA loans. Ginnie Mae Mortgage-Backed Securities

124. 124 Farmer Mac Federal Agricultural Mortgage Corporation (FAMC) Mission is to improve the availability of long-term credit at stable interest rates to America�s farmers, ranchers, rural homeowners, businesses, and communities. Purchases qualified loans from agricultural mortgage lenders

125. 125 The Real Estate Mortgage Investment Conduit (REMIC) Conduit, holding fixed pools of mortgages that back securities collateralized by the mortgage cash flows. Tranches or ownership interests to meet investor needs and respond to market conditions. Interest-only (IO); Principal only; commercial mortgage-backed (CMBS).

126. 126 Secondary Market for Junior Financing Loans Small private lending companies originate new junior loans and buy and sell existing second liens. States require that private mortgage finance companies dealing in financial securities be licensed and post bonds to protect the public from illegal activities. Growing secondary market for the sale of land contracts. Fannie Mae�s Simultaneous Second Mortgage program Freddie Mac�s Supplemental Mortgage

127. 127 Loan Defaults and Foreclosures Chapter 13

128. 128 Defaults Breach of one or more of the conditions or terms of a loan agreement. Acceleration clause Lenders seek to avoid foreclosure Acceleration and foreclosure as last resort Delinquencies Principal and interest Grace period Late period charge Property taxes Other liens Hazard insurance Poor property management

129. 129 Adjustments Workouts The Soldiers and Sailors Civil Relief Act of 1940 The Housing Act of 1964 Avoiding a foreclosure Moratoriums (forbearance) and recasting Voluntary conveyance of deed

130. 130 Foreclosures Process to recover lender�s collateral�borrower�s rights of redemption are eliminated and all interests in the subject are removed.

131. 131 Foreclosures Equitable redemption period Strict forfeiture Statutory redemption period Power-of-Sale Foreclosure Deeds of trust Judicial Foreclosure and Sale

132. 132 Investment Financing Strategies Chapter 14

133. 133 Sale-Leaseback Owner of property sells it to an investor and, at the same time, leases it back. Seller-lessees retain possession while obtaining full sales price; free capital frozen in equity Investor-landlord receives fair return on and of the investment in the form of rent during the lease term and ownership of a depreciable asset already occupied by a �good � tenant; buying guaranteed income stream that can be sheltered through proper use of allowable deductions.

134. 134 Seller Refinances Prior to the Sale Seller can refinance the property in order to secure a loan that can be assumed by the buyer.

135. 135 Trading on Seller�s Equity Buyer refinances property instead of assuming the existing loan

136. 136 Equity Participation Sale-Buyback Splitting ownership Joint ventures

137. 137 Tax-Deferred Financing Realized capital gains�the difference between the total consideration received and the adjusted book basis of the property transferred. Recognized capital gains�profits that are actually taxable. Owners can refinance their properties during their lifetimes, generating tax-deferred dollars for reinvestment. At time of death, properties receive step-up basis to fair market value and could be distributed to heirs free of potential income tax on any appreciation to time death. Pyramiding through refinancing. Option to buy�Option compared to installment sale Lease with option to buy Lease option Right of first refusal Distribution to Heirs Federal estate tax California inheritance tax Gift tax

138. 138 Mathematics of Real Estate Finance Chapter 15

139. 139 Interest Rent�paid for the use of money

140. 140 Simple Interest Paid only on the amount of principal still owed Interest ceases on principal repaid Derived from I=PRT

141. 141 Add-On Interest Rent paid on the entire amount of principal for the entire period Disregards any principal repaid Acts to almost double contract rate Derived from AIR=2IC/P (n+1)

142. 142 Nominal and Effective Rates of interest Nominal rate of interest is contracted rate Effective rate of interest includes additional costs, charges and discounts

143. 143 Compound Interest Interest paid on interest earned

144. 144 Compound Worth of an Annuity Calculating the future worth of a series of regular deposits, each made at the beginning of a period

145. 145 Time Value of Money Money not received until some time in the future is worth less today Present worth of money Present worth of an annuity

146. 146 Payment Schedules Amortization�The systematic repayment of a debt Annual payments Monthly payments Loan constants Distribution of principal and interest Total interest costs

147. 147 Measuring Profitability Breakeven Analysis Return on Investment (ROI) Lender�s Profitability Calculations Investor�s Profitability Calculations Net Present Worth Method

148. 148 Discounting Trust Deeds and Mortgages Point: one percent of loan amount Rule-of-thumb method Discount cash flow method