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Assignment for next Mon.

Assignment for next Mon.

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Assignment for next Mon.

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  1. Assignment for next Mon. • Read pgs. 39-50 in materials. • Find an article on Explanation of the Mortgage Crisis on the web or in a magazine or newspaper. Read it and be ready to share!

  2. Basic Real Estate Principles – cont. You want to buy an apartment complex….

  3. Talked about the first thing you do • F • Important factors to consider?

  4. Once you find the bldg. you want…. • What’s next? • Inspections • Financing • Title Report • Rent Rolls • Occupancy rate • Estoppel certificates

  5. What gives buyer right to do these things? • PURCHASE CONTRACT: • Offer • Includes price • Financing terms • Inspection rights • Condition of title • Other terms? • Seller – accepts, rejects or most likely, ? • Counters

  6. Terms • Equity • Examples: • Own my home - no mortgages. How much equity if the house has a Fair Market Value of $1 million? • Apartment building - FMV = $5 million. Seller has a loan on it = $3 million. How much equity? • Apt. bldg. FMV = $5 million. Loans against it for $6 million. Equity? Sellable? • Definition? • Advantages to having equity?

  7. Terms • Leverage $100,000 cash in pocket. • Could buy 1 property with $100,000. Appreciates 10% in one year. Now worth $110,000. • Could buy 2 properties, each FMV = $100,000. $50,000 down, loan on each for $50,000. Each appreciates 10% in one year. How much have you made? [Remember though you make mortgage payments too.]

  8. Definition of “Leverage” (modified from Investopedia) • Use of borrowed capital to increase the potential return of an investment.

  9. Down payment • Define • Where does it come from? • Why does lender (generally) require buyer to put in $? • “Cushion” • Assume FMV = $500,000 • Assume Down Pymt. = $100,000 • Assume loan = $400,000 • How much would property have to depreciate before lender at risk?

  10. Once “in contract”…. • Financing – What kind of loan? • List various possibilities: • Interest only: advantages? Disadvantages? • Fully amortized loan • ARM • 100+ variations

  11. Found the loan you want…. • Bank – lender • What steps will (should) bank take (due diligence)? • Appraisal • Credit check • Verify employment/income • Verify other assets such as down pymt.

  12. At closing (Close of Escrow) • First – • How does buyer get title? • Lender will require buyer/borrower to sign ? • What does the note include? • What does the mortgage do?

  13. Property encumbered by a mortgage [Seller gets $ from buyer and lender – pays off loans.] Buyer signs promissory note in favor of lender secured by a mortgage on the bldg. Buyer gets title

  14. Before getting into greater depth.. • Articles you found on real estate financing….

  15. Promissory Note - pg. 33 • “jointly and severally” • What type of loan is this? How can you tell? • Prepayment • Acceleration • Due-On-Sale • Attorneys’ Fees • Security

  16. And where did the process get off-track? Then we’ll examine why • Financing process – pg. 27 • Loan application • Loan analysis • Approval and processing • Closing • Servicing

  17. Subprime Loans – pg. 34 • Application process: No documentation • Loan analysis – low credit scores; no verification • Higher interest rates • Negative amortization • Where does equity come into play? • “High debt-to-equity” ratio

  18. Loan Analysis • Appraisal – what was happening in the mid-2000s? http://www.youtube.com/watch?v=MS5X8boUACI

  19. Mortgages (called Deeds of Trust in some places) • Your understanding? • Why does lender require this? • Bought car on credit? • Can a property have more than one mortgage? • Why?

  20. More than one mortgage… • Assume Buyer buying apt. house for $3 million. • Has $500,000 down. • Qualifies for $2 million loan from Bank – what security? • $500,000 short. • Solution? $500,000 down

  21. Second mortgage [junior] • Goes to another lender – or even same lender • Why would someone lend additional $500k? • What would first mortgage holder allow this? • What is the cushion (margin of security) for 1st? FMV = $3,000,000 (purchase price) Down = 500,000 1st = $2,000,000 2nd = 500,000

  22. Any cushion for 2nd[junior]? • FMV = $3,000,000 (purchase price) Down = 500,000 1st = $2,000,000 2nd = 500,000 Would 2nd be “safe”? What happens if property values decline?

  23. Seller Carry-Backs • Assume same facts: • FMV = $3,000,000 • Down payment = $ 500,000 • 1st = $2,000,000 And buyer can’t find a lender to loan the rest but seller wants/needs to sell. Solution? How structured?

  24. Term: “Under Water” • Assume FMV declines from $3,000,000 to $2,000,000. • First mortgage – balance of $2,000,000 • Second - balance of $ 500,000 How much would you pay for the property? In order to sell what has to happen?

  25. Will discuss why borrowers defaulting – but let’s first look at the process • Foreclosure • What does this mean? • What gives lender the right? • And – what’s the process? • Same facts: • Value at time of default = $2,000,000 • 1st loan = $2,000,000 First forecloses; what is the highest bid?

  26. Another Term: Deficiency Judgment Assume same facts Value = $2,000,000 at time of default 1st has balance due of $2,000,000 High bid = $1,500,000. Now what? And what about 2nd? (balance due = $500,000)