1. California Real Estate Finance
Seventh Edition

2. Nature and Cycle of California Real Estate
Finance
Chapter 1
2
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3. Historical Perspective
• Might and power
• English feudal system
• Allodial system
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4. Nature of Real Estate Finance
• Ownership of property
– Property
– Real property
– Personal property
– Commercial fixtures
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5. Estates in Realty
• Freehold estate
– Fee simple absolute
– Time-shares; condominiums
– Legal title; equitable title
– Concurrent ownership
– Tenants in common and partnerships
– Community property
– Joint tenancy
• Leasehold estate
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6. Real Estate Characteristics
• Physical
• Economic
• Social
– Police powers
– Eminent domain
– Condemnation
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7. Characteristics of Real Property
Investments
• Fixity
• Longevity
• Permanence
• Risk
• Market segmentation
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8. Purposes of Investing in Real Estate
• To preserve capital
• To earn a profit
• To enjoy tax relief
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9. Advantages of Investing in Real Estate
• Relatively high yields
• Leveraging opportunities
• Income tax flexibility
• High degree of personal control
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10. Mortgage Lending Activities
• Primary market
• Credit system economy
• Financing relationships
• Local markets
• National markets
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11. Real Estate Cycles
• Supply and Demand
– Real estate
– Money
• Population Characteristics
• Political attitudes
11
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12. Money and the Monetary System
Chapter 2
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13. What Is Money?
• Medium of exchange or means of payment
• Storehouse of purchasing power
• Standard of value
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14. The Use of Paper Money
• As long as the public can exchange symbolic
paper money for commodities of like value, the
system works.
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15. The Supply and Cost of Money
• M1 includes cash and checking accounts
• M2 adds money market mutual funds and
savings and time deposits of less than
$100,000
• M3 adds large time deposits at all
depository institutions
• Creating money through credit
15
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16. The Federal Reserve System (Fed)
• Central banking system that provides a
rising standard of living through controlled
growth of money and credit.
• Lender of last resort
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17. Organization of the Fed
• Twelve Federal Reserve districts
• Each district includes Federal Reserve Bank
• Directed by board of governors
• Membership
17
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18. 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)
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19. The United States Treasury
• Balancing 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
• Office of the Comptroller of the Currency (OCC)
• The Federal Deposit Insurance Corporation (FDIC)
• Office of Thrift Supervision (OTS)
19
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20. The Federal Home Loan Bank System
(FHLB)
• Organization
• Activities
– Provides its members a national market for their
securities
20
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21. California Financial Agencies
• Department of Savings and Loans
• California Housing Finance Agency (CalHFA)
• Department of Financial Institutions
• Department of Insurance
• Department of Corporations (DOC)
• Department of Real Estate (DRE)
• Office of Real Estate Appraiser (OREA)
21
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22. Institutional Lenders for Real Estate
Finance
Chapter 3
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23. 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
23
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24. Savings and Loan Associations/Thrifts
• Origins and development
• Organization
• Mortgage lending activities
• California chartered savings and loan
associations
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25. 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
25
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26. 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
26
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27. Credit Unions
• Members deposit savings, usually through payroll
deductions
• Members borrow at interest rates below
competition
• Expanding in real estate finance
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28. Noninstitutional Lenders
Chapter 4
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29. 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
• Operation
• Servicing a loan
• Assignment of loan
• Activities
29
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30. 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
– Real estate investment trust (REIT)
– Real estate mortgage trust (REMT)
– Combination trust
30
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31. 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.
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32. 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.
32
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33. 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
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34. Real Estate Mortgage Trusts (REMTs)
• Expand their financial base 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.
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35. Balanced Trusts
o Combine REIT with REMT, earning profits
from rental income and increased
property values as well as mortgage
interest and placement fees.
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36. California Syndication
• 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
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37. 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.
37
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38. 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.
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39. 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
39
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40. 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
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41. Bonds
• General obligation bonds
• Tax privilege of exempting interest income
earned on state and local securities
• Industrial revenue bonds
• Industrial development bonds
• Mortgage revenue bonds
• Zero coupon bonds
• Mortgage loan bonds
41
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42. 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
42
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43. Endowment Funds
• Provides a permanent source of income
• Managers responsible to develop income
while preserving capital
43
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44. Private Loan Companies
• Usually deal in junior finance
• Often charge higher than market interest
rates
• Must adhere to Truth-In-Lending laws
44
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45. California Real Property Loan Law
• Limits on amount of commission and fees
that can be charged for making or arranging
a hard money loan
45
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46. Individuals
• Sellers as lenders
• Families as lenders
• Other lenders
46
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47. Conventional, Insured, and Guaranteed
Loans
Chapter 5
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48. Conventional Loans
(1 or 2)
• Fixed-rate loans
• Interest-only loans
• Private Mortgage Insurance (PMI)
• Permanent/temporary (escrow) buydown
Plan
• Borrower’s qualifications
– Four Fannie Mae and Freddie Mac guidelines
48
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49. Conventional Loans
(2 or 2)
• Jumbo loans
• Home equity loans
• Automatic rate reduction
• Subprime loans
49
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50. Predatory Lending
• Flipping
• Packing
• Charging excessive fees
50
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51. Home Ownership and Equity Protection Act of
1994
• Addresses deceptive and unfair practices in
home equity lending
51
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52. Refinancing Existing Conventional Loans
• Costs of refinancing are unregulated and
vary dramatically among lenders
• Alternative is loan modification with existing
lender
52
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53. 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
53
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54. 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‖
54
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55. FHA Program Summary
• Not a direct lender
• Reduced the down payment obstacle for
cash-short borrowers
• Helps stabilize the mortgage market
55
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56. 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
56
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57. Special HUD/FHA Programs
• Energy Efficient Mortgage (EEM)
• Home Equity Conversion Mortgage (HECM)
• Good Neighbor Next Door
• Homeownership Vouchers
• Native American Housing
57
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58. Underwriting Guidelines
• Maximum loan limitations
• Down payment requirements
• Borrowers’ income qualifications
• Non-traditional credit
• Mortgage insurance premium (MIP)
• Allowable closing costs
• Second mortgage/buydowns
58
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59. 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
59
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60. Additional FHA Issues
• Direct endorsement and coinsurance
• Advantages of FHA mortgage
• FHA contributions to real estate finance
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61. 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 (CRV)
– Interest
– Income qualifying requirements
61
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62. The U.S. Department of Veterans Affairs Real
Estate Loan Guarantee Program, cont.
• Program Application
– Closing costs—may not be included in DVA loans
– Funding fee
– Second mortgages
– Buydowns
– Assumptions
– Release of liability/novation
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63. Additional DVA Loan Guarantee Programs
• DVA Adjustable-Rate Mortgage (ARM)
• DVA Streamline Refinance
• Cash Out Refinance
• Conventional to DVA Mortgage
63
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64. 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
– Un-remarried spouses of veterans killed in active duty also
eligible
64
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65. 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
65
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66. California Veterans Home and Farm Purchase
Program (CAL-VET)
• Special Conditions
– New construction
– Funds for Refinancing
– Junior financing
– Occupancy
– Others
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67. Financial Agencies and Lending Programs
Chapter 6
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68. Agricultural Lending
• Need for flexibility
• Open-end mortgages
• Moratorium on payments
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69. The Farm Credit System (FCS)
• Farm Credit Administration (FCA)
• Federal Agriculture Mortgage Corporation (Farmer
Mac)
• The U.S. Department of Agricultural Rural
Development Program (USDA Rural Development)
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70. U.S. Department of Housing and Urban
Development (HUD)
• Supervises the Federal Housing Administration
(FHA)
• Directs Ginnie Mae
• Directs development block grants
• Enforces fair housing and RESPA regulations
• Manages the Housing Choice Voucher Program
• Regulates interstate land sales registration, urban
renewal, and rehabilitation programs
• Stabilization Project
70
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71. HUD Strategic Plan
• Increase home ownership opportunities
• Promote decent affordable housing
• Strengthen communities
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72. HUD: Other Program
• Urban renewal
• Subsidized housing
• Community Development Block Grants
(CDBG)
• Public Housing
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73. The Real Estate Settlement Procedures Act
(RESPA)
• Protects participants in a real estate
transaction by providing closing cost
information so they better understand the
settlement procedures
• Disclosures
– At time of loan application
– Before settlement closing
– At settlement
– After settlement
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74. 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.
74
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75. Interstate Land Sales
• Established criteria for the dissemination of
vital information to potential buyers of
residential land.
75
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76. 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
– Federal
– California
76
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77. State Financing Agencies
• Industrial Development Agency
• Community Redevelopment Agency (CRA)
– Tax-increment financing
– Mortgage revenue bonds
– Special assessments
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78. California Housing Finance Agency
(CALHFA)
• Affordable housing bank to make low
interest rate loans through the sale of tax-
exempt bonds for eligible first-time
homebuyers
– Not a direct lender
– Works through approved lenders
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79. 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.
79
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80. The Housing Financial Discrimination Act of
1977 (Holden Act)
• Offsets illegal practice of redlining
• Prohibits discrimination
• Encourages increased lending in areas
where financing has been unavailable
80
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81. Junior Loans in Real Estate Finance
Chapter 7
81
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82. Junior and Senior Liens
• Distinguishing first and junior lien by date
and time of recording
• Junior financing by thrifts and commercial
banks
• Junior financing provides funds for land
developers to pay for offsite improvements
82
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83. 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
• Clauses protect junior lien holder’s position against
that of senior lender
• Junior loan risks
• Junior loan interest rates and usury
83
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84. 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
84
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85. Loan Terms and Note Payments
Chapter 8
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86. 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
86
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87. 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
87
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88. Innovative Payment Plans
• The 15-Year Mortgage
• Reverse Annuity Mortgage (RAM)
• Fannie Mae Senior Housing Program
• Fannie Mae’s Two-Step Mortgage Plan
88
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89. 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
89
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90. Tax-Deferred Mortgage Lending
• Installment sales
• Option to buy
• Lease with option of buy
• Exchanges—Internal Revenue Code Section
1031
90
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91. Instruments of Real Estate Finance
Chapter 9
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92. Terminology
• Encumbrance—right or interest in a
property held by one who is not the legal
owner of the property
• Lien—financial encumbrance; 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
92
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93. Interests Secured by a Real Estate Loan
• Fee simple ownership
• Less than freehold interest
• Title and lien theories
– Equitable rights
– Title theory in which lender’s rights are superior to borrower’s
– 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
93
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94. 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
94
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95. 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
95
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96. 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.
96
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97. Covenants of California Deed of Trust
• Preservation and maintenance
• Fire insurance
• Legal action
• Taxes and assessments
• Beneficiary and trustee expenditures
• Condemnation
• Late payments
• Reconveyance
• Extensions, subordination, and modifications
• Assignment of rents
97
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98. Note and Mortgage
• Note Secured by a Mortgage
• Mortgage
– Recording information
– Participants
– Pledge
– Property description
– Covenant of seisin
– Note attachment
98
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99. Note and Mortgage
• Mortgage, cont.
– Mello-Roos disclosure
– Property taxes
– Insurance
– Defeasance clause and acceleration
– Maintenance of the collateral
– Signatures and acknowledgement
– Release of mortgage
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100. Real Property Sales Contract (Land
Contract)
• Single, complete financing and sales
agreement executed between buyer and
seller
100
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101. 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
101
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102. Real Estate Loan Underwriting
Chapter 10
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103. 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
103
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104. Definition of Value
• Value in use
• Value in exchange
• Market value
104
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105. Appraisal
• Estimate of property’s value at a specific
point in time
105
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106. 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
106
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107. Appraisal Approaches
• Direct sales comparison approach
• Cost approach
– Depreciation
• Income capitalization approach
• Gross rent multiplier (GRM)
• Reconciliation of data and opinion of value
107
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108. Qualifying the Borrower
• Loan application
• Financial statement
– Assets
– Liabilities
– Net worth
108
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109. Qualifying the Borrower, cont.
• Data verification
– Deposits
– Employment
– Credit report
– Credit evaluation
– Credit scoring
– Loan qualifying income ratios
109
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110. Processing Real Estate Loans
Chapter 11
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111. Qualifying the Title
• Notices—constructive notice and actual
notice
• Abstracts and opinion of title
• Title insurance
• Title faults
• Surveys
111
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112. 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
112
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113. Disclosures in California Real Estate
Transactions, cont.
• Special flood area disclosure
• Special city and country ordinances
• Foreign investment real estate tax
• Condominium documents disclosure
• Disclosure for real property loans
113
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114. 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
114
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115. Additional Costs
• Prorations
• Interest
• Property taxes
• Insurance premiums
• Additional prorations
115
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116. Additional Processing Concerns
• Closing statements
• Servicing the loan
• Assignment of the loan
116
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117. The Secondary Mortgage Market
Chapter 12
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118. 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
– Emergence of securitization of pools of mortgage loans
118
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119. Federal Housing Financing Agency (FHFA)
• Regulates Fannie Mae, Freddie Mac, and
Federal Home Loan Bank (FHLB)
• Goal is to restore confidence in Fannie Mae
and Freddie Mac; enhance their ability to
fulfill their mission
119
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120. Fannie Mae
• Shareholder-owner company
• Purchases mortgages; enters into servicing
agreement
• Sells mortgages in open-market
transactions
• Administered price system
• Mortgage-backed securities (MSBs)
120
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121. Underwriting Standards for Conventional Loans
Sold to Fannie Mae
• Conforming and nonconforming loans
• Automated underwriting system
• Credit scoring
121
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122. Freddie Mac
• Created to provide secondary mortgage
market for lending institutions that were
members of the Federal Home Loan Bank
System
• Generally follows Fannie Mae’s underwriting
standards
122
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123. Ginnie Mae
• Government National Mortgage Corporation,
• Mission is to expand affordable housing by
linking domestic and global capital markets
to the nation’s housing markets
• Offers mortgage backed securities (MSBs)
– Pass-through certificates
123
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124. Loan Defaults and Foreclosures
Chapter 13
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125. Defaults
• Breach of one or more of the conditions or terms of
a loan agreement
• Acceleration clause activated
• Lenders seek to avoid foreclosure
• Acceleration and foreclosure as last resort
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126. Delinquencies
• Principal and interest
• Grace period
• Late period charge
• Property taxes
• Other liens
• Hazard insurance
• Poor property management
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127. 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
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128. Foreclosures
• Process to recover lender’s collateral—
borrower’s rights of redemption are
eliminated and all interests in the subject
are removed
– Equitable redemption period
– Strict forfeiture
– Statutory redemption period
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129. Power-of-Sale Foreclosures
• Deeds of trust
– Beneficiary notices payment delinquencies;
borrowers are unable to remedy
– Beneficiary notifies trustee to foreclose
– Trustee files Notice of Default
– Reinstatement period
– Notice of trustee’s sale and publication of date,
time, and place of sale
– Sale is held and highest cash bidder wins
– Trustee’s deed is given to successful bidder
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130. Judicial Foreclosure and Sale
• Conventional mortgages
– Lender notifies delinquent mortgagor
– If no solution, complaint is filed by mortgagee in county
court
– Title search made; lis pendens filed
– Complaint brought before presiding judge
– Judgment decree
– Public sale
• Conventional guaranteed mortgages
• Equitable redemption
• Statutory redemption
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131. Loans with Special Foreclosure
Requirements
• FHA-insured loans
• DVA-guaranteed loans
• Junior loans
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132. Investment Financing Strategies
Chapter 14
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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.
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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
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135. Trading on Seller’s Equity
• Buyer refinances property instead of
assuming the existing loan
135
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136. Equity Participation
• Sale-Buyback
• Splitting ownership
• Joint ventures
136
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137. Tax-Deferred Financing Concepts
• 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.
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138. Pyramiding Through Refinancing
• Periodically refinance properties already
owned and use proceeds to purchase new
properties
• Anticipates that original property will
increase in value over time
• Capital gains are delayed through
refinancing process
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139. Distribution to Heirs
• Federal estate tax
• California inheritance tax
• Gift tax
139
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140. Mathematics of Real Estate Finance
Chapter 15
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141. Interest
• Rent—paid for the use of money
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142. Simple Interest
• Paid only on the amount of principal still
owed
– Interest ceases on principal repaid
– Derived from I=PRT
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143. 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)
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144. Nominal and Effective Rates of interest
• Nominal rate of interest is contracted rate
• Effective rate of interest is the actual rate
paid by the borrower
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145. Compound Interest
• Interest paid on interest earned
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146. Compound Worth of an Annuity
• Calculating the future worth of a series of
regular deposits, each made at the
beginning of a period
146
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147. 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
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148. Payment Schedules
• Amortization—systematic repayment of a
debt
• Annual payments
• Monthly payments
• Loan constants
• Distribution of principal and interest
• Total interest costs
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149. Measuring Profitability
• Breakeven analysis
• Return on investment (ROI)
• Lender’s profitability calculations
• Investor’s profitability calculations
• Net present worth method
149
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150. Discounting Trust Deeds and Mortgages
• Point—one percent of loan amount
• Discounts
– Rule-of-thumb method
– Discount cash flow method
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