Principles of Real Estate Study Guide Questions
Course Introduction
Principles of Real Estate provides an introduction to the foundational concepts, practices, and laws governing the real estate industry. The course explores real property ownership, land use controls, property valuation, and the processes involved in real estate transactions. Students will examine topics such as agency relationships, contracts, financing methods, and real estate markets. Attention is given to the ethical responsibilities of real estate professionals and the regulatory environment affecting property rights and transfer. This course is designed to prepare students for further study in real estate or entry-level positions within the industry.
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Real Estate Principles A Value Approach 5th by David Ling
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Page 2
Chapter 1: The Nature of Real Estate and Real Estate
Markets
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Q1) Competition for the currently available supply of locations and space coupled with the existing supply of leasable space, determines:
A) the current level of rental rates for each submarket and property
B) the riskiness of the expected cash flows of an income-producing property
C) the timing of the expected cash flows of an income-producing property
D) the cost of financing the purchase of a property
Answer: A
Q2) Considered a fundamental pricing metric in commercial real estate markets, the ratio of a property's annual net income to its market value is more commonly referred to as a(n):
A) Appreciation rate
B) Capitalization rate
C) Discount rate
D) Internal rate of return
Answer: B
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3
Chapter 2: Legal Foundations to Value
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Q1) A lien is an interest in real property that serves as security for an obligation. Which of the following is an example of a general lien?
A) Property tax and assessment lien
B) Mortgage lien
C) Lien arising from a court judgment unrelated to ownership of the property
D) Mechanics' lien
Answer: C
Q2) Since an easement is a non-possessory interest, it is important to understand the right of disposition that is associated with it. In which of the following types of easements is the right of disposition claimed as part of the easement?
A) Implied easement
B) Easement in gross
C) Negative easement appurtenant
D) Positive easement appurtenant
Answer: B
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Chapter 3: Conveying Real Property Interests
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Q1) Recognizing that only recent conveyances alter the status of title, states have established laws that set limits on how far back a title search must go. These laws are commonly referred to as:
A) Statute of Frauds
B) recording statutes
C) encroachments
D) marketable title laws
Answer: D
Q2) One of the most important requirements of a land description is for it to be unambiguous. Which of the following methods of property description is the most unambiguous and is appropriate for use in legal documents?
A) Street Address
B) Tax parcel number
C) Reference to prominent features of the land (e.g. monuments, river banks, roads)
D) Metes and bounds
Answer: D
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Chapter 4: Government Controls and Real Estate Markets
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Q1) Special assessments are levied to pay for specific improvements that benefit a particular group of properties. All of the following characteristics of special assessments are true EXCEPT:
A) They are considered ad valorem taxes.
B) They are applied as pro rata charges.
C) They are levied directly on the properties benefited.
D) They are commonly used to finance streets, storm water systems, sidewalks, and other area improvements.
Q2) Most communities contain a number of tax-exempt properties. All of the following are typically included in the tax-exempt property classification EXCEPT:
A) Places of worship
B) Universities
C) Government owned properties
D) Single-family homes
Q3) A traditional zoning ordinance includes all of the following EXCEPT:
A) Minimum setback requirements
B) Minimum lot dimensions
C) Provisions for special use districts
D) Performance standards
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Page 6
Chapter 5: Market Determinants of Value
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Q1) A new faculty member at the local university pays $1500 per month to rent an apartment in the downtown area. She teaches on campus 3 days a week and works from home the remaining 2 days. On the days in which she must commute, given the heavy traffic congestion, it takes her 2 hours to commute from downtown to campus. According to the assumptions of the bid-rent model, what should this professor be willing to pay in rent per month to live near campus if her hourly wage rate is $25? (In your calculations, assume there are 4 weeks in a given month)
A) $1200
B) $1500
C) $2100
D) $2700
Q2) Using the following information, determine the location quotient for Springfield. Employment in Aerospace Products within Springfield: 30,044; Total Employment in Springfield: 208,054; Employment in Aerospace Products (nationally): 474,905; Total Employment (nationally): 106,201,232
A) 0.03
B) 12.10
C) 15.70
D) 32.29
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Chapter 6: Forecasting Value: Market Research
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Q1) A developer of a new planned unit development (PUD) has gathered the following market information for University City. The developer estimates that there will be 1,500 home (all types) sales in University City over the next year. If an analysis of demographic information has revealed that the core market share for the PUD project within the community is 14.0%, what is the total market segment potential for this project?
A) 42 units
B) 105 units
C) 210 units
D) 1290 units
Q2) When you are evaluating the prospects for a project that is new in your setting and therefore has no actual relevant market performance data, it is most helpful to use which of the following techniques as the basis for your analysis?
A) Analogy
B) Fabrication
C) Cooperation
D) Recommendation
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Chapter 7: Valuation Using the Sales Comparison and Cost Approaches
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Q1) While it is often sufficient to rely on informal methods of estimating the market value of real estate assets, the complexity and large dollar value of many real estate decisions dictate that formal estimates based on methodical collection and analysis of relevant market data should be utilized. The unbiased written estimate of the market value of a property is commonly referred to as a(n):
A) arm's length transaction
B) appraisal
C) property adjustment
D) reconciliation
Q2) It may be appropriate for a real estate professional to utilize different approaches for estimating the market value of a property depending upon the particular property type and use. Which of the following approaches would be most applicable when considering the valuation of retail office space (i.e., which approach would receive the most weight in the valuation process)?
A) Income approach
B) Sales comparison approach
C) Cost approach
D) Investment approach
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Chapter 8: Valuation Using the Income Approach
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Q1) Gross income multiplier analysis assumes that the subject and comparable properties are collecting market rents. Therefore, it is frequently argued that an income multiplier approach to valuation is most appropriate for properties with short-term leases. Which of the following property types, therefore, would we find it most appealing to use a gross-income multiplier in our analysis?
A) Apartments
B) Office
C) Industrial
D) Retail
Q2) Given the following information, calculate the effective gross income multiplier. Sale price: $950,000, Potential Gross Income: $250,000, Vacancy and Collection Losses: 15%, and Miscellaneous Income: $50,000.
A) 0.36
B) 0.30
C) 2.8
D) 3.6
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10
Chapter 9: Real Estate Finance: The Laws and Contracts
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Q1) Which of the following acts was passed out of concern for abusive predatory practices in subprime lending?
A) Equal Credit Opportunity Act (ECOA)
B) Truth-in-Lending Act (TILA)
C) Real Estate Settlement Procedures Act (RESPA)
D) Home Ownership and Equity Protection Act (HOEPA)
Q2) Added to the index of the adjustable rate is a margin, which is the lender's "markup." For standard Adjustable Rate Mortgage (ARM) loans, the average industry margin has been stable at approximately:
A) 75 basis points
B) 175 basis points
C) 275 basis points
D) 375 basis points
Q3) With most standard home loans, the lender can hold the borrower personally liable in the event of a default. Such loans are commonly referred to as:
A) recourse loans
B) nonrecourse loans
C) conforming loans
D) nonconforming loans
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Page 11
Chapter 10: Residential Mortgage Types and Borrower
Decisions
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Q1) The Federal Housing Administration (FHA) insures loans made by private lenders that meet FHA's property and credit-risk standards. Which of the following statements concerning FHA insurance is true?
A) The insurance is paid by the lender and protects the lender against loss due to borrower default.
B) The insurance is paid by the borrower and protects the lender against loss due to borrower default.
C) The insurance is paid by the lender and protects the borrower against loss due to lender default.
D) The insurance is paid by the borrower and protects the borrower against loss due to lender default.
Q2) The loan origination market, in which borrowers and lenders come together to provide adequate financing for the purchase of a property, is more commonly referred to as the:
A) primary mortgage market
B) secondary mortgage market
C) over-the-counter market
D) government sponsored market
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Chapter 11: Sources of Funds for Home Mortgages
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Q1) When the contract rate at closing is less than the current market rate (i.e., interest rates have increased since the time of the loan commitment), the mortgage banker will have to sell the newly originated loan at a discount. This scenario best depicts the mortgage banker's exposure to which of the following risks?
A) Interest rate risk.
B) Fallout risk.
C) Default risk.
D) Liquidity risk.
Q2) Traditional home mortgage underwriting is said to rest on three elements, the "three C's." Recent research (e.g., Archer and Smith, 2011) has confirmed that the underwriting characteristic most strongly associated with default is:
A) Collateral
B) Creditworthiness
C) Capacity
D) Capability
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13
Chapter 12: Brokerage and Listing Contracts
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Q1) There are a number of different types of listing contracts that can be used when marketing a property. Which of the following types of listings requires the broker to be paid a commission if anyone, other than the owner, sells the property during the contract period?
A) Open listing
B) FSBO listing
C) Exclusive agency listing
D) Exclusive right of sale listing
Q2) Real estate brokers serve as intermediaries by bringing buyers and sellers together in the real estate market. For this service, brokers are paid what is commonly referred to as a:
A) commission
B) licensing fee
C) recovery fee
D) listing fee
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Chapter 13: Contracts for Sale and Closing
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Q1) Recording documents in the public records informs anyone who may have a potential interest in a property of both the owner and lender. In so doing, it provides what is commonly referred to as ____________ of an interest in real property.
A) mutual assent
B) constructive notice
C) consideration
D) simultaneous issue
Q2) Which of the following contract elements is an additional requirement that must be satisfied in a contract for sale of real estate that isn't necessarily a part of other contracts?
A) Competent parties
B) Consideration
C) Legal objective
D) Proper description of the property
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Chapter 14: The Effects of Time and Risk on Value
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Q1) Upon starting his first job after graduation, Jon has completed the necessary paperwork to set up direct deposit of his paycheck into his savings account. After taxes, medical benefits, and retirement account contributions have been taken out of John's gross salary, he is left with a direct deposit of $4000 at the end of each month. If John started with no other savings in his account, how much will John have in his savings account at the end of 12 months if he is able to earn an annual interest rate of 3%, with interest being compounded monthly?
A) $48, 665.53
B) $48,787.19
C) $56,768.12
D) $58,471.16
Q2) Which of the following terms refers to a fixed amount of money paid or received at the beginning of every recurring period (i.e. a series of equal lump sums)?
A) Future value
B) Present value
C) Ordinary annuity
D) Annuity due
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Page 16
Chapter 15: Mortgage Calculations and Decisions
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Q1) You have taken out a $300,000, 5/1 ARM. The initial rate of 5.4% (annual) is locked in for 5 years. Calculate the payment after recasting the loan (i.e., after the reset) assuming the interest rate after the initial lock period is 8.0%. (Note: the term on this 5/1 ARM is 30 years)
A) $1,684.59
B) $1,784.79
C) $1,887.75
D) $2,138.02
Q2) Assume you have taken out a partially amortizing loan for $1,000,000 that has a term of 7 years, but amortizes over 20 years. Calculate the balloon payment if the interest rate on this loan is 9%.
A) $8,997
B) $559,199
C) $825,679
D) $936,405
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Chapter 16: Commercial Mortgage Types and Decisions
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Q1) While floating rate mortgage loans may offer lower interest rates to borrowers than comparable fixed-payment mortgages, floating-rate loans may increase a lender's exposure to which of the following risks since borrowers may not be able to continue to service the debt if payments on the loan increase significantly?
A) Default risk
B) Interest rate risk
C) Liquidity risk
D) Pipeline risk
Q2) Some investors obtain more than one loan when acquiring properties, thereby substituting more debt financing for equity financing. A traditional second mortgage is secured by:
A) an equity interest in their company (e.g., LLC)
B) the borrower's pledge of the property as collateral
C) a set of US Treasury securities whose coupon payments replace the mortgage cash flows
D) a balloon payment made by a government sponsored enterprise
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18
Chapter 17: Sources of Commercial Debt and Equity Capital
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Q1) If the per share stock price of a REIT is greater than its per share net asset value (NAV), the REIT is said to be selling at:
A) par value
B) a discount
C) a premium
D) an auction
Q2) Which of the following types of real estate private equity funds would you expect to invest in properties that have some lease-up risk and/or the need for moderate renovation or repositioning?
A) Core
B) Value Added
C) Opportunistic
D) Full platform
Q3) All of the following are responsibilities of the syndicator in the origination phase of a syndicate's life EXCEPT:
A) Develop the concept for the syndication
B) Organize the legal entity
C) Acquire or obtain control of the real estate
D) Raise additional investment capital
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Page 19
Chapter 18: Investment Decisions: Ratios
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Q1) Given the following information, calculate the equity dividend rate for this investment. First-year NOI: $18,750, Before-tax cash flow: $11,440, Acquisition price: $520,000, Equity Investment: 20%.
A) 2.2%
B) 3.6%
C) 11.0%
D) 18.02%
Q2) Given the following information, calculate the acquisition price of the property. First-year NOI: $57,750, capitalization rate: 8.5%, Equity Investment: 30%.
A) $192,500
B) $203,824
C) $679,412
D) $2,264,706
Q3) In an analogy to the stock market, the net operating income of a property can be viewed as which of the following?
A) Annual dividend expected to be produced by the property
B) Annual return on the value of the property
C) Market value of the property
D) Price-earnings ratio of the property
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Page 20
Chapter 19: Investment Decisions: NPV and IRR
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Q1) The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment:
A) greater than zero
B) equal to zero
C) less than zero
D) greater than the opportunity cost of not investing
Q2) Given the following information regarding an income producing property, determine the internal rate of return (IRR) using levered cash flows. Expected Holding Period: 5 years; 1 year Expected NOI: $89,100; 2 year Expected NOI: $91,773; 3 year Expected NOI: $94,526; 4 year Expected NOI: $97,362; 5 year Expected NOI: $100,283; Debt Service in each of the next five years: $58,444; Current Market Value: $885,000; Required equity investment: $221,250; Net Sale Proceeds of Property at end of year 5: $974,700; Remaining Mortgage Balance at end of year 5: $631,026.
A) 10.6% B) 12.2% C) 22.9% D) 33.4%
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21
Chapter 20: Income Taxation and Value
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Q1) Current tax law allows investors to take tax credits for the cost of renovating or rehabilitating older or historic structures and for the construction or rehabilitation of qualified low-income housing. Which of the following statements regarding tax credits is true?
A) A $1 tax credit reduces the investor's tax liability by an amount dependent on the individual's income tax bracket.
B) A $1 tax credit reduces the investor's tax liability by $1.
C) A $1 tax credit increases the investor's taxable income by $1
D) A $1 tax credit has exactly the same impact on an investor's tax liability as a tax deduction.
Q2) Limited liability companies (LLCs) and limited partnerships are preferred to corporate ownership structures because these forms of ownership allow investors to obtain limited liability and avoid the double taxation faced by corporations. This tax benefit can be extremely important as the maximum capital gain rate for corporations remains at (as of 2016):
A) 15%
B) 25%
C) 35%
D) 45%
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Page 22
Chapter 21: Managing Residential Rental Property
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Q1) When property managers are looking to lease residential units to households whose prior history indicates a probability of long-term occupancy, they are seeking what is referred to as:
A) permanence potential
B) synergism
C) rehabilitation
D) adaptive reuse
Q2) Property managers may choose at times not to perform ordinary maintenance at the time a problem is detected in order to boost short-run NOI. This type of maintenance is more commonly referred to as:
A) Custodial maintenance
B) Corrective maintenance
C) Preventive maintenance
D) Deferred maintenance
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Chapter 22: Managing Non residential Rental Property
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Q1) Of the following choices, which best describes the operating expenses that you would expect to be the paid by the tenant in a net lease agreement?
A) No operating expenses
B) Only property taxes
C) Both property taxes and insurance
D) All operating expenses
Q2) In contrast to rent for residential units, rent for U.S. commercial properties is typically quoted as:
A) a dollar amount per month
B) a dollar amount per year
C) a monthly cost per square foot
D) an annual cost per square foot
Q3) Retail establishments are found in a variety of forms, the simplest of which is: (Hint: fast-food franchise)
A) Freestanding retail outlet
B) Strip center
C) Power center
D) Regional mall
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24
Chapter 23: Development: The Dynamics of Creating Value
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Q1) Even the smallest building project involves a multitude of separate contractors to complete construction. Therefore, it becomes difficult for the developer to monitor the construction process. Which of the following individuals serves as the developer's liaison and representative on the project site?
A) General contractor
B) Construction manager
C) Land planner
D) Subcontractor
Q2) The expertise of several types of engineers must be coordinated by the architect in bringing together the final structure design. Which of the following types of engineers is responsible for specifications to achieve safety and stability for a structure's foundation?
A) Soils engineer
B) Structural engineer
C) Mechanical engineer
D) Civil engineer
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