Real Estate Finance
Exam Solutions
Course Introduction
Real Estate Finance explores the principles and practices involved in financing real estate assets, with an emphasis on residential and commercial properties. The course examines various funding sources, investment strategies, the structure of real estate transactions, and risk assessment. Key topics include mortgage instruments, secondary mortgage markets, underwriting standards, valuation techniques, financial analysis, and the impact of monetary policy on real estate markets. Students will also analyze the roles of lenders, borrowers, investors, and government agencies in shaping the real estate finance landscape, preparing them for financial decision-making and investment analysis in the property sector.
Recommended Textbook
Real Estate Principles A Value Approach 5th by David Ling
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23 Chapters
796 Verified Questions
796 Flashcards
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Page 2
Chapter 1: The Nature of Real Estate and Real Estate
Markets
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31 Verified Questions
31 Flashcards
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Sample Questions
Q1) The expected stream of rental income is capitalized into value by converting expected future cash flows into present value through a process called:
A) amortization
B) discounting
C) compounding
D) accounting
Answer: B
Q2) As of 2015, the single largest asset category in the net worth portfolios of households is:
A) government and corporate bonds
B) stocks and mutual fund shares
C) consumer durable goods
D) housing
Answer: D
Q3) An example of a real estate asset that trades in the public debt market is:
A) real property
B) real estate operating companies
C) equity REITs
D) commercial mortgage backed securities (CMBS)
Answer: D
Page 3
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Chapter 2: Legal Foundations to Value
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36 Verified Questions
36 Flashcards
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Sample Questions
Q1) Requirements to create a joint tenancy are quite restrictive. They require the presence of the "four unities," which include all of the following EXCEPT:
A) Condition
B) Title
C) Interest
D) Possession
Answer: A
Q2) Brian just began graduate school at the local university and is looking to rent an apartment. A family friend has decided to lease him a two bedroom, one bathroom cottage through an oral agreement with no definite lease period outlined. Which of the following leasehold estates best describes Brian's situation?
A) Tenancy for years
B) Tenancy at sufferance
C) Periodic tenancy
D) Tenancy by the entirety
Answer: C
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Chapter 3: Conveying Real Property Interests
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30 Verified Questions
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Sample Questions
Q1) Which of the following covenants in a deed promises that the property is not burdened by liens, easements or other limitations, except as noted in the deed?
A) Covenant of seizin
B) Covenant against encumbrances
C) Covenant of quiet enjoyment
D) Exceptions and reservation clause
Answer: B
Q2) An owner of land may involuntarily and unknowingly give up the rights to land. When a fee simple interest is conveyed to a new owner without a deed and without the consent or knowledge of the original owner, this is said to be conveyed by:
A) Prescription
B) Adverse possession
C) Accretion
D) Reliction
Answer: B
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Chapter 4: Government Controls and Real Estate Markets
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) Given the following information, compute the effective tax rate for the particular piece of property in percentage terms. Market value of property: $325,000, Assessed value of property: $250,000, Exemptions: $50,000, Taxes paid: $5,363.
A) 1.50%
B) 2.35%
C) 1.65%
D) 2.68%
Q2) In order for the board of adjustment to approve a variance, all of the following conditions must be met EXCEPT:
A) The owner must be unable to use the lot as zoned.
B) The condition is common to other parcels of land in the vicinity
C) The variance must not materially change the character of the neighborhood.
D) The condition is unique to the lot.
Q3) Development taking place in rural areas well beyond the urban fringe is commonly referred to as:
A) urban sprawl
B) holdout
C) urban service areas
D) homestead
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Page 6
Chapter 5: Market Determinants of Value
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32 Verified Questions
32 Flashcards
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Sample Questions
Q1) An important effect of agglomeration economies on real estate is its impact upon market risk. Based on your understanding of this relation, which of the following statements is TRUE?
A) Properties located in a city with more advanced development of agglomeration economies will carry more risk and therefore suffer a larger price decline during an economic downturn than comparable properties in a city with less agglomeration.
B) Properties located in a city with more advanced development of agglomeration economies will carry less risk and therefore suffer a larger price decline during an economic downturn than comparable properties in a city with less agglomeration.
C) Properties located in a city with more advanced development of agglomeration economies will carry more risk and therefore suffer a smaller price decline during an economic downturn than comparable properties in a city with less agglomeration.
D) Properties located in a city with more advanced development of agglomeration economies will carry less risk and therefore suffer a smaller price decline during an economic downturn.
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Chapter 6: Forecasting Value: Market Research
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Sample Questions
Q1) Suppose that you were interested in building a new townhome community on the east side of University City that will be marketed exclusively to senior citizens above the age of 62. In your analysis of local demographics, you discover that the target market makes up only 10% (core market share) of the households that currently live in this city. If market experts believe that a total of 500 townhome (or similar condominium) units will be purchased in all of University City within the next year, what is the projected number of units the developer could expect to sell in year 1 if he is able to capture 40% of the market potential?
A) 500 units
B) 50 units
C) 20 units
D) 10 units
Q2) Survey research has been applied to real estate markets at many levels. Despite its frequent application, analysts must be cautious with survey use because:
A) it is difficult to implement
B) interviews and questionnaires are not received well by consumers
C) it cannot be used in a small sample area
D) it can be fraught with abortive errors
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Chapter 7: Valuation Using the Sales Comparison and Cost Approaches
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38 Verified Questions
38 Flashcards
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Sample Questions
Q1) Given the following information, determine the value of having an additional bedroom. Assume that the comparable properties are similar in all other attributes besides those listed in the table below. \[\begin{array} { | l | c | c | c | c | }
\hline & \text { Comparable 1 } & \text { Comparable } 2 & \text { Comparable 3 } & \text { Comparable 4 } \\
\hline \text { Time Sold } & \text { Today } & 1 \text { Year Apo } & \text { Today } & 1 \text { Year Apo } \\
\hline \text { Bathrooms } & 2 & 2 & 2 & 3 \\
\hline \text { Bedrooms } & 4 & 5 & 5 & 5 \\
\hline \text { Sale Price } & \$ 250,000 & \$ 265,000 & \$ 275,000 & \$ 270,000 \\
\hline
\end{array}\]
A) $5,000
B) $15,000
C) $20,000
D) $25,000
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Page 9
Chapter 8: Valuation Using the Income Approach
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36 Verified Questions
36 Flashcards
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Sample Questions
Q1) Which of these is most likely to be regarded as a capital expenditure rather than an operating expense?
A) Property taxes
B) Trash removal
C) Insurance payments
D) Roof replacement
Q2) Given the following information, calculate the effective gross income multiplier. Sale price: $2,500,000; Effective Gross Income: $340,000; Operating Expenses: $100,000; Capital Expenditures: $36,000.
A) 0.136
B) 7.35
C) 10.42
D) 12.25
Q3) When using discounted cash flow analysis for valuation, an appraiser will prepare a cash flow forecast, often referred to as a:
A) restricted appraisal report
B) net operating income statement
C) direct market extraction
D) pro forma
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Page 10
Chapter 9: Real Estate Finance: The Laws and Contracts
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35 Verified Questions
35 Flashcards
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Sample Questions
Q1) Certain mortgage loans contain a due-on-sale clause, which gives the lender the right to terminate the loan at sale of the property. Which of the following types of loans is the most likely to contain a due-on-sale clause?
A) Federal Housing Administration (FHA) loan
B) Veterans Affairs (VA) loan
C) Conventional home loan
D) An assumable home loan
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
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11
Chapter 10: Residential Mortgage Types and Borrower
Decisions
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43 Verified Questions
43 Flashcards
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Sample Questions
Q1) In recent years, home equity loans have become a popular form of second mortgage. Their popularity has been a result of all of the following EXCEPT:
A) Lower interest rates than other consumer debt
B) Shorter terms than other consumer debt
C) Tax-favored status
D) Aggressive marketing by lenders
Q2) Which of the following types of institutions has historically been the largest purchaser of residential mortgages?
A) Commercial banks
B) Savings and Loans
C) Government sponsored enterprises
D) Mortgage banking companies
Q3) Assume that a veteran decides to purchase a house for $150,000 using a VA loan that amounts to $44,000. If the buyer were to defaults on the loan, what is the maximum amount that the VA guarantees the lender?
A) $11,000
B) $22,000
C) $33,000
D) $44,000
12
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Chapter 11: Sources of Funds for Home Mortgages
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31 Verified Questions
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Sample Questions
Q1) The emergence of mortgage securities propelled the development of mortgage companies, an entity significantly different from the thrifts and banks that previously dominated the mortgage landscape. Which of the following parties is responsible for providing mortgage origination services and initial funding within this new framework?
A) Mortgage banker
B) Mortgage broker
C) Portfolio lender
D) Security analyst
Q2) Loan servicing includes a number of responsibilities such as collecting monthly mortgage payments from the borrower, remitting principal and interest payments to investors, ensuring sufficient escrow payments are being made by the borrower, and managing default if it should arise. In exchange for these services, mortgage bankers receive a fee. If the outstanding loan balance is $250,000 and the annual servicing fee is 0.35%, what is the monthly fee for servicing the loan?
A) $72.92
B) $729.17
C) $875.00
D) $8,750.00
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13
Chapter 12: Brokerage and Listing Contracts
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Sample Questions
Q1) Which of the following duties refers to a broker's obligation to keep the principal informed about financial aspects of their assignment?
A) Disclosure
B) Accounting
C) Loyalty
D) Skill and care
Q2) In dual agency, conflicts of interest may arise since a single broker has both the listing contract with the seller and a buyer agency agreement with the purchaser. One way that states have attempted to deal with this issue is to develop a new type of brokerage relationship in which the broker assists the buyer and seller, but does not represent either party. This type of brokerage relationship is commonly referred to as:
A) unintended dual agency
B) universal agency
C) transaction brokerage
D) multiple listing
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14
Chapter 13: Contracts for Sale and Closing
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Sample Questions
Q1) When a party in a contract fails to perform (e.g. breach of contract, nonperformance, or default) the other party has a variety of remedies. All of the following are remedies that an aggrieved seller may pursue EXCEPT:
A) Sue for damages.
B) Retain the earnest money deposit as liquidated damages.
C) Agree to rescission of the contract.
D) Sue for specific performance.
Q2) Both parties to a valid and enforceable contract must provide consideration. In a contract for the sale and purchase of real estate, which of the following depicts the seller's consideration?
A) A meeting of the minds with the buyer.
B) The option to present a counteroffer.
C) The property to be given up.
D) The money or goods that constitute the purchase price.
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15
Chapter 14: The Effects of Time and Risk on Value
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36 Verified Questions
36 Flashcards
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Sample Questions
Q1) Assuming that an investor requires a 10% annual yield over the next 12 years, how much would she be willing to pay for the right to receive $20,000 at the end of year 12?
A) $6,053.91
B) $6,372.62
C) $62,768.57
D) $136,273.84
Q2) Suppose you are starting a Ph.D. program with only $1,000 in your savings account. The university has agreed to waive your tuition, cover all of your living expenses, and pay you an additional stipend of $2,000 at the beginning of each month, as long as you teach one course per semester over the course of five years. If your savings account is able to earn 5.5% per year for the five years that you will be in this program, how much will you have accumulated in your savings account by the end of the program if interest is compounded on a monthly basis?
A) $136,445.94
B) $137,708.75
C) $139, 077.35
D) $139,708.76
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Page 16
Chapter 15: Mortgage Calculations and Decisions
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Sample Questions
Q1) Suppose you have taken out a $325,000 fully-amortizing fixed rate mortgage loan that has a term of 30 years and an interest rate of 5.5%. In month 10 of the mortgage, how much of the monthly mortgage payment does the interest portion consist of?
A) $370.68
B) $1,474.64
C) $1,489.58
D) $1,845.31
Q2) Given the following information on a 30-year fixed-payment fully-amortizing loan, determine the owner's equity in the property after 7 years if the market value of the property is $240,000 at the end of year 7. Interest Rate: 7%, Monthly Payment: $1,200.
A) $15,967.33
B) $59,630.92
C) $75,598.25
D) $164,401.75
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Chapter 16: Commercial Mortgage Types and Decisions
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Sample Questions
Q1) An interest-only balloon mortgage loan is commonly referred to as a(n):
A) Mini-perm loan
B) Mezzanine loan
C) Land acquisition loan
D) Bullet loan
Q2) If mortgage rates decline significantly, borrowers may decide to prepay the principal on their loan even if they face prepayment penalties. One way that lenders protect themselves from prepayments in such circumstances is by requiring the borrower who prepays to purchase for the lender a set of U.S. Treasury securities whose coupon payments replicate the cash flows the lender will lose as a result of the early retirement of the mortgage. This process is referred to as:
A) Lockout
B) Yield-maintenance
C) Defeasance
D) Curtailment
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Chapter 17: Sources of Commercial Debt and Equity Capital
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Sample Questions
Q1) Which of the following measures, equal to the estimated total market value of a REITs underlying assets, allows investors to compare the value of a publicly traded security to the value of the properties that it holds in the private market?
A) Net income
B) Net asset value
C) Funds from operations
D) Effective gross income
Q2) 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
Q3) All of the following constitute indirect ownership of real estate private equity EXCEPT:
A) limited partnership
B) limited liability company
C) tenancy in common
D) real estate investment trust
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19
Chapter 18: Investment Decisions: Ratios
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Sample Questions
Q1) In determining a property's before-tax cash flow from operations (BTCF) and net operating income (NOI), it is important to understand how each accounts for the use of financial leverage in its calculation. Which of the following statements is true in regards to how these two measures account for the use of financial leverage?
A) BTCF and NOI are both levered cash flows
B) BTCF is an unlevered cash flow, while NOI is a levered cash flow
C) BTCF is a levered cash flow, while NOI is an unlevered cash flow
D) BTCF and NOI are both unlevered cash flows
Q2) The debt coverage ratio is used to indicate how much the NOI can decline before it will not cover the debt service on the property. While DCRs can vary based on competition within a particular market, lenders usually seek a minimum DCR of:
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Chapter 19: Investment Decisions: NPV and IRR
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Sample Questions
Q1) Suppose an industrial building can be purchased for $2,500,000 and is expected to yield cash flows of $180,000 each of the next five years (Note: assume payments are made at end of year). If the building can be sold at the end of the fifth year for $2,800,000, calculate the IRR for this investment over the five year holding period.
A) 0.09%
B) 4.57%
C) 9.20%
D) 10.37%
Q2) Given the following expected cash flow stream, determine the NPV of the investment opportunity. Investment Horizon: 3 years; End of first year NOI estimate: $886,464; End of second year NOI estimate: $913,058; End of third year NOI estimate: $940,450; Price at which the property is expected to be sold at the end of year 3: $5,000,000; Current market price of the property: $6,200,000; Discount rate: 9%.
A) -$321,010.66
B) -$28,451
C) +$28,451
D) +$321,010.66
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Chapter 20: Income Taxation and Value
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Sample Questions
Q1) Sharon purchased a new photocopier for her business. According to her accountant, she can deduct 1/7 of its original cost each year for the next seven years from her taxable income. This depreciation method is commonly referred to as:
A) declining balance method
B) straight line method
C) sum of the years' digits method
D) modified accelerated cost recovery system
Q2) Johnson Builders is in the new residential construction business. They built a house that sat empty for 6 months after its completion. This type of property would be categorized as a:
A) personal residence
B) dealer property
C) trade or business property
D) investment property
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Chapter 21: Managing Residential Rental Property
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Sample Questions
Q1) 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
Q2) Someone shopping for a new suit at a department store is much more likely to stop at a nearby shoe store than a nearby bakery or drugstore. This scenario highlights the importance of which of the following determinants of the income-producing ability of the property?
A) Tenant mix
B) Preventive maintenance
C) Rehabilitation
D) Professional designation
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Chapter 22: Managing Non residential Rental Property
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Sample Questions
Q1) Which of the following classes of the office sector includes office buildings that are considered the most prestigious in their tenancy, location, amenities and overall desirability?
A) Class A office
B) Class B office
C) Class C office
D) Class D office
Q2) The choice of which method to use in constructing the contracted rental rate can also be impacted by the type of property being leased. With which of the following property types would one most expect to see a percentage rent method used?
A) Apartment
B) Office
C) Industrial
D) Retail
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Chapter 23: Development: The Dynamics of Creating Value
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Sample Questions
Q1) Suppose that a development group would like to determine if the local zoning and land-use ordinances will permit the type of development they desire. However, they do not want to be obligated to purchase the property if they find that their proposed development will not be permitted. To gain control of the site without being obligated to perform, the development group should purchase which of the following?
A) Ground lease
B) Option
C) Fast-track
D) Floor loan
Q2) A developer's selection of an architect is a vital step in the development process as the architect fulfills a number of important roles throughout the life of the project. As compensation for contributions in the design phase, the architect is often given a percentage of the construction cost. For moderately complex designs, the average compensation will be:
A) 1 to 2%
B) 3 to 7%
C) 7 to 10%
D) greater than 10%
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