Real Estate Finance
Pre-Test Questions
Course Introduction
Real Estate Finance explores the principles and practices involved in financing real estate, emphasizing both residential and commercial properties. The course covers key topics such as mortgage markets, loan structures, risk assessment, investment analysis, and the role of financial institutions. Students will learn about various financing instruments, underwriting processes, and government regulations affecting real estate lending. Through case studies and practical exercises, the course develops skills in evaluating financial feasibility, understanding cash flows, and making informed decisions in real estate investment and development.
Recommended Textbook
Real Estate Principles A Value Approach 3rd Edition by David Ling
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Page 2
Chapter 1: The Nature of Real Estate and Real Estate Markets
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Sample Questions
Q1) Large commercial properties valued well over $10 million are often referred to as:
A)segmented property
B)investment-grade property
C)speculative-grade property
D)immobile property
Answer: B
Q2) 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
Q3) What proportion of U.S.households own their home?
A)One-third
B)One-half
C)Two-thirds
D)Three-fourths
Answer: C
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Chapter 2: Legal Foundations to Value
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Sample Questions
Q1) Which of the following is an example of a negative easement appurtenant?
A)A driveway easement across one parcel to another.
B)Rights-of-way for roads.
C)A common drive easement where owners of adjoining lots must permit each other to use a driveway lying on their shaped property line.
D)A scenic easement used to restrict construction on adjacent parcels so as to preserve a valued view.
Answer: D
Q2) Which of the following types of direct co-ownership combines single person ownership with tenancy in common?
A)Cooperative
B)Tenancy by the entirety
C)Condominium
D)Partnership
Answer: C
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4
Chapter 3: Conveying Real Property Interests
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Sample Questions
Q1) Initially used to survey the Old Northwest Territory (Ohio,Indiana,Illinois,and Michigan)in 1789,which of the following methods of land description relies on townships and section numbers as essential units of identification?
A)metes and bounds
B)subdivision plat lot and block number
C)government rectangular survey
D)tax parcel number
Answer: C
Q2) 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
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Chapter 4: Government Controls and Real Estate Markets
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Sample Questions
Q1) Which of the following tools of public land use control represents the earliest method of police power to regulate land use? (Hint: Standards for energy efficiency and sustainability are the most recent trends in the application of this land use control)
A)Subdivision regulation
B)Zoning
C)Building Codes
D)Planned Unit Developments
Q2) In the state of Florida,for example,homeowners may qualify for a tax exemption in which up to $50,000 will be deducted from the assessed value of the property before taxes are calculated as long as the property owner occupies a home as the family's principal residence and has claimed residency within the state.This exemption is better known as the:
A)ad valorem exemption
B)affordable housing exemption
C)growth moratorium
D)homestead exemption
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Chapter 5: Market Determinants of Value
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Q1) The growth of the motion picture industry in Los Angeles,the petrochemical industry in Houston,the software industry in "Silicon Valley," are all examples of how the growth of an industry within a city can create cost advantages for future growth.Economists refer to this phenomenon as:
A)industry economies of scale
B)agglomeration economies
C)location quotient
D)linkages
Q2) The location of competitors within a particular land use area may be influenced by whether the types of services and products are convenience activities or comparison activities.Which of the following is an example of a comparison activity?
A)Supermarket
B)Coffee boutique
C)Fast-food restaurant
D)Apparel store
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Chapter 6: Forecasting Ownership Benefits and Value:
Market Research
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Sample Questions
Q1) Computer software systems that enable one to manipulate and "map" information with great flexibility and speed are referred to as:
A)geographical information systems (GIS)
B)psychographics
C)survey research
D)census mapping
Q2) Development of subdivisions,apartments,offices,or other commercial structures can have a lead time of two years or more.In general,the longer the construction lead time:
A)the lower the construction cost
B)the greater the supply of units
C)the lower the market value
D)the greater the amplitude of real estate cycles
Q3) Preferences of households can vary with time,prosperity,and context.The nuances in the preferences or needs of market subgroups are commonly referred to as:
A)market segmentation
B)market parameters
C)market projection
D)market cycles
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Chapter 7: Valuation Using the Sales Comparison and Cost Approaches
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Q1) The sequence of adjustments to the transaction price of a comparable property would make no difference if all adjustments were either dollar adjustments or percentage adjustments,but with mixed adjustments the sequence matters.In making adjustments to a comparable property to arrive at a final adjusted sales price,the proper sequence for the following adjustments would be:
A)Financing terms,market conditions,location.
B)Location,market conditions,financing terms.
C)Market conditions,location,financing terms.
D)Location,financing terms,market conditions.
Q2) Real estate appraisal is often considered "more art than science," since identifying truly comparable properties is a subjective process.Therefore,it is essential that a comparable property transaction at least meets the requirement that it was fairly negotiated under typical market conditions.Which of the following types of transactions would be most appropriate for use in the sales comparison approach to valuation?
A)Commingled business transactions
B)Low-interest financing programs
C)Real estate auctions
D)Arm's-length transactions
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Chapter 8: Valuation Using the Income Approach
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Sample Questions
Q1) The going-in cap rate,or overall capitalization rate,is a measure of the relationship between a property's current income stream and its price or value.Which of the following statements regarding cap rates is true?
A)It is a measure of total return since it accounts for future cash flows from operations and expected appreciation (depreciation)in the market value of the property.
B)It is a discount rate that can be applied to future cash flows.
C)It is analogous to the dividend yield on a common stock.
D)It is the main determinant of a property's value.
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
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Chapter 9: Real Estate Finance: The Laws and Contracts
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Q1) Foreclosure is considered the ultimate recourse of the lender because it allows the lender to bring about sale of the property to recover the outstanding indebtedness.All of the following statements regarding foreclosure are true EXCEPT:
A)Foreclosure is a costly process for all parties involved.
B)Only those claimants who are properly notified and engaged in the foreclosure suit can lose their claims to the property.
C)When a lender forecloses on a property,it extinguishes all superior liens,bringing about a free and clear sale of the property.
D)The net recovery by a lender from a foreclosed loan seldom exceeds 80 percent of the outstanding loan balance.
Q2) 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
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Page 11
Chapter 10: Residential Mortgage Types and Borrower
Decisions
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Q1) It would be hard to overstate the importance of the Federal Housing Administration (FHA)in the history of housing finance.Which of the following instruments created by the FHA is considered the single most important financial instrument in modern housing finance?
A)Level-payment,fully amortizing loan
B)Adjustable rate mortgage
C)Partially-amortizing balloon loan
D)Subprime mortgage loan
Q2) Mortgage originators can either hold loans in their portfolios or sell them to investors.When a mortgage originator decides to sell mortgages to an institution,for example,this transaction occurs in what is commonly referred to as the:
A)primary mortgage market
B)secondary mortgage market
C)over-the-counter market
D)loan origination market
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Chapter 11: Sources of Funds for Residential Mortgages
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Sample Questions
Q1) Total mortgage debt outstanding at the end of 2008 approached $14.6 trillion.Which of the following types of mortgage loans accounts for the greatest percentage of mortgage debt outstanding?
A)Residential (1-4 family)
B)Apartment (multifamily)
C)Commercial
D)Farm
Q2) In the securitization process,mortgages are pooled together and cash flows are packaged into securities to be sold in the secondary market.Agencies and private companies that pool mortgages and sell mortgage-backed securities (MBS)are often referred to as:
A)thrifts
B)credit unions
C)conduits
D)automated underwriters
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13
Chapter 12: Real Estate Brokerage and Listing Contracts
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Sample Questions
Q1) State licensing laws generally prescribe two levels of real estate brokerage licensing: the broker license and the salesperson license.Which of the following responsibilities is an individual with a salesperson license permitted to do?
A)Own and operate a real estate brokerage business
B)Handle money in trust for clients
C)Negotiate listing contracts or contracts for sale
D)Complete legal documents used in sales and leases in their own name
Q2) All 50 states have licensing laws that regulate persons and companies that engage in the brokerage business.Interpreting and enforcing state licensing laws falls under the responsibilities of which of the following parties?
A)Broker
B)Real estate commission
C)National Association of Realtors
D)Salesperson
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Chapter 13: Contracts for Sale and Closing
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Q1) When a buyer signs an offer to purchase a property,the broker receives a monetary amount from the purchaser of 5 or 10 percent of the purchase price.This deposit is commonly referred to as the:
A)commission
B)earnest money
C)closing cost
D)title insurance premium
Q2) The final step in a real estate transaction is the closing.In most closings,which party is responsible for seeing that the closing is completed successfully?
A)Escrow agent
B)Lender
C)Selling Broker
D)Listing broker
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15
Chapter 14: The Effects of Time and Risk on Value
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Sample Questions
Q1) The purchase price of a piece of property is $70,000.After analysis of the cash flows,expected sales price,and expected yield,the investor decides the deal has a present value (PV)of $80,000.What is the net present value (NPV),and should the investor take the deal?
A)$10,000;Yes
B)$10,000;No
C)-$10,000;Yes
D)-$10,000;No
Q2) Suppose that a tenant is interested in renting out a two-bedroom apartment for $1000 a month for the next year.While the tenant requires rent to be paid at the beginning of the month,he will not be depositing the rental check into a local savings account until the end of each month.If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly,how much will the tenant have in his savings account at the end of the year?
A)$12,278.86
B)$12,613.94
C)$13,330.02
D)$15,917.13
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Chapter 15: Mortgage Calculations and Decisions
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Sample Questions
Q1) With the recent popularity of adjustable-rate mortgages (ARM),lenders have begun to offer ARMs with different adjustment periods.Which of the following ARM choices will most likely have the highest initial rate?
A)Three-year-one-year ARM
B)Five-year-one-year ARM
C)Seven-year-one-year ARM
D)Ten-year-one-year ARM
Q2) Given the following information,calculate the effective borrowing cost (EBC).Loan amount: $166,950,Term: 30 years,Interest rate: 8 %,Payment: $1,225.00,Discount points:
2,Other Closing Expenses: $3,611.
A)7.7%
B)8.2%
C)8.5%
D)9.1%
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Chapter 16: Commercial Mortgage Types and Decisions
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Sample Questions
Q1) Of the following lending relationships,which gives the borrower the most senior claim to the cash flows associated with a property?
A)Straight debt
B)Joint venture
C)Land sale-leaseback
D)Complete sale-leaseback
Q2) In order to better understand a borrower's probability of default,lenders have a number of tools at their disposal.The ratio that measures the percentage of the price (or value)of a property that is encumbered by the first mortgage is referred to as the:
A)debt coverage ratio (DCR)
B)loan-to-value ratio (LTV)
C)break-even ratio (BER)
D)price-earnings ratio (PE)
Q3) 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
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18
Chapter 17: Sources of Commercial Debt and Equity Capital
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Q1) Section 1031 of the Internal Revenue Code permits investors to defer some or all of the taxable gain that would ordinarily be due on the sale of a property if they exchange for "like-kind" property.In order to avoid income taxes,many investors attempted to make use of this tax code when disposing of commercial real estate assets.This led to the reemergence of which of the following forms of ownership in commercial real estate?
A)General Partnership
B)Limited Liability Company
C)Tenancy-in-common
D)Limited Partnership
Q2) Ownership forms for pooled equity investment can differ in terms of how the entity's cash flows are distributed to its investors.Which of the following ownership structures requires cash flows to be allocated to each shareholder in proportion to his or her ownership of the entity,thereby preventing special allocations to multiple classes of investors?
A)Subchapter S Corporation
B)General Partnership
C)Limited Partnership
D)Limited Liability Company
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Chapter 18: Investment Decisions: Ratios
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Sample Questions
Q1) Profitability ratios,income multipliers,and financial risk ratios can be used to provide a quick assessment of a property's relative value.Which of the following ratios measures the overall income-producing ability of the property?
A)Capitalization rate
B)Equity dividend rate
C)Debt coverage ratio
D)Operating expense ratio
Q2) Given the following information,calculate the total amount of annual operating expenses for this income-producing property.Lawn care: $10,000,Property taxes: $24,000,Maintenance: $35,000,Janitorial: $25,000,Security: $32,000,Debt service: $145,000.
A)$102,000
B)$126,000
C)$247,000
D)$271,000
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Chapter 19: Investment Decisions: NPV and IRR
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Q1) Given the following information,calculate the NPV for this property.Initial cash outflow:
$200,000,Discount rate: 15%,CF for year 1: $25,876,CF for year 2: $23,998,CF for year 3:
$23,013,CF for year 4: $22,105,CF for year 5: $144,670.
A)-$51,875
B)-$59,657
C)$140,343
D)$295,951
Q2) 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
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Chapter 20: Income Taxation and Value
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Q1) When cash flows are classified as passive activity income,investors are subject to passive activity loss restrictions.These restrictions imply that passive income losses:
A)can be used to offset positive taxable income from other passive activities.
B)can be used to offset positive taxable income from other passive and active activities. C)can be used to offset positive taxable income from other passive and portfolio activities.
D)cannot be used to offset positive taxable income from any type of activity.
Q2) All taxable income from investment property sales must eventually be classified as either ordinary income,depreciation recapture income,or capital gain income.What is the maximum tax rate that an investor can be charged on depreciation recapture income?
A)10%
B)15%
C)25%
D)35%
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Chapter 21: Enhancing Value Through Ongoing Management
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Q1) Suppose an owner is trying to decide whether or not to make improvements to her property.Given the following information,what would be the value added or potential loss if the improvements are undertaken? Current rent per square foot: $8.75,Anticipated rent per square foot: $14.50,Cost of improvements: $250,000,Square feet: 34,000.
A)Gain of $54,500
B)Loss of $54,500
C)Gain of $195,500
D)Loss of $195,500
Q2) Given the following information,calculate the leasing agent's commission in dollar terms.Lease Term: 10 years,Monthly Rent: $5,000,Commission: 3%.
A)$150
B)$1,500
C)$1,800
D)$18,000
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Chapter 22: Leases and Property Types
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Q1) In commercial leases,rents do not necessarily have to be kept constant over the life of the lease term.One option is for there to be prespecified increases in the contract rental rate over time,sometimes referred to as "step-ups" or "escalations." This type of rent treatment is commonly referred to as:
A)flat rent
B)graduated rent
C)indexed rent
D)percentage rent
Q2) The two most important determinants of the classification of an office property are age and obsolescence.Which of the following classes includes office buildings that are older and reasonably maintained,but are below current standards for one or more reasons?
A)Class A office
B)Class B office
C)Class C office
D)Investment grade property
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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) In each stage of the development process,the developer faces risks that can have a profound impact on the success of the particular project.Which of the following risks is of primary concern after the construction phase has been completed?
A)Environmental risk
B)Title risk
C)Market risk
D)Permitting risk
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