Real Estate Law and Finance Study Guide Questions
Course Introduction
This course provides a comprehensive overview of the legal and financial principles governing real estate transactions and investment. Students examine the fundamentals of property rights, land use regulations, contracts, and key legal documents involved in buying, selling, and leasing real estate. The course covers mortgage financing, loan structures, and the role of financial institutions and government policies in real estate markets. Practical case studies and current market trends are used to illustrate risk assessment, due diligence, and ethical considerations, preparing students for informed decision-making in professional real estate practice.
Recommended Textbook
Real Estate Finance Theory and Practice 6th Edition by Terrence M. Clauretie
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473 Verified Questions
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Page 2
Chapter 1: Finance and Real Estate
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Sample Questions
Q1) The most accurate definition of finance is:
A) the study of the allocation of resources
B) the process of maximizing profits through money transfers
C) the study of the transfer of money and credit between individuals,businesses,and governments
D) the one you are about to marry
Answer: C
Q2) The definition of real property includes:
A) only that property that can be seen and touched
B) all of the rights and privileges of the use of real estate
C) only land and buildings,the rights and privileges cannot be included
D) a and c
Answer: B
Q3) Capital markets:
A) deal in long-term securities
B) deal in short-term Treasury bills and long-term Treasury bonds to finance their deficits
C) rarely are involved in real estate transactions
D) consider mortgages only for short-term,interim financing
Answer: A
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Chapter 2: Money Credit and the Determination of Interest
Rates
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Sample Questions
Q1) Velocity of circulation refers to:
A) how fast the average person spends his paycheck
B) how fast the current interest rate doubles
C) the average number of times one dollar turns over in one year
D) the total annual dollar transactions divided by the current interest rate
Answer: C
Q2) Default risk:
A) is the risk the bond issuer will be unable to pay the interest and principal on the obligation
B) means a high percentage yield (11% or higher)
C) with a 11.3% yield on a bond means that there is little risk involved in paying back the principal and interest
D) means that the interest rate can be low because the risk is high
Answer: A
Q3) Liquidity,income,and price-anticipation effects:
A) are related to the money supply increase
B) are related to the interest rate increase
C) are related to the bond market increases
D) operate autonomously in the market and are not related to each other
Answer: A
Page 4
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Chapter 3: Finance Theory and Real Estate
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Sample Questions
Q1) The value of mortgage-backed securities changes as a result which most important factor?
A) the maturity date for the security
B) the Dow Jones Industrial Average Index
C) volatility in the interest rates
D) the change in market interest rates
Answer: D
Q2) If an investor owned an equity position in a building and wanted to increase value using leverage he could do so by either leveraging the property or borrowing personally.However,leverage is usually applied at the property,not the personal level because:
A) the investor could make the personal loan against cash flows from the property,leaving the property available as collateral for additional loans
B) the investor cannot take personal loans to leverage an increased value based on cash flows
C) leverage can be created cheaply from personal loans; it is not added value
D) personal loans cannot be applied to cash flows; only to real property
Answer: A
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Chapter 4: The Early History of Residential Finance and
Creation of the Fixed Rate Mortgage
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Sample Questions
Q1) A lender offers you a fixed-rate mortgage for $145,000 at 6.25% for 30 years, monthly payments,with 0.75 discount points.If you repay the loan balance at the end of year four,what is the effective cost of the loan?
A) 6.32%
B) 6.47%
C) 7.00%
D) 6.25%
E) none of the above
Q2) Lenders are offering different financing options on 30-year FRMs.One lender offers a contract rate of 6% with one discount point while another lender offers a 6% contract rate with two discount points.Since both loans are discounted,which is the better option for the borrower based on the APR? Other factors are held constant and the borrower wants to minimize his/her borrowing cost.
A) 6% with one point
B) 6% with two points
C) can't determine without the loan amount
D) discounting doesn't matter,the APRs will be the same since the contract rates are the same
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Chapter 5: Modern Residential Finance
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Sample Questions
Q1) A maturity mismatch occurs when:
A) over one half of all mortgage debt is held by depository institutions
B) mortgage loan interest rates are high
C) a financial institution has originated more conventional loans than government insured loans
D) there is a large difference in the maturity of a financial institutions assets and liabilities
Q2) Negative amortization refers to the fact that:
A) the balance of a loan grows larger rather than smaller
B) the amount of interest on a loan becomes larger rather than smaller
C) the reduction in the value of a property falls below the loan amount
D) none of the above
Q3) Disintermediation refers to:
A) the withdrawal of funds from financial institutions by depositors in excess of deposits
B) financial institutions withdrawing from the Federal Reserve System
C) financial institutions shifting from FHA loans to conventional loans
D) none of the above
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Chapter 6: Alternative Mortgage Instruments
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Sample Questions
Q1) The longer the adjustment period on an ARM:
A) the lower the value of the ARM to the lender
B) the higher the value of the ARM to the lender
C) has no effect on the value of the ARM
D) the higher the risk to the borrower
Q2) A PLAM has the following terms: loan amount: $140,000,real interest rate: 5.50%, 30-year term,2.50 discount points,annual payments adjustments,monthly payments,observed inflation EOY1: 3%.What is the monthly payment for the first year?
A) $1076.47
B) $794.90
C) $775.03
D) $553.17
E) $826.81
Q3) A Price Level Adjusted Mortgage (PLAM)
A) does not involve negative amortization
B) is very easy for the average borrower to understand C) solves the problem of the tilt effect and interest rate risk
D) solves maturity mismatch problem of the lender
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Chapter 7: Financing and Property Values
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Sample Questions
Q1) Mortgage Revenue Bonds,a class of bonds called municipals,are issued by state and local governments and:
A) allow the government to purchase property for government use
B) provide an interest rate at a higher rate than corporate bonds
C) provide interest that is free of federal taxation
D) provide interest that is free from capital gains taxation
Q2) The term "cash equivalent" value refers to:
A) the value of a residential property while it is listed
B) the amount of discount points charged by a lender
C) the value of a property if sold for all cash
D) the cash equivalency of the mortgage on a property
Q3) The term "carryback financing" refers to:
A) a motivated seller who takes back a note at a low rate in order to sell the property
B) a situation where the lender takes the property back after a default on the loan
C) an assumable loan in which a lender waives the discount points in order to complete the loan transaction
D) an assumable FHA loan
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Chapter 8: Federal Housing Policies: Part 1
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Sample Questions
Q1) What conclusions can you draw about the influence of housing inflation on the annual cost of housing?
A) Housing inflation increases the cost of housing
B) Housing inflation increases the cost of housing by a very small amount
C) Housing inflation reduces the cost of housing
D) Housing inflation has almost no effect on the cost of housing
Q2) Escrow accounts are designed to:
A) ensure that the property taxes and hazard fees are current
B) ensure the borrower that no other party can claim ownership or title to the property
C) provide for the payment of all closing costs
D) ensure that the mortgage insurance and title insurance are paid.
Q3) After the securitization of residential mortgages,the relative yield that lenders require has
A) lowered
B) risen
C) been about the same
D) risen for higher value homes,but lowered for lower value homes
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Chapter 9: Federal Housing Policies: Part 2
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Sample Questions
Q1) Which of the following methods has the federal government focused on to regulate discrimination and enforce the ECOA Act?
A) effects method
B) intent method
C) practices method
D) screening method
Q2) If a broker makes a statement that certain minority groups are moving into a neighborhood,and that property owners should sell quickly at a reduced price to avoid further depreciation,they are using an illegal practice known as:
A) blacklisting
B) redlining
C) blockbusting
D) FHAing
Q3) In a perfectly competitive market,a discriminatory firm would:
A) have higher costs
B) be less efficient
C) have a lower stock value
D) all of the above
E) none of the above
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Chapter 10: The Secondary Mortgage Market
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Sample Questions
Q1) 10-27.Prior to the secondary mortgage market it was difficult for thrifts to sell mortgages because:
A) their mortgage assets were not homogeneous
B) potential buyers were concerned with default risk
C) both a and b
D) none of the above
Q2) 10-11.FNMA and FHLMC are:
A) official departments of the U.S. government
B) official branches of the U.S. government
C) corporations originated through federal legislation
D) all of the above
Q3) The Federal National Mortgage Association reduced interest rates on mortgages relative to other securities in the mid-eighties by issuing:
A) CMOs
B) passthroughs and MBBs
C) CMOs and passthroughs
D) MBBs and CMOs
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Chapter 11: Valuation of Mortgage Securities
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Sample Questions
Q1) 11-14.Servicing a pool of loans may NOT include:
A) collecting monthly payments
B) maintaining an escrow account for property taxes and hazard insurance
C) Sending notices of default to the government
D) making claims to the mortgage insurance for losses on defaulted loans
Q2) 11-11.For traditional debt securities which of the following is false?
A) cash flows are fixed in terms of amount and payment date
B) for treasury bonds or (non-callable)corporate debt,an increase in the market rate of interest will lower their value
C) the longer the duration (similar to maturity)of the obligation,the less the changes in value as a result of a change in market rates
D) mortgage securities are very dissimilar to traditional types of debt
Q3) 11-16.Which of the following is false?
A) for a discounted security,an acceleration in prepayments increases the yield
B) for a discounted security,a delay in prepayments reduces the yield
C) for a premium security,an acceleration in prepayments increases the yield
D) for a premium security,a delay in prepayments increases the yield e all are true except c
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Chapter 12: Controlling Default Risk Through Borrower
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Sample Questions
Q1) 12-13.The provisions of a deed of trust outline the rights and obligations of the:
A) lender
B) borrower
C) trustor
D) all of the above
Q2) A promissory note is:
A) a recourse note
B) a non-recourse note
C) either a or b
D) both a and b
Q3) 12-12.An appraiser will not generally deal with:
A) property location
B) physical characteristics of the [property]
C) borrower income
D) past selling prices of the property
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Chapter 13: Loan Origination, Processing, and Closing
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Sample Questions
Q1) Under the FIRREA,for appraising federally related transactions,each federal regulatory agency establishes:
A) lender guidelines
B) appraisal guidelines
C) state guidelines
D) government guidelines
Q2) 13-22.The following is not considered one of the stages in the appraisal process:
A) ordering an appraisal
B) signing an appraisal
C) monitoring an appraisal
D) evaluating an appraisal
Q3) 13-40.A record stating the amounts that are to go to the buyer and seller when a loan is closed is called:
A) note
B) truth-in-lending disclosure
C) settlement statement
D) recording
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Chapter
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Sample Questions
Q1) The FHA up-front mortgage insurance premium (MIP)is:
A) refunded if the loan is subsequently assumed
B) equal to five percent of the face amount of the loan
C) can be financed under some conditions
D) none of the above
Q2) Foreclosure is a process that:
A) returns the property to a borrower when the loan is paid off
B) is consistent in all states as required by federal law
C) is exercised by a buyer of the property
D) none of the above
Q3) Title insurance:
A) insures against losses on a property due to natural disasters
B) insures against losses due government restrictions on the use of the property
C) insures against losses due to changes in interest rates
D) none of the above
Q4) Two methods of foreclosure include:
A) power-of-sale and statutory
B) power-of-sale and judiciary
C) judiciary and statutory
D) none of the above
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Chapter 15: Value, Leverage, and Capital Structure
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Sample Questions
Q1) Using the formula ROE = [NOI - rD] /Equity,the term positive leverage implies that the return On equity is ________________ than the return on assets if the cost of debt "r" is ___________ than ROA where ROA = NOI/EQUITY.
A) greater,less
B) less,greater
C) minimal,maximized
D) a and b
E) a and c
Q2) In any property cash flows are derived from two avenues:
A) operating cash flows
B) from sale of property
C) management costs
D) a and c
E) a and b
Q3) The following is a NOT a proper list of potential commercial properties:
A) hotels,motels,urban office buildings
B) suburban office buildings,shopping malls,strip centers
C) warehouses,mini-warehouses,theme parks
D) restaurants,fast-food facilities,nursing centers
E) hospitals,apartment complexes,casinos,public schools
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Chapter 16: Federal Taxation and Real Estate Finance
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Sample Questions
Q1) Income from a limited partnership is classified as:
A) active
B) passive
C) portfolio
D) deferred
Q2) The Tax Act of 1993 raised the marginal tax rates on ordinary income to:
A) 28%
B) 39.6%
C) 51.8%
D) 42.5%
Q3) 16-12.Section 1031 limits the amount of personality included in an exchange to ______________________ of the aggregate value of the replacement property:
A) 15%
B) 18%
C) 20%
D) 25%
E) none of the above
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Chapter 17: Sources of Funds for Commercial Real Estate
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Sample Questions
Q1) Thrifts specialize in:
A) residential loans
B) multi-family properties
C) commercial properties
D) none of the above
Q2) The primary institutional investors in equity real estate are:
A) pension funds
B) federal credit agencies
C) unions
D) none of the above
Q3) Insurance companies invest primarily in:
A) CMOs
B) commercial mortgages
C) residential mortgages
D) none of the above
Q4) The largest supplier of commercial real estate debt is:
A) state and local retirement funds
B) commercial banks
C) thrifts
D) pension funds
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Chapter 18: Acquisition, Development, and Construction Financing
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Sample Questions
Q1) 18-22.For an ADC loan the lender's yield can be determined by finding the rate which equates:
A) the future value of the disbursements to the present value of the loan repayment
B) the present value of the disbursements to the present value of the loan repayment
C) the present value of the disbursements to the future value of the loan repayment
D) the future value of the disbursements to the future value of the loan repayment
Q2) 18-17.Construction loans:
A) generally,are final type of financing prior to "takeout" loan
B) are generally short term
C) have interest payments that are variable and deferred and "financed" by the lender D) all of the above
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Chapter 19: Permanent Financing of Commercial Real
Estate Properties
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Sample Questions
Q1) 19-16.A sale-leaseback refers to the situation where:
A) a property is sold and the seller leases the property from the buyer
B) a property is sold and a repurchase agreement is signed
C) a property is sold and a subsequent tax-free exchange is made
D) a property that is leased is subsequently sold
Q2) 19-11.The following is/are advantages of equity participation agreements for the borrower:
A) reduced risk to the owner
B) retain ownership of the property
C) lower interest obligation
D) all of the above
Q3) A clause that allows the lender to step in and collect lease payments directly from the tenants in the event the borrower becomes delinquent on the loan is an:
A) assignment of leases
B) assignment of rents
C) assignment of payments
D) assignment of loans
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Page 21
Chapter 20: Ownership Structures for Financing and Holding Real Estate
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Sample Questions
Q1) 20-22.Partnerships can be categorized as:
A) general
B) limited
C) material
D) a and b
E) all of above
Q2) 20-24.A condition for a REIT to be able to sell its real estate property is:
A) It has held the property for at least five years
B) during the four-year period prior to the sale it must have incurred capital expenditures on the property in excess of 25% of its sales price
C) it must have sold more than five properties during the same year
D) it must have acquired property through a foreclosure
Q3) 20-12.REITs that invest in both equity properties and mortgages are called:
A) combination REITs
B) hybrid REITs
C) dual purpose REITs
D) none of the above
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Page 22
Chapter 21: Real Estate in a Portfolio Context
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Sample Questions
Q1) Diversification has value that results from risk reduction that occurs when:
A) the returns on the combined assets are perfectly correlated
B) the returns on the combined assets are inversely related to the business cycle
C) the returns on combined assets are uncorrelated
D) none of the above
Q2) At a point where the return on asset A and the return on asset B are both above their average,the numerator in the coefficient of determination will be:
A) negative
B) positive
C) can be either negative or positive
D) indeterminate
Q3) 21-17.The New Equilibrium Theory suggests that:
A) all assets in a portfolio have equal returns when diversified
B) the excess returns on real estate are a reward for the unique risk characteristics of real estate
C) the low returns on real estate are due to their inflation hedge characteristics
D) none of the above
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Chapter 22: Liability, Agency Problems, Fraud, and Ethics in Real Estate Finance
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Sample Questions
Q1) A lender that has a property taken because of its use in drug transactions can use a defense referred to:
A) due diligence
B) good faith dealings
C) breach of contract
D) innocent-owner
Q2) Making of a promise with no intention of fulfilling it is referred to as:
A) nondisclosure fraud
B) promissory fraud
C) tort
D) fiduciary
Q3) One who intentionally causes injury to another is subject to liability to the other for that injury,if this conduct is generally culpable and not justifiable under the circumstances.This is referred to as:
A) prima facia tort
B) breach of contract
C) fraud
D) strict liability
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