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Real Estate Terms & Concepts Jerry Rioux, CCRH Board Member grioux@sbcglobal.net http://www.angelfire.com/jazz/jrioux/
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Workshop Outline n Part I - Terms & Concepts n Part II - Financing n Part III - Purchase Process
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Part I Terms & Concepts
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What Is Real Estate? n Land n Affixed to the Land n Appurtenant to Land n Immovable by Law
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Real Estate = Bundle of Rights n Old English Concept of Ownership n The Right to Possess, Enjoy, Control and Dispose of Real Estate n The Individual “Rights” May be Bought and Sold or Rented Separately
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Title & Estates n Title = Ownership of Real Estate n Estate = Character of Interest n Fee Simple n Less Than Fee Estate n Life Estate
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Real Estate Legal Descriptions n Lot, Block and Tracks n Metes and Bounds n Section and Township
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Deeds n Legal Documents that Convey (Transfer) the Title to Real Estate n Usually Recorded against the Property in the County Recorder’s Office
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Examples of Deeds n Warranty Deed n Grant Deed n Quitclaim Deed n Tax Deed n Trust Deed (or Deed of Trust) n Deed of Reconveyance
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Encumbrances n Things that Burden the Title to Property n Claims of Others to Property n Non-Monitory Encumbrances n Monitory Encumbrances
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Non-Monitory Encumbrances n C C & Rs n Easements n Encroachments n Mineral Rights n Leases n Regulatory Agreements n Public Rights of Way
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Covenants, Conditions and Restrictions (C C & Rs) n Private Land Use Controls –Lot Size, Set-Backs... –Home Size, Architectural Style… –Parking, Pets… n Public Deed Restrictions –Price & Occupancy Controls
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Covenants, Conditions and Restrictions (C C & Rs) n Judicial Enforcement n Invalid –Racial & Religious Covenants n Unenforceable –Restrictions the Cause Waste n Can Be Released by Beneficiary
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Monitory Encumbrances n aka Liens n Loans, Taxes & Assessments n Voluntary or Involuntary n General or Specific n “Blanket Encumbrances” Cover Multiple Parcels
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Lien Priorities n Based on Recording Dates or Subordination Agreement n Legal Description (lot split) n C C & Rs n Property Taxes n 1st Mortgage n 2nd Mortgage
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Real Estate Contracts n Real Estate Purchase Agreement n Land Contract (Contract for Deed) n Option n Lease Option n First Right of Refusal
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Valid Real Estate Contracts n In Writing n Capable Parties n Mutual Consent n Lawful Object n Sufficient Consideration
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Purchase Contract n Consideration n Purchase Price n Timing n Financing & Other Terms n Contingencies
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Contingencies n Financing n Appraisal n Clear Title n Due Diligence
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Option to Purchase n Right to Purchase n Consideration n Time Limits for Performing n Extension Fees n Purchase Price or Formula n No Obligation to Buy
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First Right of Refusal n Right to Buy n When Offered for Sale n Match Price or Formula n Limited Time to Perform n No Obligation to Buy
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Title Insurance Companies n Title Plants - duplicates county records n Organizes Records by Parcel n Provides Title Reports n Records Documents n Issues Title Insurance
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Title Reports n Preliminary (not Title) Reports n Lists Ownership Interests and Encumbrances n Encumbrances are “Exceptions” to the Title n Buyers want Exceptions Removed
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Types of Insurance n Title Insurance –CLTA & ALTA n Mortgage Insurance –PMI & MMI n Hazard Insurance –also Flood & Earthquake
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Escrow n Independent 3rd Party who Processes Real Estate Sales Transactions n Acts Only When All Conditions Are Met n Divides or Allocates Costs as Agreed n Can Handled by –Title Insurance Companies –Private Escrow Companies –Real Estate Brokers
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Closing Costs - Recurring n Property Taxes n Insurance n Interest n HOA Dues n Assessments
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Closing Costs - Non-Recurring n Escrow Fees n Title Insurance n Transfer Fees n Recording Fees n Doc Prep Fees n Loan Fees & Points n Home Warrantee
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Part II Financing
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Single Family Financing n Value of Collateral n Payment Ratios n Buyer’s Credit Worthiness n Stability of Buyer’s Income
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Loan to Value Ratio (LTV) n Loan Amount n divided by Property Value n $160,000 / $200,000 = 80% n 97% and 100% are Possible n over 80% needs Mortgage Insurance
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Payment Ratio (Housing) n PITI –Principal –Interest –Taxes –Insurance n divided by Gross Income n 28%, 32%, 40%...
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Payment Ratio (Overall) n PITI n plus Other Recurring Debt n divided by Gross Income n 36%, 40%, 45%...
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Market Rate Home Buyer
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Assisted Home Buyer
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Multi-Family Financing n Value of Collateral n Debt Coverage Ratio n Market Demand & Absorption Rates n Buyer’s Credit Worthiness n Management Capacity
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Proforma or Pro Forma n Jargon for Budget n Project Financial Performance n Development Pro Forma n Operating Pro Forma n Development & Operating together
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Development Pro Forma
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Sources of Funds
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Operating Pro Forma
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Appraisals n Estimates of the Value n Three Approaches –Competitive Market –Income –Replacement Cost n MAI Appraisals
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Competitive Market Approach
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Income Approach
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Types of Lenders n Institutional –Banks and Savings Banks –Pension Funds –Insurance Companies n Non-Institutional –Mortgage Bankers –Mortgage Brokers n Government
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S&L Concept n Intermediation –Accept lots of small short-term deposits to make 30-year home loans n Disintermediation –Depositors withdraw money faster than it is collected from Borrowers
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Secondary Mortgage Market n The Buying and Selling of Mortgages n Lenders Now Originate, Sell and Service Mortgages n Fannie Mae & Freddie Mac –Government Chartered Companies –Sell Mortgage-Backed Securities
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Types of Loans n Amortized Loan n Fixed Rate & Adjustable Loans n Balloon Payment Loan n Straight Note n Insured & Guaranteed Loans
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Typical Loan Documents n Promissory Note n Deed of Trust n Regulatory Agreement –(assisted housing only)
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Promissory Note n Agreement to Repay the Loan –Amount Borrowed –Interest Rate –Repayment Terms –Other Conditions n Between Lender & Borrower
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Straight Note n Frequently used for interim financing and seller carry back loans n monthly payments of interest only n balloon payment of principal n due on specific date or occurance
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Straight Note (example) Borrow agrees to pay Lender $200,000 plus interest at the rate of 12% per annum. Borrow shall make monthly payments of interest only in the amount of $2,000 on the first of each month beginning June 1, 2001. The principal balance shall be due and payable in full on May 1, 2006. Dated: May 1, 2001 Signed: Borrower
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Deed of Trust n Pledge of Real Estate as Collateral for Repayment of the Loan Amount n Recorded Against Property n Parties to a Trust Deed –Borrower (Trustor) –Lender (Beneficiary) –Trustee (Holder of Title)
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Typical Loan Conditions n Late Payment Fees n Agreements to Maintain Property, Pay Property Taxes & Carry Insurance n Agreements to Perform Other Things n Acceleration Clause (Due on Default) n Alienation Clause (Due on Sale)
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Part III Purchase Process
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Real Estate Purchase Process n Identify Needs n Search for Property n Gain Site Control n Conduct Due Diligence n Secure Financing n Secure Everything Else n Close Escrow
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Identify Needs n Desired Location n Desired Characteristics n Desired Cost n Land w/ Zoning & Services n Building of Adequate Size on Bus Line
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Search for Property n Local Real Estate Brokers n Talk with Planning Departments n Public/Private Records Research n Drive Around Target Areas n Contact Property Owners Directly
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Gain Site Control n Purchase Contract n Option n Lease n Partner or Joint Venture n Disposition & Development Agreement from Redevelopment Agency
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Conduct Due Diligence n Review Title & Clear Exceptions n Verify Zoning, Utilities, etc. n Conduct Studies –Environmental Studies/Reviews –Structural Studies –Termite/Pests –Soils Studies
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Secure Financing n Loan Commitments n Loan Guarantees n Grants & Subsidies n Make Sure Property Qualifies n Make Sure Management Qualifies
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Secure Everything Else n Re-Zone, Use Permit, Subdivision Map and/or Development Approvals n Project Design Review n Construction/Rehab Plans & Specs n Bids from Contractors
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Close Escrow n Bring it All Together n Satisfy Conditions n Exchange Promises n Exchange Money n Exchange Title
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Develop the Property n Whether New Construction, Major Rehab or Less, the Real Work Begins Now...
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