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Assignment for next Mon. Read pgs. 39-50 in materials. Find an article on Explanation of the Mortgage Crisis on the web or in a magazine or newspaper.

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Presentation on theme: "Assignment for next Mon. Read pgs. 39-50 in materials. Find an article on Explanation of the Mortgage Crisis on the web or in a magazine or newspaper."— Presentation transcript:

1 Assignment for next Mon. Read pgs in materials. Find an article on Explanation of the Mortgage Crisis on the web or in a magazine or newspaper. Read it and be ready to share!

2 Basic Real Estate Principles – cont. You want to buy an apartment complex….

3 Talked about the first thing you do F Important factors to consider?

4 Once you find the bldg. you want…. What’s next? Inspections Financing Title Report Rent Rolls Occupancy rate Estoppel certificates

5 What gives buyer right to do these things? PURCHASE CONTRACT: Offer – Includes price – Financing terms – Inspection rights – Condition of title – Other terms? Seller – accepts, rejects or most likely, ? Counters

6 Terms Equity – Examples: Own my home - no mortgages. How much equity if the house has a Fair Market Value of $1 million? Apartment building - FMV = $5 million. Seller has a loan on it = $3 million. How much equity? Apt. bldg. FMV = $5 million. Loans against it for $6 million. Equity? Sellable? Definition? Advantages to having equity?

7 Terms Leverage $100,000 cash in pocket. – Could buy 1 property with $100,000. Appreciates 10% in one year. Now worth $110,000. – Could buy 2 properties, each FMV = $100,000. $50,000 down, loan on each for $50,000. Each appreciates 10% in one year. How much have you made? [Remember though you make mortgage payments too.]

8 Definition of “Leverage” (modified from Investopedia) – Use of borrowed capital to increase the potential return of an investment.

9 Down payment Define Where does it come from? Why does lender (generally) require buyer to put in $? “Cushion” Assume FMV = $500,000 Assume Down Pymt. = $100,000 Assume loan = $400,000 How much would property have to depreciate before lender at risk?

10 Once “in contract”…. Financing – What kind of loan? List various possibilities: Interest only: advantages? Disadvantages? Fully amortized loan ARM 100+ variations

11 Found the loan you want…. Bank – lender What steps will (should) bank take (due diligence)? Appraisal Credit check Verify employment/income Verify other assets such as down pymt.

12 At closing (Close of Escrow) First – How does buyer get title? Lender will require buyer/borrower to sign ? What does the note include? What does the mortgage do?

13 Property encumbered by a mortgage [Seller gets $ from buyer and lender – pays off loans.] Buyer signs promissory note in favor of lender secured by a mortgage on the bldg. Buyer gets title

14 Before getting into greater depth.. Articles you found on real estate financing….

15 Promissory Note - pg. 33 “jointly and severally” What type of loan is this? How can you tell? Prepayment Acceleration Due-On-Sale Attorneys’ Fees Security

16 And where did the process get off- track? Then we’ll examine why Financing process – pg. 27 Loan application Loan analysis Approval and processing Closing Servicing

17 Subprime Loans – pg. 34 Application process: No documentation Loan analysis – low credit scores; no verification Higher interest rates Negative amortization Where does equity come into play? – “High debt-to-equity” ratio

18 Loan Analysis Appraisal – what was happening in the mid- 2000s? UACI

19 Mortgages (called Deeds of Trust in some places) Your understanding? Why does lender require this? Bought car on credit? Can a property have more than one mortgage? Why?

20 More than one mortgage… Assume Buyer buying apt. house for $3 million. Has $500,000 down. Qualifies for $2 million loan from Bank – what security? $500,000 short. Solution? $500,000 down

21 Second mortgage [junior] Goes to another lender – or even same lender Why would someone lend additional $500k? What would first mortgage holder allow this? What is the cushion (margin of security) for 1 st ? FMV = $3,000,000 (purchase price) Down = 500,000 1 st = $2,000,000 2 nd = 500,000

22 Any cushion for 2 nd [junior]? FMV = $3,000,000 (purchase price) Down = 500,000 1 st = $2,000,000 2 nd = 500,000 Would 2 nd be “safe”? What happens if property values decline?

23 Seller Carry-Backs Assume same facts: FMV = $3,000,000 Down payment = $ 500,000 1 st = $2,000,000 And buyer can’t find a lender to loan the rest but seller wants/needs to sell. Solution? How structured?

24 Term: “Under Water” Assume FMV declines from $3,000,000 to $2,000,000. First mortgage – balance of $2,000,000 Second - balance of $ 500,000 How much would you pay for the property? In order to sell what has to happen?

25 Will discuss why borrowers defaulting – but let’s first look at the process Foreclosure – What does this mean? – What gives lender the right? – And – what’s the process? Same facts: Value at time of default = $2,000,000 1 st loan = $2,000,000 First forecloses; what is the highest bid?

26 Another Term: Deficiency Judgment Assume same facts Value = $2,000,000 at time of default 1 st has balance due of $2,000,000 High bid = $1,500,000. Now what? And what about 2 nd ? (balance due = $500,000)


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