karoliukas

Demand for real estate is a function of all of the following factors EXCEPT?

A) Population characteristics of the community.

B) Competitive properties.

C) The terms and conditions of mortgage financing.

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This is a determinant of the supply of real estate property. Both remaining choices are determinants of demand.

karoliukas

Which of the following is least likely to be a form of real estate investment?

A) Aggregation vehicles.

B) Property insurance.

C) Leveraged equity position.

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Property insurance is not considered a category of real estate investment because the underlying real estate does not revert to the insurer if the property holder allows the policy to lapse. A leveraged equity position and aggregation vehicles such as real estate investment trusts are each forms of real estate investment.

karoliukas

Mortgages are considered to be a form of real estate investment because:

A) the investor receives a constant stream of cash flows.

B) if the borrower defaults on the loan, the lender may end up owning the property.

C) the borrower will own the property at the end of the loan term.

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It is true that the borrower will own the property if all loan terms are met, but the question is stated in terms of the mortgage lender, not the borrower. The investor anticipates a constant stream of cash flows, similar to other fixed income investments, but is also subject to defaults as well as prepayments. If the borrower defaults on the terms of the loan, the property will revert back to the lender, and this exposure is the reason why mortgages are considered a real estate investment.

karoliukas

Investors can diversify their direct real estate holdings through all of the following vehicles EXCEPT:

A) commingled funds.

B) co-operative shares.

C) limited partnerships.

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Real estate co-operatives are generally a tool with which multiple owners can purchase shares in a single building or complex. This strategy spreads out risk among many investors but doesn’t offer much in the way of diversification for a single investor. Commingled funds and limited partnerships typically allow investors to spread their bets either geographically or through different property types.

karoliukas

Which of the following least likely affects a property’s investment potential?

A) Structure of the financing mechanisms used to buy the property.

B) The legal rights associated with the property.

C) The activity around the property, both commercial and non-commercial.

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The financing and investing decisions are made separately. Market value analysis does not consider how the asset will be financed.

karoliukas

Define the sales comparison method and the cost approach.

Sales comparison

Cost approach

A) uses the price of a similar property or properties from recent transactions to value real estate the value of real estate is determined by the replacement cost of improvements, plus an estimate for the value of the land

B) uses the price of a similar property or properties from recent transactions to value real estate links the value of a property to an investor's specific marginal tax rate

C) uses a discounted cash flow model to estimate the present value of the future income produced by the property links the value of a property to an investor's specific marginal tax rate

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The sales comparison method values property relative to similar properties that have been recently sold. The cost approach values a property at the cost it would be to rebuild it.

karoliukas

Which of the following is least likely a disadvantage of the cost approach method of estimating the market value for real estate?

A) market value of a property may differ significantly from its construction cost.

B) the replacement cost of existing improvements may be difficult to determine.

C) estimating the value of the land may be difficult.

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The market value may be more or less than what it would cost to rebuild or replace it. Estimating the value of the land portion of a property with improvements is a difficult process. The replacement cost is usually easy to determine, although it may or may not reflect the value of the improvements.

karoliukas

Consider the following descriptions of approaches used in valuing real estate:

• Approach 1: This approach relies on examining recent transaction prices from a group of similar properties.
• Approach 2: This approach suggests that projects with positive expected net present value should be accepted.
• Approach 3: In this approach, an estimate for net operating income is discounted by an estimate of the market required rate of return to obtain the appraisal price.
• Approach 4: In this approach an estimate for the value of land is added to the price tag that would have to be paid if a property had to be replaced.

List in order from Approach 1 to Approach 4 the real estate valuation method that corresponds to each of the four valuation approaches listed above.

A) The sales comparison method; the income method; the cost method and the discounted after-tax cash flow model.

B) The sales comparison method; the discounted after-tax cash flow model; the income method and the cost method.

C) The income method; the cost method; the sales comparison method and the discounted after-tax cash flow model.

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The approach that relies on examining recent transaction prices from a group of similar properties is the sales comparison method. The approach that suggests that projects with positive expected net present value should be accepted is the discounted after-tax cash flow model. The approach that requires an estimate for net operating income which is subsequently discounted by an estimate of the market required rate of return to obtain the appraisal price is the income method and the approach that adds an estimate for the value of land to the price tag that would have to be paid if a property had to be replaced is the cost method.

karoliukas

Consider the following descriptions of approaches used in valuing real estate:

• Approach 1: In this approach, the present value of after-tax cash flows are calculated based on the investor’s required rate of return before the equity portion of the investment is deducted.
• Approach 2: In this approach, the value of land is estimated and is added to the price that would have to be paid if a property had to be replaced.
• Approach 3: In this approach, an appraisal price is estimated as the discounted net operating income based on the market required rate of return.
• Approach 4: This approach relies on examining recent transaction prices from a group of similar properties and depends on a reasonably liquid market.

List in order, from Approach 1 to Approach 4, the real estate valuation methods that correspond to each of the four valuation approaches listed above.

A) The income method, the cost method, the sales comparison method, and the discounted after-tax cash flow model.

B) The discounted after-tax cash flow model, the cost method, the income method, and the sales comparison method.

C) The income method, the discounted after-tax cash flow model, the sales comparison method, and the cost method.

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The approach that suggests that the present value of after-tax cash flows be calculated based on the investor’s required rate of return before the equity portion of the investment is deducted, is the discounted after-tax cash flow model. The approach that adds an estimate for the value of land to the price tag that would have to be paid if a property had to be replaced, is the cost method. The approach that requires an estimate for net operating income (NOI) which is subsequently discounted by an estimate of the market required rate of return to obtain the appraisal price, is the income method. Finally, the approach that relies on examining recent transaction prices from a group of similar properties, is the sales comparison method. The accuracy of this method depends on there being a liquid real estate market from transactions data that can be collected.

karoliukas

Which of the following is least likely a characteristic of the income method for real estate valuation?

A) Account for the effects of income taxes.

B) Require a discounted cash flow model.

C) Ignore future changes in operating income.

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The income method does not consider the investment’s income-tax implications. However, it does use a discounted cash flow model based on net operating income. The income method does not account for potential changes in operating income.