Real Estate Appraisal - Chapter 5: Real Estate Markets and Analysis
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The central bank of the United States is known as:
a. the Federal Bank of America
b. the Unites States Reserve
c. the Federal Reserve
d. the National Reserve
(c) The Federal Reserve System is the central bank of the United States. It is an independent banking system designed to manage money and credit and to promote orderly growth in the economy. Page 125
In a trust, the ______ gives control to the _____ on behalf of the _____.
a. trustor, mortgagee, fiduciary
b. trustee, trustor, beneficiary
c. trustor, trustee, beneficiary
d. fiduciary, beneficiary, trustee
(c) A trust is a legal arrangement in which the trustor gives fiduciary control of property to the trustee who holds title on behalf of the beneficiary. Page 126
Regarding partnerships, which of the following is true?
a. Partnerships are an arrangement where two or more partners share profits and losses.
b. There are general partnerships and limited partnerships
c. A limited partner's liability is limited to only the amount of capital he or she invested
d. All of the above
(d) Partnerships are arrangements in which two or more partners jointly own an asset and share in any profits or losses. General and limited partnerships are the two types of typical partnerships. The limited partners have a passive role and their liability is limited only to the amount of capital invested. page 127
Which of the following is true regarding the difference between debt investors and equity investors?
a. Equity investors are passive and debt investors are active
b. Equity investors are active and debt investors are passive
c. Debt investors invest in higher risk investments than equity investors
d. There is no difference
(b) Typically, equity investors are active in the management of real estate. They have an ownership interest, and assume a relatively higher risk. Debt investors have a relatively passive role in the operation and management of the real estate. They seek conservative investments, with relatively little risk. Pages 126 & 128
Which of the following is not considered a debt investor?
a. A mortgage broker
b. A credit union
c. A thrift
d. All of the above are debt investors
(a) Mortgage brokers bring together borrowers and lenders. Mortgage brokers usually do not have the money themselves to fund the loans, but serve as facilitators in that they find the borrower(s), process the application, and submit the loan package to a wholesale lender who ultimately makes the loan. Page 130
Low risk investments typically provide:
a. a lower yield to the investor than higher-risk investments
b. a higher yield to the investor than higher-risk investments
c. the same yield to the investor as higher-risk investments
d. None of the above. Risk and yield are unrelated
(a) Low-risk investments typically provide a lower yield to the investor than high-risk investments. Page 133
Of the competing investments discussed in this chapter, which are considered safe?
c. Government-issued bonds
d. All of the above
(d) Government-issued bonds are considered very safe investments since they have the backing of the government entity issuing the bond. The CD is backed by the credit of the issuing lending institution and is usually insured by the FDIC, which makes these kinds of deposits very secure. U.S. Treasury Bills have the full faith and credit of the U.S. government. Therefore, they are considered a very safe investment as well. Page 135
Joan borrows $20,000 for an auto loan with a term of six years at 9%. When she pays off the loan in full, her total cost will be $25,956.72. The difference of $5,956.72 is known as:
a. the principle
b. the interest
c. the principal
d. the equity
(b) The fee for renting money is called interest and the amount borrowed is called the principal. Page 137
When using a trust deed, a neutral third party holds the deed as security:
a. on behalf of the borrower
b. until the beneficiary pays off his or her debt
c. while the trustor repays the trustee
d. and has bare title
(d) The trustee (neutral third party) holds the trust deed as security for payment of a debt on behalf of the beneficiary (lender). The trustor (borrower) has equitable title and the trustee has bare or naked legal title to the property. Page 138
A major difference between a mortgage and a trust deed is:
a. a trust deed has one more involved party
b. the borrower retains both title and possession in a mortgage
c. Both a. and b.
d. Neither a. nor b.
(c) The two parties in a mortgage are mortgagor (borrower) and mortgagee (lender). The three parties in a trust deed are trustor (borrower), beneficiary (lender), and trustee (neutral third party). Unlike a trust deed, under a mortgage both title and possession remain with the borrower. Page 140
Meredith has a fully amortized mortgage and owes the bank $1,500 in monthly payments. She has only been paying $1,450, however. The monthly difference of $50 a month:
a. causes negative amortization
b. is added to the loan balance
c. increases the principal
d. All of the above
(d) When the borrower makes lower payments than what should be made on a fully amortized loan, negative amortization occurs? The difference between what should be paid and what is actually paid is added to the principal balance of the loan causing the principal to increase. Page 140
When a repayment schedule has a final payment that is significantly larger than the other payments, this final payment is known as a(n):
b. interest-only payment
c. balloon payment
d. graduated payment
(c) A balloon payment is the single, large payment that pays the remaining balance due. It is much larger than the previous payments because it includes all of the remaining principal and interest. This type of repayment schedule may have extra risks because the borrower ma not be able to pay the balloon payment and may need to refinance the property, possibly at a higher rate. Page 142
Jane wants to purchase a house for $335,000 using a conventional loan. What is her minimum down payment requirement if she does not want to carry PMI?
(c) When the loan exceeds 80% of the value of the property, lenders usually require private mortgage insurance (PMI) on conventional loans. This means Jane will have to pay a 20% down payment of $67,000 in order to avoid PMI. Page 144
Prime loans are also known as:
a. "A" paper
b. "B" paper
(a) Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac and are called "A" paper loans, or prime loans. Page 144
Appraisers are reprimanded if they fail to use specialized guidelines when preparing an appraisal for:
a. friends and family
c. FHA-backed loans
d. the Department of Veterans Affairs
(c) Appraisers are reprimanded if they do not use FHA guidelines when preparing appraisals for FHA loans. If an appraiser intentionally misrepresents the subject property's value on an FHA loan appraisal, and the inaccurate appraisal subsequently causes a loss, the appraiser could be fined and face legal action. Page 146
Which of the following organizations does not operate within the secondary mortgage market?
d. Farmer Mac
(a) The Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), the Government National Mortgage Association (GNMA), and the Federal Agricultural Mortgage Corporation, are among the major organizations operating in the secondary market. The Federal Housing Administration (FHA) insures mortgages, but does not purchase them. Page 131 & 146
Which of the following is responsible for the real estate market's inefficiency?
a. Each property's uniqueness
b. Real estate's illiquidity
c. The limited supply
d. All of the above
(d) Some of the causes of these inefficiencies include: the unique nature of real property, its illiquidity, uninformed buyers and sellers, its relatively high cost, the immobile nature of real estate, and the inflexible suppy of real estate. Page 150
Which of the following is not one of the five broad categories of real estate markets?
c. Special Purpose
(a) The five broad categories of real estate markets are residential, commercial, industrial, agricultural, and special-purpose. Page 152
If a property is "illiquid," it means that:
a. the property has improper drainage
b. the property cannot be sold quickly for full value
c. the property has poor plumbing
d. the property is in a flood zone
(b) Real estate is not liquid, which means that real estate assets cannot be quickly sold for full market value. Page 155
A new subdivision's first phase took a full year to sell and it contained 60 units. The next two phases contain 30 units each, and the appraiser concludes that the absorption rate will decrease by one third per year. How many more years will it take to sell the remaining units?
a. 1 year
b. 2 years
c. 3 years
d. 3 1/2 years
- (b) Between the two phases, there are 60 more units to sell.
- Year 1 sold 60 units.
- Year 2 will sell 40 units (two-thirds of 60), and
- Year 3 will sell the last 20 units (two-thirds of 40 is 26.67).
- So, it will take approximately two more years to sell the remaining 60 units. Page 158
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