Real Estate Finance and Economics PDF

**DIFFERENCE BETWEEN THE TWO** **REAL ESTATE FINANCE** **REAL ESTATE ECONOMICS** ------------------------------------------------------...

**DIFFERENCE BETWEEN THE TWO** **REAL ESTATE FINANCE** **REAL ESTATE ECONOMICS** --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- a branch of finance, which deals with investing money or wealth in real estate. the application of economic techniques to real estate markets. it deals with the allocation, generation and use of monetary resources over time, which is invested in the real estate business.  it tries to describe, explain, and predict patterns of prices, supply, and demand. also has risks associated with it and the effective management of assets, which will maintain or increase in value over a period of time, i.e. the investment yield of the project. **Real Estate Finance ** One of the factors that have impact on real estate transaction is the availability of credit The availability of debt money also influences real estate development and consequently the value of real estate. When credit is plentiful, loans are easy to obtain, and the availability of money results in an active market. When credit is scarce, illiquidity occurs, and prices often decline because only a few people can pay cash or qualify to borrow or find a bank to loan them money. The decrease or increase in interest influences real estate transactions. A decline in interest rates tends to expand the borrowing power of many people. **The Circular Flow of National Economy** - We must know how money works or flows in the economy. - This model helps understand economic activity, income distribution, and the government\'s role in the economy. - The Circular Flow of the National Economy is a model that shows how money, goods, and services move between households, businesses, and the government in an economy. **Importance of Real Estate Finance** It is therefore important that real property professionals understand the following in order to efficiently proceed through the transactional processes. - The basic impact of monetary and fiscal policy that impact the price and supply of money; - Understand the difference between money and capital markets; and - Understand the basics of real estate finance including the basic terms, types of loans, and various forms of mortgages; - Real estate transfers usually involve the use of money as opposed to other assets \[i.e. exchange, donations, inheritance, etc.\]; - Also, most real estate acquisitions involve both the buyer\'s investment in the property \[cash out\] as well as the use of borrowed funds for the balance usually through financing; **Important Terms ** 1. **Principal Loan** - this is the original loan amount 2. **Equity** - down payment or initial cash out, earnest money 3. **Amortization** - is process of retiring a mortgage or debt over a specified time period 4. **Interest** - is the payment or money earned for the right to use of the principal 5. **Payment** - also known as a debt service 6. **Loan-to-value (LTV)** - is percentage of the proposed or original loan value of property 7. **Leverage (Positive or Negative)** - measure of positive or negative benefits of financing that are obtained in relation to interest gained - - **Monetary and Fiscal Policies** - **Discount Rates** - is the rate at which member banks can borrow funds from the BSP to loan to other customers. Banks compete in the market and need to charge higher to their customers to gain a profit. - **Monetary Policy** - is the function of BS to control the flow of money in the market. - **Fiscal Policy** - is the function of government to management revenues (Taxes) and expenses (appropriation) **DIFFERENCE BETWEEN MONETARY AND FISCAL POLICY** **Monetary Policy** - The monitoring and control of money supply by a central bank, such as the Federal Reserve Board in USA, and the BS in the Philippines; **Fiscal Policy** - Refers to \"measures employed by governments to stabilize the economy, by manipulating the levels and allocations of taxes and govt. expenditures. - Fiscal measures are frequently used in tandem with monetary measures to achieve certain economic goals **Terms in Monetary and Fiscal Policies ** 1. **Money Markets** - Money markets are financial vehicles with traditional maturities with less than one year. 2. **Capital Markets** - financial vehicles with usual maturities of more than one year. 3. **Types of loans ** - - **Real Estate Investment** - It involves critical investment decisions that **require substantial funds outlay** with the expectation of financial benefits generally over a long period or time horizon.  **The Discounted Cash Flow**  It operates as follows: **Gross Possible Income (GPI)** **=Effective Gross Income (EGI)** **= Net Operating Income (NOI) or Net Effective Income** **= Cash Flow Before Taxes (CFBT)** **= FREE CASH FLOW** **ECONOMIC CHARACTERISTICS OF PROPERTY VALUE** - **These are expressed in DUST:** - - - - **Forces that Impact Real Estate Values \[P E G S\]** - **Physical or environmental Forces** - these are what you usally see or know through your five senses - **Economic Forces** - commercial and economic activity ex. If it is in a business district mas mataas yung price - **Government Forces** - different policies, laws, rules and regulations by the government - **Social forces** - people or culture of the community **SIX PARTS OF THE FINANCIAL SYSTEM** 1. **Money** -  To pay for purchases and store wealth. 2. **Financial Instruments** - To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. 3. **Financial Markets** - To buy and sell financial instruments. 4. **Financial Institutions**- To provide access to financial markets, collect information & provide services. 5. **Regulatory Agencies** - To provide oversight for the financial system. 6. **Central Banks** - To monitor financial Institutions and stabilize the economy. **FIVE CORE PRINCIPLES OF MONEY AND BANKING** 1. **Time has value.** - - 2. **Risk requires compensation.** - - 3. **Information is the basis for decisions.** - - 4. **Markets determine prices and allocation resources.** - - - 5. **Stability improves welfare.** - - **INTEREST** - The cost of money is also known as \"Interest\". Interest is expressed as a portion of the sum of money involved and this is called the \"Interest Rate\". The units used for interest rates are called the \"percentage.\" Since the cost of money is time-dependent, interest rates must always be accompanied by a \"period\" **TYPES OF INTEREST** 1. **Simple Interest** - means that the interest rate is applied only to the principal sum year after year. 2. **Compound Interest** - means that the interest rate is applied to both the principal sum and the accumulated interest year after year. Interest not withdrawn is added to the principal, or \"compounded\" and becomes the base of the next period\'s interest. **SIMPLE INTEREST** - Simple interest is rarely used in financial transactions. But here\'s a simple example: - What will be the FV of your deposit of Php1,000,000.00 in 5 years if earning 10% per annum? - FV = P 1,000,000.00 + 10% of P 1,000,000.00 × 5 years = P 1,500,000.00 - The formula is : FV = PV + (r)(PV)(n) = PV(1 + r n) **COMPOUND INTEREST** - Instead of focusing on mathematical formulas which may be too complex, most finance professionals, including bankers, use factors that are found in published tables. These factors are multiplied to the principal sums to obtain the desired results. - There are six types of factors, but they can all be derived from the first two. - Please refer to the INTEREST TABLES which - shows factors for different interest rates and periods. In the examples that follow, the values of the appropriate factors are obtained from the Interest Tables. **Factors to Derive the Future Values of Money, \"FV\"** **Factor \"f1\": Compound Interest of 1** - Formula: f1= (1+r)^n^ - The future value FV of an initial amount PV growing at compound interest rate \"r\" over \"n\" years is computed by multiplying PV with the factor \"f1\". Thus FV = f1 (PV); f1 is found in the appropriate tables for the given \"r\" and \"n\" - For Example: What will be the future value (FV) of your deposit of P 1,000,000 after 5 years if earning 10% compound interest? - Answer: PV = 1,000,000. г = 10% or. 10 n = 5 years **Factor \"f2\": Annuity Factor** - Formula: f2=\[(1 +rt -1 )n\]        Ir =(f1-1)/(r) - The future value FV of equal year-end deposits RV, growing at compound interest rate \"r\" over \"n\" years is found by multiplying the factor \"2\" against RV. Thus: FV = f2 (RV). An \"annuity\" is a **stream of money in equal amounts** deposited or withdrawn repeatedly over time. - Example: You wish to save money to build a home. If you can set aside P100,000 annually, what will be the future value of your deposits in 10 years if it earns 10% compound interest? - Answer: FV = RV (f2) f2 = (f1-1)/r  f1=1.10\^10=2.594 **Factors to Compute the Present Values of Money, \"PV\"** **Factor \"f3\": Discount Factor** - f3 = 1If1 (Reverse or reciprocal of f1) - How much is an amount at a future date worth today? This is simply the ***reverse of compounding***. It is called \"**discounting**.\" PV = f3 (FV) or PV = FV / f1 - Example: You need P 2.6M 10 years from now. Interest earning is 10%. How much should you set aside now? -  Answer: **Factor \"f4\": Present Value of Annuity** - Formula: f4 = f2 I fI        PVm = f4 (RV) - How much will a stream of periodic payments RV paid for \"n\" years be worth today? - Example: You are given a choice to buy a house in cash today or sign a lease-purchase contract to pay an installment of PI,000,000 annually for the next 10 years. If the interest rate is 10%, what is the comparable amount if purchased on outright cash sale? - Answer: PV = RV x f4; f4 = f2/f1 f1 = 2.59 f2 = (2.59-1)/.10 = 15.9 **Factors for Computing Recurring Sums of Money \"RV\"** - RV stands for recurring or repeated values or sums of money. - This is mostly applicable in installment sales contracts, loan amortization, etc. **Factor \"f5\": Sinking Fund Factor** - Formula: f5 = 1/ f2 - Equal deposits needed each year to reach a certain future amount FV.  RV = f5(FV) - The factor f5 is multiplied to the target future sum to determine the needed recurring deposits, RV. - Example: You want to save a total amount of P 1,593,742. So (about P1.6 million) over 10 years; if the interest rate is 10%, how much should you deposit every year? - Answer: RV = FV x f5 f5 = 1/f2 = 1.1\^10 = 2.594 **Factor \"f6\":Amortization Factor** - Formula: f6 = f1 / f2 - Factor \"f6" is used to compute annual payments RV to repay a loan PV in \"n\* years with compound interest on the unpaid balance. RV = f6 (PV). Note that when you \"amortize\" a loan, each payment reduces the principal. The declining principal continues to accrue interest. - Example: You borrow P 1,000,000 today, payable in 10 years at 10% interest. How much is your annual amortization? - Answer: RV=  PV x f6.  f6 = f1/f2 =  2.59 / 15.94 = 0.1625 https://lh7-rt.googleusercontent.com/docsz/AD\_4nXcesn8AMk1CmQMUI-SsZ1qMkIKyyJMM6ijnXmwHp5WAPh24U\_-eWz0zR8mUueALpKwGvJS8VJdkIG2NG9-o874hobSVTiY3uPM6hLXWGoj7jNYAUcbm1NzMdLOzECFuZE9LP9xI0Q?key=pyUjwWui9mTNqFpS92a\_RZwD **AMORTIZATION TABLE** shows periodic movement of principal and interest. **Summary** It is practical either to use printed tables of factors or a spreadsheet. The two most important tables to keep are those for \"f1\" and \"f3". You can derive the rest from these two factors. - **To compute FUTURE SUMS: \"FV\",** use the factors f1 and f2 - **To compute PRESENT WORTH: \"PV\",** use the factors f3 and f4 - **To compute RECURRING VALUES: \"RV\",** use the factors f5 and f6  **INTEREST TABLE** **C1. SIMPLE INTEREST TABLE**  **C2. COMPOUND INTEREST (FUTURE AMOUNT OF 1 AT COMPOUND INTEREST DUE IN N PERIODS)** https://lh7-rt.googleusercontent.com/docsz/AD\_4nXfVxjp03TTo4VHO7a32nbVV7ywj4lJTQUmNTNmL8LQ5vmgdXVqd3VKfy8cNf536yni3QJdOv6ZCP9CoiP8dkY5DpAh1h31JGG9mOeChfgTsjhn6ls8dR6MTG1-2FS6hBX6bo4UYiA?key=pyUjwWui9mTNqFpS92a\_RZwD **C3. COMPOUND INTEREST (PRESENT VALUE OF 1 DUE IN N PERIODS)**  ** ** **C4. PRESENT VALUE OF ORDINARY ANNUITY OF 1 PER PERIOD** https://lh7-rt.googleusercontent.com/docsz/AD\_4nXe8IwsUksKgEUeUd1-S85mm2sja6Ro7eI39yg7ZYE9zr7VGm56IwblVcPPBK8cTd6\_Aco5UqQYDIqg\_VbDA9bXrOIRNrrbbNL2\_dq1G\_ls5ZzY8MLok6c-g9RuSlyF\_pZQM7Bo1Zg?key=pyUjwWui9mTNqFpS92a\_RZwD **C5. FUTURE AMOUNT OF ORDINARY ANNUITY OF 1 PER PERIOD**  **Risk** - The possibility of something bad happening - Harm, danger, loss **What is Risk Management?** - Risk is uncertain events that may have a positive or negative impact on the project - Risk Management is the process of identifying and mitigating risk **Why it is essential:** - Risk affects all aspects of real estate projects (budget, schedule, scope quality, and so on) - Risk probability of positive events - Reduced occurrence of adverse event - Make sure to manage risk **What is in the Risk Management Plan?** - Identify risks and threats (avoid, transfer, mitigate, accept) - Monitor and control (audit, response, analyze) - Qualitative risk analysis (adjective, description) - Quantitative risk analysis (numerical description) - Risk response planning (action plan) - Risk monitoring and control (audit and control) - Risk mitigation and solution (reduce-resolve) -  Consider threat and opportunities (external conditions) **Benefits of Risk Management Plan** - Effective use of resources - Promoting continuous improvements - Fewer stocks and failures - Strategic business planning - Raise awareness of significant risks - Quick grasp of new opportunities - Enhanced communication - Focused internal audit programs - Pinpointing responsibility and accountability **REAL ESTATE AS BUSINESS** - RE as a business is cyclical.  - Direct Real Estate Ownership Risks owing long gestation period - **Buy and sell** -- investors suffer financial risk if the property is stuck in the market esp. if the cash flow was a leverage or when market value declines - **Buy and lease** -- if you fail to rent out for an extended period of time, maintaining to upkeep the property is a financial loss - Private Real Estate Deal, investing in someone else's property - **Titling** - investing for the titling of the property or a return of investment - **Development or Redevelopment** -- sharing in the development or redevelopment of property of others - **Joint Venture** -- as financial investor, risk if development is not finished or delayed **CLOA** - In the Philippines, CLOA stands for \"Certificate of Land Ownership Award.\" It is a significant document in the context of the Comprehensive Agrarian Reform Program (CARP), a land reform initiative in the country. The CARP was designed to distribute land to landless farmers and promote social justice and rural development.  **REAL ESTATE RISKS** - The following are some of the Real Estate risks - Fire damages - Earthquake fire damages - Earthquake damages - Typhoon damages - Flooding damages - The following are the results of the Real Estate risks - Damage to property -  Human casualty (accidents in the premises) - Financial losses - Environmental losses - Construction losses - The following are the causes of the Real Estate risks - Man-made factors: negligence, sabotage or vandalism, pollution, land subsidence, encroachments - Construction-related factors: poor construction, soil contamination, zoning or regulatory changes, property title issues - Natural disasters: earthquakes, typhoons, flooding, fire - Economic factors: market fluctuations, interest rate changes - Environmental risks: contamination cleanup, environmental regulations - Legal and regulatory factors: legal disputes, changes in laws - There are many critical aspects of RE risks today in the course of acquiring, selling, managing, developing, or redeveloping properties - However, many firms are now offering solutions from mitigation to resilience and recovery. **Types of Risks** - Reputation - Strategic - Business - Legal and regulatory - Operational - Financial - Credit - Market **WHAT IS RISK?** - Real estate risk is the perils that a real estate company must contend with, encompassing various potential threats and challenges that can impact its investments, operations, and overall stability. **Three broad types of Risks** 1. **Credit Risk**: is the risk of loss following a change in the factors that cause real estate asset or increase in cost of leverage. - - - 2. **Market Risks**: Market risks, also known as systematic risks, are related to the potential losses that can occur due to broader economic or financial market conditions. These risks include fluctuations in interest rates, exchange rate changes, and stock and commodity price movements. Market risks are often beyond an individual or company\'s control and can impact the value of investments and assets. 2. **Operational Risks**: Operational risks are those associated with an organization\'s internal processes, systems, and procedures. These risks encompass a wide range of factors, including human errors, system failures, fraud, compliance issues, and disruptions in the supply chain. Operational risks can affect a company\'s efficiency, reputation, and financial stability and are often mitigated through improved processes and risk management practices. **OTHER RISKS** 1. **Financial risks** --the probability that shareholders will lose money when they invest in a company that has a debt, cash flow inadequate to meet financial obligations or when a RE company uses debt financing and the company becomes insolvent. Investors lose some financial risk factors. - - - - - 2. **Legal and Regulatory risks** --the risk that a change in laws and regulations will automatically impact the RE project, while the legal risk is a possible loss caused by defections, transactions, or defective contracts. - - - - 3. **Business Risk** -- refers to the basic liability of business. The question of whether a company will be able to make significant rules and generate sufficient revenues to cover its operational expenses and turn a profit. - - - 4. **Reputation risk** -- refers to risks taking on a new dimension in the accounting scandal that defrauded the stable holders in some RE companies during BOOM in the equity market in the late 1990s. it is a risk of loss resulting from damages to a firm or individual reputation, resulting in loss in revenue, increased operating capital, regulating costs, or decline of shareholder's value, consequence adverse criminal even if the company is not guilty. **DIFFERENCE BETWEEN FINANCIAL RISK AND BUSINESS RISK** **FINANCIAL RISK BUSINESS RISK** https://lh7-rt.googleusercontent.com/docsz/AD\_4nXdMUdES94YuBTkuc1FNpSjBy7uzhmXD3XCG-16Uh-euAMP-ewNtUHdY9m\_vYyt\_AxXcjDIAJHRejXwc28h\_YA4w6pcsq7WJwcXpLZGFXDTdts\_oVqseAseKubvdcdouvtPGMzJ9hQ?key=pyUjwWui9mTNqFpS92a\_RZwD **SRM -- Strategic Risk Management** - Current and prospective impact of strategic decisions made by management arising from adverse human decisions **COMMON STRATEGIC RISKS** 1. **HUMAN RESOURCE RISKS** -- knowledge, staffing, employee theft 2. **STRUCTURAL RISKS** -- IT systems, proprietary information 3. **RELATIONSHIP RISKS** -- reputation, performance 4. **EXTERNAL RISKS** -- Competition, market changes 5. **FINANCIAL RISKS** -- cash flow, capital, prices or cost pressures 6. **PHYSICAL RESOURCE RISKS** -- disasters, bottlenecks **STRATEGIC RISK MANAGEMENT** - Scenarios that prevent firms from achieving their strategic objectives, both internal and external, strategic risk management impacts all other risks in the industry. - Risks associated with future plans and strategy, including plans to enter new projects or services, expand existing projects or services over-diversification, etc. - Current and prospective. **COMMON STRATEGY RISK** - **External Risk** - Competition - Market Changes - **Financial Risk** - Cashflow  - Capital **COMPONENTS OF SRM ** - A process performed by management for identifying, assessing, and managing risks;  - It is the ultimate goal is successful implementation of a strategic plan.  - It is the organization\'s overall process\'s primary component and necessary foundation.  - It requires a realistic strategic view of risk and consideration of how risks will affect the organization;  - It is a continual process that should be embedded in all strategic settings.  **Basic Steps in Strategic Management Process (SMP) ** - Communicate and share information across business  - Intranet, company website, newsletter, emails, sms, etc.  - Breakdown risk management tools  - risk in one area could affect the others  - Identify and assess possible risks  - consider severity, probability, timing, impact, likelihood - Prioritize the organization\'s risk zones  - Identify potential positive consequences of risks  - A risk can be turned into opportunity. Risk is inherent to an organization embracing areas opportunities.  -  It is continual process that never end.  **Methods of Managing Strategic Risks: ** - **Avoid** - You will not achieve strategic objectives by avoiding risks.  - **Transfer** - This is the purpose of insurance but no insurance willing to issue indemnify a company which does not manage strategic risks.  - **Accept** - Taking chances is detrimental to the organization, reduce into acceptable level.  **RISK MITIGATION ** -  Insurance Availment  - Avail insurance coverage for your property against loss or damages by fire, lightning, and other catastrophic events. It can be extended to cover perils such as aircraft damage by earthquake, typhoon, flood, falling aircraft, impact damages, explosion, bursting or overflowing of water tanks or pipes, subsidence and landship, volcanic eruption, riot, strikes, and malicious damages, spontaneous combustion, sprinkler leakage, bush/lolling fire, damage by falling trees or branches and objects. Cover can be extended to all other physical losses or damages.  - How are buildings designated against earthquakes?  - **Peak Ground Acceleration (PGA)** - is a measure of earthquake acceleration on the ground, also known as the design basis earthquake ground motion (DBEGM)  - **Richter Scale** measures magnitude  - **Mercalli scale** measures intensity. Mercalli using personal reports and observations.  - **Seismic designs** - does not use magnitude or crude intensity. In an earthquake, damages to buildings are related more closely to ground motion, rather than magnitude.  - Designers use & specified peak ground acceleration measure by instruments called **(accelerographs)**  **FINANCIAL INSTRUMENTS ** **Promissory Notes** - A written promise to pay money. **Basic provisions** - A promissory note can be a brief and simple document. - It usually contains: - names of the parties, amount of the debt, - interest rate, and - how/when money is to be repaid. - Promissory note must be signed by the maker. - A legal description isn\'t required. **Negotiable instrument** - A written, unconditional promise, - to pay a certain sum of money, - on demand or on a certain date, - payable to order or bearer, - signed by the maker. **Without recourse** - Means future payment is only between the maker and the third party the instrument is endorsed to. - Original payee not liable if maker fails to pay. **Holder in due course** - Someone who buys a negotiable instrument for value, in good faith, and without notice of defenses.  **Types of notes** - Promissory notes are classified according to how principal and interest are paid off. - **Straight note** - periodic payments are interest only, with principal due on maturity date. - **Installment note** - periodic payments include both principal and interest. **Security Instruments** **Purpose** - In real estate transactions, a promissory note is accompanied by a security instrument: - Mortgage - Deed of trust - Security instrument gives the lender the right to foreclose on the property if borrower defaults. - Foreclosure = lender forces sale of property and collects debt out of sale proceeds. - Lenders can enforce unsecured promissory notes by filing a lawsuit to obtain a judgment. - May not be able to collect without collateral. - Secured lender in much better position. - Real estate lenders always require borrowers to sign a security instrument. **Historical background** - Personal property used as collateral for early forms of secured lending. - Borrower gave lender property until loan was repaid. - Lender kept property if loan remained unpaid. - **Hypothecation -** Pledging property as collateral without giving up possession of it. - Became standard arrangement for borrower to retain possession of land. - Lender received title. - **Legal title** = title transferred only as collateral, without possessory rights. - **Equitable titl**e = property rights retained by the borrower, without legal title. **Liens** - Financial encumbrance on property owner\'s title, allowing lienholder to foreclose on property to collect debt. - Eventually, transfer of legal title wasn\'t necessary. - Mortgage or deed of trust creates lien against borrower\'s property. - Depending on the state, a security instrument may or may not transfer legal title. - **Title theory states -** security instrument transfers legal title until loan is paid off. - **Lien theory states** - instrument creates lien and doesn\'t transfer legal title. - **Mortgages** - Two-party security instrument in which borrower mortgages his property to lender. - Mortgagor = borrower - Mortgagee = lender - Mortgage must include: - a names of parties, - accurate legal description of property, and  - identify promissory note it secures. **Covenants** - Mortgagor promises to: - pay property taxes, - keep property insured against fire and other hazards, and - maintain structures in good repair. - Mortgagee has right to inspect property. - If mortgagee fails to fulfill covenants imposed by mortgage, he is in default. - Mortgagee can foreclose. **Mortgage recording** - After execution, mortgagee records document to establish priority of mortgagee\'s security interest. **Satisfaction of mortgage** - Document given to mortgagor by mortgagee, after mortgage is paid off, releasing property from mortgage lien. -  Mortgagor records document. **Deeds of trust** - Similar to mortgage, but involves three parties, rather than two. - Grantor (or trustor) = borrower - Beneficiary = lender - Trustee = independent third party, who arranges for release of property or foreclosure, as necessary. - Usually include same basic provisions found in a mortgage, including: - names of parties, - property description, - identification of promissory note, - \"grantor\'s promises to pay taxes and insure property, and - beneficiary\'s right to inspect property. **Reconveyance (Deed of reconveyance)** - Document releasing property from lien. - Executed by trustee when deed of trust loan is paid off. - Recorded by the grantor. **Foreclosure** - Key difference between deeds of trust and mortgages: procedures used for foreclosure. **Judicial foreclosure** - Traditionally, judicial foreclosure was only option. -  Lender filed lawsuit against borrower. - Sheriff\'s sale ordered by court if borrower found in default. - Alternative to judicial foreclosure was eventuall developed. **Judicial foreclosure procedures** 1. **Acceleration of debt** - 2. **Foreclosure lawsuit** - - - 3. **Equitable right of redemption (Reinstatement v. equitable redemption)** - - - - - - 4. **Order of execution** 4. **Public notice of sale** - - - 6. **Sheriff\'s sale** - - - - - - - 7. **Statutory right of redemption** - - - - - - **Nonjudicial foreclosure** - Generally associated with deeds of trust. - Lender doesn\'t have to file lawsuit. - Trustee arranges for property to be sold at trustee\'s sale. - Property sold to highest bidder. - Some states don\'t allow nonjudicial foreclosure. - In some circumstances, it might be preferable for lender to foreclose deed of trust or mortgage judicially. **Nonjudicial foreclosure procedures** - Entire nonjudicial foreclosure process may be completed in under a year, without many expenses. - State may place variety of restrictions on nonjudicial foreclosures, including: - Requiring a post-sale redemption period for agricultural property. - Prohibiting beneficiary from obtaining deficiency judgment after sale. 1. ** Notice of default** - - 2. **Public notice of sale** - - - 3. **Cure and reinstatement** - - - 4. **Trustee\'s sale** - - - - 5. **No post-sale redemption** **Lender\'s point of view** Advantages of judicial foreclosure - Borrower can\'t reinstate loan. - Right to deficiency judgment. Advantages of nonjudicial foreclosure: - Quick and inexpensive. **Borrower\'s point of view** Advantages of judicial foreclosure: - Slow process. - Post-sale redemption. Advantages of nonjudicial foreclosure: - Right to cure and reinstate. **Land contract** - A land contract serves purpose similar to that of a deed of trust or mortgage. - Used in seller-financed transactions. - Buyer takes possession of property, but seller retains title until contract has been paid off - Vendor = seller - Vendee = buyer **Finance Instrument Provisions** Rights and responsibilities of borrower and lender may be affected by: **Subordination clause** - gives mortgage recorded earlier lower priority than another mortgage that will be recorded later on. - Common in construction financing. - Inclusion of these clauses must be negotiated during the earlier transaction. - Should be reviewed or drafted by real estate lawyer. **Late charge provisions** - Promissory notes usually provide for late charges if borrower doesn\'t make payments on time. - State laws may override late charge provision, to protect borrowers from excessive late charges. **Prepayment provision** - imposes penalty on borrower if she repays some or all of principal before it is due. - Prepayment deprives lender of some of the interest it expected to receive over loan term. - No longer standard in residential loan agreements. - Fannie Mae/Freddie Mac promissory note gives borrower right to prepay. - Prepayment penalties prohibited with FHA and VA loans - Penalties are usually charged only if loan is prepaid during first few years of loan term. - Unreasonable prepayment penalties are considered a predatory lending practice. - Some states limit the amount of such penalties. **Partial release clause** - obligates lender to release part of property from lien when part of debt is paid. - Typically found in deed of trust or mortgage covering subdivision in the process of being sold. **Acceleration clause** - allows lender to declare outstanding loan balance due immediately in event of default. - Most lenders wait 90 days before accelerating. **Alienation clause (due-on-sale clause) ** - is designed to limit borrower\'s right to transfer title to property without lender\'s permission. - When borrower transfers security property without paying off loan, either: - new owner takes title subject to loan - new owner assumes loan without release of original borrower; or - assumption and release. - If new owner takes title subject to any existing liens: -  Lender still has power to foreclose on property. **Assumption** - New owner takes on primary liability for repaying - Unless lender agrees to release, original borrower is secondarily liable. - Original borrower can be forced to pay deficiency if new owner doesn\'t. - Most alienation clauses are triggered by transfer of any significant interest in property. - Includes long-term leases, or leases with options to purchase. - Lender can\'t forbid a sale, but can demand payment of loan. - Lender may charge assumption fee, which may be as substantial as loan origination fee. **Estoppel letter** - Acknowledges transfer of ownership and waives lender\'s right to accelerate loan. - Lender estopped from trying to enforce alienation clause later on. - Real estate agent should always ask seller about existing financing. - If assumption is arranged, both parties should seek legal advice and agreement should be drawn up by lawyer. **Types of Real Estate Loans** **Junior or senior mortgage** **Junior mortgage** - Mortgage with lower lien priority than another mortgage or deed of trust against same property. **Senior mortgage** - Mortgage with first lien position. - Also called a first mortgage. - Property may be encumbered with two mortgages in several situations: 1. 2. 3. - After foreclosure, junior mortgage paid only after senior lender has been paid in full. - If proceeds insufficient, junior lender receives nothing. - Junior lender can still sue borrower, but debt is now unsecured. **Purchase money mortgage** 1. Any mortgage loan used to finance purchase of property that is collateral for loan. 2. A mortgage buyer gives to seller in seller-financed transaction. **Home equity loan** - loan secured by mortgage against borrower\'s equity in home she already owns. - Equity = difference between property\'s current market value and liens against  - Often used to finance remodeling or property improvements. - Interest rates higher than purchase loans. - Also used to pay off credit cards. **Home equity line of credit (HELOC)** - Line of credit with a limit and minimum monthly payments that homeowners can draw upon as needed. - Automatically secured by borrower\'s home. **Refinance mortgage** - Refinancing refers to a new loan used to pay off existing mortgage against same property. - Often used: - to take advantage of market interest rate drop; or - when large balloon payment is required on existing mortgage. **Cash-out refinancing** New loan amount is more than amount of existing mortgage balance, so borrowers receive cash from refinance lender. - A way to tap into equity of home. **Bridge loan ** - provides cash for purchase of new home pending sale of old home. - Secured by equity in old home. - Usually has interest-only payments. - Also called swing loan or gap loan. **Budget mortgage** - is mortgage in which monthly payments include property taxes and hazard - Impound account = lender places tax and insurance payments in account and pays premiums out of it - PITI payments = payments on a budget - mortgage (principal, interest, taxes, and insurance) **Package mortgage ** - is secured by personal property as well as real property. - Alternatively, personal property may be financed separately, using a separate security agreement. - Lender must file a financing statement with the Secretary of State. - Key advantage of package mortgage: - Mortgage term is generally much longer than with ordinary loan for personal property. - Interest rate may also be lower. **Blanket mortgage** is secured by more than one parcel of land and contains a partial release clause - Partial release clause = requires lender to release some of security property from lien when portion of debt is paid off **Construction loan** is a short-term loan used to finance construction of improvements on land already owned by borrower. - Considered high risk loans. - High loan fees and interest rates. **Fixed disbursement plan** - Common disbursement schedule for construction loans that calls for a series of predetermined disbursements (obligatory advances) at certain stages of construction. - Interest starts to accrue at first disbursement. - Once construction is complete, the construction loan is replaced by take-out loan. - Borrower repays amount borrowed over specified term. **Nonrecourse mortgage** gives lender no recourse against borrower. - Lender\'s only remedy in event of default is foreclosure on collateral property. - Borrower is not personally liable for loan repayment. **Participation mortgage ** allows lender to participate in earnings generated by mortgage property, in addition to collecting interest payments. **Shared appreciation mortgage ** entitles lender to a share of increases in property\'s value. **Wraparound mortgage** new mortgage that includes existing first mortgage on property. - Used almost exclusively in seller-financed transactions. **Reverse equity mortgage** provides elderly homeowners with a source of income, without having to sell their home. - Homeowner borrows against equity. - Receives monthly check from lender, rather than making monthly payments. - Borrower typically required to be over certain age. - Home sold after death to pay loan **REAL ESTATE INVESTMENT TRUST (REIT)** **WHAT IS A REIT? ** - A **Real Estate Investment Trust** (REIT) corporation that earns recurring income from properties they own and manage,  - A REIT makes money by collecting rentals, user's fees, toll fees, parking fees, or storage fees from their tenants.  - A corporation should meat the requirements under the Real Estate Investment Trust Act of 2009 (Republic Act 9856) for the protection of investors. **Requirements:** 1. Public company listed with the Philippine Stock Exchange 2. At least 1,000 public shareholders, with each ownin at least 50 shares (Minimum public ownership must be 33% of the REIT\'s outstanding capital stock.)  3. Paid-up capital of at least Ph 300 million  4. At least 75% of the REIT\'s deposited property consisting of income-generating real estate assets  5. An appointed \'independent fund manager who implements the REIT\'s investment strategy  6. An appointed independent property manager who manages the REIT's properties  7. An independent appraisal company that conducts a full valuation of the REIT\'s properties at least once a year. https://lh7-rt.googleusercontent.com/docsz/AD\_4nXdjwll48n79KFaXN3asBqgGqEmaN5-SI2fKQH5JCi4pDjugT-Ms\_-6TWhPKCQyvdJlgJePvQA2P-LHaDkEMZmWXgF-n\_i7C1VtwF4WY4ngKe0OjGVk79-4zO337cfJ89EkuN-ByPA?key=pyUjwWui9mTNqFpS92a\_RZwD **REIT INVESTING: What are its similarities & differences from other investments?** **Investment Types** **Similarities to REIT Investing** **Differences from REIT Investing** --------------------------- --------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Real Estate Investing** Both investments allow investors to own properties Real estate investors have to shoulder the full cost of the acquired property. REIT investors pay only a small fraction of the provperty value in the form of shares. **Mutual Fund Investing** Funds from individual investors are pooles and professionally managed Mutual funds invested in money market funds, bonds, or stocks. REIT shares are investerd in real estate assets. **Stock Investing** Shares are traded on the stock market can be purchased by investors. Investors own a piece of the publicly traded company Stock investors get shares from various companies, while REIT shares may or may not pay dividends to shareholders, while REIT are required by law to pay dividends. **Why should you invest in REIT?** 1. Regular earnings through dividends 2. Capital appreciation  3. High liquidity  4. Diversifictition of assets  5. Low-price entry  6. Easy way to invest  7. Transparency  8. Professional fund management. **What are the risks of investing in REITs?** - REIT share prices can fluctuate over time - Changes in dividend pays - Returns from the appreciation of the land's value **Top REITS in the PH** 1. Ayala Land Inc. (AREIT) 2. Citicore Energy REIT (CREIT) 3. DDMP REIT, INC.  4. Filinvest REIT Corp. (FILRT) 5. Megaworld Corp. (MREIT) 6. RL Commercial REIT Inc. (RCR REIT) 7. VistaREIT (VREIT)