Book Title
Real Estate Finance & Investments (Real Estate Finance and Investments) 14th Edition

FE 14219

March 13, 2017
The risk of bankruptcy tends to travel with the risk of foreclosure since both can result
from financial distress. Known popularly by its section in the Federal Bankruptcy Code,
which of the following types of bankruptcy is a court-supervised workout for a troubled
A. Chapter 1 bankruptcy
B. Chapter 7 bankruptcy
C. Chapter 11 bankruptcy
D. Chapter 13 bankruptcy
Suppose you are starting a Ph.D. program with only $1,000 in your savings account.
The university has agreed to waive your tuition, cover all of your living expenses, and
pay you an additional stipend of $2,000 at the beginning of each month, as long as you
teach one course per semester over the course of five years. If your savings account is
able to earn 5.5% per year for the five years that you will be in this program, how much
will you have accumulated in your savings account by the end of the program if interest
is compounded on a monthly basis?
A. $136,445.94
B. $137,708.75
C. $139, 077.35
D. $139,708.76
The internal rate of return (IRR) and the net present value (NPV) are tools that are
widely used in real estate investment and finance decision making. An investor would
most likely pursue an investment if which of the following circumstances was true?
A. The going-in IRR exceeds the investor's required rate of return
B. The going-in IRR is less than the investor's required rate of return
C. The going-in IRR exceeds the NPV
D. The going-in IRR is less than the NPV
Added to the index of the adjustable rate is a margin, which is the lender's "markup."
For standard Adjustable Rate Mortgage (ARM) loans, the average industry margin has
been stable at approximately:
A. 75 basis points
B. 175 basis points
C. 275 basis points
D. 375 basis points
Real estate appraisers generally distinguish among the concepts of market value,
investment value, and transaction value. Which of the following statements best
describes the concept of market value?
A. It is an estimate of the most probable selling price of a property in a competitive
B. It is the value a particular investor places on a property.
C. It is the price we observe when a property is sold.
D. It is the maximum amount that a seller would be willing to accept.
One of the most important requirements of a land description is for it to be
unambiguous. Which of the following methods of property description is the most
unambiguous and is appropriate for use in legal documents?
A. Street Address
B. Tax parcel number
C. Reference to prominent features of the land (e.g. monuments, river banks, roads)
D. Metes and bounds
Suppose an investor deposits $2500 in an interest-bearing account at her local bank.
The account pays 2.5% interest compounded annually. If the investor plans on
withdrawing the original principal plus accumulated interest at the end of 7 years, what
is the total amount that
she should expect to receive assuming interest rates do not change?
A. $2,971.71
B. $2,974.89
C. $3,532.43
D. $11,920.93
When the seller in a contract for sale fails to perform (e.g. breach of contract,
nonperformance, or default), the buyer has a variety of remedies. One such remedy is to
appeal to the court to force the defaulting seller to carry out the contract. This remedy is
most commonly referred to as suing for:
A. Damages.
B. Earnest.
C. Recission.
D. Specific performance.
A major problem in buildings constructed prior to the early 1970's, which of the
following environmental hazards commonly associated with insulation has been the
focus of costly
cleanups at many public buildings, especially schools?
A. Asbestos
B. Radon
C. PCBs (Polychlorinated biphenyls)
D. LUSTs (leaking underground storage tanks)
A developer of a new planned unit development (PUD) has gathered the following
market information for University City. The developer estimates that there will be 1,500
home (all types) sales in University City over the next year. If an analysis of
demographic information has revealed that the core market share for the PUD project
within the community is 14.0%, what is the total market segment potential for this
A. 42 units
B. 105 units
C. 210 units
D. 1290 units
A traditional zoning ordinance includes all of the following EXCEPT:
A. Minimum setback requirements
B. Minimum lot dimensions
C. Provisions for special use districts
D. Performance standards
Assume that an individual has just lost his job and has been consistently late paying his
bills. The bank recognizes deterioration in the individual's credit score and has notified
him that he must pay his home equity line of credit in full. The mortgage clause that
makes this possible is known as the:
A. demand clause
B. insurance clause
C. escrow clause
D. exculpatory clause
The going-in cap rate, or overall capitalization rate, is a measure of the relationship
between a property's current income stream and its price or value. Which of the
following statements regarding cap rates is true?
A. It is a measure of total return since it accounts for future cash flows from operations
and expected appreciation (depreciation) in the market value of the property.
B. It is a discount rate that can be applied to future cash flows.
C. It is analogous to the dividend yield on a common stock.
D. It is the projected rate at which prices will appreciate in the future
Given the following information, compute the taxable value for the particular piece of
property in dollar terms. Market value of property: $500,000, Assessed value of
property: 85 % of the market value of the property, Exemptions: $50,000, Taxes paid:
A. $75,000
B. $375,000
C. $416,750
D. $425,000
Externalities can play an important role in determining a property's price, either by
adding value through positive externalities or by diminishing value through negative
externalities. Which of the following is most likely to be considered a negative
A. Nearby parks and recreation facilities
B. Quality neighborhood schools
C. Public assistance facilities such as homeless shelters.
D. Well-kept landscapes.
Lenders generally require private mortgage insurance (PMI) for conventional loans
over 80 percent of the value of the security property. PMI protects a lender against
which of the following?
A. Losses due to default on the loan
B. Legal threat to the lender's mortgage claim
C. Stoppage of mortgage payment after the death of the insured borrower
D. Changes in the index rate associated with an adjustable rate mortgage
There are three main types of income subject to federal taxation. Which of the
following types of income includes income generated from rental real estate
A. Active income
B. Portfolio income
C. Passive activity income
D. Residual income
The expected stream of rental income is capitalized into value by converting expected
future cash flows into present value through a process called:
A. amortization
B. discounting
C. compounding
D. accounting
In the modern framework of home mortgage lending, there are four channels by which
first mortgage home loans are created. Within which of the following channels would
you typically find a Wall Street investment bank obtaining loans, pooling loans, and
creating a senior-subordinate security structure?
A. Traditional direct (portfolio) lending
B. FHA/VA loan securitization
C. Conforming conventional loan securitization
D. Nonconforming Conventional loan securitization
Although the function of commercial brokerage is the same as that of residential
brokerage, the activities of commercial brokers usually differ considerably from those
of residential brokers due to fundamental differences in these two markets. All of the
following statements regarding commercial brokerage are true EXCEPT:
A. Relative to residential transactions, commercial transactions tend to be larger
B. The parties in commercial mortgage transactions are typically less knowledgeable
than those in residential transactions.
C. An important part of the commercial broker's service is to provide the prospective
buyer with reports that enable him to complete due diligence for the property
D. Commercial brokers are often required to lower their commission in order to
negotiate compromises between buyers and sellers when they reach an impasse over
Some commercial mortgages have adjustable, or floating, interest rates. The index rate
to which the contract rate is tied is typically which of the following for commercial
A. The yield on a constant maturity Treasury security of the same term
B. The cost of funds index (COFI)
C. The London Interbank Offer Rate (LIBOR)
D. The interest rate on a comparable maturity level-payment mortgage
The growth of the motion picture industry in Los Angeles, the petrochemical industry in
Houston, the software industry in "Silicon Valley," are all examples of how the growth
of an industry within a city can create cost advantages for future growth. Economists
refer to this phenomenon as:
A. industry economies of scale
B. agglomeration economies
C. locational monopoly
D. economic inefficiencies
Federal and state laws prohibit discrimination in housing. However, exemptions do
exist depending on the particular type of property that is being considered. All of the
following activities could be considered exempt in specific scenarios EXCEPT:
A. Refusing to sell or rent to a person because of race.
B. Refusing to sell or rent based on familial status (i.e. having children).
C. Refusing to sell or rent to persons based on age.
D. Refusing to sell or rent a single-family home based on religion provided the owners
do not employ the services of a broker or agent.
An owner whose property is in a strong market position, where fewer services can be
offered to tenants for the same dollar of rental income and where the owner will not
lose tenants if the property is undermaintained, is said to participate in a market that
A. a relatively elastic demand for space
B. a relatively inelastic demand for space
C. economies of scale
D. diseconomies of scale
In contrast to maintenance and repair expenditures, which are operating expenses, the
improvement decision generally involves a capital expenditure meant to increase the
value of the structure. Which of the following classifications of improvements calls for
the restoration of a property to satisfactory condition without changing the floor plan,
form, or style of the structure?
A. Rehabilitation
B. Remodeling
C. Adaptive reuse
D. Conversion
A law requiring any contract conveying a real property interest to be in writing in order
to be enforceable is a modern application of the:
A. Statute of Frauds
B. doctrine of constructive notice
C. habendum clause
D. actual notice
For the purposes of estimating the effective borrowing cost (EBC), only those up-front
expenses associated with obtaining the mortgage should be included, not the settlement
costs associated with obtaining ownership of the property. With this in mind, which of
the following costs should not be included in one's calculation of EBC?
A. Discount points
B. Loan origination fees
C. Appraisal fee
D. Buyer's title insurance
In addition to the UFMIP (up-front mortgage insurance premium), the owner-occupant
borrower who decides to use an FHA mortgage loan will normally pay an additional
annual mortgage insurance premium (MIP) that depends on the loan-to-value ratio and
the term of the loan. For loans with maturity longer than 15 years and a loan to value
ratio that is greater than 95 percent, the MIP will be what percentage of the average
annual loan balance?
A. 0.25%
B. 0.50%
C. 1.10%
D. 1.15%
With a site under control, the developer will begin to evaluate the feasibility of the
project. The main tool that a developer will use in determining the financial feasibility
of a project is:
A. Net present value (NPV) analysis
B. Cost approach to valuation
C. Repeat-sales approach
D. Direct capitalization
In the state of Florida, for example, homeowners may qualify for a tax exemption in
which up to $50,000 will be deducted from the assessed value of the property before
taxes are calculated as long as the property owner occupies a home as the family's
principal residence
and has claimed residency within the state. This exemption is better known as the:
A. ad valorem exemption
B. affordable housing exemption
C. growth moratorium
D. homestead exemption