1. 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. 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? http://www.youtube.com/watch?v=MS5X8bo 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)