Real Estate Financing

There are many different types of loans available to consumers with various terms dependent upon what type of property you are financing and for how long. Some of these different loans include a Conventional Mortgage, an Adjustable-Rate Mortgage (ARM), an Assumable Mortgage, a Balloon Mortgage, and a Veteran Affairs Mortgage. A Conventional Mortgage has a fixed interest rate and are generally financed over a period of 10, 15 or 30 years. In an Adjustable-Rate Mortgage, also known as a Variable or Floating-Rate Mortgage, the initial interest rate is normally fixed for a period of time, then adjusts periodically to a specific benchmark. An Assumable Mortgage is a financing arrangement where the outstanding mortgage on a property can be transferred from the current owner to the buyer, which prevents the buyer from having to obtain his or her own mortgage. A Balloon Mortgage is a short term mortgage that requires borrowers to make regular payments for a specific time period, then payoff the remaining balance. Veteran Affairs Mortgages provide benefits to veterans and active duty military, such as requiring no down payment on loans up to $200,000. Specifics regarding VA Loans can be found by clicking on the following link:

http://www.freddiemac.com/sell/factsheets/va_morts.htm

Capital for real estate can be obtained from many different sources. These include individual investors, Pension Funds, Life Insurance Companies, Real Estate Investment Trusts (REITs), and most commonly Commercial Banks. Each of these obtain capital for their real estate investments using various methods. For example, life insurance companies use premiums from their policies to invest in real estate, while REITs sell shares of stock to smaller investors and use the capital gained for their investments. There are many ways to get creative with real estate financing. One such creative concept, known as Free and Clear Real Estate Investing, proposes making only prinipal payments and avoiding interest payments. This is attractive to both the borrower and the lender, because the borrower is buying equity with each payment and every payment received by the lender is pocketed rather than having to pay tax on interest. This concept is explained in the following YouTube clip:

http://www.youtube.com/watch?v=ROzo5xjW2GI

Overview of Real Estate Finance

The major employers related to real estate finance are banks, insurance companies, mortgage companies, and investment firms. There are numerous career opportunities associated with real estate finance. These careers include Residential Mortgage Loan Officer, Residential and Commercial Development Finance, Corporate Real Estate Management, and Investment Analyst. A Residential Mortgage Loan Officer is responsible for selling, packaging, and closing residential mortgage loans. Professionals in Residential and Commercial Development Finance use financial and analytical skills to research local trends and financing for developers and development lenders. Professionals in Corporate Real Estate Management provide critical financial recommendations and expertise in analyzing costs and expenditures, structuring deals, setting prices to purchase land, etc. Most corporate real estate professionals start out in commercial banking and lending, then advance into corporate real estate portfolio management. Investment Analysts assess, review, and provide financial reports on a corporation's real estate portfolio and investment. They continually provide reports on the performance of a company's real estate investments. Below is a link providing more detailed information about these careers:

http://www.ehow.com/list_6496787_careers-real-estate-finance.html

Real estate finance trade organizations are formed to bring together the best professionals, knowledge, and experience to provide informative programs and networking opportunities for real estate finance professionals. One such example of a real estate finance trade organization is the Real Estate Finance Association (REFA) of Greater Boston. The link to REFA's website is provided below:

http://www.gbreb.com/refa.aspx

Real estate financial markets are performing well and beginning to make a resurgence, as we are recovering from the recent subprime mortgage crisis. Real estate finance will always be needed and play a critical role in our economy, as financing will always be needed for consumers for homes and businesses for expansion and investments. However, foreclosures are still an issue that real estate finance companies need to protect themselves against. They can do this by enforcing strict financial analysis of potential clients, through covenants included in real estate loans, etc.

Overview of a Real Estate Appraisal

Real estate appraisal, also known as property valuation or land valuation, is the process of valuing real property. Appraisals are needed in any real estate transaction, whether purchasing or selling a property, to properly determine the property's value. There are three different types of appraisals: Appraisal with Self-Contained Report, Appraisal with Summary Report, and Appraisal with Restricted Use Report. Appraisal with Self-Contained Report is the most complete report available. It contains a full reporting of the appraisal process, complete details on comparable data, area and market analysis, etc. It is the most time-consuming to complete and so has the highest appraisal fee. Appraisal with Summary Report is the most common appraisal assignment. It involves a documented narrative or multi-page form report with an adequate explanation of the appraisal procedure and data used in the valuation. Appraisal with Restricted Use Report is an abbreviated report. The report is a brief letter with no supporting data included. It is not designed for use by third parties or for new money mortgage purposes and so has limited application. Below is a link to a sample real property appraisal:

http://jamesdoughertyappraisers.net/ListingAppraisalSample.PDF

When it comes down to it, appraisals are one qualified individual's opinion of a property's value, but an opinion nonetheless. Therefore, it is hard to determine an appraisal to be of "bad" quality. However, an appraisal can be determined to be inaccurate for a variety of reasons, for example not including all of the relevant property information into the appraisal. Appraisers are perceived as a necessary element to any real estate transaction. Their expertise is needed for both sides of the transaction (buyer and seller) as well as third parties involved (lenders, etc.). Unfortunately, with the information that can be obtained from the internet and new programs for property valuation being introduced, it is possible that the appraisal profession could begin to decline and eventually become obsolete. The appraisal profession was created to protect consumers, however with safe alternatives such as computerized valuation services coming out, the amount of jobs in the appraisal industry could be at risk. Lenders are also backing these computerized valuation services and trying to push appraisers out of the picture. Below is a link to a YouTube clip discussing the matter and endorsing a recently published book regarding this topic:

http://www.youtube.com/watch?v=lR0Z7brAnhI

It is estimated that the appraisal industry will grow at a rate of 7% until the year 2020, which is slower than the average rate for all occupations. Although these statistisc do forecast growth, it shows signs of decline in the industry. Real estate appraisers can expect more and more competition as the years go on, and increased risk as uncertainty mounts in the industry.

Overview of a Real Estate Appraiser

The Appraisal Foundation is nonprofit educational organization formed by the appraisal profession in 1987. Part of the AF's structure includes the Appraisal Qualification's Board (AQB), which establishes minimum education and experience guidelines that states must use in issuing appraisal licenses. There are four categories of appraisers that distinguish between residential and nonresidential assignments and the complexity of the transactions. The following categories are listed according to their requirements, from least to most strict: Trainee Appraiser, Licensed Real Property Appraiser, Certified Residential Appraiser, and Certified General Appraiser. The requirements for becoming one of the aforementioned appraisers range from 75 hours of classroom instruction with no experience or written exam, to 300 hours of classroom instruction with 3,000 hours of appraisal experience and a written examination. Below is a video that details some of the daily activites and responsiblites of an appraiser:

http://www.youtube.com/watch?v=XGrWJTlGbZc

In summary, the daily job of a real estate appraiser is to assign a value to specific properties using their qualified opinion, on a particular day, based on the information and evidence they have available.

It is obvious that demand for real estate appraisers fluctuates directly with increases and decreases in the real estate market. Therefore, renewed real estate activity will spur demand for appraisal services. At this moment in time, the future looks bright for appraisers, and more are needed. After significant declines resulting from the subprime mortgage crisis and poor economic conditions, the real estate appraisal industry is beginning its recovery. The following link further details these statistics:

http://www.ibisworld.com/industry/default.aspx?indid=1359

Real estate appraisers are paid either by the buyer or seller of a property. They are not definitively paid by one or the other, as who pays for the appraisal can be negotiated in the sales contract. The amount the appraiser is paid is determined by the specifics of the property being appraised, for example if it's a commercial or residential property. Some national appraisal firms include Integra and Cushman-Wakefield; regional firms include Metro-West Appraisal Company, LLC and Texas Company Appraisal; and local firms include Brewster Appraisal Firm and Breedlove Appraisal Services.

Public Restrictions on Ownership

Public restrictions on ownership differ from private restrictions in that they are administered by the government, as opposed to private entities. Public restrictions tend to be more burdensome simply because they are regulated by the government and there are not many options for recourse. Some examples of public restrictions include eminent domain, building codes, and mandatory dedication. Eminent domain is the right of the government to take private property for public use upon the payment of just compensation. This is an extremely controversial restriction for many reasons. One big reason is that history has shown that if the government wants a piece of land badly enough for a public project, there's really not anything the landowner can do to stop them from condemning it. Another reason is that it is up to the government to determine what "just" compensation will be. More often than not, the compensation is far below what the landowner believes to be the value of the property. Below is a link to a news segment regarding a case of eminent domain.

http://www.youtube.com/watch?v=8S7eUzHIcmA

As shown in this news story, there are many problems people face with eminent domain. In this particular case, the government offered William Lieberth compensation he claims he would be able to gross in just two years of operation at his shop. It is also very apparent that aside from the financial distress, he is facing emotional distress due to the change eminent domain has caused in his community and the history he would lose if his body shop is condemned. Mr. Lieberth will try to fight this in court, but unfortunately his chances of winning against the government are near to none.

Building codes are another public restriction that control the design, materials, and methods of construction, and compliance with them within their jurisdiction is mandatory. The reason for building codes is to protect public health and safety by setting a minimum standard for building construction. The government enforces building codes by requiring various permits, field inspections at various stages of construction, and test reports, among other things. Conformity with the building codes is primarily the responsibility of the design professional. The General Contractor is under legal obligation to notify the owner or design professional of any deviation from the requirements of the building code that come to his attention. A recent trend in new building codes that has come about in the last few years deals with the "green" construction of buildings. Below is a news segment on the subject:


http://www.youtube.com/watch?v=aWTRHhPZl58

Code writers are now focusing more of their efforts toward this idea of "green" construction. The first version of the International Green Construction Code (IGCC) was created by code writers at the beginning of 2010, who hope that the code will eventually be adopted by all local governments. The code would govern everything from the materials used in construction, waste produced, how energy is consumed, what is done with water, the lighting used, and even what land the building can be constructed on. This is all in an attempt to make the commercial structures of the future more sustainable. I admire the attempt at sustainability, but feel that the regulation may be too unrealistic and burdensome to American businesses.

Another public restriction is mandatory dedication. With mandatory dedication, the government requires the developer to dedicate parts of the property to public uses. It has been widely used by local governments as a means for providing park land and is a development requirement that has generally been upheld by the courts. This requirement I believe has good intentions for providing nice landscape for the community, however it burdens developers both with extra costs and more difficult construction planning.

Private Restrictions on Ownership

Private restrictions are created by private entities such as land developers rather than public agencies and usually constitute both a benefit and a burden to the land. Private restrictions are considered a benefit when the landowner has a right of enforcement against other landowners; however, they are considered to be a burden when they restrict the use the landowner may make of the land. Examples of some private restrictions are Covenants, Conditions, and Restrictions (CC&Rs), liens, and encroachments. CCRs are private encumbrances that limit the way a property owner can use their property, such as deed restrictions. An example would be not allowing homeowners to keep horses on their property. A lien is a form of security interest granted over property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienor, and the person who has the benefit of the lien is referred to as the lienee. One of the most common types of liens is a mortgage, which is a consensual lien.This means that a borrower agrees to give up ownership of the property to the lender if the borrower does not make his or her payments. Other common liens are tax liens, construction liens, and judgements liens, among others. Different types of liens hold different priorities, meaning there is an order to which the liens are handled. Below is a link to a video regarding property liens:

http://www.youtube.com/watch?v=NPzPmBOJD1k

An encroachment is an intrusion on another person's property. Examples of encroachments would be if your fence crossed your neighbor's property line or if part of your pool was built on your neighbor's land. Encroachments are often caused by surveyor error in placing the pins marking the boundaries in a subdivision. Many people don't know about the existence of an encroachment on their property until a survey is done, they try to sell their home, or are approached by a neighbor. Below is a link to a video with an example of an encroachment:


http://www.youtube.com/watch?v=6-hIM7F1D4o

Private restrictions can greatly affect real estate owners. It is very important to be aware of all restrictions that are applicable to a piece of property before purchasing it. Referring back to my example earlier regarding deed restrictions, if your family rides and owns horses and would like to house them on your property, you must find a neighborhood who's deed restrictions allow horses. Also in the case of encroachments, if your neighbor's fence was built on your land, that essentially takes away from your acreage and decreases the value of your property.

Property Rights and Legal Descriptions

Introduction to Property Rights: A Historical Perspective  

http://urbanext.illinois.edu/lcr/propertyrights.cfm

Property rights are a product of culture and community, and a function of what a society is willing to acknowledge, defend, and enforce. They establish relationships among the people in any social and economic system. Many people believe that they are entitled to do whatever they wish on the land that they own, however that is only true if an individual lives alone and completely isolated from any type of community. Property rights can be described as a bundle of rights that are inherently gained when a property is purchased, and include such things as the right to sell your land, to grant easement to others, air rights, mineral rights, and so on. However, one's property rights are limited by the government and the laws of the community, which reflect the general values and accepted behaviors in that community. Property rights are very controversial, and the balance between the rights of an individual and the rights of a community will continue to change with time. It is very important to understand property rights as they can have major effects on our lives. For instance, eminent domain gives the government the right to take one's private property for public use upon the payment of just compensation. Now assume you are a farmer with some of the most fertile land in the region, and depend on that land to make a living. If the government wants to condemn your land in order to build a new highway, there's not much you can do to stop them and your life has just changed drastically.

Legal Descriptions

The legal description of a piece of property is a formal, detailed, and complete description that unambiguously identifies and locates a specific property. Many people falsely believe that the address of a property qualifies as a legal description, however an address is just considered to be a physical description. The Metes-and-Bounds description is a legal description of a parcel of land that begins at a well-marked point and follows the boundaries, using directions and distances around the tract, back to the place of beginning. This type of description is usually found in the deed for the property. Below is a link to an example of a Metes-and-Bounds description, about half-way down the page:

 http://www.ticorblog.com/blog/real-estate-legal-descriptions-in-plain-english/

The Rectangular Survey System is a legal description that uses a system of rectangles to locate and specify the boundaries for land parcels. This system provides for a unit of land approximately 24 square miles, bounded by base lines that run east and west, and meridians that run north and south. This 24 square miles is divided into areas 6 square miles called townships. Townships are then further divided into 36 sections, each being 1 square mile (640 acres). Below is an example of a Rectangular Survey System description, again about half-way down the page: 

http://www.landprints.com/LpRectangularSurveySystem.htm 

 

The Importance of Real Estate

How Important Is Housing To The U.S. Economy? http://www.bostonconnect.com/from-the-experts/1572/

Both research and history have shown that there is a strong relationship between real estate prices, especially housing prices, and the economic cycles of our nation. When we have a healthy housing market with strong prices, our economy tends to flourish; however the opposite is also true. When the housing market is hurting and home prices plummet, we tend to face periods of recession. 

For the vast majority of Americans, our homes are the greatest assets on our balance sheets. Purchasing a home provides the home buyer with a number of things, including a means of liquidity, financial self-confidence, and an investment in which the value of the home is expected to appreciate over time. Spending money on the purchase of a home is one of many things that helps fuel the economy, and when we gain that financial self-confidence from buying a home we tend to continue to spend and invest, continuing a healthy economic cycle.

However, there is a point when too much spending, specifically spending based on debt, becomes a major problem for the economy. During our recent housing crisis and economic downturn, home buyers were purchasing homes left and right, planning on flipping them for a profit. And during this time banks began to offer loosely structured, interest-only type home loans, making it very easy for consumers to qualify for and take advantage of these loans. Home prices initially jumped, but eventually began to plummet as the inability to pay off the loans caught up to consumers and homes began to foreclose. This left banks with high inventories of low value homes during a time when the demand for homes was now nonexistent, placing our nation into a recession.

Our nation is currently in a state of recovering from the housing crisis and subsequent recession. Banks are now working outstanding debt off of their balance sheets, tightening their credit policies and further analyzing creditworthiness, and selling their inventory of homes to knowledgeable investors who understand the involved risks. It will take some time, but with smarter and continual spending to fuel the economy, Americans will see a time of economic prosperity again.

Simple Ways To Invest In Real Estate

http://www.investopedia.com/articles/pf/06/realestateinvest.asp#axzz26fN3JLBM

With research and knowledge about the property you are considering investing in, real estate investment can be a relatively safe way to earn a return on your money. There are many ways in which an individual or group of individuals can invest in real estate.

Investment in basic rental properties is when an individual purchases a piece of property and rents it out for income. With this type of investment, rent should be high enough to cover the mortgage, taxes, and maintenance costs of the property. The purpose of this type of investment is to rent out the property long enough to pay the mortgage, leaving the owner with a high value asset that can either be sold or continued to be rented out for income. The house I live in right now in College Station was purchased by my parents as a rental property investment. My roommates pay enough rent to my parents to cover the costs mentioned above, so that down the road my parents will be left with a valuable asset that has been paid off.

Real Estate Investments Groups are essentially like small mutual funds for rental properties. Companies will buy or build groups of rental properties and allow investors to purchase individual units. The company will take care of all the maintenance and operations of the units, and just charge the investor a percentage of the monthly rent. With this type of investment, an investor can create a steady cash inflow without having to directly manage the property.

Real Estate Trading is a type of investment where investors purchase a property with the intention of flipping it for a profit in the short term. Typically an investor will only hold on to the property for a matter of months. The investor may purchase a property he or she believes is undervalued with the intent of flipping it for a profit right away; or they may purchase a property, take the time to add value to the property through improvements, and sell it later on down the road for a profit.

Real Estate Investment Trusts (REITs) are created when a corporation or trust uses investors' money to purchase and operate income properties. REITs are bought and sold on the major exchanges, just like stocks in the stock market. To maintain its status as a REIT, the corporation must pay out 90% of its taxable profits as dividends. This allows REITs to avoid paying corporate income taxes. REITs also allow investors into commercial investments, which eliminates the need for a realtor to help you cash out of your investment. REITs are a great investment for stock market investors that are looking for regular income.

 

 

About Me

My name is Trevor Beam and I'm 21 years old. I'm a senior Finance major from Montgomery, Texas, but most importantly I am the loudest and proudest member of the Fightin' Texas Aggie Class of 2013! I decided to come to Texas A&M University because of the tradition and the excellent reputation of Mays Business School, and the time I've spent here has provided me with some of the greatest experiences and memories of my life!




I grew up in a family of five, with an older brother and a younger sister. My dad graduated from the United States Air Force Academy and has worked for Southwest Airlines since finishing his service in the Air Force, while my mom has been a homemaker since my brother was born. My brother, Royce, graduated from Texas A&M in 2011 with a degree in Finance and Real Estate and is currently working for an investment company in Houston. My sister, Lauren, is a junior in high school and plans on coming to A&M after graduation. I also have a 3 year old Boxer named Lexi who has become just another member of the family.


I have a wide variety of hobbies, my favorites being playing sports, hunting, fishing, shooting, hanging out with friends and spending time with my family. I also have various occupational interests, including law, real estate and flying. I earned my Texas Real Estate License when I was 18 and began working toward my private pilot's license when I was 17. I am currently preparing to take the LSAT in December to get into law school to study either Real Estate Law or Intellectual Property.