FNAN 351 George Mason University Principles of Real Estate Midterm Questions

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FNAN 351

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GEORGE MASON UNIVERSITY School of Business FNAN 351 Principles of Real Estate © Gerald A. Hanweck, Ph.D. Professor of Finance Midterm Spring 2020 G#________________ Name: ________________________________ DEFINE YOUR TERMS. Numbers in parenthesis are the weightings for each question. Answer all questions. SHOW YOUR WORK and Key Assumptions. Type: E 1. (5) In the United States, the bundle of rights called real property seems to have gotten smaller in recent decades. Explain what has caused this. What type of governmental powers, such as safety regulations on the use of real estate, may have been invoked? Why is it good? Why may these be bad? What effect might these have on property values? Type: E 2. (5) Why might it be advisable to require a survey in purchasing a newly built house on a 100-year-old subdivided property in an urban subdivision? Type: E 3. (5) Some real estate industry professionals have suggested that it is good to require a title insurance commitment as evidence of title for rural property, but that it is satisfactory to use the less costly abstract and attorney’s opinion as evidence of title for a residence in an urban subdivision. Discuss the merits or risks of this policy. Type: E 4. (5) The term real estate can be used in three fundamental ways. List these three alternative uses or definitions. Type: E 5. (5) Real estate assets and markets are unique when compared to other assets or markets. Discuss the primary ways that real estate markets are different from the markets for other assets that trade in welldeveloped public markets. HINT: Real estate is unlike other asset classes because it is heterogeneous, highly segmented and immobile. Type: E 6. (5) Real estate construction is a volatile process determined by the interaction of the user, developer and capital markets. What signals do real estate producers use to manage this process? What factors affect the volatility of real estate construction and commercial and residential real estate development? Type: E 7. (5) Explain how rights differ from power or force, and from permission. Type: E 8. (8) You are planning to buy a house appraised for $350,000 and finance it through a mortgage of $300,000. What is the loan-to-value ratio and would it be above or below the normal cutoff set by your lender of 80 percent? Being securely employed, your take-home pay is $2,300 per month and you have no substantial other debts. Your lender has offered you a 3.5 percent, 30 year, fixed-rate mortgage. What is the amount that you will pay per month if the mortgage payments are treated as an ordinary annuity with 12 payments per year for 30 years? For the first payment, how much is interest and how much is principal? Can you afford the loan? Type: E 9. (4) Why is it that in a simple bid-rent model (gradient with drivers and walkers) a person who commutes on foot will outbid one who commutes by car for space closest to the CBD? 1 Type: E 10. (5) What are three of the most profound forces that has brought about urban change since the end of World War I (1913)? What are three since the end of World War II (1945)? Type: E 11. (5) Discuss three features of real property that introduce special challenges for the orderly transfer of ownership. As a hint, one of these is that real property interests can be very complex. What are two others? Type: E 12. (5) What is the “gravity” that is needed to draw economic activity into forming cities? Considering in your answer, what is it that has historically brought economic activity together to form cities? Type: E 13. (4) For a mortgage loan of $300,000, at 4.5 percent interest for 30 years and 12 monthly payments per year, find the balance at the end of 4 years and 15 years. Type: E 14. (5) The economic base of a region is the foundation of value of real estate and incomes. Evaluate the statement: “As goes the base, so goes the city.” Type: E 15. (4) Is the following statement true or false about the relationship between 15-year and 30-year fixedrate and 12 monthly payments per year mortgages? “Assuming they can afford the payments on both mortgages, borrowers usually should choose a 30-year mortgage over an otherwise identical 15-year loan if their discount rate (opportunity cost) exceeds the mortgage rate.” Type: E 16. (7) University City is a town of more than 300,000 persons, with over 50,000 university and community college students. It has over 40,000 apartment units which, with one or two exceptions, are garden apartments with a maximum of three floors. Except for buildings within or immediately adjacent to the university medical center, the football stadium, and the two graduate student dorms, only two other buildings in the University City exceed five floors. A developer proposes to introduce two 24-story apartment buildings halfway between the downtown and the university, which are about 2.5 miles apart. One tower, would be targeted to undergraduate students and the other to graduate students. The downtown consists of little more than government offices, mostly local and county. What questions should the developer ask in order to create a “market defining story” for the twin towers? Are there factors leading to housing market segmentation affecting the success of this project? Type: E 17. (3) Why are restrictive covenants a good idea for a subdivision? Can they have any detrimental or advantageous effects on the subdivision or its residents? For example are there any listed in the text book that might have questionable effects on value of a residence? Type: E 18. (3) Dr. Maurice Povici owns a parcel of land that a local farmer has offered to rent for the next 8 years. The farmer has offered to pay $24,000 today or an annuity of $3,000 at the end of each of the next 8 years. Which payment method should Dr. Povici accept if his required rate of return is 6 percent? Type: E 19. (5) The government’s power of eminent domain, stemming from the Fifth and Fourteenth Amendments of the U.S. Constitution, is usually stated as: “Right of government to acquire private land, without the owner’s consent, for public use, with due process and just compensation.” What is the means by which governments take property? Discuss the difference between taking for “public use versus public purpose,” and the concept of “just compensation for the property taken related to the concept of highest 2 and best use.” Type: E 20. (3) More than smart systems that improve efficiency are needed to make the city “smart.” Discuss how taking a more bottom-up view of how cities actually develop provides governments and developers an opportunity to radically rethink what intelligent, connected communities of the future could look like and how they can be designed, built and lived in. So, by empowering people to devise ways to run their daily lives as smartly as possible, the extended community can be made —the actual embodiment of a city—smarter, too. Type: E 21. (4) In February 2020 the Home Builders Association took a poll of its members and found that they were very optimistic for home sales and building throughout 2020. The resulting sales of new and existing homes unfortunately turned out to be considerably more sluggish than anticipated. With rising household incomes, what macroeconomic factors may have been the cause of this sluggishness? Recall the Fed began lowering interest rates at the end of June 2019 and did not change rates in the December 2018 FOMC meeting. However, the Fed continued to lower rates to near zero in March 2020.What role do interest rates play in households’ decisions to buy houses and builders’ decisions to build houses? 3
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Explanation & Answer

i have corrected 18/19 and 8

GEORGE MASON UNIVERSITY
School of Business
FNAN 351 Principles of Real Estate
© Gerald A. Hanweck, Ph.D. Professor of Finance
Midterm Spring 2020 G#________________ Name: ________________________________
DEFINE YOUR TERMS. Numbers in parenthesis are the weightings for each question. Answer all
questions. SHOW YOUR WORK and Key Assumptions.
Type: E
1. (5) In the United States, the bundle of rights called real property seems to have gotten smaller in
recent decades. Explain what has caused this. What type of governmental powers, such as safety
regulations on the use of real estate, may have been invoked? Why is it good? Why may these be
bad? What effect might these have on property values?

The bundle of rights in the united states has been getting smaller over time because the government
increased utilization of its authority and power to police the rights. It is the responsibility of the united
states government to protect the safety, health, and the welfare of the citizens. This control might not be
good because if the government overdoes, it can be considered as “taking" which will then require the
citizen to be compensated for their loss of property.

2. (5) Why might it be advisable to require a survey in purchasing a newly built house on a 100-year-old
subdivided property in an urban subdivision?

Surveyors are important as they help in determining the subdivided land was done correctly and that
there is no property or land encroachment that might lead to bitter conflicts in the future. A survey is very
important as it can reveal if there is any type of property corner or property line disputes with the property
being bought, and this helps in the protection of the investment being made.

3. (5) Some real estate industry professionals have suggested that it is good to require a title insurance
commitment as evidence of title for rural property, but that it is satisfactory to use the less costly
abstract and attorney’s opinion as evidence of title for a residence in an urban subdivision. Discuss
the merits or risks of this policy.

A title of insurance commitment can be described as a title a real estate company promises to hand
over a title insurance policy for a property after a sale has been completed. Its major advantages include
1

that they are cheap, and one is more likely to identify title errors and defects before closing the deal. Its
risk is that errors made can only be held against the seller if lawyers had not seen the.

4. (5) The term real estate can be used in three fundamental ways. List these three alternative uses or
definitions.
a. Residential real estate
b. Commercial real estate
c. Land

5. (5) Real estate assets and markets are unique when compared to other assets or markets. Discuss the
primary ways that real estate markets are different from the markets for other assets that trade in
well-developed public markets. HINT: Real estate is unlike other asset classes because it is
heterogeneous, highly segmen...


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