Topic 8: Real Estate Financing

To start off our discussion of real estate financing, the first thing we're going to look at are the different types of loans available for a home mortgage. Follow the link below to check them out:

http://www.thetruthaboutmortgage.com/mortgage-loan-types-home-loan-types/

The first thing we'll look at is the subject of conforming vs. non-conforming loans. A conforming loans is in accordance with all of the Fannie Mae and Freddie Mac requirements and is lower than $417,000 or $625,500 in the lower 48 and Hawaii/Alaska, respectively. Anything that is non-conforming will be at a higher mortgage rate than a conforming loan and is considered to be a jumbo loan.

Next we'll look at the difference between conventional loans and government loans. Conventional loans can be either jumbo (non-conforming) or conforming loans. The difference is that they are independent of the government (not insured by the FHA). Government loans are just that, certified government loans that back the loan through the FHA to insure it against default to protect lenders and to help get people into their first home that would not ordinarily qualify for a loan.

And lastly, we'll talk about loan programs...how we actually make our monthly mortgage payments. There are many types of loans and we'll explorer just two here: fixed-rate and adjustable rate.

A fixed-rate mortgage is exactly that, it has a fixed interest rate. The loan payment amounts will never change over the life of the loan unless, of course, you refinance some time in the future to lower your loan payments.

And adjustable-rate mortgage is, you guessed it, a mortgage where the interest rate varies over the life of the loan. This variable interest rate usually follows a 6-12 month pattern and follows the some national rate, usually the US Inflation Rate. Also incorporated in this loan are floors and ceilings that protect the lender (from the rate dropping too low) and borrower (from the rate getting too high).

Now that we've talked about loans and payments, I added a loan calculator at the following link:

http://homes.yahoo.com/calculators/amortization.html

Let's run an example on the calculator. A $480,000 loan for 30 years (360 months) at 3.99% annual interest. The purchase price of the property was $600,000, meaning that our down payment was $120,000 (20%). This calculator has the options for hazard premiums, taxes, and private mortgage insurance, but for simplicity sake, we're going to ignore those for the time being. After plugging in all of this data to the calculator, we realize that our monthly mortgage payments are going to be $2,288.83 a month for 30 years. This calculator will even break down the difference between interest payments and principal payments. And as always, we could decrease these payments and the number of payments by paying early to avoid additional interest.

Topic 7: Overview of Real Estate Finance

To start off our discussion of the real estate finance industry, let's take a look at the link below for an overview of what real estate finance is all about and what kind of jobs are available in this field.

http://www.selectleaders.com/real-estate-jobs-finance

Within the real estate finance arena, there are very diverse jobs and organizations to work for. You could work for pension funds, insurance firms, different kinds of banks, and even credit unions. Within those organizations, a wide array of jobs are available including: investment bankers, mortgage bankers, mortgage brokers, as well as underwriting. You could also go into loan origination, servicing current loans, and refinancing of loans. Other opportunities are also available to pool loans together in the form of mortgage backed securities (MBS) and commercial mortgage backed securities (CBMS) that can be sold/exchanged on the secondary market.

As mentioned before we talked about the wide array of companies and firms to work for within real estate finance. Let's take a look at the link below and check out the top 10 private equity real estate firms in the US:

http://llenrock.com/blog/10-largest-private-equity-real-estate-firms/

1. The Blackstone Group
2. Morgan Stanley
3. Goldman Sachs
4. Colony Capital
5. Beacon Capital Partners
6. Lehman Brothers
7. LeSalle Investment Management
8. Tishman Speyer
9.  The Carlyle Group
10. Westbrook Capital Partners

Topic 6: Overview of a Real Estate Appraisal

Now, we're going to take a look at what a real estate appraisal consists of. As mentioned in the previous blog post, there are different types of appraisal used for different purposes. One of the most common appraisals is that of a home appraisal. So let's check out the link below to learn a little bit more:

http://home.howstuffworks.com/real-estate/home-appraisals.htm

The above link talks about the differences between an inspector and an appraiser and how most banks will require an appraisal before lending to a borrower. There are two types of of appraisals used for home mortgages, the cost approach and the sales comparables approach.

The appraisal report generally includes:

• an explanation of how the appraiser determined the value of the property
• the size and condition of the house and other permanent fixtures, along with a description of any improvements that have been made and the materials used
• statements regarding serious structural problems, such as wet basements and cracked foundations
• notes about the surrounding area, such as new or established development, rural acreage, and so on
• an evaluation of recent market trends of the area that may affect the value
• a comparative market analysis that supports the appraisal
• maps, photographs and sketches

Eventually, there will be an appraised value of the house that will show how the market price should be set and what should be paid for the property. 

Appraisals are also used by the banks as well as the buyers and sellers in the real estate market. Let's take a look at what the banks look for in an appraisal when considering granting a loan to a borrower:

http://budgeting.thenest.com/bank-consider-appraisal-mortgage-4092.html

The biggest thing that banks look at when granting a loan to a borrower is obviously the appraised value of the property. The bank will traditionally loan 80% of the purchase price of the property to the borrower, requiring a 20% down payment. But the bank also wants to ensure the the borrower of the property can not only afford the mortgage, but also that they are loaning the appropriate value for the property and are not loaning too much. 

Topic 5: Overview of a Real Estate Appraiser

So, we're doing a little overview of a real estate appraiser. The first link that we're going to look at is from the US Bureau of Labor and Statistics to get a little bit more information about this profession.  

http://www.bls.gov/ooh/business-and-financial/appraisers-and-assessors-of-real-estate.htm

To sum it up, a real estate appraiser is someone who is certified to analyze a property and determine its value. There are many different types of value: market, tax, and insured just to name a few. This is a relatively easy field to get into, however there is a fair amount of competition. The average salary was $48,500 annually in 2010. On top of that, the job is expected to grow by about 7% from 2010 to 2020.

Now that we know a little bit more about this career, what's the road to become an appraiser in Texas? For that, let's take a look at the website for the Texas Appraiser Licensing and Certification Board's website:

http://www.talcb.state.tx.us/Appraisers/default.asp

At this link, we see that the road begins with the Appraiser Trainee position and then moves up to the Licensed Appraiser position. After that, the next level is the Certified Residential Appraiser Position and lastly the Certified General Appraiser.

There are links on the above website to look at the details, qualifications, and requirements necessary for each position. For starters, let's just take a look what it takes to get into the field from the bottom-up, the position of an Appraiser Trainee. All of the following information is taken from the TALCB website.

1. Be a citizen of the United States or a lawfully admitted alien.
2. Be eighteen (18) years of age or older.
3. Be a legal resident of Texas for a minimum of 60 days immediately prior to filing the application.
4. Satisfy the board as to the applicants honesty, trustworthiness, and integrity.
5. Satisfy the education requirements.
6. Have a certified sponsor. 

On top of those requirements, applicants must complete 75 hours of education training and eventually file their application for the TALCB and pay a fee of $304.  For more information, feel free to browse the website and look at the requirements for each of the different appraiser positions. 

Topic 4: Public Restrictions on Ownership

Public restrictions on ownership are government restrictions on what you may do with your real estate. Some of the common types of public restrictions on ownership are taxation, eminent domain, police power, and escheat. One thing we talked about in class was zoning. Zoning involves dividing an area into zones where each zone has a specified use. For example, you can't put a factory in the middle of a neighborhood. So it's interesting to hear that my hometown of Houston, TX does not have zoning. Dr. Peterson brought this up in class, so I decided to do a little bit of investigating.

Houston does not have official strict zoning laws. However, they do have quite a few rules about real estate. Below is a good article that sums of the Houston zoning myth. 

http://www.businessweek.com/the_thread/hotproperty/archives/2007/10/how_houston_gets_along_without_zoning.html 

The article basically says that without the zoning laws, Houston is still separated into sections...but these sections are driven by economic factors instead of actual strict laws. The developers in the area create very thorough deed restrictions as well and don't want to lose any potential profit in the future. So although there's not zoning in the traditional sense, there are plenty of rules that keep things organized in Houston. 

You would think that not having zoning would hurt property values, but in fact, the two small cities incorporated within Houston (Bellaire and West University) that actually have zoning have noticed that their property values do not climb as quickly as those in rest of Houston. If you'd like to read more on Bellaire and West University, I've pasted a link the article below. 

http://www.thefreemanonline.org/columns/houston-says-no-to-zoning/

Topic 3: Private Restrictions on Ownership

Deed Restrictions and HOAs

Restrictions on real estate ownership are limitations on what you can and cannot do on private property. There are two types of limitations: public and private. Private encumbrances are non-govermental restrictions. Some examples of these are covenants, conditions, and restrictions. Probably the most common example of private encumbrances are deed restrictions by a neighborhood's HOA (homeowner association).

Below is a link from Yahoo that talks about some of the pros/cons of living in a neighborhood with an HOA and deed restrictions:

http://voices.yahoo.com/advantages-disadvantages-buying-house-an-5251557.html

To sum up the article in short, there are some certain benefits to living in a deed restricted community. The most important benefit is probably the fact that having an HOA helps protect your property value and keeps everything in your neighborhood looking nice and neat. But on the same hand, nothing comes without a price. There are usually HOA dues to be paid and you are limited on what you can do with your property.

Personally, I prefer to have an HOA. I grew up in a neighborhood with an HOA and our property values have never dropped, there's no one causing trouble, and they are not overbearing or strict. I know that when I look at buying my first home I'll definitely check out an HOA and probably seek out a community that does have deed restrictions.

Topic 2: Property Rights and Legal Descriptions

Property Rights

Simply put, property rights are laws enacted by the government to control uses and benefits of someone's property. These laws are fundamentally important to how society as a whole functions. If someone had purchased property but there were not rules enforced on them, how would you prevent the mistreatment of someone's property? How would you deal with squatters? 

Associated with property rights are some rules that are enforced by the government over privately-owned land including: taxation, eminent domain, police power, and escheat. 

Today, we're going to talk about eminent domain and how it hit close to home for a native Houstonian like me. Simply stated, eminent domain is when the government takes away private property for public use after paying them a fair amount for it. Well, that is exactly what happened when Interstate 10 was expanded on the west side of Houston. This freeway expansion included roughly 20 miles and included condemnation (using eminent domain) to take over 400 pieces of property. 

Here is an article from The Houston Chronicle that explains the story in a little more detail: 

http://www.chron.com/neighborhood/memorial-news/article/Katy-Freeway-expansion-bad-for-businesses-1536972.php

The issue here is the matter of the government paying these property owners an appropriate wage. Sometimes folks get the short end of the stick on the deal. For example, the owner of Photo Lab was only offered $20,000 for his property and numerous other businesses had to close their doors. On the other hand, you had people who just got greedy like the owners of the restaurant who would have been better off having taken the original deal from the Texas Department of Transportation. 

Personally, I agree with eminent domain as it was used in this case. I live near I-10 about halfway in the middle of the project and traffic was absolutely horrible on that freeway, even when it wasn't rush hour. This project, although costly and perhaps a pain for some property/business owners, has paid off tenfold for the local Houstonians who use this freeway everyday.