Finance 320 Real Estate Principles. Fall, 2011 R. Hall

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2 / Fall, 2011 Instructor: Office: Office Hours: Rich Hall Finance Dept. / 134 Rehn Hall 6:30 PM - 7:00 PM Wednesday or any time by appointment. Rehn Hall Room 134 (Finance Office) hallr@siu.edu / (W) / (H) Text: Galaty, Allaway & Kyle. Modern Real Estate Practice in Illinois Web-site: "Class Pak's": Overheads & various handouts available on the web-site Exams & Quizzes: Three exams are required. (100 Points Each ) Exams will consist of multiple choice questions, True/False & possibly short answer questions. Exams may be comprehensive. Review sheets indicating important aspects will be provided. Four un-announced quizzes & two bonus projects. (45 points) Grade: Total points will be determined by adding the three exams, the four quiz grades and any bonus points. Your final grade will be determined by the following scale: A = 275 B = C = D = F = 184 Course Description & Objective: introduces the student to real property law concepts with a special emphasis on being able to practically apply this knowledge for personal and employment use. Our textbook highlights Illinois specific laws & practice issues.

3 Chapter Outline & Calendar August 24, December 14, 2011 Chapter I. Overview Introduction Intro to RE & Real Property Law 1, 2 Property "Rights" & Land Use Controls 20 Market Analysis: Real vs. Personal Property Markets II. RE Services Brokerage & Agency Law 4, 5, 6 Illinois License Law 14 Broker / Lawyer Accord Property Management 18 Real Estate Appraisals 19 Fair Housing & Ethical Issues 21 Exam One / September 21st III. Property Rights Nature & Classification of Property Rights 7, 8 Legal Descriptions 9 Contracts 11 Deeds & Conveyances 12, 13 Exam Two / November 2nd IV. Real Estate Finance Real Estate Financing: Principles 15 Real Estate Financing: Practice 16 V. Real Estate Investments Home & Commercial Ownership 3 Real Estate Taxes & Liens 10 VI. Purchasing & Leasing Real Estate Title Closing 23 Environmental Issues 22 Leases 17 Final Exam / December 14th

4 SIUC Emergency Procedures Southern Illinois University Carbondale is committed to providing a safe and healthy environment for study and work. Because some health and safety circumstances are beyond our control, we ask that you become familiar with the SIUC Emergency Response Plan and Building Emergency Response Team (BERT) program. Emergency response information is available on posters in buildings on campus, on the BERT s website at the Department of Public Safety s website (disaster drop down) and in the Emergency Response Guidelines pamphlet. Know how to respond to each type of emergency. (Note: The 'B.E.R.T' website can be accessed only from on-campus internet locations.) Instructors will provide guidance and direction to students in the classroom in the event of an emergency affecting your location. It is important that you follow these instructions and stay with your instructor during an evacuation or sheltering emergency. The Building Emergency Response Team will provide assistance to your instructor in evacuating the building or sheltering within the facility.

5 An Introduction I. What are we about to study? Realty Real Estate Real Property II. What does it look like? Size Shape Land & all improvements permanently attached. Physical Characteristics Economic Characteristics III. Why study Real Property? How can I benefit? General Knowledge will you ever lease or buy a home? Investment can you make money investing in RE? Career possibilities jobs involving real property? IV. A basic understanding "Real vs. Personal" V. Success in Real Estate 4 things to remember. "Rule Number One" - When you are involved with creating or transferring an interest in real property, seek out & consult an experienced real property attorney what you see may not be what you get! "It's cheaper to 'keep' you out of trouble, than to 'get' you out of trouble." (T. Barrett) "Luck is when preparation meets opportunity." (V. Lombardi) "Watson, you see but you do not observe. You must train yourself to notice what you see." (Sherlock Holmes) The 2 "P's" patience and persistance. (Coolidge)

6 Real Property The beginning: An understanding of property is basic to the study of real estate. I. What is property? A. Real property vs. Personal property B. Size & Shape C. Unique Characteristics 1. Physical Only one no two are alike. Can't be moved Indestructible Can't be mixed 2. Economic Scarce Improvements can be made & are long lasting Economic use determines value D. "Fixtures" II. Property: "A bundle of rights " Rights can be privately or publicly granted, partially restricted, or denied III. Real Property History A. Feudal B. Allodial U.S. Real Property Concepts - Late 1700's

7 Real Property IV. Real Estate "Industry" A. Brokerage Brokers Sales / Listing B. Property Management C. Financing Banks Mortgage Brokers D. Development Developers Trades Suppliers E. Operators (Landlords) F. Appraisal G. Attorneys H. Land Use Planners I. Architects / Designers J. Abstractors How complicated is the purchase of real property and what can be done to minimize future problems?

8 Real Estate Laws Real property is unique and has specific laws, ordinances, regulations & practices or policies I. Types of Laws Contract law Property law Agency law License law Tax law Land Use law Environmental law Federal regulations II. Sources of Laws A. United States Constitution B. Laws passed by Congress C. Rules of Regulatory Agencies D. State Constitutions E. State Statutes F. Local Ordinances G. Common Law

9 Land Use Controls "The rights of real property ownership are not absolute." I. Private Restriction A. Restrictive Covenants & Deed Restrictions II. Public Powers & Restrictions A. "PETE" 1. "P" - Police Power 2. "E" - Eminent Domaim - "Taking" 3. "T" - Taxation 4. "E" - Escheat B. "Practice, Policy & Procedures" C. Formal Ordinances D. Zoning E. Building Codes IV. Subdivision & Development A. Subdividers B. Developers V. Land Sales A. Interstate Land Sales Full Disclosure Act B. Illinois Land Sales Registration Act

10 Real Estate Markets Market: A place where where goods & services can be bought & sold, and where prices levels can be established based on supply & demand. I. Know your market II. Real Property Markets vs. Personal Property Markets III. Supply & Demand: Real Property can't be moved & there's only one. A. Factors affecting supply: Labor, construction costs, gov't controls & financial policies. B. Factors affecting demand: Population & their demographics, employment & wage levels. VI. A time to buy A time to sell. When?

11 Real Estate Brokerage & Agency Law I. The purpose of RE Agents & Agency Law "Evaluate the competency of persons engaged in the real estate business for the protection of the public" A. Universal / General / Special Agents II. Illinois Agents Brokers & Salespersons A. The Illinois License Act of 2000 B. Relationship between Brokers & Salespersons C. License Requirements 1. Salespersons 2. Brokers III. Duties of a Broker / Salesperson A. Care B. Obedience C. Accountability D. Loyalty E. Disclosure IV. Employment Contracts A. Buyer vs. Seller Contracts B. Listing Contracts 1. Content 2. Types 3. Termination V. Commissions VI. Agency: Single vs. Dual VII. Lawyer Broker Accord

12 Property Management I. Licensing A. Brokers B. Leasing Agents II. Functions A. Leasing B. Collecting Rents C. Maintenance D. Tenant Relations III. Careers

13 Real Estate Appraisal An appraisal is an estimate or opinion of value based on supportable evidence and approved methods. I. Licensing A. Associate Appraiser 75 Classroom Hours / No Experience* B. Certified Residential** 120 Classroom Hours / 2,500 Hours Experience C. Certified General** 180 Classroom Hours / 3,000 Hours Experience * Must work under the supervision of a Certified Residential or Certified General Appraiser ** Illinois law changes as of 1/1/08 II. The Appraisal "Process" A. Define the problem B. Plan the appraisal C. Collect the data D. Apply the valuation approaches E. Arrive at value conclusion F. Report the value conclusion III. The Valuation Approaches A. Market Comparison B. Cost C. Income IV. The Appraisal Report A. Letter B. Summary (URAR) C. Narrative

14 Fair Housing & Ethical Practices I. Equal Opportunity Laws A. Civil Rights Act of 1866 B. Fair Housing Act 1. Civil Rights Act of 1968 (Title VIII) Race, color, religion, national origin 2. Housing & Community Development Act (1974) Sex 3. Fair Housing Amendments Act (1988) Disability, familial status 4. Exemptions 5. Administered by Housing & Urban Development (HUD) and Office of Fair Housing& Equal Opportunity (OFHEO) C. Equal Credit Opportunity Act Race, color, religion, national origin, sex, marital status, age ( public assistance, social security) D. American with Disabilities Act (ADA) Employment & Access II. Fair Housing Practices A. Blockbusting B. Steering C. Redlining D. Appraising III. Code of Ethics - National Association of Realtors

15 / Exam One Review Chapters: 1, 2, 4, 5, 6, 14, 18, 19, 20, 21 & Class Notes. What is real property what does it look like? Size Shape / Location Unique characteristics Physical Economic Real vs. Personal Property differences (real vs. personal) Fixtures (do you know the tests of a fixture) RE Industry what kind of businesses make up the industry. RE History concepts of Feudal vs. Allodial ownership RE Markets Real property markets vs. Personal property markets Buyers markets vs. Sellers markets Times to buy, times to sell RE Services Brokerage Categories of license holders. (Broker/Sales/Leasing) Requirements for license Broker & Sales Duties of Brokers/Salespersons Listing Contracts Types & differences Single vs. Dual Agency Property Management Duties / Responsibilities Requirements for license Appraisal Three Valuation Approaches Land Use Controls Fair Housing Laws & Ethical Practices Give some thought to How complicated is the purchase of RE & what can be done to minimize future problems?

16 Property Rights I. Property A. Real vs. Personal B. Fixtures: Test of a Fixture 1. Intent of the parties 2. Method of Annexation 3. Trade Fixture 4. Adaption of Article II. Real Property "Title" A. Types 1. Original a. Discovery b. Occupancy c. Conquest d. Cession 2. Derivative B. Title Conveyance 1. Private Grant a. Deed b. Dedication c. Devise 2. Public Grant 3. Title from Nature 4. Title from Civil/Political a. Escheat b. Confiscation c. Forfeiture d. Eminent Domain 5. Title from Public Policy a. Adverse Possession b. Prescription

17 Property Rights III. Estate: An interest that a person holds in land. A. Freehold - Undeterminable length 1. Fee simple (absolute) 2. Fee simple defeasible (conditions) 3. Life estate B. Less than Freehold (Leasehold) - capable of accurate time determination. IV. Ownership A. Severalty B. Concurrent Ownership 1. Joint Tenancy (4 Unity's - Interest, Time, Title, Possession) 2. Tenancy by the Entireties 3. Tenancy in Common 4. Condominium 5. Cooperatives 6. Partnership/Corporate/REIT/LLC 7. Time Share V. Encroachments VI. Emblements

18 Property Rights VII. Encumbrances - A claim, charge, or liability that attaches to real property. A. Liens B. Restrictions 1. Private - deed restrictions (covenants, conditions, or restrictions) 2. Public C. Easements 1. Appurtenant vs. In Gross 2. Types a. Grant b. Implied Grant c. Reservation d. Prescription e. Necessity f. Condemnation D. License VIII. Water Rights A. Riparian B. Littoral

19 Legal Descriptions Any way in writing that describes the shape of a property on the plane of the earth & where it is relative to a known point, including it's orientation to that point. The three traditional methods of describing real property: I. Metes & Bounds (Measures & Directions) II. Rectangular (Government) Survey A. Parallels & Meridians B. Checks / Townships / Sections III. Lot & Block

20 Real Estate Contracts Contracts establish the legal relationship between the parties involved in a transaction "a legally enforceable promise". I. Contract Types A. Bilateral vs. Unilateral B. Express vs. Implied II. Contract Terminology A. Valid B. Void C. Voidable D. Executed E. Executory III. Statute of Frauds IV. Essential Elements of a Contract A. Offer B. Acceptance C. Consideration D. Legal Capacity E. Validity F. Illegality & Impossibility

21 Real Estate Contracts V. Listing Contracts VI. Sales Contracts A. Date B. Parties C. Legal Description D. Personal Property E. Purchase Price F. Covenants & Restrictions G. Easements H. Apportionments I. Deed Type J. Marketable or Merchantible Title K. Risk of Loss L. Liquidated Damages VII. Contingencies VIII. Land "Contracts" IX. Options X. Specific Performance

22 Real Property Deeds A written instrument by which an owner of real property (grantor) conveys the right, title or interest in a parcel of real property to someone else (grantee). All deeds must be in writing. I. Parts of a Deed A. Grantor(s) & Grantee (s) B. Consideration C. Granting Clause (Operative Words of Conveyance) D. Legal Description E. Appurtenances F. Execution & Acknowledgement G. Delivery II. Types of Deeds A. General Warranty B. Special Warranty C. Quit Claim / Bargain & Sale D. Judicial Deeds III. Recording IV. Involuntary Alienation V. Wills VI. Transfer Tax - "Green Sheets" VII. Miscellaneous Provisions

23 / Exam Two Review Chapters: 7, 8, 9, 11, 12, 13 & Class Notes. Nature & Classification of Property Rights (Chapters 7 & 8) Understand the bundle of rights concept - individual rights that can be separated & restricted wholly or partially by previous owners/gov t. a. Title (Conveyances / Documents) 1. Private 2. Public 3. Nature 4. Civil or Political action (Gov t) 5. Public policy b. Estate c. Ownership variations d. Easements e. Encroachments f. Emblements g. Covenants Legal Descriptions (Chapter 9) Contracts (Chapter 11) a. Elements of and an understanding of their terms 1. Basic elements: Offer, Acceptance, Consideration, Capacity, Validity, Legality/Possibility 2. RE specific provisions and an understanding b. Terminology c. Contingencies d. RE contracts: Listing & Sales Contracts e. Specific performance Deeds & Conveyances (Chapter 12, 13 ) a. Elements of b. Requirements for a proper conveyance c. Deed types d. Liability differences e. Participants

24 Real Estate Finance I. Money, Banks, Loans & Credit Bureaus A. Money what is it? B. Sources of Money: Banks & other Lenders C. Loans 1. Preparation 2. Types Term vs. Installment 3. "Mechanics" of loans 4. The "Art" of borrowing "4 C's" D. Credit Bureaus II. Mortgages A. Markets 1. Primary a. Thrifts b. Insurance Companys c. Credit Unions d. Pension Funds e. Investmentment groups f. Mortgage Banking g. Mortgage Brokers 2. Secondary a. FNMA b. GNMA c. FHLMC

25 Real Estate Finance II. Mortgages (continued) B. Parts of a Mortgage 1. Promissory Note 2. Mortgage Agreement C. Lien Theory vs Title Theory D. Types of Mortgages 1. Degree of priority a. Senior b. Subordinate 2. Method of Payment a. Straight Term (Lump Sum) b. Amortized c. Flexible Payment d. Variable Rate (Interest) 3. Kinds of Mortgages a. Conventional (Purchase Money) b. Construction (Interim) c. Home Equity d. Package e. Open End f. Blanket g. Wrap Around

26 Real Estate Finance II. Mortgages (continued) E. Mortgage Concerns 1. Points 2. Prepayment Penalties 3. Indexes (Adjustable Rate Mortgages) 4. Payment Commencement III. Legislation A. Truth in Lending B. Equal Credit Opportunity Act C. Real Estate Settlement & Procedures Act D. Community Reinvestment Act III. Closings What to expect? A. Loan Application Fee B. Appraisal Fee C. Legal Fee D. Documents Fee E. Recording Fee F. Notary Fee G. Title Insurance H. Property Insurance I. Property Taxes J. Points K. Interest L. Other Miscellaneous Fees IV. Affordability V. Foreclosure

27 Mortgage Rate Examples Single Family - Owner Occupied 15 Year Fixed Rate Rate Points 80% or less 6.50% 2 81%-90% PMI Over 90% Not Available 30 Year Fixed Rate Rate Points 80% or less 7.00% 2 81%-90% 7.25% 2 + PMI Over 90% Not Available 1 Year Adjustable - Caps: 2% per year, 6% life, 30 Yr. Amort. Rate Margin Points 80% or less 5.50% 2.50% 2 81%-90% 5.75% 2.50% 2 + PMI Over 90% 6.25% 2.50% 2 + PMI 3 Year Adjustable - Caps: 2% per year, 5% life, 30 Yr. Amort. Rate Margin Points 80% or less 6.50% 2.50% 2 81%-90% 6.75% 2.50% 2 + PMI Over 90% 7.25% 2.50% 2 + PMI

28 Real Estate Taxes & Liens I. Illinois Property Taxation A. The tax cycle B. Assessment & Valuation C. Tax Formula's MV / 3 = AV AV x Multiplier = EV EV x Tax Rate = Tax (Tax Rate = $ per $100) D. Appeals II. Income Taxation A. Residential B. Commerical ("For Profit") III. Liens a claim against property made to enforce the payment of money. (An" encumbrance") A. Voluntary vs Involuntary B. General vs Specific C. Real Estate Tax Liens D. Mortgage Liens E. Mechanics Liens F. Judgments G. IRS Liens H. Misc Liens IV. "Lis Pendens" Litigation Pending

29 Illinois Property Taxes I. "Ad Valorem" Taxes II. Assessment Officials III. The Assessment Cycle A. Assessment B. Review C. Equalization D. Levy E. Extension F. Collection & Distribution IV. Assessment Formula's MV x 1/3 = AV AV x Multiplier = EV EV x Tax Rate (per $100 of EV) = Tax V. Appeal VI. Tax & Scavenger Sales

30 Environmental Issues I. Hazardous Substances A. Asbestos (Banned in 1978) B. Lead Paint (Banned in 1978) C. Radon - radioactive gas D. Urea - Formaldehyde (Banned in 1982) E. Carbon Monoxide F. Electromagnetic Fields II. Environmental Concerns A. Groundwater Contamination B. Storage Tanks (Above & Below Ground) C. Landfills/Waste Disposal Sites III. Disclosure - IL Responsible Property Transfer Act IV. Environmental Assessments A. Standards American Society for Testing & Materials (ASTM) B. Transaction Screens C. Phase I, Phase II, & Phase III Asssessments

31 Leasehold Interests I. Leasehold participants Lessor vs Lessee II. Leases & the Statute of Frauds In writing if over one year or can't be performed within one year of execution. III. Leasehold Estates A. Estate for Years - definite time period B. Estate from Period to Period Notice: Year - 60 days / Month - 30 days Week - 7 days / Farm (1 Yr) - 4 months C. Estate at Will (With permission) D. Estate at sufferance (W/O permission - 2 x Rent) IV. Types of Leases A. Gross / Net (Triple) / Percentage / Variable B. Oil & Gas C. Lease Purchase V. Implied Warranty of Habitability (Supreme Court) V. Security & Damage Deposits A. Five or more units no damage deposit deductions without itemized statements within 30 days of the premises being vacated AND receipts within 30 days of first notice. If no notice within 45 days,full refund. B. Interest must be paid on deposits if there are 25 units or more & the depost is held over six months.

32 / Final Review Chapters: 2, 3, 10, 15, 16, 17, 22, 23 & Class Notes. Property (Chapter 2) a. Definition b. Types & methods to distinguish difference c. Rights / restrictions d. Unique characteristics of each Home Ownership & Affordability (Chapter 3) RE Finance & Closings (Chapter 15, 16 & 23) a. Primary & secondary markets - participants b. Mortgages 1. Elements of 2. Priority 3. Foreclosure/default 4. Affordability 5. Terms of 6. Interest rate calculation 7. Participants 8. Title insurance / Abstracts 9. Collateral type c. Seller financing: Contract for deed / Land contracts / Purchase $ mortgages d. 4 C s & borrowing money e. Your credit rating f. Closing & costs Taxes & RE (Chapter 10) a. Personal vs. Commercial differences b. What s deductible - what s not c. Illinois property tax calculation & exemptions d. Failure to pay property taxes Environmental Issues (Chapter 22) Leases (Chapter 17)

33 Bonus: Highest & Best Use The value of real estate is a function of its potential use rather than its actual or present use For a maximum of five points, identify a property that is not being used to it s 'highest & best use'. Identify & analyze it s site characteristics (neighborhood, proximity to earthquake, flood & environmental hazards, utilities, transportation, etc.), physical characteristics (size, shape, topography, etc.) and use restrictions (private, public & market). Analyze the property as if vacant and as presently improved. Give value judgments for the value for each. What is your opinion as to the property s highest and best use? Consider more one than one option, and calculate profitability of the alternate uses. Your opinions & conclusions must be 1. Physically possible 2. Legally permissible 3. Economically feasible. 4. Maximally productive

34 Bonus: Property Tax For a maximum of five bonus points, interview a family member or friend who owns property in Illinois about their Illinois property tax bill. Acquire a copy of their most recent property tax bill and review the property owner s circumstances for any exemptions for which they may be eligible, but are not receiving. Turn in a copy of the tax bill and a brief summary of what you discovered about their tax bill, including any comments they may have concerning Illinois property tax assessment practices. favorable or unfavorable. Should your family member or friend desire, please feel free to remove any reference to their personal information. Questions you might consider asking: Do you know on what basis your property tax is determined? Do you know what your tax goes to pay? Who gets the major portion? Are you aware of any exemptions available to property owners? Do you think your tax is a fair amount? If not, do you know how to appeal the amount of your tax? Do you feel the Illinois' property tax process should be changed or eliminated? If so, how will those organizations who currently receive property tax dollars acquire funding for the services they provide? Alternatives? Understanding the Illinois Property Tax System Understanding your Property Tax Bill Tax Relief and Incentive Programs Property Tax Extension Limitation Law Assessment Appeals Real Estate Transfer Declaration Information for Assessment Officials