Monday, August 29, 2011
Commercial real estate properties include:
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- Investment (tenant
- Owner occupied properties
commercial real estate properties are for investment, and therefore the decision by an investor to purchase a commercial property
is primarily based upon a financial performance analysis of the asset. One of the fundamental components of the financial
analysis is the Capitalization (CAP) Rate.
What is the CAP Rate?
The CAP Rate is calculated as follows:
CAP Rate = NOI/Price, where
NOI is the Net Operating Income of the asset and Price is the price of the property. The CAP Rate is analogous to a simple
Rate of Return (ROR) calculation for an investment. For example, if you invest $100,000 into a CD (Certificate of Deposit)
and your annual return is $10,000, then your ROR = $10,000/$100,000 = 10%.
if an investor purchases a commercial property for $1,000,000 and the Net Operating Income is $70,000, then the CAP Rate =
$70,000/$1,000,000 = 7%.
Of course, the commercial property’s Net Operating
Income (NOI) is needed for the CAP Rate calculation. The NOI is determined from the asset’s gross income and expenses.
An investor (buyer) typically obtains the necessary financial information by requesting it from the seller or the seller’s
agent prior to executing a commercial real estate sales transaction.
It is customary
that the sale transaction purchase contract sets forth the details by which the buyer and his agent verifies or determines
a CAP Rate and other important components of his financial analysis by his own due diligence work while in escrow.
Thursday, August 25, 2011
Residential Real Estate Statistics for Buyers and Sellers
Buyers and sellers often find residential real estate statistics confusing. In this blog we will
shed some light on these numbers. We’ll take a look at the most widely used statistics and we’ll review each one
to better understand them.
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What are the some of the more important statistics?
“Existing-Home Sales” is one of the commonly used statistics. This number represents
completed resale transactions of single-family, townhomes, and condominiums. New homes are not included. This statistic is
prepared and reported monthly by the National Association of REALTORS (NAR) and is considered to be a good indication of trends
in residential real estate. NAR’s “Housing Affordability Index” is also an important statistic.
NAR develops this index by expressing the typical monthly mortgage principal and interest payment as a fraction of gross household
income. A low index indicates very good housing affordability. The “Median Existing Home Price” (reported
by NAR) is reported both nationally and by region, and represents the sale price at which half of all homes sold at a higher
price and half of all homes sold at a lower price. NAR also reports its “Total Housing Inventory” which
is an accounting of existing homes that are available for sale. This number is then divided by the current sales pace (homes
being sold per month) to establish the current number of months of supply of homes for sale.
U.S. Census Bureau and the Department of Housing and Urban Development (HUD) jointly release their monthly estimate of “Sales
of New Single-Family Houses” and the “Median Sales Price of New Homes Sold” and “New
Houses for Sale.” All of these numbers arseasonally adjusted, and the “New Houses for Sale”
statistic is used to develop an estimate of the number of months of supply of new houses in inventory on the market and available
San Diego-based DataQuick monitors real estate activity nationwide and
each month reports “New and Resale Houses and Condos Sold” nationally, statewide, and by metropolitan
area. Another important statistic prepared by DataQuick is its monthly-reported “Median Price Paid for a Home.”
DataQuick also provides statistics on distressed property sales (foreclosures, short sales) and “Typical Mortgage
Payments” by home buyers.
Zillow Inc prepares and reports quarterly its
“Home Value Index.” This number is widely used to demonstrate possible trends in improving or deteriorating
“Inventories of Unsold Homes” is shown in the Wall
Street Journal’s quarterly survey of housing market conditions in 28 major metropolitan areas. Inventories are expressed
as the number of months of supply of homes listed for sale in each market at the current sales pace.
What should I look for when reading these statistics?
Home Sales” is a good number to follow to get a good broad sense of the direction and strength of the market. If
the month-to-month number is generally rising, this would indicate an improving sales pattern, and if the number is falling
it would indicate a deteriorating sales pattern. The same is true for DataQuick’s “New and Resale Houses and
Condos Sold.” The rate at which it rises or falls will indicate the relative strength or weakness in the market.
Also watch the “Total Housing Inventory” and the “Inventories of Unsold
Homes.” A large inventory would typically indicate a weak real estate market and a small inventory would indicate
a strong market. A balanced market typically has a six-month supply. And, for an understanding of price appreciation or depreciation,
watch the “Median Existing Home Price” and the “Median Price Paid for a Home” and
the “Home Value Index.”
With all of these numbers, always be
attentive to local statistics, not to national or even state-wide figures. This is because real estate markets can vary substantially
across the nation, across your state, and even across metropolitan areas.
Wednesday, August 24, 2011
The Notice of Right to Cancel: An Explanation for Borrowers
One of the common documents a borrower may encounter in escrow is
the “Notice of Right to Cancel.” This document is also referred to as the “rescission document” or
the “3-day Notice of Cancellation.” This notice will be found in the loan document package, and it states that
the borrower can cancel or rescind their loan transaction within three business days after signing the loan documents. Confusion
arises for borrowers as to when the right to cancel applies, and if so, exactly what day the borrower can rescind their approval
of the loan transaction.
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When does the right to cancel apply?
The right to cancel applies to refinances or “home equity lines of credit” extended on a borrower’s
“primary residence.” The right to cancel does not apply to borrowers who are purchasing a home, borrowers
who are refinancing their second home, or on investment or rental properties.
the important dates on the document.
There are two important dates on the document.
The first is the date of signing. The second is the rescission date, or final date to cancel. When the lender prepares final
loan documents for an anticipated signing, he may indicate these dates by printing them in advance for the borrower on the
Notice of Right to Cancel. However, many lenders prefer to leave the dates blank on the document because the exact date of
signing may not be known. In this case, the lender may print instructions on the document for determining the correct dates,
or the lender may insert an instruction sheet into the loan package with the Notice of Right to Cancel. If the dates are already
printed on the document in advance, but are incorrect, the instructions will provide information on how to properly correct,
or how to properly interpret the dates to determine the rescission date.
the rescission date.
The borrower has the right to cancel until midnight on the
third day after signing. To determine the correct rescission date after signing, the borrower or his qualified escrow and
loan document-signing agent (Notary Public) will count three days beginning with the first day following the signing date
(the transaction date is not counted). Sundays and legal federal holidays are not counted, and are therefore skipped. Saturdays
are counted because banks conduct lending business on this day. To help with the determination of the correct rescission date,
free “rescission calendars” are available and can be found via the Internet.
Tuesday, August 23, 2011
The Preliminary Change of Ownership Report: An Explanation for Buyers
In every purchase/sale of Real Estate, a Preliminary Change of Ownership Report (PCOR) must be
filed. The PCOR must be filed for other types of transfers as well, but in this blog we will consider only purchase/sale transactions.
After opening escrow, a buyer can expect to find the PCOR in the opening document package.
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What is the PCOR?
Ordinarily, at the time of transfer when sales
of property are recorded via the grant deed with the county recorder, the grantee (buyer) fills out and files a PCOR. It is
a two-page questionnaire requesting information on the property, principals involved in the transfer, type of transfer, purchase
price, and terms of sale.
The PCOR normally satisfies the change of ownership
reporting requirements unless the form is returned incomplete. The PCOR is to be completed, signed and certified by the buyer,
as the buyer is signing the document under penalty of perjury. It is then filed in the county recorder’s office
for the county where the property is located. The county assessor may also request other information about a deed or other
matters related to the transfer after reviewing the PCOR. The PCOR is confidential and is not available for public inspection.
What is the purpose of the PCOR?
county assessor’s office reviews all recorded deeds for that county to determine which properties require reappraisal
under the law. Once the county assessor has determined that a change of ownership has occurred, Proposition 13 requires the
county assessor to reassess the property to its fair market value as of the date of ownership change. The PCOR is important
to this process and it must be filed at the time of recording, otherwise an additional $20 recording fee will be assessed.
If the PCOR is not filed at the time of recording, the county assessor will send
a Change of Ownership Statement (COS) to the transferee (buyer). If the COS is not filed by the transferee within 45 days
of the county assessor’s request, then penalties can ultimately range from $100 to $2,500.
Understanding how to complete the PCOR
The section at
the top of the first page of the document is used to identify the buyer (transferee) and seller (transferor), and the property
being transferred. The information may be typed in the areas provided. Enter this information as it appears correctly on the
grant deed. Be sure to enter the 10-digit Assessor’s Parcel Number (APN), which can be found in the title report provided
by the escrow officer, and is also usually also found on the buyer’s purchase contract for the property. Also enter
the mailing address to which property tax notices are to be sent.
Part I of
the PCOR is used to provide transfer information, and it can be confusing. The assessor uses the information in this section
to determine if the transfer may be excluded from reassessment. If a buyer has questions about Part I, the county assessor’s
office can be contacted for assistance, or the buyer’s real estate agent or escrow officer may be consulted. Parts II,
III, and IV of the document will help the county assessor better understand the nature of the transfer and the purchase price.
Finally, the buyer’s name must be printed at the end of the form, and the
buyer must sign it to certify that the information provided is true and correct.
Monday, August 22, 2011
An Explanation of the Truth in Lending Disclosure Statement in Escrow
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One of the many important documents received by Escrow from a lender
is the Truth in Lending Disclosure Statement (TIL). The TIL disclosure statement is one of the most misunderstood documents
required for closing, and Escrow Officers are often faced with many questions from the borrower regarding this document. This
post is designed to educate the borrower (purchase or refinance) as to how to best understand the Truth in Lending Disclosure
A lender is required to give the borrower a Truth
in Lending “statement” containing information on the loan’s annual percentage rate (APR), the finance charge,
the amount financed, schedule of payments, and the total payments required. The statement may also contain information on
security interest, late charges, prepayment provisions, and whether the mortgage is assumable. The lender will require that
the TIL disclosure statement is signed by the borrower along with many other loan documents, all of which must be received
back into Escrow.
What is a TIL?
It is important to understand that the TIL statement is not
an agreement between the borrower and the lender. It is a federal-required disclosure document (Regulation Z) under The Truth-in-Lending
Act (TILA), which is an important part of the federal Consumer Credit Protection Act. The TIL disclosure statement requires
complete disclosure of all credit terms, conditions and consumer costs of obtaining credit. Unlike the “Good Faith Estimate”
document which discloses an entire sale transaction’s cost, Truth-in-Lending deals only with the cost of the
Understanding the APR Calculation in the TIL
One of the most common questions Escrow
receives regarding the TIL statement often has to do with the annual percentage rate. This piece of information in the TIL
statement often confuses borrowers, as the APR calculation is prominently displayed on the document. It is not uncommon for
a borrow to panic when they are presented with the statement during Escrow and loan document signing, as the APR is usually
higher than the agreed contract interest rate of the loan.
many borrowers APR, or “annual percentage rate”, sounds a lot like “interest rate.” The APR is not
an interest rate. It is a measure of the total cost of credit, expressed as a percentage rate. The contract interest rate
is defined in the promissory note. The purpose of the APR is to provide the borrower with a uniform measure of the total cost
of a loan. The APR calculation includes the contract interest rate in addition to the other costs of the loan, including any
prepaid costs (points and fees) that are part of the cost of borrowing. The contract interest rate in the note is only one
part of the finance charges. The APR is a representation of the total finance charges.
Though it is important to understand how the APR is calculated, it is equally important to thoroughly
understand the other elements of the TIL statement, as the lender requires the statement is signed by the borrower and given
to Escrow. For more specific questions related to a borrower’s loan, Escrow will assist the borrower in contacting the