Residential Real Estate Introduction Slides - Student Version-1

Residential Real Estate: Everything You’ve Ever
Wanted to Know (and then some)
REL 602
Wendy Usrey
Real Estate: The American Dream?
Selected Household Assets as a Percentage of Total Assets
Real Estate:
The American
Dream?
What factors influence house price appreciation?
Is the declining rate of homeownership in the U.S.
a cause for concern?
What do we know?
• The decline in homeownership
is not the choice of most
consumers
• Sustainable homeownership
has provided for wealth
accumulation for owners.
Source: Survey of Consumer Finances (2016)

Is the declining rate of homeownership in the U.S.
a cause for concern?
What do we know?
• The decline in homeownership
is not the choice of most
consumers
• Sustainable homeownership
has provided for wealth
accumulation for owners.
• Not everyone is happy with
their home purchase
To
Rent or to Buy?
Rent if… Buy if…
Homeownership: The American Dream?
Advantages of Owning Advantages of Renting

• Build wealth over time • Mobility
• Tax savings • No maintenance
• Pride of ownership expenses
• Security/stability • Less cost
• Predictable monthly (generally)
payments
• Paws welcome
Comparative Analysis in Renting vs. Owning Decisions

• Compares the relative costs of owning and renting for the same
residence.
1. Compile all cash flows associated with each form of occupancy
2. Estimate annual expenses and other values for the holding period (be sure to
consider growth rates of relevant expenses, the appreciation rate of the home and
income tax implications for ownership).
3. Calculate before and after-tax cash flows during the holding period.
4. Determine after tax cash flow for owning vs. renting (i.e. the difference)
5. Calculate before and after-tax cash flows from the sale of the home in each year.
6. Calculate the rate of return that will be earned on the funds used to make the
down payment if the property is purchased
Suppose you found a home that you would like to live in for the
next five years, and have two options:
1. Rent the home for $1,000/month with rent increases of 2% per
year.
2. Purchase the home for $150,000 and you have qualified for a
mortgage with the following terms:
• 20% down payment
• 30 year conventional loan
• 7% annual interest rate
Additional assumptions:
1. Other ownership costs are maintenance, insurance and
property taxes.
• Maintenance and insurance will start at $500 each year
• Annual property taxes will be 1.5% of the property value.
2. Expenses and property value will both increase at a rate of 2%
per year.
3. Your marginal federal income tax rate is 28%.
4. Estimated selling expenses are 7%.

Purchase price $150,000
Initial Rent $12,000
Rental growth rate 2.00%
Property growth rate 2.00%
Insurance $500
Maintenance $500
Expense growth 2.00%
Marginal tax rate 28.00%
Property tax % 1.50%
Selling expenses 7.00%
Equity investment (down
payment) 30,000
Annual debt service
(payments)*

Initial Rent $12,000 *Annual debt service (the amount you pay each year towards
Rental growth rate 2.00% the mortgage).
Property growth rate 2.00% 1. Determine monthly loan payment:
Insurance $500
Maintenance $500
Expense growth 2.00%
Marginal tax rate 28.00%
Selling expenses 7.00%
Equity investment (down
payment) 30,000
Annual debt service
(payments)*

Initial Rent $12,000 *Annual debt service (the amount you pay each year towards
Rental growth rate 2.00% the mortgage).
Property growth rate 2.00% 1. Determine monthly loan payment:
Insurance $500 PV= 120,000 (.8 x 150,000)
Maintenance $500 N= 360
Expense growth 2.00% I/Y= 7/12
Marginal tax rate 28.00% PMT= cpt  798.36
Selling expenses 7.00% 2. Multiply by 12 to obtain the annual debt service
Equity investment (down amount.
payment) 30,000 798.36 x 12 = 9,580.36 (round to the nearest dollar)
Annual debt service
(payments)* $9,580
2. Estimate annual expenses and other values for the holding period
Year 0 1 2 3 4 5
Property data:
Property Value 150,000 153,000 (150,000 x 1.02) 156,060 159,181 162,365 165,612
Rents 12,000 12,240 (1.02 x 12,000) 12,485 12,734 12,989
Loan Information
Payments 9,580 9,580 9,580 9,580 9,580
Interest paid
Principal paid
Remaining loan
balance
Solving for loan information:
1. Enter your loan information and solve for payment as usual
2. Do amortization calculations for relevant time periods
1. Press [2nd] [PV] (notice it says “AMORT” above the PV key)
2. P1= the starting payment period (remember these are in monthly terms)
We want to know the loan information at the end of the 1st year, so
P1=1 [enter] [ ]
3. P2= the ending payment period (remember these are in monthly terms)
P2=12 [enter] [ ]
4. BAL= 118,781.03 (this is the outstanding loan balance after 12 monthly
payments)
5. Press [ ] to display the next value
PRN = 1,218.97 (this is the amount of principal that was paid)
6. Press [ ] to display the next value
INT= 8,361.38 (this is the amount of interest that was paid)
For remaining years, arrow back to P1 and enter
Year 2: P1 = 13, P2= 24
Year 3: P1 = 25, P2 = 36
Year 4: P1 = 37, P2 = 48
Year 5: P1 = 49, P2 = 60
Year 0 1 2 3 4 5
Property data:
Property Value 150,000 153,000 (150,000 x 1.02) 156,060 159,181 162,365 165,612
Rents 12,000 12,240 (1.02 x 12,000) 12,485 12,734 12,989
Loan Information
Payments 9,580 9,580 9,580 9,580 9,580
Interest paid 8,361 8,273 8,179 8,077 7,969
Principal paid 1,219 1,307 1,402 1,503 1,612
Remaining loan 118,781 117,474 116,072 114,569 112,958
balance
3. Calculate before-tax cash flows (from the owner’s perspective)

Year 0 1 2 3 4 5
Before-tax cash flows
(BTCF)
Property taxes 2,250 (150,000 x .0125)* 2,295 2,341 2,388 2,435
Insurance 500 510 (1.02 x 500) 520 531 541
Maintenance 500 510 520 531 541
Principal and Interest 9,580 9,580 9,580 9,580 9,580
BTCF: 12,830 12,895 12,962 13,029 13,098
* Property taxes are paid in arrears, so we use the property value from the previous year
4. Calculate tax deductions and tax savings (from owning)

Year 0 1 2 3 4 5
Tax deductions
Property taxes 2,250 2,295 2,341 2,388 2,435
Interest 8,361 8,273 8,179 8,077 7,969
Total tax deductions: 10,611 10,568 10,520 10,465 10,404
Tax savings: 2,910 (.28 x 10,611) 2,959 2,946 2,930 2,913
5. Calculate net cost of owning and renting

Year 0 1 2 3 4 5
Net cost of owning
BTCF 12,830 12,895 12,962 13,029 13,098
Tax savings 2,971 2,959 2,946 2,930 2,913
After-tax cost (own) 9,859 9,936 10,016 10,099 10,185
Net cost of renting 12,000 12,240 12,485 12,734 12,989

6. Calculate net cash flow from owning before sale vs renting (i.e. the difference)
Year 0 1 2 3 4 5
After-tax cost (own) 9,859 9,936 10,016 10,099 10,185
Net cost of renting 12,000 12,240 12,485 12,734 12,989
ATCF Own vs. Rent 2,141 2,304 2,469 2,635 2,804
7. Calculate before and after-tax cash flow from the sale in each year
Year 0 1 2 3 4 5
BTCF- Sale
Property Value 153,000 156,060 159,181 162,365 165,612
Selling costs 10,710 (.07 x 153,000) 10,924 11,143 11,366 11,593
Mortgage balance 118,781 117,474 116,072 114,569 112,958

Benefit from sale 23,509 27,662 31,966 36,430 41,061
Capital gains tax* 0 0 0 0 0
ATCF-Sale 23,509 27,662 31,966 36,430 41,061
* Residential real estate capital gains exclusions apply ($250,000 gain single/$500,000 gain married), so there is no capital gains tax on this sale
8. Calculate the after-tax IRR for each year

1. Calculate cash flows for each year the property may be sold
Cash Flows 0 1 2 3 4 5
Year Sold $25,650 (23,509 +
1 -30,000 2,141)
2 -30,000 2,141 29,966
3 -30,000 2,141 2,304 34,435
4 -30,000 2,141 2,304 2,469 39,065
5 -30,000 2,141 2,304 2,469 2,635 43,865

2. Calculate IRR for each of the cash flows
Cash Flows 0 1 2 3 4 5 ATIRR
Year Sold $25,650 (23,509 +
1 -30,000 2,141) -14.5%
2 -30,000 2,141 29,966 3.57%
3 -30,000 2,141 2,304 34,435 9.63%
4 -30,000 2,141 2,304 2,469 39,065 12.34%
5 -30,000 2,141 2,304 2,469 2,635 43,865 13.71%
Cash Flows ATIRR A negative IRR in Year 1 indicates that if the property is
Year Sold 1 -14.5% expected to be sold after only one year, renting may be a
2 3.57% better choice
3 9.63%
4 12.34%
5 13.71%
For the remaining years, the ATIRR indicates the after-tax
required rate of return that must be earned if you invest the
money not spent on the down payment on investments of
similar risk, in order for renting to be equivalent to owning.
Check your understanding
Monthly Expenditures
Medical
Pets
Expenses
Mortgage and 2%3% Maintenance
Step 1:
related 5%
expenses Vacation
28% 8%
How much
Kids' Activities
8%
can I afford?
Utilties
9%
Necessities
(groceries, gas, Other
clothing, etc) Payments
23% 15%
Step 2:
How’s my credit?
Lender underwriting…
 Underwriting: process of determining whether the risks of a loan are

acceptable (“loan approval”)
 “Three Cs” of traditional underwriting
 Collateral: appraisal
 Creditworthiness: credit score/rating
 Capacity: ability to pay (payment ratios)
Mortgage Underwriting…
The Three C’s of Mortgage Underwriting
Collateral Credit History Capacity
• House Value • History of repayment • Ratios:

• Down payment • Current account o Income
balances o Debt
• Recent inquiries • Reserves
• New accounts
• Age of accounts
11-36
Payment ratios for underwriting…
Capacity
The Three C’s of Mortgage Underwriting
• Ratios:
o Income Generally set maximum at:
o Debt • 28% for conventional loans
• Reserves • 31% for FHA
Known as “front-end” ratio
Generally set maximum at:

• 36% for conventional loans
• 43% for FHA
Known as “back-end” ratio
Step 3:
Meet with a
lender
Step 4:
Time to
Shop!
(or is it)?
Step 4:
Select a
real estate
broker/agent
Step 4:
Select a
real estate
broker/agent
Understanding Real Estate Commissions
to the listing brokerage/agency

Understanding Real Estate Commissions
to the listing brokerage/agency
------------------------------ 6%
----------------------------- 30,000
15,000 15,000
Step 4:
Select a real estate
broker/agent
•Why use a buyer’s agent?
• Access to the MLS (multiple listings

service)
• Market knowledge
• Negotiation skills
• Guidance through the process
• Paperwork
• It is free to you
Understanding real estate representation
(this is you)
What is a broker?
• An intermediary who brings together buyers and sellers,

without ever actually owning the asset being sold.
• Stock broker
• Mortgage broker
• Real estate broker
• Receives compensation in the form of a commission from
either the buyer or seller.
What is a real estate broker?...
 Bring buyers and sellers together

 Physically (“making the market”)
 REALTOR © multiple listing service (“MLS”)
 Emotionally (“making the deal”)
 Receive commission (paid at/upon closing)

 Percentage of price (e.g., 3%/3%)
 Net commission: Amount in excess of seller’s required net proceeds from
sale
REALTOR © ≠ Broker!!!!
• Don’t confuse licensing with

professional affiliations/designations
• REALTOR © - trademark name for
members of the National Association of
Realtors (NAR)
Brokers’ expertise and knowledge…
 Prices and terms in current market

 Identify available (buyers) and competing properties (sellers) on the market
 Marketing approaches that work and access to those approaches (“MLS”)
 Legal obligations of buyers and sellers
 Shepherding the transaction and client through the listing contract
closing process
 Broker = Limited Attorney…
 Agent = limited attorney
 Transaction-broker ≠ limited attorney
Real estate brokerage licensing…
 Must be licensed to provide real estate services (sales, leasing, auctioning) for
others (not yourself, employer, company, attorney for client, etc.)
 Traditionally two levels of licensure
 Broker: Owns/manages brokerage firm and employs
salespersons as “agents” of broker
 Salesperson: “agent” of broker
 Hence, the title “real estate agency”
Real estate brokerage licensing cont’d…
 CO first state to enact single licensing in `97

 All licensees are “brokers” (no “salespersons”)
 “Broker Associates” work under Employing Broker
 “Employing Broker”
 Additional experience (2 year’s)
 Additional education (trust accounts/records)
 Supervision of and liability for “Broker Associates”
 “Independent Broker” (2 year’s experience only)
Law of agency…
Law of agency governs relationship between a principal (seller/buyer) and an

agent (broker)
 An agent is an individual who is authorized and consents to represent the
interests of another person.
• charged and assumes to act on the principal's behalf
• A principal is the person on whose behalf the agent acts.
• An important distinction:
• Client- principal whom the agent owes a fiduciary duty
• Customer- person whom the agent owes only honesty and fair dealing.
Duties or Fiduciary Responsibilities
• Disclosure:
• Being completely open and honest
• Confidentiality:
• Never betraying confidential information
• Accounting:
• Keeping principal informed about financial aspects of assignment
• Obedience:
• Following instructions of the principal fully
• Loyalty:
• Never subordinating the best interest of principal
• Skill and care:

• Representing principal as agents would represent themselves
12-55
Types of Brokerage Relationships
• Single Agency- agent represents only one party in any single

transaction
• Buyer’s Agent
• Seller’s Agent
• Transaction Broker- facilitator
• Customer- no agency relationship
• Dual Agency- the agent represents both parties in the same
transaction… not permitted in Colorado
Broker’s duties when acting as agent…
 NOTE: CO law!
 Exercise reasonable skill and care (always)
 Promote principal’s interest with utmost good faith, loyalty and fidelity
(“fiduciary!) in…
 Seeking price/terms acceptable to principal
 Disclosing to principal all material facts (of all kinds) actually known by broker
 Counseling principal to all material benefits/risks
 Broker as agent = advocate of principal
 Affirmative duty to promote principal’s interests
Duties of agent cont’d…
Cannot disclose w/out informed consent of principal

Principal is willing to accept less/offer more
Motivating factors of principal
Material information about principal unless required by law or failure would be fraud or
dishonest dealing
Facts or suspicions about the property that may psychologically stigmatize the property
Must disclose adverse material facts known about the property (physical condition, title
or legal matters)
No duty to inspect property or verify representations
May list/show properties that compete with principal
Duties of transaction-broker…
 Exercise reasonable skill and care in…
 Advising parties and suggest they seek legal advice to material matters
 Keeping parties informed
 Assisting parties in complying with contract
 Cf. to whom agent’s duties are owed (“principal”)
 Cf. duties of an agent (“seek” and “counsel”)
 Transaction-broker is a “facilitator” for everyone and not an advocate
(agent) of anyone
Duties of transaction-broker cont’d…
 Cannot disclose w/out informed consent of all parties

 Any party willing to offer/accept more/less or other terms
 Motivating factors of any party
 Any material information about any party unless required by law or would be fraud or dishonest dealing
 Any facts/suspicions that will psychologically stigmatize the property
 Must disclose adverse material facts known about the property (physical condition, title or legal
matters)
 Must disclose adverse material facts known by broker about buyer’s financial condition/ability to
perform
 No duty to inspect property or verify representations
 May list/show other properties (of course!)
Broker’s role terminology…
 Role in the transaction…
 Listing broker “lists” an owner’s property for sale or lease pursuant to a “listing contract”
 “List” comes from listing the property on the MLS
 Buyer’s broker contracts with buyer to locate properties, write offers, administer contract, etc.
 Selling broker/company is the traditional description of the broker/company bringing the buyer
(may or may not be a “buyer’s broker”…could be subagent of seller/listing broker)
 Legal status/relationship to the seller/buyer…
 Every broker is acting either as an “agent” or a “non-agent” (transaction-broker) in the transaction
 Typically the listing broker and selling broker share/split the commission paid by the
seller
Buyer’s broker/buyer broker contracts…
 Contract between buyer (or tenant) and buyer’s broker

 A contract for services, not for real estate
 Buyer’s broker may act either as a buyer’s agent or transaction-broker (non-agent)
 C.f., traditionally no buyer brokerage…rather, acted as sub-agent of seller
 May act as dual agent of buyer and seller (bad idea!)
• Not in Colorado!
 Buyer’s brokers are responsible for identifying and showing the buyer suitable
properties, assisting with negotiations and contracting, and generally shepherding
the buyer through the showing-contracting-closing process
Buyer’s agency wrap up
• Finding the best home for you is

the motivation
• Loyalty to you
• Knowledge and expertise
• They can show you any property!
• Negotiating skills and contract
knowledge
• It doesn’t cost you anything!
Step 5:
Shop for a
house/make an
offer
13-66
WHAT ARE YOUR THOUGHTS?
• It’s a hot real estate market and homes are going under contract right and left.
• You’ve narrowed your list down to three properties that you are interested in.
• You decide to make an offer on one, but are afraid of missing out on all three if your
first offer isn’t accepted.
• Is it OK to write more than one offer?
13-67
REAL WORLD EXAMPLE
May 2 May 8 May 11
• Property • Multiple • Buyer’s

Listed offers agent leaves
received a
• Under message…
Contract
13-68
13-69
13-70
13-71
13-72
REAL WORLD EXAMPLE
May 2 May 8 May 11 June 13
• Property • Multiple • Buyer’s • Seller’s

Listed offers agent withdraw
received leaves a property
• Under message…
Contract
• Should the Buyer receive their earnest money back?
13-73
REAL
WORLD
EXAMPLE
SHOULD THE BUYER
RECEIVE THEIR EARNEST
MONEY BACK?
13-74
ACTING IN GOOD FAITH
“state of mind denoting honesty of purpose, freedom from

intent to defraud, being faithful to one’s duty or obligation”
• How does it apply to a real estate transaction?

• All parties are obligated to deal fairly, honestly, and make reasonable efforts to fulfill a condition in
the contract.
• Are Buyer’s “get out of jail free cards” really free?
• Is using a condition (financing, inspection, etc..) to get out of a deal for buyer’s remorse acting in
good faith?
13-75
Fixtures and Personal
Property Refresher
Fixture- anything attached

whose removal would cause
damage to the home.
Personal Property- anything

not permanently attached
Rule of thumb:
does it need a tool?
Buying a Fridge:
Fixtures, Personal Property and Exclusions
• One of the most expensive provisions of the

real estate contract to buy (for a broker)
• Never assume it’s included
• When in doubt, list it!
• BE SPECIFIC!!!!!!
• Are you asking for the old refrigerator
stored in the garage or the LG Black
Refrigerator currently in use in the
kitchen?
Sections 2.5 and 2.6:
Inclusions and Exclusions
Stainless steel appliances in kitchen (Whirlpool refrigerator, gas stove/oven, built-in microwave and
dishwasher), Samsung clothes washer and dryer, compost bin, wrought iron patio table and four
chairs, pool table and accessories. All items are currently in place and will be conveyed at no value.
Your turn- Inclusions
13-79
13-80
13-81
What if there
is something
on the property
that you don’t
want?
Exclusions
• The exclusions portion of the contract is for

listing items that would normally be
considered a fixture but for some reason are
not being sold with the home.
• This is also an appropriate place to list
personal property items that could be
mistaken for a fixture
What else should you take
into consideration when
selecting a property to
purchase?
• Price
• Location
• Features/updates
• HOA/Metro tax
district
• Condition
• And…
Things to Consider:
Seller’s Disclosures
What is a Seller’s Disclosure?
• Discloses known material facts about the house
• Informs buyers and protects sellers from future legal actions
Colorado Required Disclosures:

• If the property is part of a common interest community
• If property has been used as a meth lab unless fully remediated
• Source of drinking water
• Proposed transportation projects
• Special taxing district
• Lead based paint (Federal)
Read: Advisory to Buyer (last page of Seller’s Disclosure)

Real World Application
Assume you are in the market to purchase a

townhome and came across this listing online.
Would you pay for a home inspection prior to
purchasing the property? Review the pictures
(page 1 ONLY) in your handout before
answering.
a) Yes
b) No
87
Now read pages 6 and 7 of the Seller’s

Property Disclosure (the next document in
the handout).
Do you see anything that would be of
concern to you? Why/why not?
88
89
Things to Consider:
Caveat Emptor
… “No disclosure is required if the Property was remediated in accordance with

state standards...”
A
“real
life”
meth
house
91
92
Things to Consider:
Caveat Emptor
What you don’t know can hurt you:
What’s the “Loophole?” Things they don’t have to tell you
• Current actual knowledge • Annoying Neighbors
• Fully remediated • Megan’s Law
• Psychological Stigma
Things to Consider:
Caveat Emptor
Know what the disclosure’s really telling you:
• The “Snake House”
Lesson- read it all and don’t assume!

• Remember… in Colorado the owner is not required to
complete a Seller’s Disclosure
• Ultimately you should not rely on anyone to provide

information regarding things that are important to you.
Step 6: Due diligence
Due Diligence
What is important to you?

• Condition of the property and its major systems
• The neighborhood and areas surrounding the home
• Quality of schools in the area
• Possibility of renovation (and cost)
• No health hazards
• and ?
Due Diligence: The Home Inspection
What is a home inspection?

• A home inspection is an objective visual examination of the physical
structure and systems of a house, from the roof to the foundation.
What is included?
• Heating/air conditioning systems • Walls, ceilings, floors
• Plumbing (interior) • Windows and doors
• Electrical • Foundation and other structural
• Roof components
• Attic and visible insulation • And more!
Problems will be found

• Every home inspection will identify issues with the property
• It is up to the buyer(s) to decide if they want to move forward with the
purchase, and under what conditions
What options does a buyer have?
• Ask the seller to make the repairs/corrections
• Ask the seller to provide a credit at closing or reduce the purchase price to
cover the buyer’s costs of having the repairs done at a later date
• Ask for nothing
• Walk away
• Home inspectors are not specialists and don’t inspect everything.

• What else should be evaluated?
• Items identified in the report for further evaluation
• Radon levels
• Sewer lines leading into the home
• Termites
• Well or septic tank inspections
Lead Based Paint
• Lead is a highly toxic metal that can

cause a variety of health problems
Lead Based Paint
Source: epa.gov
Lead Based Paint
• Lead is a highly toxic metal that can

cause a variety of health problems
• Likely present in homes built prior
to 1978 (based on building permit
date)
Lead Based Paint
Federal law requires that a buyer must receive the following prior to
going under contract on a home that may have lead based paint
(building permit issued before 1/1/78):
1. An EPA-approved information pamphlet (see Canvas)
2. Any known information concerning the presence of LBP in the
property.
3. A signed disclosure confirming that the above information was
received.
4. A 10-day inspection period to conduct a paint inspection/risk
assessment for LBP. Buyers may waive this inspection opportunity
(this can be done on the disclosure form)
Step 7: At the Finish Line
Closing
At the finish line:
Day of Closing
Why should you do a final walk through?

• Verify condition (same as when contract signed)
• Make sure repairs have been completed as agreed
• Verify who is in possession of the property
At the finish line:
Day of Closing
At the finish line:
Day of Closing
Why should you do a final walk through?
• Verify condition (same as when contract signed)
• Make sure repairs have been completed as agreed
• Verify who is in possession of the property
When does the Buyer become responsible for

the home?
• The day of closing
What if closing is at 9:00 pm?
At the Finish Line:
Closing Documents
HUD-1 Settlement Sheet

• Details all closing costs related to the sale of the home
Truth-in-Lending Statement
• Outlines the cost of the loan (APR, points, fees, etc..)
Closing Disclosure (CD)
• Replaced the HUD-1 and Truth in Lending Disclosure
(Oct 2015)
• Must be provided to consumer three FULL days prior to
closing.
At the Finish Line:
Closing Documents
Closing Disclosure
• Details costs and loan information related to sale of home
Mortgage Note
• “Promise to repay the mortgage”
• Indicates loan amount and terms and lenders remedies if you fail
to make payments
Mortgage or Deed of Trust
• Secures the note (places the lien on the property)
Deed
• Transfers ownership from sellers to buyers
Settlement Statements:
The Basics
What is a Settlement Statement?

• Form that itemizes fees and charges in a real-estate transaction
• Breakdown of costs involved in the real estate sale
Who pays?
• Accrued expenses- unpaid costs the Seller still owes but the Buyer
will eventually pay.
• Property taxes
• Rent collected in advance
• Unpaid HOA fees
• Utilities billed in arrears
• Prepaid Expenses-costs the Seller has paid ahead of time
• Prepaid HOA fees
• Utilities billed and paid in advance
The Basics of Prorating
Proration- allocation of expenses to Buyer and Seller
• Buyer pays for the day of closing
• 365 days in a year/actual days in the month (366 in a leap year)
• Prorations- carried out at least 4-6 decimal places
• Round only the FINAL number to two decimal places.
Debit/Charge- money owed

Credit- money received
Good funds- cash, cashier’s or certified check, wired funds or checks

that have been deposited and cleared the bank.
Personal checks are NOT good funds!!!!!
The Basics of Prorating

An example:
 Taxes are $365 per year and are paid in arrears
 Closing is on January 31st.
 What does the Seller owe for the current year’s taxes at
closing?
$1 x 30 days= $30
 Debit or Credit the Seller? Buyer?

 What if last year’s taxes had not yet been paid?
Escrow expenses
Lender’s Required Escrows:
• Used to establish an escrow account with money collected from the buyer in
advance to cover expenses such as property taxes, homeowner’s insurance,
flood insurance, HOA dues, etc.
• One of the largest expenses buyers will encounter at closing
• Protects both the borrower and lender
• Once established, account balance is maintained through regular monthly
contributions (added to your monthly mortgage payment)
• Amount is evaluated each year and may be adjusted as taxes and other bills
adjust from year to year.
Settlement Statement Worksheet:
Putting it together
A (Very) Simple Settlement Statement Worksheet Example
1. Closing is January 31, 2020 at 8:00p.m.

2. Sales Price: $300,000
3. Buyer paid Earnest Money at time of offer: $3,000
4. Buyer is taking out a new loan in the amount of $200,000
5. Seller’s existing loan payoff amount is $260,000
6. Lender fees (doc prep, appraisal, credit report, etc.) for the new loan total $500
7. 2019 Property taxes –not yet paid by the Seller are $1,830
8. 2020 Property taxes- will not be paid until 2021
9. 2020 HOA Dues have been paid by the Seller and are $670
10. Lender requires 2 month’s reserves for establishing an escrow account (assume
the annual homeowner’s insurance premium is $1,200)
11. The Listing Broker is charging commission of 6% and has agreed to pay the
Buyer’s Broker 3% of that amount.
Settlement Statement Worksheet:
Putting it together
Seller Buyer
Debit Credit Debit Credit
1 Selling Price
2 Earnest Money
3 New Loan
4 Loan Payoff
5 Lender Fees
6 Property taxes 2019
7 Property taxes 2020
8 HOA Dues 2020
9 Lender’s required escrows
10 Broker’s Fee (6%)
Subtotals
Balance due to/from:
Total

Residential Real Estate Introduction Slides - Student Version-1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Residential Real Estate Introduction Slides - Student Version-1

Uploaded by

Copyright:

Available Formats

Residential Real Estate: Everything You’ve Ever

Wanted to Know (and then some)

Source: Survey of Consumer Finances (2016)

Advantages of Owning Advantages of Renting

Comparative Analysis in Renting vs. Owning Decisions

1. Compile all cash flows associated with each form of occupancy

1. Compile all cash flows associated with each form of occupancy

1. Compile all cash flows associated with each form of occupancy

3. Calculate before-tax cash flows (from the owner’s perspective)

4. Calculate tax deductions and tax savings (from owning)

5. Calculate net cost of owning and renting

Net cost of renting 12,000 12,240 12,485 12,734 12,989

Mortgage balance 118,781 117,474 116,072 114,569 112,958

8. Calculate the after-tax IRR for each year

8. Calculate the after-tax IRR for each year

8. Calculate the after-tax IRR for each year

 Underwriting: process of determining whether the risks of a loan are

The Three C’s of Mortgage Underwriting

Collateral Credit History Capacity

• House Value • History of repayment • Ratios:

Generally set maximum at:

to the listing brokerage/agency

to the listing brokerage/agency

•Why use a buyer’s agent?

• Access to the MLS (multiple listings

• An intermediary who brings together buyers and sellers,

 Bring buyers and sellers together

 Receive commission (paid at/upon closing)

• Don’t confuse licensing with

 Prices and terms in current market

 CO first state to enact single licensing in `97

Law of agency governs relationship between a principal (seller/buyer) and an

• Skill and care:

• Single Agency- agent represents only one party in any single

Cannot disclose w/out informed consent of principal

 Cannot disclose w/out informed consent of all parties

 Contract between buyer (or tenant) and buyer’s broker

• Finding the best home for you is

May 2 May 8 May 11

• Property • Multiple • Buyer’s

May 2 May 8 May 11 June 13

• Property • Multiple • Buyer’s • Seller’s

• Should the Buyer receive their earnest money back?

“state of mind denoting honesty of purpose, freedom from

• How does it apply to a real estate transaction?

Fixture- anything attached

Personal Property- anything

• One of the most expensive provisions of the

• The exclusions portion of the contract is for

Colorado Required Disclosures:

Read: Advisory to Buyer (last page of Seller’s Disclosure)

Assume you are in the market to purchase a

Now read pages 6 and 7 of the Seller’s

… “No disclosure is required if the Property was remediated in accordance with

Lesson- read it all and don’t assume!

• Ultimately you should not rely on anyone to provide

What is important to you?

What is a home inspection?

Problems will be found

• Home inspectors are not specialists and don’t inspect everything.

• Lead is a highly toxic metal that can

• Lead is a highly toxic metal that can

Why should you do a final walk through?