Involve work with consumers and their changing needs and wants. Typical clients are selling the family home due to employment, monetary or family changes. Typical buyers relocating due to the same motivating factors as sellers. Be ready for irregular hours.
This work involves listing functions or offers presentation, qualifying the buyers and closing the sale. Showing may consist furnishing info, demonstrating diagrams and plans.
A system of land ownership, where each individual holds title to a specific unit as well as owning a share of common property.
Industrial Real Estate: sale or lease of warehousing and manufacturing space. General purpose, special purpose, single purpose.
Retail/Office: sale or leasing of all forms of retail or office facilities. Sales of business, with or without ownership of land.
Investment: sale of industrial, office or residential income-producing real estate to investors - domestic or overseas.
Requires detail knowledge of techniques and procedures to be applied in estimates of value for different property types.
Keeping the property leased
Paying the property expenses
Maintaining soundness of property
Choosing a Brokerage
Franchise vs. Independent
Market presence within particular market segment, specific training tools as a benefit, public awareness
Full Service vs. Limited Service
Full service provides all services to the buyer and seller from start to finish. Limited - provide specific service with the limited commission or a flat rate.
Listing vs. Selling
Organized Real Estate vs. Non-Organazed
CREA (The Canadian Real Estate Association)
National and international representation. "To present and promote the interests of the members, enhance members' professionalism and ability to succeed, and advocate policies that ensure real estate property rights and ownership"
Understanding the Listing/Selling Process
The listing agreement is between the seller and the real estate brokerage, authorizing the brokerage to act as a seller's agent in offering the property for sale. broker or salesperson act on behalf of the brokerage.
Involves search for qualified buyers for the listed property. "The property will qualify the buyer".
Qualifying and Showing
Qualifying involves determining the buyer's needs and wants. Typically - selecting a limited number of properties to be shown. the process of showing and providing accurate and complete info follows.
In preparing an offer, the salesperson accepts a very serious responsibility to ensure that the document contains all terms and conditions required by the buyer and that the elements necessary to create a binding agreement, according to the common law of contract, are present.
Involves analysis of the document and discussion of such matters as market conditions and circumstances that the seller should take into consideration. The seller may accept, reject or counter the offer.
The brokerage and representative must follow through after the sale. If any changes - ex. agreement have 1 or more conditions that must be satisfied.
Sales Person Remuneration
Typically involves commission as a % of the sale or a flat fee.
Commission sharing - if the salesperson lists and sells the property, the commission is paid to the brokerage and splits with a salesperson. Also, it can be allocated between listing and selling salespersons or brokerages.
ABC listing and selling brokerage ($5000 commission received) - $2500 listing portion and $2500 selling portion - $1250 go to the listing salesperson and $1250 go to brokerage (50/50). $1750 go to selling salesperson and $750 tp brokerage (70/30).
ABC listing brokerage ($5000 received) - $2500 distributed to XYZ selling brokerage. $2500 listing portion (60/40) and $2500 selling portion (90/10).
RECO (Real Estate Council of Ontario) - is responsible for regulating the activities of brokerages, brokers, and sales in ON. Its mission is to regulate the activity of trading in real estate in the public interest. The key goals of RECO:
establish a code of ethics and complaints process
Establish education program
Establish an insurance program
Achieve real estate act reform
Protecting The Public Interest:
Registration - standards required to register a brokerage
Education - requirements for pre-registration for real estate courses
Inspections - inspections of brokerages offices
Complaints and Concerns
Insurance - consumer deposit, errors, commission protection
The Ontario Mobility Act - ensures that workers certified to practice in one province are entitled to be certified in that occupation in ON without examinations or assessments.
Registration Approval - The certificate of registration, once the application is approved, is sent to employing brokerage. It sets out the name, salesperson status, brokerage name, registration number and expiry date. The certificate must be returned to RECO if the registrar suspends, revokes, cancels or refuses to renew the registration.
Maintaining the Registration
Articling courses must be completed within 2 years following initial registration (3 courses).
Students in pre-registration education will be required to complete only 1 articling course: Principles of Appraisal, Principles of Mortgage Financing, Real Estate Investment Analysis, Property Managment.
Every registrant is responsible for registration renewal. To renew the registration, the registrant must meet the educational requirements and apply to renew with RECO.
Insurance is based on 12-month policy, which is renewed each year in mid-August. A registrant cannot trade in real estate unless he is insured.
All examinations are 3 hours length. At least 75% must be achieved. Students have 2 chances to pass. Otherwise, the course must be taken again.
Consumer Protection - consumer deposit protection.
Registrant Protection - Errors and Omissions / Commission Protection
Policy coverage is on the claim made basis. Claim made against the registrant will be reported to the insurer. Registrants must also report a circumstance (incident or situation that a registrant could reasonably foresee).
RCI (Registrar's Complaints and Inquiries Process) - provides a method of addressing complaints.
Brokerage Inspections and Investigations
Types of Inspections:
Routine Inspections - typically, inspectors randomly choose brokerages for inspections. These inspections are conducted to ensure compliance with the Act.
Complaint-Initiated Inspections - the registrar may investigate complaints against registrants and those who are trading in real estate without the benefit of registration under the Act.
Courtesy Inspections - will conduct by request, to correct problems and improve reporting systems within the brokerage.
Reconciliation Inspections - in addition to on-site inspections, brokerages are asked to submit trust account reconciliations, a copy of financial institution, a list of pending trades.
Investigations - procedures, that may result in court action. Investigations can involve search warrants (ордер на обыск), seizures (конфискация), freez orders and applications to Court.
Factors of Production
All economies require 4 elements to produce goods and services:
Economic Principles and Primary Indicators
Canada - mixed economy. Certain key indicators demonstrate a high degree of reliability in predicting economic swings including real estate are:
Resource Markets (land, labor, capital, entrepreneurial skills)
The national employment rate, job creation, and job vacancy statistics is a very important info when analyzing local markets. Labor indicators not only measure the strength of the economy, but also efficiency with which manpower is being utilized in addressing consumer demand.
GNP - Gross Nationa Product. Measures total production by residents, corporations and individuals in the economy, overall prosperity within the country.
GDP - productions located solely within the country, a complementary indicator for GNP.
Retail Sales - these statistics are viewed as a lead indicator foreshadowing overall trends in the economy.
Consumer Confidence and Spending - quarterly reports. If attitudes are positive - increased expenditures on goods and services will result.
CPI (Consumer Price Index) - a measure of supply and demand. This is a valid measure of purchasing power.
Indexes - economists use indexes to show the change of a particular indicator over time.
Market Bubble - expansion of the market due to excessive buyer confidence resulted in inflated values. Real Estate bubbles have a significant negative impact on the overall economy. Government controls the bubbles.
Business Cycle - a series of economic events (prosperity, recession, recovery), that takes place in the same approximate order and time interval.
Spending Policies - gov directly impact the market through its acquisition of goods and services.
Crown Corps - gov owned companies influences the natural supply and demand equation in the economy.
Analyzing The Real Estate Market
No Standard Product - no 2 houses are ever exactly the same. Each property is adapted to the needs of the owner.
Local Real Estate Market - real estate retains its local character.
Fixed Location - residential and commercial buyers differentiate identical properties by location (access to trnasportation, proximity to services, surrounding properties, travel distance etc.).
Market Not Standardized
Slow Supply/Demand Adjustment - with an oversupply, production can usually be slowed. The market seeks a balance between supply and demand.
Private Transactions - The purchase of real estate is a private transaction, the results are not published at large. Info regarding the ownership is available through the docs registered at the provincial land registry.
Demographic Changes - ex. family composition is a significant factor impacting the market. the family is the primary housing consumer unit. An increase in family formations creates an increase in demand for housing.
Employment Conditions and Wage Levels - a strong demand for housing is associated with periods of prosperity and increased employment. Also, pensions have enabled seniors to continue as homeowners after retirement.
Mortgage Volume and Interest Rates - loans are based on the lender's confidence in the borrower and the security that the borrower offers. If interest rates are high - people tend to stay put in their existing housing accommodations. As debt is frequently a major component in a house purchase, any significant interest increase directly impacts the market. If interest rates are low - mortgages become more affordable.
Building Activity - Substantial building activity indicates a strong real estate market.Overbuilding may depress real estate values by new supply in excess of demand.
Types of Markets
Seller's Market - the # of buyers wanting properties exceeds the supply. Properties sell fast, rising prices, many buyers looking and a minimal inventory available for sale.
Buyer's Market - the supply of properties exceeds the demand. Longer selling periods, fewer buyers compared to properties available, higher inventory and stabilized or declining prices.
Balanced Market - supply = demand. Properties selling within a reasonable period of time. Reasonable offers and prices.
Real Estate Market Cycles
Long vs. Short Cycles
Many believe that the long cycle is driven by demographics, transportation, macroeconomic growth etc. The shorter cycle affected by interest rates, consumer confidence, and general economic conditions. Others believe that the reals estate market demonstrated consistent short-term cycles every 6-10 years.
Real Estate Cycles vs. Business Cycles
Differentiate from each other.Variations occur due to unique factors - fixed location, supply/demand adjustment.
Tracking The Ontario Residential Market
3 sources of market information:
Brokerage Files - specialized data collected to specific market areas or niches.
MLS Statistics - boards offer detailed statistics to assist in establishing market trends, preparing competitive market analyses for sellers and guidance to buyers in negotiating the process. Data is separated into active and historical.
Other Sources - ex. Canada Mortgage and Housing Corp. offer housing and construction trends resources.
Market Indicators - provide sale prices, average prices, median prices, average sale to listing ratios and # of days on the market.
Market Trends - statistics are often focused on measures of central tendency, most notably by mean (average) and median. The mode, which is the 3rd measure is used for real estate appraisal statistics.
ex. Mean: 5 selling prices of homes (1+2+3+4+5) / number of figures (5) = Mean price
ex. Median: is the middle figure (1,2,3,4,5) or (1,2,3,4,5,6)
ex. Mode: most frequently appearing # in an array of figures (1,5,5,5,8,3)
ON is strong for manufacturing and business/financial services. ford, Chrysler, GM, Toyota, and Honda chose ON for manufacturer activities. However, declining market share for the big 3 (Ford, Chrysler, GM) will pose challenges in future. ON has the largest agriculture component of any other province. In addition, forest products and mining remain vital sectors in provincial economy. Also tourism. The housing market demonstrated continued strength (the past decade) both in residential and commercial segments.
Ontarians have enjoyed prosperity due to higher productivity and increased returns on investment, growth in personal income and gains in savings. Province GDP is 2-4% range (past 20 years).
4 out of 10 workers highly skilled over 60% completed post-secondary education.
The ON economy benefited from lower long-term interest rates. Certain factors can impact the long-term economic outlook, including:
the value of Canadian Dollar (rising can impact exports)
Interest Rates (increase negatively affects GDP)
the general economic climate in the US (90% exports)
Oil Price fluctuations (increase is negative factor for ON, the province imports oil and gas)
ON has a population - 13 million (most populated province). 3 out of 10 Ontarians - foreign-born. 10% of population arrived in here within 15 years. During the past 20 years population grow 1.5% per year.
Population growth is not evenly distributed through the province. GTA is the most popular destination for immigrants (60% of all provincial growth). Most growth has occurred in urban areas (beyond GTA) - Central, Eastern, Southwestern ON.
55% - 25 to 64 age. 12.5% - 65+. Census - is a periodic count of the population by the gov. Full census - every 10 years, part census - every 5 years.
ON is the 2 nd largest province after Quebec.
More than 88% of all Ontarians reside within major metropolitan centers. While the GTA is by far the largest, other cities provide diversified business opportunities and high standard living.
Demographics and The Real Estate Market
Assuming current patterns continue, net migration will be the most significant factor in ON's population growth. Net migration is the difference between entering vs. leaving the province people within a specified period of time.
Real Estate Market Implications (Последствия)
Bew house construction is a major source of employment and is key in addressing pent-up demand. Home ownership is a high priority for the most Canadians with 2 out of 3 families owning own home. Population growth is now focused in Southern ON - Central, Southwestern, and GTA.
The 2nd key demographic factor impaction ON is aging of the population. More and more baby boomers enter 65+. The shift to an older population brings new demands for those involved in real estate. New retirement communities are appearing in many ON cities. This demographic change affects commercial real estate (clinics, healthcare support services etc.). Housing developments (stairless entries, elevators, wider halls etc.). Residential developments (security, fitness centers, social events etc.).
Objective Value - the direct cost of creating.
Subjective Value - value that exists in the mind of buyer/seller.
Value in Exchange - the probable price at which a commodity trades in the free, competitive and open market.
Value in Use - involves the economic good to its owner, which is based on the productivity of economic good to a specific individual.
Market price is the price paid for a specific property, while market value is an estimate of value arising from many sales (market prices). Market value is based on judgment arising from various sales in the marketplace.
Investment Value - defined as the value of an investment property from the perspective of a specific investor.
Principles of Value
The value is created by the anticipation of benefits to be derived in the future. Value - present worth of future benefits.
The value of a property is governed by the balance found in the particular marketplace. Too much or too little of any one of the factors tends to reduce value.
The principle of change is fundamentally the law of cause and effect. This principle illustrates the fact that a value estimate provided by an appraiser is only valid as of a specific time.
Excessive profits will tend to create competition that, in turn, has a negative impact on profits.
Stating that land must be utilized to reasonably conform with existing standards of the area in order to maintain max value.
When improved land is in transition to another highest and best use, it cannot be appraised with one use allocated to the land and another to the building or other improvements.
The value of any component of a property is measured by how much it adds to the net income, by reason of its presence, or deducts from the net income by reason of its absence.
Increasing and Decreasing Returns
When a successive increase of 1 or more factors of production is added to fixed amounts of the other factors, an initial improvement of income in dollars, benefits or amenities occurs, to a point of max return, followed by a decrease in incremental value in the relation of the value of the added factor.
In the case of dissimilar properties, the value of the poorer property will be affected positively by the presence of the higher value property.
Between dissimilar properties, the value of the better property will be affected disadvantageously by the presence of the poorer property.
Buyers will consider the alternatives available to them, that they will act rationally, and that the time is not a significant factor.
Supply and Demand
If supply increases and demand stays the same - prices will decrease. If demand increases and supply stays the same - prices will increase. If both increase or decrease - prices will remain stable.
The land is valuable according to the surplus productivity imputed to it (after all expenses necessary to the operation have been paid and the capital invested in improvements has been satisfied).
Consumer Behaviour Basics
Consumer behavior is affected by both internal and external forces. The challenge lies in dissecting the consumer mindset and analyzing basic underlying motivations - the world of needs and wants.
Personal Traits and Psychographics
Decisions are influenced by internal personality traits and demographic factors. Not only does the mindset vary, but also personal backgrounds.
What Others Think
Our opinions are formed by what others say or do. We often make decisions based on what other people will think of our purchases. Many people follow others for conformity, whether out of fear of being different, a desire to belong or both.
Consumers are social and the urge to flock with others of similar psychographic, ethnic, age and etc. is strong. The consumer marketplace is made up of many sub-markets that can be based on such factors as - ethnicity, income level, lifestyle, family structure, and age.
The Electronic World Beyond
Confidence personally attributed to a specific product through brand loyalty. Often, consumers unconsciously dismiss countless valid alternatives, only to pick up that favorable label.
People don't buy houses, they buy homes. The design, layout, amenities, colors, all play out in the decision-making process.
Consumer Needs and Wants
Hierarchy of Needs (Maslow):
Self-Actualization - personal fulfillment and the ability to develop one's potential in terms of creativity and outward expression.
Ego - general feeling of self-satisfaction. Behind these are financial security and social acceptance. Status Symbols - a tangible sign of economic or social status.
Social - involves love, family, companionship, social ties and desire to belong.
Security - can range from either physical or financial.
Physiological - basic human drive needs for existence (ex. search for food and water). If these needs are not fulfilled, they become #1 priority.
Consumer Vulnerabilities (Уязвимости)
Confusion Regarding Who Represents Who
Consumers often don't understand agency law. REBBA 2002 sets out detailed disclosure requirements, which require that buyers and sellers are fully aware of service alternatives available through the brokerage.
Caution When Inspecting Properties
Brokers and Salespersons should ensure that the buyer understands the importance of carefully inspecting properties, and seeking out an appropriate professional advice.
Due Care When Signing Docs
A Clear understanding of printed clauses. Consumers must read documents carefully before signing. Explain them everything.
Cooling Off Periods
A time period that provides the consumer with an opportunity to cancel whatever action has been taken. Cooling off periods doesn't typically apply when entering into a real estate transaction. Consumers must fully understand what they are signing when purchase or sale.
Failure to Include Conditions
Not Respecting Deadlines
Not Getting Finances in Order
Lenders are cautious and want to see stability (credit history, employment, financial resources, available funds for the downpayment etc.). Also, buyers should have additional cash on hand for any adjustments.
Ethics and The Consumer
Morals vs. Ethics
Morals - fundamental principles of right and wrong. Ethics - standards adopted by a society that is deemed to be cultural-specific.
Business Ethics and Professional Standards
Business ethics - professional standards. Real estate registrants in ON must follow RECO Code of ethics. This code has the force of statutory law, contained under REBBA 2002.
Ethics and Law
It is possible to be legally correct, but not ethically acceptable. Law is designed to keep us from doing wrong while ethics encourages us to do that which is right and good.
Typically occur when one's moral values are in conflict with standards adopted in a particular society. This dilemma can also extend to a conflict with the law.
Consumer Protection Legislation
Consumer Protection Act (CPA) - provincial legislation concerning consumer protection in ON. It set out penalties including a max sentence of 2 years with individual fines up to $50k and $250k for corporations.
The Competition Act - federal statute addressing many forms of competition in the interest of promoting a fair and efficient Canadian marketplace. The act covers criminal and civil law matters.
ON Human Rights Code - an anti-discrimination law for all persons in ON. The ON Human Rights Commission is an independent body, representing the public interest.
Personal Info Protection and Electronic Docs Act (PIPEDA)
This federal statute is focused on privacy matters involving business activities. Personal info can't be collected, used or disclosed without the informed consent of individuals. Sensitive personal info should be properly secured either by way of locked cabinets for print materials or password-protected electronic files.
Professionals and The Consumer
Lawers provide legal advice and assistance to consumers. Lawers are governed by the Law Society of Upper Canada (LSUC), that will assist regarding complaints provided by the lawyer (misleading info, improper communication, failure to correctly handle funds etc.).
A professional who estimates value and possesses the necessary qualifications, ability, and experience to execute or direct the appraisal of the property. Logical analysis leading to an estimate of value:
Define the problem
Inspection and planning the work
Data collection and analysis
Apply the cost approach
Apply the direct comparison approach
Apply the income approach
Write the appraisal report
Licensed by the Association of ON Land Surveyors (AOLS). They prepare a Surveyor's Real Property Report that sets out all visible improvements in relation to the property's boundaries.
Federal Acts containing the cost of borrowing Regulations include the Bank Act, the Insurance Companies Act, and the Trust and Loan Companies Act.
The Financial Services Commission of ON (FSCO) regulates mortgage brokers. They may also be members of IMBA or CAAMP.
Insurance Agents and Brokers
Consumers seek protection against property loss by obtaining insurance through insurance agents and brokers. Agents represent a specific insurance company and brokers have relationships with several companies.
Are common when buying a home in ON, inspections are requested by buyers seeking to know about the condition of the property. The report can assist in determining needed repairs and generally placing the house in a better condition for marketing purposes. Ontario Building Code (OBC).
Effective marketing should begin with determining what customers want. It involves 3 stages:
Marketing Products vs. Services
Brokerages sell both - intangible services and tangible.
The 4 P's
The marketing mix is developed by weighting the 4 components.
Service Based Marketing
Customer Service as a Competitive Force
While consumers will always focus on product and benefits, they are increasingly studying how services are delivered and the level of customer satisfaction.
Value Added Services
Can typically be added to a basic service and sold at a premium price.
The concept refers to a particular method that consistently produces a better outcome (ex. heighten the quality of services and achieve higher consumer satisfaction).
Marketing Plan vs. Strategy
A strategy focuses on the overall strategic directions of an org., while plans put specifics into place to pursue those directions.
Selecting Target Markets - a target market involves a specific area or group to which an org. directs its marketing efforts.
Creating a market Position - involves the creation of an identity in the consumer's mind. (branding)
Broadening Competitive Advantage - while target marketing and market position theory can be very effective in differentiating the brokerage from its competitors, other strategies are often necessary to build and maintain a presence.
Cost advantages that are obtained through increased efficiency.
Differentiation advantages (more desired) that involve offering unique services.
Designed to gather opinions to better understand customer needs and wants.
(Surveys) Quantitative Research - a method using techniques to obtain specific, objective info usually reported in a tabular or statistical format.
Focus Groups - consist of 6-12 people. A skilled interviewer can move beyond the question and determine what the person is thinking when making a response. Info gathered is subjective. (ex. What was the reason you selected our brokerage?).
Personal Research - the risk with this kind of research is that responders may not provide honest opinions.
Marketing to the Seller
The Commercial Marketing Proposal
Proposal Objectives and Scope of Work - the who, what, when and at what cost details. A detailed schedule of activities within the marketing period is included.
Site, Building and Marketing Analysis - analysis if the site, the building, related matters affecting both site and building (ex. taxes and financing) and the market analysis.
Marketing Plan Development - identifies the selected target market along with a description of planned marketing tools.
Property Valuation - commercial registrants rely on all 3 approaches to value: cost, direct comparison and income.
Listing Process and Marketing Plan Implementation
Negotiations and Drafting the Agreement - registrants usually detail types of services commonly provided to clients during negotiations.
Closing the Transaction
The Residential Listing Presentation
A salesperson must be able to meet the seller's needs and explain how complications can be minimized through the use of a brokerage.
Do I know the owner's motivation for selling?
Do I know the neighborhood and site?
Do I know financing alternatives?
Do I know when they purchased and for how much?
Comparable properties ready?
Do I have my listing presentation planned? etc.
Marketing to the Buyer
Establish a buyer profile - property specifics and special needs/requirements.
Provide Market Info
Identify Target Properties
Discuss Professional Assistance
Disclose Material Latent Defects - brokerages must be aware of hidden defects in a property.
Prepare an Offer
Negotiate Acceptable Terms - ensure that the buyer's interests are protect4ed and he is informed of facts in the decision making process.
Assist From Sale to Closing
Advertising - any message that influences people.
Promotion - a marketing communication delivered by advertising tools.
Regulatory requirements set out by REBBA 2002 and RECO.
Federal Competition Act.
Office policy manuals.
Ethical standards established by a professional org. of which the registrant is a member.
Institutional Advertising - focuses on the promotion of services to the general public, as distinct from classifieds which are viewed as specific forms of advertising.
Specific Advertising - focused on individual products and services, reaching a specific target market, satisfying the needs of seller clients, promoting sales staff and building a company image.
Get the prospect's Attention by creating a unique and interesting heading and related lead line. (#1 item of interest is - location of property)
Continue to create an Interest by outlining the property's features and benefits.
Build Desire to live on that property by describing the way of life.
Prompt the reader to take Action.
For Sale Signs - informs neighbors that the home is for sale. They are a good source of referrals regarding their friends and relatives. Municipalities often control the size and placement of signs.
Open Houses - the protection of the seller's personal property is important. Risk of theft or damage must be minimized.
Direct Marketing - establish communication links directly with consumers.
Direct Mail - effective when targeting specific areas and groups. Can be grouped into addressed and non-name addressed.
Push/Pull Technology - Internet-based marketing is a pull technology. Customers are drawn to the site given benefits, features, and value-added services, as opposed to e-mail which is viewed as a push technology.
MLS - Multiple Listing Service is best described as a system for the orderly coordination and dissemination of listings info to members. (marketing access, market selection)
REALTOR.CA - this website puts consumers in touch with REALTORS regarding MLS property advertisements. Consumers can access property advertisement and other relevant info and tools.
Working With Percentages
Every % consists of:
Rule #1 - Part Unknown
Whole = 3000 sq house
Rate = 15% kitchen area
Part: 3000 x 0.15 =450 sq. ft.
Rule #2 - Rate Unknown
Part = 100000 downpayment
Whole = 400000 price
Rate: 100000 / 400000 = 0.25 (25%)
Rule #3 - Whole Unknown
Part = 5 homes
Rate = 25%
Whole: 5 / 0.25 = 20
Percentage Change = (New Amount - Old Amount) / Old Amount
ex. The average price in Vaughan was $224500 a year ago. Now it is $232000
232000 - 224500 = 7500 / 224500 = 0.03340757 x 100 = 3.3%
- feet/meters (ex. room measurement and lot sizes)
- sq.ft/sq.m (ex. sq. footage of house, condo, and commercial premises)
- acres/hectares (ex. land)
Area = a x b
Right Angle Triangle
One of the angles is 90. Area = 1/2 x (base x height)
Total Area = Length x Perpendicular height
Total Area = Sum of Parallel Sides x 1/2 Perpendicular Height
Cube or Box Shape
Volume = Length x Width x Height
1 cubic foot = 12'' x 12'' x 12''
1 cubic yard = 3' x 3' x 3'
To convert cubic feet to yards - divide by 27 abd vice versa.
Measuring a Residential Condo
Unit ownership must be differentiated from common elements.
The Residential Mortgage Financial Process
Application - central doc. in the financing process. Designed to detect info about the financial ability of the applicant and the property's value. The application is prepared and forwarded electronically by a mortgage broker for review by underwriting department.
Appraisal and Credit Check - the lender reviews the application, applies loan qualification ratios and considers the income stability and future prospects. An appraiser or bank rep. may inspect the property to ensure it meets lender criteria. A credit check is usually performed to verify financial stability of the applicant.
Commitment - a letter from the lender agreeing to make the loan. Such a letter has little, if any, stature.
The Commercial Mortgage Financing Process
Feasibility (осуществимость) Report - report on economic, market and physical characteristics of the venture.
Construction and Site Analysis - complete documentation regarding the property, architecture, construction plans, landscaping, utilities etc.
Borrower Info - past projects, financial statements for the past 2-3 years, credit check and background of the company/individual.
Estimated Income/Operating Expenses
Involves 2 factors:
Downpayment - required cash recourses from the borrower. Typically represent total liquid assets minus purchasing costs (ex. fees and adjustments).
Mortgage Qualification - lender requirements (gross debt service ratio / total debt service ratio) for approval of the mortgage principal.
Affordability Index - measures the cost of homeownership. Assumes 25% downpayment and a 5-year loan amortized over 25 years.
Gross Debt Service Ratio (GDS) - represents the max % of borrower's gross income to be allocated to principal, interest and tax payments (PIT). May include heating costs.
ex. Max's Income = $50000 GDS ratio = 30%
max PIT payment (50k x 0.30) = $15000
Annual taxes (T) on property = $1500
Remaining PI payments availavle - $13500
Max Monthly PI Payment Available ($13500 / 12) = $1125
If Max requires a $140000 mortgage at 6.5% 25 years, the payment is: 6.698238 x 140000 = $937.75. Max meets lender's requirements.
GDS Ratio - Condo
Includes a portion of the common share expenses.
ex. Max's gross income = $58000 Downpayment = $50000 Condo Purchase = $170000 Taxes = $4120 Maintainance = $325 per month (3900 year)
Max requires $120000 conventional mortgage for 25 years with a 5 year term. Current rates are 7.5% and the monthly payment factor per $1000 - 7.315549
Monthly Mortgage Payment: 120000 / 1000 x 7.315549 = $877.87 | Annual: 877.87 x 12 = $10534.44 | + Taxes and Maint. fee: 10534.44 + 4120 + (3900 x 0.5) = 16604.44
GDS = (Principal and Interest + Taxes + Maint. (50%)) / Gross Income = 16604.44 / 58000 = 28.63% (Max meets the max 30% limit for this particular lender.
Total Debt Service Ratio (TDS)
Includes charges for principal, interest, and taxes, plus other debts including personal.
Calculating Loan Payments
Max's Income = $55000 Lender req. 30% GDS PIT = GDS x Buyer Income | 55000 x 0.30 = $16500
Max's income = $65000 PIT = $20960 GDS = PIT / Income | 20960 / 65000 = 0.32246 (32.25%)
Calculating Required Income
PIT = $29000 30% GDS Income = PIT / GDS | 29000 / 0.30 = 96700
Calculating Maximum Mortgage
Establish Buyer Income $60000
Determine Lender GDS Ratio 30%
Calculate Available PIT Ratio 18000 (60000 x 0.30)
Establish Annual Property Taxes (T) $2000
Calculate Remaining PI Payments $16000 (18000 - 2000)
Calculate Monthly PI payment $1333.33 (16000 / 12)
Insert Current Mortgage Rate 6.5%
Insert Amortization Period 25 years
Obtain Mortgage Payment Factor 6.698238
Calculate Mortgage Principal $199056.83 = (1333.33 / 6.698238) x 1000
Calculating Simple Interest
Interest payable for a specified period of time at a given rate with no compounding. Short term financing or small personal loan may involve simple interest.
Interest (I) = Principal (P) x Rate (R) x Time (T)
Calculating Compound Interest
Interest charged at specific intervals (daily, weekly ...). Compound Interest earned during each period is reinvested and continues to earn interest.
Compound Amount (A) = P x (1 + i (interest rate per period))n
Nominal vs. Effective Interest Rates
The nominal rate is stated rate ex. 12%. The effective takes into account any compounding ex. 12.6485 or 12.64%.
Monthly Mortgage Payment = Monthly Payment Factor x Loan Value (in 1thousands)
$150000 mortgage, 25-year amortization, 6.5% interest | 6.698238 x 150 = $1004.74
Capitalization - the appraisal process consists of direct comparison, cost, and income approaches.
Direct vs. Yield Capitalization (капитализация доходности)
Direct capitalization is based on a single year's projected income and expenses in arriving at a value. Yield cap. req. forecasted income and expenses over a projected investment period (3-5 yrs) and involves 4 steps:
Determination of a specified holding period
Projected income/expenses over that period
Selection of an appropriate discount rate (the cost of a lost opportunity)
Estimating present value based on that rate
Establishing ab Overall Capitalization Rate
The rate of return on the investment (Discount rate) | The rate of return of the investment (Recapture rate)
V (value of a property) = I (net operating income) / R (overall cap rate) | R = I / V | V x R = I
Methods to Determine Overall Cap Rate
Investor Analysis - the analysis of expected return of the investment and return on the investment.
ex. Property = $150000 | land allocation - 20% (30k) | building allocation - 80%
Establish return on Investment - the investor req. a 10% return.
Establish return of Investment - building economic life is 40 yrs, so funds invested should be returned over that time.
Recapture rate - Divide remaining economic life into 100%, which represents return of all investments (100 / 40 = 2.5%).
Overall Cap Rate - 20% land value at 10% - 0.2 x 0.1 = 0.02| 80% building value at 12.5% (10% + 2.5) 0.8 x 0.125 = 0.1 | 0.02 + 0.1 = 0.12 (12%)
Reconstructed Operating Statement - typically involves a 1 yr analysis of actual income and expenses according to the owner's statement for an investment property.
Income Multipliers - the relationship between the rent that can be obtained from a property and its selling price. The monthly rental factor (MRF) and the gross income multiplier (GIM) are used in the valuation of properties when the rents are known.
GIM (gross income multiplier) = Sale Price / Effective Gross Income
ex. The subject property's effective gross income = $50000. A comparable sale with an effective gross income of $56000 and a selling price $392000 is found. GIM = 392000 / 56000 = 7. The comparable sold for 7 times its effective income. This multiplier can be used with the subject property. V = 50000 x 7 = 350000.
MRF (monthly rental factor) - the ratio of value to the gross monthly rent. Ex. if the value is $60000 and the rent is $600, then: MRF = 60000 / 600 = 100. It demonstrates that the property sold for 100 times its monthly rent. The MRF is applicable if the monthly rent is known and an MRF can be determined from similar properties to the subject property.
Provincial Land Transfer Tax - used when transferring property from one party to another.
Real Property Registration - tax is payable based on 3 conditions: a registration is made under either the Registry Act or Land Titles Act, the document being registered is a conveyance and the conveyance involves land.
First Time Buyers Refund - citizen or PR, 18+, the home is purchased for the first time. The refund is based on the amount of interest the individual owns in the newly constructed home. Buyers of the resale home may also be eligible to claim a refund up to $4k.
Municipal Land Transfer Tax - MLTT is charged on purchases in Toronto. Typically collected at the time of registration. First-time buyers of property which contains 1 and no more than 2 single-family residences are eligible for a rebate up to $4475.
Real Property Taxation
According to Value - the basis of the real property taxation is according to the value system. The current value = market value of the property. Tax depends on a % of the value of the property.
Tax Rate - the tax rate is established by dividing the projected annual budget by the tax base. Estimated Current Value x Tax Rate = Property Tax.
The Sale Transaction - commonly referred to as the date of completion. (when the buyer is to deliver the balance of money and seller is to deliver deed and vacant possession of the property). A closing statement (statement of adjustments) sets out the financial history of the transaction including all adjustments.
Fuel - in the case of the tank, the seller fills the tank and the buyer pays for it.
Insurance - the buyer arranges new coverage and no adjustment is req. as per agreement.
Interest in Assumed Mortgages - interest due on the mortgage on the actual closing day is a responsibility of the buyer.
Closing Costs - various expenses associated with the completion of a sale transaction.