California Real Estate Finance

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California Real Estate Finance

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Title: California Real Estate Finance

1
California Real Estate Finance

Sixth Edition

2
Nature and Cycle of California Real Estate
Finance

Chapter 1

3
Historical Perspective

Might and power
English feudal system
Allodial system

4
Nature of Real Estate Finance

Ownership of property
Property
Real property
Personal property
Commercial fixtures

5
Estates in Realty

Freehold estate
Fee simple absolute
Time-shares
Legal title equitable title
Concurrent ownership
Tenants in common and partnerships
Community property
Leasehold estate

6
Real Estate Characteristics

Physical
Economic
Social
Police powers
Eminent domain
Condemnation

7
Mortgage Lending Activities

Savings associations
Credit system economy
Financing relationships
Local markets
National markets

8
Real Estate Cycles

Supply and Demand
Real estate
Money
Population Characteristics
Political attitudes

9
Money and the Monetary System

Chapter 2

10
What is Money?

Medium of exchange or means of payment
Storehouse of purchasing power
Standard of value

11
The Use of Paper Money

As long as the public can exchange symbolic paper
money for commodities of like value, the system
works.

12
The Supply and Cost of Money

M1 includes cash and checking accounts
M2 adds savings and time deposits of less than
100,000
M3 adds large time deposits at all depository
institutions
Creating money

13
The Federal Reserve System (FED)

A central banking system that provides a rising
standard of living through controlled growth of
money and credit.

14
Organization of the FED

Twelve Federal Reserve districts
Each district includes Federal Reserve Bank
Directed by board of governors
Membership

15
Functions of the FED

Reserve requirements to protect depositors
Discount rates to regulate the cost of funds
Federal Funds Rate at which the Fed lends money
to member
Open market operations
Truth-in-Lending Act (Regulations Z)

16
The United States Treasury

Balances governments income against its
long-term and short-term debt instruments has a
direct effect on the monetary and credit climate
of the country.
The Office of the Comptroller of the Currency
(OCC)
Nations Fiscal Manager
The Treasurys Role
The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA)
The Federal Deposit Insurance Corporation (FDIC)
The Deposit Insurance Fund

17
The Federal Home Loan Bank System (FHLB)

Organization
Office of Thrift Supervision
Activities
Provides its members a national market for their
securities

18
California Financial Agencies

Department of Savings and Loans
California Housing Finance Agency (CHFA)
Department of Banking
Department of Insurance
Department of Corporations (DOC)
Department of Real Estate (DRE)
Office of Real Estate Appraiser (OREA)

19
Institutional Lenders for Real Estate Finance

Chapter 3

20
Commercial Banks

Origins
Goldsmiths and money lending
Advent and evolution of checking system
Underwriting
Organization and operation
Mortgage loan activities
Interim financing (construction loans)
Home improvement loans
Manufactured home loans
Equity loans
Mortgage banking
Trust department activities

21
Savings and Loan Associations/Savings Banks

Origins and development
Organization
Mortgage lending activities
California chartered savings and loan
associations

22
Life Insurance Companies

Seek safety and long-term stability of an
investment.
Participation financing
Purchase of blocks of single-family mortgages or
securities from the
secondary mortgage market

23
Pension and Retirement Programs

Pension monies collect routinely, usually from
payroll deductions, and are held in trust until
needed at retirement.
Pension fund managers invest assets from
accounts.

24
Credit Unions

Members deposit savings, usually through payroll
deductions.
Members borrow at interest rates below
competition.
Expanding in real estate finance.

25
Noninstitutional Lenders

Chapter 4

26
Mortgage Brokers and Bankers

Mortgage brokers match up borrowers and lenders
Mortgage bankers are intermediaries (known as
correspondents) originate new loans, collect
payments, periodically inspect the collateral,
and supervise foreclosure, if necessary.
Development Interest only loans with balloon
payments
High level of defaults during Great Depression
Formation of Federal Housing Administration (FHA)
in 1934
New plans for mortgage payback systemamortization
Operation
Servicing a Loan
Assignment of Loan
Activities

27
Real Estate Trusts

Designed to provide vehicles by which real estate
investors can enjoy the special income tax
benefits granted to mutual funds and other
regulated investment companies.

28
Trust Qualifications (1 or 2)

Trust must not hold property primarily for sale
to customers in the ordinary course of business.
Trust must be owned beneficially by at least 100
investors.
Trust must not have fewer than five persons who
own more than 50 percent of the beneficial
interest.
Trusts beneficial interests must be evidenced by
transferable shares or certificates of interest
Ninety-five percent of the trusts gross income
must be derived from its investments.

29
Trust Qualifications (2 or 2)

Seventy-five percent of the trusts gross income
must be derived from real estate investments.
No more than 30 percent of the trusts gross
income may result from sales of stocks and
securities held for less than 12 months or from
the sale of real estate held for less than four
years.
Ninety-five percent of the trusts gross income
must be distributed in the year it is earned.
All trust income must be considered passive by
the IRS.

30
Real Estate Investment Trusts (REITS)

Invest in improved income properties
Income derived from rents and capital gains
Individual investors pay income tax only at
participant level

31
Real Estate Mortgage Trusts (REMTs)

Expand their financial bass with strong credit at
their commercial banks.
Make mortgage loans on commercial income
properties.
Income from mortgage interest, origination fees,
and profits made from buying and selling
mortgages.

32
Balanced Trusts

Combine REIT with REMT, earning profits from
rental income and increased property values as
well as mortgage interest and placement fees.

33
Syndicates

Organizations of investors pooling capital for
real estate investments
Can be corporations, general partnerships, or
limited partnerships
Investment conduits that pass profits and losses
through to investors in proportion to their
ownership shares

34
California Syndication

Controlled by the California Department of
Corporations
Limited partners may become liable for the total
debts of the partnership if they take an active
role in the management of the partnership
Limited liability company (LLC) combines
single-level tax benefit of partnership with
organizational structure and limited liability of
limited partnerships and corporations.

35
Real Estate Bonds

Can be used to secure funds for financial real
estate projects through 1) issuance and sale of
mortgage bonds and 2) issuance and sale of
municipal, county, or state bonds for purposes of
financing community improvements.

36
Nature of Bonds

Secured and unsecured (debentures)
Coupon registered coupon
Classification by nature of issuer, nature of
security, or by maturity date
Issuance of banks
Market prices of bonds
Ratings

37
Uses for Bond Issues

Use has faded since depression of 1930s
Many companies today use debenture bonds as a
source of raising long-term funds

38
Bonds

General obligation bonds
Tax privilege of exempting interest income earned
on state and local securities
Revenue bonds
Industrial revenue bonds
Mortgage revenue bonds
Zero coupon bonds
Mortgage loan bonds

39
California Bonds

Issued by Community Redevelopment Agencies
Money used to make below-market interest rate
loans to qualified developers of low-income and
medium-income residential projects
Mortgage-backed bonds issued by savings
associations

40
Endowment Funds

Provides a permanent source of income
Managers responsible to develop income while
preserving capital
Perfect vehicle for real estate financeREMIC

41
Private Loan Companies

Usually deal in junior finance
Often charge higher than market interest rates
Must adhere to Truth-In-Lending laws

42
California Real Property Loan Law

Limits on amount of commission and fees that can
be charged for making or arranging a hard money
loan.

43
Individuals

Sellers as lenders
Families as lenders
Other lenders

44
Conventional, Insured, and Guaranteed Loans

Chapter 5

45
Conventional Loans (1 or 2)

Fixed-Rate Loans
Interest-0nly Loans
Private Mortgage Insurance (PMI)
Permanent/Temporary (Escrow) Buydown Plan
Borrowers Qualifications
Other Conventional Loan Programs
Zero Money Down Payment

46
Conventional Loans (2 or 2)

Reduced Paperwork
Jumbo Loans
Home Equity and Home Equity Line of Credit
(HELOC)
Automatic Rate Reduction
Subprime Loans

47
Predatory Lending

Flipping
Packing
Charging excessive fees

48
Home Ownership and Equity Protection Act of 1994

Addresses deceptive and unfair practices in home
equity lending.

49
Refinancing Existing Conventional Loans

Costs of refinancing are unregulated and vary
dramatically among lenders.

50
Electronic Real Estate Loan Services

Borrower can arrange for a residential loan on
the computer
Still requires filing of a loan application and
the probably submission of ancillary documents
such as bank statements and annual income tax
reports.

51
FHA Organization and Requirements

Lenders must grant long-term, self-amortizing
loans at market interest rates
All properties must meet minimum standards of
acceptability
Careful loan application review
Comprehensive written appraisal report on
property
Borrower required to receive and sign a form
entitled For Your Protection Get a Home
Inspection

52
FHA Program Summary

Not a direct lender
Reduced the down payment obstacle for cash-short
borrowers
Helps stabilize the mortgage market

53
Existing FHA Programs

Title Ilight or moderate rehabilitation of
properties manufactured homes, developed lot, or
combination of lot and home.
Title II
Section 203(b)Mortgage Insurance for One-Family
to Four-Family
Section 203(k)Rehabilitation Mortgage Insurance
Section 234(c)Mortgage Insurance for Condominium
Units
Section 251Insurance for Adjustable Rate
Mortgages
Other Title II programs

54
Special HUD/FHA Programs

Energy Efficient Mortgage (EEM)
Home Equity Conversion Mortgage (HECM)
Officer Next Door
Teacher Next Door
Homeownership Vouchers
Native American Housing

55
Underwriting Guidelines

Maximum Loan Limitations
Down Payment Requirements
Borrowers Income Qualifications
Mortgage Insurance Premium (MIP)
Allowable Closing Costs
Second Mortgage/Buydowns

56
Frequently Used FHA Loans

Section 203(b) One-Family to Four-Family
Mortgage Insurance
Section 234(c) Mortgage Insurance for
Condominium Units
Section 251 Insurance for Adjustable-Rate
Mortgages
Section 203(k) Rehabilitation Mortgage Insurance
Streamline Refinance

57
Additional FHA Issues

Direct Endorsement and Coinsurance
Advantages of FHA Mortgage
FHA Contributions to Real Estate Finance

58
The U.S. Department of Veterans Affairs Real
Estate Loan Guarantee Program

Program Application
Eligibility/Entitlement
Certificate of Eligibility
Partial Entitlement
Certificate of Reasonable Value
Interest
Income Qualifying Requirements
Closing costsmay not be included in DVA loans
Funding Fee
Second Mortgages
Buydowns
Assumptions
Release of Liability/Novation

59
Additional DVA Loan Guarantee Programs

DVA Adjustable-Rate Mortgage (ARM)
DVA Streamline Refinance
Cash Out Refinance
Conventional to DVA Mortgage

60
California Veterans Home and Farm Purchase
Program (CAL-VET)

Funding and title
Eligibility requirements
All veterans are eligible
90 days active service or meet other
qualifications
Honorable discharge
Active service within designated periods
Veteran receiving approved medals during
peacetime may also qualify
Unremarried spouses of veterans killed in active
duty also eligible

61
California Veterans Home and Farm Purchase
Program (CAL-VET)

Qualifying procedures
Maximum property values on single family homes,
condos and mobile homes on owned lots
Maximum for manufactured homes
Maximum for self-supporting farms and ranches
Downpayment differs depending on type of loan
Most loans amortized over 30 years
Fixed an variable rate loans available
Insurance against floods and earthquakes required
Special Conditions
New construction
Funds for Refinancing
Junior financing
Occupancy
Others

62
Financial Agencies and Lending Programs

Chapter 6

63
Agricultural Lending

Need for flexibility
Open-end mortgages
Moratorium on payments

64
The Farm Credit System (FCS)

Farm Credit Administration (FCA)
Federal Agriculture Mortgage Corporation (Farmer
Mac)
Farm Credit Leasing Services
Farm Credit Council
The U.S. Department of Agricultural Rural
Development Program (USDA Rural Development)

65
U.S. Department of Housing and Urban Development
(HUD)

U.S. Department of Housing and Urban Development
(HUD)
Supervises the Federal Housing Administration
(FHA)
Directs Ginnie Mae
Oversees Fannie Mae and Freddie Mac operations
Enforces fair housing and RESPA regulations
Manages the Housing Choice Voucher Program
Manages the Indian Housing Act
Regulates interstate land sales registration,
urban renewal, and rehabilitation programs
Supervises public housing projects

66
HUD Strategic Plan

Increase home ownership opportunities
Promote decent affordable housing
Strengthen communities

67
HUD Additional Responsibilities

Regulation of Fannie Mae and Freddie Mac
Urban renewal
Subsidized housing
Community Development Block Grants (CDBG)
Public Housing

68
The Real Estate Settlement Procedures Act (RESPA)

Disclosures under RESPA
Disclosures before Settlement Closing
Disclosures at Settlement
Disclosures after Settlement

69
The Federal Equal Credit Opportunity Act (ECOA)

Prohibits lenders from discriminating against
credit applicants on the basis of race, color,
religion, national origin, sex, marital status,
age, or dependency on public assistance.

70
Interstate Land Sales

Established criteria for the dissemination of
vital information to potential buyers of
residential land.

71
Federal Legislation

Fair Housing Act
Uhruh Civil Rights Act (Civil Code Section 51)
Community Reinvestment Act
The Home Mortgage Disclosure Act
Truth-in-Lending (Regulation Z)
Advertising
Right of rescission
Usury Laws
Usury Laws
Federal
California

72
State Financing Agencies

Industrial Development Agency
Community Redevelopment Agency (CRA)
Tax-increment financing
Mortgage revenue bonds
Special assessments

73
The California Housing Finance Agency (CHFA)

Programs provide below-market, fixed-rate
financing for first-time homebuyers.
The Home Purchase Assistance Program
The Matching Down Payment Program
Other CHFA Programs

74
City Of Los Angeles Home Mortgage Program

Provides mortgage loans to low-income and
moderate-income first-time homebuyers who wish to
purchase from selected new homes and condominiums.

75
The Housing Financial Discrimination Act of 1977
(Holden Act)

Offsets illegal practice of redlining
Prohibits discrimination

76
Junior Loans in Real Estate Finance

Chapter 7

77
Junior and Senior Liens

Distinguishing first and junior lien by date and
time of recording
Increase of junior financing by thrifts and
commercial banks
Secondary market for junior finance
Junior financing provides funds for land
developers to pay for offsite improvements

78
Anatomy of a Second Mortgage/Deed of Trust

Second deed of trust is in junior position to an
existing senior loan
Junior loan holder in higher-risk position
In event of default, senior lender will usually
give junior lender a chance to make delinquent
payments
Causes protect junior lien holders position
against that of senior lender
Junior loan risks
Junior Loan interest rates and usury

79
Home Equity Loans

Offered by many lenders
Interest is tax deductible, unlike interest on
consumer debt, which is not
Attractive interest rates, sometimes for only
short period of term
Face high default rates when economy slows
Freddie Mac has program for purchase of secured
home improvement loans

80
Loan Terms and Note Payments

Chapter 8

81
Interest

Simple Interestpaid only on the amount of
principal still owed.
Term Loanrequires payments of interest only with
the entire principal being repaid at a specified
time.
Amortizationpayments include portions for both
principal and interest.
Distribution of Principal and Interest

82
Variations in Payments and Interest Rates

Graduated-Payment Mortgage (GPM)
Adjustable-Rate Mortgage (ARM)
Adjustment periods
Initial rate
Note rate
Qualifying rate
Index
Margin
Interest rate caps
Payment caps

83
Innovative Payment Plans

The 15-Year Mortgage
Reverse Annuity Mortgage (RAM)
Fannie Mae Senior Housing Program
Fannie Maes Two-Step Mortgage Plan

84
Variations in Formats

Open-End Mortgage
Construction Mortgage
Blanket Mortgage
Release Clauses
Leasehold Mortgage
Package Mortgage
Manufactured Home Mortgages
Purchase-Money Mortgage
Hard-Money Mortgage (Equity Mortgage)
Bridge Loan
Wraparound Encumbrance (Wrap)
Mortgage Participation

85
Tax-Deferred Mortgage Lending

Installment Sales
Option to Buy
Lease with Option of Buy
ExchangesInternal Revenue Code Section 1031

86
Instruments of Real Estate Finance

Chapter 9

87
Terminology

Encumbranceright or interest in a property held
by one who is not the legal owner of the
property.
Lien is a financial encumbrance.
Liendefined as a charge against a specific
property wherein the property is made the
security for the performance of a certain act,
usually the repayment of a debt.
Voluntary liens and involuntary liens general
and specific liens.

88
Interests Secured by a Real Estate Loan

Fee simple ownership Less than fee simple
ownership Personal property, trade fixtures
Title and Lien Theories
Equitable rights
Title theory
Redemption right
Statutory redemption period
Lien theory recognizes the rights of lenders in
collateral property being equitable rights, while
borrowers retain their legal rights in the
property.
California has taken modified position between
the title and lien theories.
General Requirement for a finance instrument

89
Note and Deed of Trust (Trust Deed)

Deed of Trustevolved to become the dominant
security instrument for financiers of California
real estate.
Advantage of trust deed over mortgage is shorter
foreclosure period.
Judicial foreclosure nonjudicial foreclosure
power-of-sale clause naked title beneficiaries.

90
Note Secured by Deed of Trust

Date signed
Participants identities
Promise to pay
Payment due dates
Amount and terms
Reference to security
Signatures and endorsements
Cosigners

91
Deed of Trust

Executed by the trustor to transfer a form of
legal fee ownership to the trustee to be held for
the beneficiary, while the trustors maintain
their equitable ownership.

92
Covenants of California Deed of Trust

Preservation and maintenance
Fire insurance
Legal action
Taxes and assessments
Beneficiary and trustee expenditures
Condemnation
Late payments
Reconveyance

93
Note and Mortgage

Note Secured by a Mortgage
Mortgage
Recording information
Participants
Pledge
Property description
Covenant of seisin
Note attachment
Mello-Roos disclosure
Property taxes
Insurance
Defeasance clause and acceleration
Maintenance of the collateral
Signatures and acknowledgement
Release of mortgage

94
Real Property Sales Contract (Land Contract)

Single, complete financing and sales agreement
executed between buyer and seller.

95
Special Provision in Real Estate Finance
Instruments

Late payment Penalty
Prepayment Privilege
Prepayment Penalties
Lock-In Clause
Due-On-Sale Clause
Assumption Versus Subject To
Subordination Clause
Release Clause
Extensions and Modifications

96
Contracts Used in the Real Estate Business (cont.)

Listing agreements
Sales contracts
Offer and acceptance
Equitable title
Destruction of premises
Earnest money deposits
Cooperative apartment contracts
Condominium sales
Option agreements
Land contracts
Local forms
Recission

97
Real Estate Loan Underwriting

Chapter 10

98
Underwriting

Estimating the value of the property being
pledged as collateral to guarantee repayment and
determining the ability of a borrower to repay
the loan.

99
Definition of Value

Value in use
Value in exchange
Subjective value
Objective value
Market value

100
Appraisal

Estimate of propertys value at a specific point
in time.

101
The Appraisal Process

Drive-by appraising
Defining the appraisal problem
Determining the purpose for the appraisal
Examining the neighborhood and property being
appraised
Collecting the pertinent data
Applying approaches to estimate value
Reconciling values estimated
Preparing the report

102
Appraisal Approaches

Direct Sales Comparison Approach
Cost Approach
Income Capitalization Approach
Gross Rent Multiplier (GRM)
Reconciliation of Data and Opinion of Value

103
Qualifying the Borrower

The loan application
Financial statement
Assets
Liabilities
Net worth
Data verification
Deposits
Employment
Credit report
Credit evaluation
Credit scoring
Loan qualifying income ratios

104
Processing Real Estate Loans

Chapter 11

105
Qualifying the Title

Noticesconstructive notice and actual notice
Abstracts and Opinion of Title
Title Insurance
Title Faults
Surveys

106
Disclosures in California Real Estate Transactions

Real estate transfer disclosures
Delivery of a pest control inspection report
Disclosure of geological hazards
Disclosure of hazardous waste deposits
Thermal insulation disclosure
Special flood area disclosure
Special city and country ordinances
Foreign investment real estate tax
Condominium documents disclosure
Disclosure for real property loans

107
Costs of Securing a Loan

RESPA requires good-faith estimate
Points
Placement or origination fee
Impound funds (escrow accounts)
Property taxes
Hazard insurance
Title insurance
Mortgage insurance
Assessment liens
Interest adjustments
Prepayment penalties

108
Additional Costs

Prorations
Interest
Property taxes
Insurance premiums
Additional prorations

109
Additional Processing Concerns

Closing Statements
Servicing the Loan
Assignment of the Loan

110
The Secondary Mortgage and Trust Deed Markets

Chapter 12

111
Introduction to Secondary Market

Originators of new loans are called primary
lenders
Most loans created by primary lenders are sold in
the secondary market
Lenders acquire money for new loans avoid the
risk of holding long-term fixed interest loans
Some keep loan servicing responsibilities high
tech approach has removed personal interaction
between lenders and borrowers
Emergence of securitization of pools of mortgage
loans

112
Fannie Mae (formerly the Federal National
Mortgage Association)

Originally a government agency
Created to buy FHA-insured loans issued in the
Depression
Bought loans at par to stimulate economic
recovery

113
Fannie Mae Charter of 1954

Allowed Fannie Mae to sell as well as to buy
loans
Financed by private capital
National secondary mortgage market operations to
provide liquidity for mortgage investments

114
Housing and Urban Development Act of 1968

Fannie Mae reorganized as a private corporation
Creation of Ginnie Mae, established for special
assistance programs
Administered price system allows Ginnie Mae to
adjust its required yields daily in accordance
with market factors and its financial needs
Fannie Mae Mortgage-Backed sold on international
markets

115
Underwriting Standards for Conventional Loans
Sold to Fannie Mae

Conforming and nonconforming loans
Automated underwriting system
Credit scoring

116
Other Fannie Mae Programs

Fannie Mae Mortgage Solutions
Community Lending Mortgage Products
Office of Federal Housing Enterprise Oversight

117
Freddie Mac

Created in 1970 to offset credit crunch for the
savings associations

118
Organization of Freddie Mac

Established with an initial subscription from the
12 Federal Home Loan district banks
Under direction of three members of Federal Home
Loan Bank Board
Authorized to raise additional funds by floating
its own securities
Since 1989, became independent stock company in
direct competition with Fannie Mae

119
Freddie Mac Mission

To make it possible for Americans to obtain
affordable mortgage loans dedicated to expanding
minority home ownership in the United States.

120
Freddie Mac Operations

Purchases conventional loans FHA-insured and
VA-guaranteed loans
Obtains funds by selling securities, referred to
as participation certificates (PCs), and debt
instruments to investors worldwide.

121
Freddie Mac Systems and Programs

Underwriting Standards
Electronic Underwriting System
Risk-Based Loan Pricing
Fixed-Rate Mortgages
Adjustable-Rate Mortgages (ARMs)
Affordable Housing Products and Programs

122
Ginnie Mae

Government National Mortgage Corporation, created
in 1968 to provide financing for special
assistance programs and operate the securities
pool.

123
Ginnie Mae Operations and Programs

Works with issuers of mortgage-backed securities
and investors/sponsors of mortgage-backed
securities
Does not buy or sell loans or issues
mortgage-backed securities
Guarantees that investors will receive timely
payments of principal and interest primarily on
MBSs based on FHA or VA loans.
Ginnie Mae Mortgage-Backed Securities

124
Farmer Mac

Federal Agricultural Mortgage Corporation (FAMC)
Mission is to improve the availability of
long-term credit at stable interest rates to
Americas farmers, ranchers, rural homeowners,
businesses, and communities.
Purchases qualified loans from agricultural
mortgage lenders

125
The Real Estate Mortgage Investment Conduit
(REMIC)

Conduit, holding fixed pools of mortgages that
back securities collateralized by the mortgage
cash flows.
Tranches or ownership interests to meet investor
needs and respond to market conditions.
Interest-only (IO) Principal only commercial
mortgage-backed (CMBS).

126
Secondary Market for Junior Financing Loans

Small private lending companies originate new
junior loans and buy and sell existing second
liens.
States require that private mortgage finance
companies dealing in financial securities be
licensed and post bonds to protect the public
from illegal activities.
Growing secondary market for the sale of land
contracts.
Fannie Maes Simultaneous Second Mortgage program
Freddie Macs Supplemental Mortgage

127
Loan Defaults and Foreclosures

Chapter 13

128
Defaults

Breach of one or more of the conditions or terms
of a loan agreement.
Acceleration clause
Lenders seek to avoid foreclosure
Acceleration and foreclosure as last resort
Delinquencies
Principal and interest
Grace period
Late period charge
Property taxes
Other liens
Hazard insurance
Poor property management

129
Adjustments

Workouts
The Soldiers and Sailors Civil Relief Act of 1940
The Housing Act of 1964
Avoiding a foreclosure
Moratoriums (forbearance) and recasting
Voluntary conveyance of deed

130
Foreclosures

Process to recover lenders collateralborrowers
rights of redemption are eliminated and all
interests in the subject are removed.

131
Foreclosures

Equitable redemption period
Strict forfeiture
Statutory redemption period
Power-of-Sale Foreclosure
Deeds of trust
Judicial Foreclosure and Sale

132
Investment Financing Strategies

Chapter 14

133
Sale-Leaseback

Owner of property sells it to an investor and, at
the same time, leases it back.
Seller-lessees retain possession while obtaining
full sales price free capital frozen in equity
Investor-landlord receives fair return on and of
the investment in the form of rent during the
lease term and ownership of a depreciable asset
already occupied by a good tenant buying
guaranteed income stream that can be sheltered
through proper use of allowable deductions.

134
Seller Refinances Prior to the Sale

Seller can refinance the property in order to
secure a loan that can be assumed by the buyer.

135
Trading on Sellers Equity

Buyer refinances property instead of assuming the
existing loan

136
Equity Participation

Sale-Buyback
Splitting ownership
Joint ventures

137
Tax-Deferred Financing

Realized capital gainsthe difference between the
total consideration received and the adjusted
book basis of the property transferred.
Recognized capital gainsprofits that are
actually taxable.
Owners can refinance their properties during
their lifetimes, generating tax-deferred dollars
for reinvestment. At time of death, properties
receive step-up basis to fair market value and
could be distributed to heirs free of potential
income tax on any appreciation to time death.
Pyramiding through refinancing.
Option to buyOption compared to installment sale
Lease with option to buy
Lease option
Right of first refusal
Distribution to Heirs
Federal estate tax
California inheritance tax
Gift tax