OF REAL ESTATE INVESTMENT
basic element of real estate; land, cannot be destroyed, moved or
lost and is less likely to suffer a loss in value through
mismanagement compared with for example, a competitive business. Real
estate defects are visible that is, more tangible and most people
have knowledge of how a house works as they have lived in them most
of their lives. Generally, as the economy increases in value (as the
GDP or GSP rises) real estate increases in value. However, such
increases should be measured in real terms (after inflation).The
common methods of financing real estate purchases and developments
- joint venture
- joint ownership
- unit trust.
most common method is by way of a mortgage. A first mortgagee has a
first mortgage over the land and first claim on moneys realised on
sale after government and local council if the mortgagor defaults on
the mortgage repayments. Therefore, a fast mortgage is the safest
real estate investment because:
- as land values
increase in an expanding economy, the mortgagee's investment becomes
improvements or fixtures made to the land become part of the real
estate (fixtures) and therefore, increases the mortgagor's equity and
therefore, makes the mortgage safer.
the 1960s and early 1970s it was common for mortgages to be at fixed
interest rates that is, the interest charged remained level over the
period of the loan. However today, mortgages over investment
properties usually have the repayments tied to some index or formula
such as the CPI or the gross income of the property.
credit foncier mortgage is one where the interest part of the
repayment reduces over the period of the loan because it is
calculated on the balance owing. It is also known as a reducing
fixed interest mortgage
amount borrowed by way of mortgage i5 usually less than the price of
the real estate. For example, the borrower (mortgagor) may pay 20% of
the sale price from his own funds (owner's or mortgagor's equity) and
borrow the remainder (80%; lender's or mortgagee's equity) from a
bank. The property is the security (collatera4 for the loan. The
mortgagee has certain powers under the mortgage agreement (subject to
legislation) if the mortgagor defaults on repayments. These are
either the power to foreclose on or sell the property.
this power the mortgagee takes control of the property to enjoy
future rents and benefits until the mortgage debt and expenses
incurred have been paid off. This power is seldom used as financiers'
comparative advantage is in lending, not property management.
mortgagee is more likely to use this power on default of repayments
by the mortgagor. The mortgagee is allowed to deduct all monies owing
and the expenses of selling from the sale price but any residue goes
to the mortgagor.
valuer when making a valuation for mortgage or security purposes
determines the market value under the willing buyer willing seller
theory unless otherwise instructed by the client. Valuation terms
such as security value and mortgage value should be interpreted as
meaning market value. The mortgagee should clearly state the type of
value required for example, "fee simple in possession",
"vacant possession" or "fee simple subject to existing
tenancy" and these instructions should be included in the
there is no difference in a mortgage valuation report for an existing
building than that required for a normal market valuation (see
Mortgage Valuation Practice Standard (1993) The Valuer and Land
Economist, November 1993, p569).
is no discount for a mortgage valuation as the ratio of borrowed
money to market value is a matter for the mortgagee to decide and not
the valuer. The API Standard states that the valuer should "..make
a recommendation to the lender as to whether the property is or is
not a suitable security" (part 1.3). However, the valuer is not
an expert in banking as the mortgagee will take into account non
valuation factors such as the credit worthiness of the applicant and
the lending policies of the institution. For example, some
institutions are "risk takers" while others are very
conservative in their lending policy. Further, it can be argued that
all property is suitable security at market value.
FOR NON VALUATION INFORMATION
well as market value the valuer may be asked by the lender to supply
other, usually economic information about the subject property. For
- the outlook for
a land use. for example, the mortgagee may ask the valuer the expected
economic future of the current land use.
- the probability
of future capital gains
- whether or not
there are likely to be any difficulties on resale.
valuer should stress that answers to such questions about the future
are largely speculative and should point out that the market value
has already taken into account such factors by the use of an
appropriate capitalization rate. With regard the possible problem of
resale, if there is some unusual factor that could affect resale it
should have been covered in the valuation report and the market value
is less because of it. For example, "bad" or ugly
valuer should endorse his/her report to cover those matters which
he/she is not expert in. There is an unfortunate trend towards long
and verbose standard form reports by large lenders. Those modelled on
American forms ask a large number of difficult and unnecessary
questions. The valuer should try to avoid such forms wherever
possible and instead use the Institute's PropertyProform.