Question

I’m taking real estate finance and I need a good definition for these five terms, please be clear and explain more for each one

title assurance

mortgage Rate Risk

valuation methods, including the three methods

diversification

thank you

Answer 1

Answer:-

Real Estate Finance definitions

1) Title assurance

  It is a written proof of property ownership or investing in real estate property. The title assurance implies that the person has all the necessary documents that can prove the ownership of the property.

2) Mortgage rate risk

It is the risk that varies with the interest rate regime. The rising rates of interest leads to a fixed-rate mortgage with lower risk for a borrower and higher risk for a lender

3) Valuation Methods-

The three valuation methods are
a) Income approach

The income approach is an absolute valuation method. The two methods of  income approach are the simpler Direct capitalization approach and the Discounted cash flow method. The Direct capitalization method values a property as a perpetuity with infinite stream of cash flows. The Discounted cash flow approach forecasts the net operating income (NOI) for the future by forecasting the revenue and expense line item and finding the terminal value at the end of the initial foreseeable period and finally discounting all the future cash flows using the required rate of return.

b) Comparable sales approach-

The comparable sales approach we consider the past transactions of comparable properties and use them to calculate the value of the property.

c) Cost approach

The cost approach values a property at its replacement cost i.e. the cost of reconstructing the property. The value of a property equals the market value of the land on which the construction takes place plus the cost of construction of a similar property at given current prices.

4) Diversification

Diversification in real estate i to reduce overall risk from investing in different markets by distributing the money in different types of real estate investments.