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Real Estate Quiz

By - 2009

1. Getting a "no-doc" loan means you don't have to have any source of income.

True or False?

2. An apartment building without any special problems is a good deal if it has a capitalization rate (or more commonly called the "cap rate") of:

A. .10 or higher B. .05 or lower C. Not enough information

3. When doing a 1031 exchange you can't sell your property and then buy another, but must trade your property for another in order to avoid paying taxes on your gains.

True or False?

4. A market analysis or standard appraisal of a home takes into account which of the following?

A. How much money the owners have into it. B. The replacement cost C. What similar homes have sold for. D. All of these.

5. Having no income means a bad credit score.

True or False?

6. When buying an apartment building, the most likely area in which the seller is hiding something or misrepresenting a property is:

A. Physical condition of the building. B. Problem tenants. C. The income and expenses.

7. The best way to find a good property for sale is to look at the MLS listings.

True or False?

8. When you contact a real estate agent to look at a property he has listed, he is working for:

A. You B. The seller C. Both you and the seller

9. Making "low-ball " offers of 10% or more below the asking price generally wastes your time and that of the seller and real estate agent.

True or False?

10. Your earnest money deposit should be:

A. 1% of the price. B. Whatever the agent suggests. C. Based on your own best judgment.

Real Estate Quiz Answers

1. False. Generally you have to have some source of income, and you may even have to state how much that income is. "No doc" means no documentation, so you just won't have to prove or document the income. If your stated income is false, however, there may be criminal penalties, and you will be in default according to the terms of most loans.

2. The answer is C - not enough information. A cap rate is the rate of return on an investment, but is computed using the net income before loan payments or interest payments. For example, if you pay $100,000 for a house and the net income after expenses is 8,000, you divide that into the purchase price to get the cap rate: .08 - or an 8% return. This may be good if you are borrowing at 6% interest, or bad if you are paying 12% interest.

3. False. Although the process can be very tricky, you can sell your property and replace it with another within 45 days, and still avoid paying the capital gains tax.

4. The answer is C - what other similar homes have sold for. What the owners have into it is irrelevant to buyers, and what they will pay is what is being determined. For the same reason, replacement cost is irrelevant, although it may be considered with unique homes that are hard to compare to others.

5. False. Credit rating agencies have a hard time tracking income. They base credit scores on how you pay your bills, how many loans and credit cards you have had, and other things. Credit scores are not all that lenders base their loans on, however.

6. The answer is C - The income and expenses. These impact the net income shown, which is what you use to determine the value of an apartment building. Under-reporting of expenses, or over-reporting of income can dramatically increase what investors will pay for a property.

7. False. In my opinion, the best way to find a good property at a good price is to look at properties that are not yet for sale, or ones that have been for sale and have had their listings expire. In fact, two our of the four homes I have owned were not listed for sale and did not even have a "for sale" sign out when I approached the seller.

8. The answer is B - the seller. Unless you specifically contract with an agent, hiring him as a "buyer's agent," he is most often obligated to work for the interests of the seller - even if the property is not his listing. Clarify this. As a seller's agent, he is obligated to pass on any comments you make that make help the seller get a higher price.

9. False. It may seem like a waste of his time to the seller and real estate agent, but making a lot of low offers (and so offending a lot of people) is a proven way for investor to get great deals. Sometimes sellers want to sell fast. In any case, they have the right to say no, but you have the right to offer whatever you want.

10. The answer is C of course. Agents will say a "good faith" or earnest money deposit has to be a certain amount, but there is no rule. A deposit of $100 might not be taken seriously as $5,000, but it can take time to get your money back when offers are rejected. This is why a serious offer of $100 now and $5,000 more upon acceptance might be a good idea.

How did you do on this real estate quiz? If you answered more than half of the questions correctly, you probably are more informed than most home buyers. Eight or more correct puts you ahead of most real estate investors.


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