Think you are pretty well informed when it comes to real estate? See how well you do on this real estate quiz for home buyers and real estate investors.
1. A "no-doc" mortgage loan means you don't have to have any source of income.
2. An income property 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. In 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.
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.
6. 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
The answers to the next four questions are debatable. They are to some extent a matter of opinion.
7. The best way to find a good property for sale is to look at the MLS listings.
8. 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.
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.
10. Your earnest money deposit should be:
- A. 1% of the price.
- B. Whatever the agent suggests.
- C. Based on your own best judgment.
Answers To The Real Estate Quiz
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.
How did you do on this real estate quiz? If you answered more than three of the first six questions correctly, you are more informed than most home buyers. Five correct puts you ahead of most real estate investors.