solution

Question 1

The market in the small rural town of Centerville has been very hot. Values are leveling off but single family residences remain scarce. A potential buyer asks about the advisability of buying some farmland outside of town to develop into single family lots for sale to builders. She has noticed several builders already getting ready for new subdivisions by preparing new lots. How might a broker best advise this potential buyer?

A – He should suggest to this potential buyer that her timing is perfect. The slowing residential market will give her a chance to get the lots ready and she can probably pre-sell some to builders to raise some cash. Since strong markets usually last a decade or more, she should line up her financing and get started.

B – In a cycle like the one described, builders always know what is going on, so playing “follow the leader” is a smart move. The builders obviously feel that all of their new homes will sell quickly, so a broker should encourage this potential buyer to go ahead with her plan so she can be ready to profit by providing the next round of lots.

C – He should advise that the current shortage will likely continue to drive prices up and make this potential buyer’s plan feasible. As the town prices rise, the price of surrounding land will fall because of the encroachment of suburban neighborhoods. Land is much cheaper than developed lots, so there is plenty of room for profit. The broker may even encourage the buyer to select a farm property and offer to join in her venture by contributing his commission to the project.

D – He should advise this potential buyer that development of raw land is risky and complex. It will take time and considerable money to produce satisfactory finished lots with zoning, utilities and other amenities. The market shows signs of slowing, so the time to market is a risk. This buyer may be better served by exploring other investment opportunities in real estate.

Question 2

Which of the following is NOT a good reason to recommend the seller provide a home warranty?

A – The National Association of Realtors statistics show homes with a warranty sell 15% faster.

B – Purchasing a home warranty is a good method of risk reduction for a seller to consider.

C – The fee the home warranty company pays will increase the cash flow for the brokerage.

D – Sixty-eight percent of used homes will have a major system failure the very first year purchased.