Word of the Day

Word of the day


Word of the day


Word of the day

Interpleader

A legal proceeding whereby an innocent third party (stakeholder), such as an escrow agent or broker, can deposit with the court property or money that the party holds and that is subject to adverse claims so that the court can distribute it to the rightful claimant. 

The distribution of deposit or earnest money held in escrow is often a problem when the buyer and the seller are in dispute over the purchase contract. Generally, the escrow agent will not release the funds until all parties—including the broker—sign a cancellation of escrow form. If one of the parties refuses to cancel the escrow, then no one can recover the deposit money. If the escrow agent cannot get the parties to agree on the disposition of the deposit money, one recourse is to file an interpleader action asking the court to accept the money and distribute it to the rightful claimant.


Word of the day

Joint Venture

The joining of two or more people in a specific business enterprise, such as the development of a con¬dominium project or a shopping center. The parties may pool their respective resources (such as money, expertise, property, or equipment). There must be an agreement, express or implied, to share in the losses or profits of the venture. Joint ventures are a business form of partnership and for tax purposes are treated as partnerships. The main difference between the two is that a joint venture is a special joining of the parties for a specific project with no intention on the part of the parties to enter into any continuing partnership relationship (a “one-shot partnership”). If the joint parties combine their efforts on several different projects, the relationship becomes more like a general partnership than a joint venture. Also, even though a partner can bind the partnership to a contract, one party to a joint-venture agreement cannot bind the other joint venturers to a contract.


Word of the day

Encroachment

An unauthorized invasion or intrusion of an improvement or other real property onto another’s property, thus reducing the size and value of the invaded property. Common examples of encroachments are the roof of a building that extends over the property line or the front of a building that extends over the building setback line or extends onto a neighbor’s property. Most encroachments are the result of carelessness or poor planning rather than bad intent, as in the case of a driveway or fence built without a survey to find the lot line. 

Because an undisclosed encroachment could render a title unmarketable, its existence should be noted in the listing, and the contract of sale should be made subject to the existence of the particular encroachment.

An encroachment is a trespass if it encroaches on the land and a nuisance if it violates the neighbor’s airspace, as in the case of overhanging tree branches. The injured party can seek a judicial remedy in ejectment, quiet title, or injunction and damages. A court can order removal of the encroachment. However, if the encroachment is insignificant, the cost of its removal is great and its creation was unintentional, a court may decide to award money damages in lieu of ordering removal. 

If there is any doubt as to possible encroachments, purchasers should obtain their own surveys when purchasing property because an accurate land survey will disclose most encroachments. If a survey reveals encroachments not previously disclosed by the seller, the buyer may compel the seller to remove the encroachment (or to reduce the purchase price accordingly) and pay for the survey. In some cases, neighbors will sign an encroachment agreement, granting a license to continue the encroachment of a wall or fence onto a neighbor’s property. 

Encroachments are not normally revealed in the chain of title and thus are not warranted against in a title insurance policy. Also, most standard title insurance policies do not insure against matters an accurate survey would reveal. An extended-coverage title policy often insures against encroachments.


Word of the day

Adjustments

1.    In appraisal, the increases or decreases to the sales price of a comparable property to arrive at an indicated value for the property being appraised. Adjustments may be made for several reasons. The first adjustment is for seller concessions or conditions of sale; then for financing terms. Another is for time of sale if there has been a change in market conditions since the comparable sale. Adjustments are then made for location and dissimilarities between the physical characteristics of the subject and the comparable property. The indicated value is increased or decreased for each difference or dissimilarity. 

2.    In real estate closings, the credits and debits of a settlement statement, such as real property tax, insurance, and rent prorations.
 

Word of the day

Inquiry Notice

Legal notice that is presumed by law when factors exist that would make a reasonable person inquire further. For example, if someone is in possession of the property offered for sale, the purchaser is charged with knowing whatever facts an inspection of the property would have disclosed; purchasers therefore take title subject to the rights of the occupant.


Word of the day

Key Man Insurance

A life insurance policy paid for by a company to cover the estimated cost of replacing a key person in the company; it may be either a life or a disability policy or a combination of both. Some lenders require key employee insurance when the borrower is a small corporation that relies primarily on the talents of one executive.


Word of the day

Fiduciary

A relationship that implies a position of trust and confidence wherein one person is usually entrusted to hold or manage property or money for another. The term fiduciary describes the faithful relationship owed by an attorney to a client or by a broker (and salesperson) to a principal. The fiduciary owes complete allegiance to the client. The fiduciary owes to a principal the duties of loyalty, obedience, and full disclosure; the duty to use skill, care, and diligence; and the duty to account for all monies. When an agent breaches any of these fiduciary duties, the principal can usually bring civil action for money damages, sue to impress a constructive trust upon any secret profit, or compel the agent to forfeit any compensation. 

Because of the close personal relationship between broker (agent) and seller or buyer (principal), the broker often learns certain confidential information about the client and/or financial situation of the principal. In most states, this information cannot be disclosed by a broker, even after the transaction is completed and the fiduciary relationship terminated. One reason it is so difficult to represent both parties in a real estate transaction is the conflict of interest that arises for the broker, who has a duty to keep confidential that information learned from the principal and also a duty to disclose all pertinent information to the principal.


Word of the day

Interim Financing

A short-term loan usually made during the construction phase of a building project; often referred to as a construction loan. Proceeds from the interim loan are disbursed in increments as the construction progresses. Long-term or permanent financing is usually arranged to “take out” the interim loan.

Word of the day

Land Bank

Land purchased and held for future development. In some communities, the government will condemn and land-bank certain scenic property in an effort to prevent adverse development and to control urban or suburban development or sprawl.

Word of the day

Marketable Title

Good or clear salable title reasonably free from risk of litigation over possible de¬fects; also referred to as merchantable title. A marketable title is one that (1) is free from undisclosed encumbrances; (2) discloses no serious defects and does not depend on doubtful questions of law or fact to prove its validity; (3) will not expose a purchaser to the hazard of litigation or embarrassment in the peaceful enjoyment of the property; and (4) would be accepted by reasonably well-informed and prudent persons, acting on business principles and willful knowledge of the facts and their legal significance with the assurance that they could in turn sell or mortgage the property at market value.

Marketable title does not necessarily mean a perfect title, just one that is free from plausible or reasonable objections. A court of law would order the buyer to accept it if asked to decree specific performance of the sales contract. 

Title would not be marketable if there were a significant risk of litigation—the buyer cannot be forced to buy a lawsuit along with the property. An unmarketable title does not mean that the property cannot be transferred, but it does mean that certain defects in the title may limit or restrict its ownership, and the purchaser cannot be forced to accept a conveyance that is materially different from the one bargained for or “marketed” in the contract of sale.

If the buyer inserts a contract provision that the seller must deliver title “free from all defects or encumbrances,” the seller should be aware the buyer could probably reject title even if only a small or insignificant encroachment or defect existed. Unless the contract provides otherwise (in a “subject to” clause), any of the following could render title unmarketable: easements, restrictions, violations of restrictions, zoning ordinance violations, existing leases, encroachments (except slight ones), and outstanding mineral and oil rights.


Word of the day

Informed Consent

Consent to a certain act, given after a full and fair disclosure of all facts needed to make a conscious choice. Only those with adequate reasoning facilities who can appreciate the implications and future consequences of an action can give informed consent.


Word of the day

Grandfather Claus

A common expression used to convey the idea that something that was once permissible continues to be permissible despite changes in the controlling law. For instance, a developer with prior county planning approval to build on 10,000-square-foot minimum-size lots can be granted the right to build on such lots even if the current zoning regulations are amended to require 12,000-square-foot minimum-size lots. The developer is “grandfathered” under the originally approved subdivision plan. This situation is similar to nonconforming use.

Under state legislation regarding real estate pre-licensing educational requirements, current licensees may be “grandfathered,” or exempted, from such new requirements.


Word of the day

Kiosk

A small structure, usually constructed of wood, with one or more sides open and typically used as a newsstand, jewelry stall, or phone sales, especially in an enclosed mall. Such an enterprise usu¬ally pays rent on a fairly high percentage lease basis.

Word of the day

Equity of Redemption

The right of a mortgagor, before a foreclosure sale, to reclaim property forfeited due to mortgage default. The mortgagor can redeem the property by paying the full debt plus interest and costs. Any attempt to have the mortgagor waive the equity of redemption is unenforceable and void as being contrary to public policy. Equity of redemption has been held to be an interest in real estate and is thus affected by the ordinary laws and rules concerning conveyances, including the statute of frauds.

Any right to redeem after a foreclosure sale must be created by state statute. In those states that permit a power of sale to be inserted in the mortgage document, most foreclosures of property are conducted pursuant to the nonjudicial foreclosure statute. Upon a foreclosure sale, the equity of redemption is terminated.


Word of the day

Indemnification

An agreement to reimburse or compensate someone for a loss. For example, a buyer of commercial property might require the seller to indemnify the buyer against claims caused by the discovery of hazardous substances on the property.


Word of the day

Jumbo Loan

A residential mortgage loan that exceeds the loan amounts acceptable for sale to Fred¬die Mac and Fannie Mae. Also called nonconforming loans, they may carry higher interest rates and require a larger down payment. As such, they must be packaged and sold differently to underwriters.


Word of the day

Littoral Land

Land bordering on the shore of a sea or ocean and thus affected by the tide currents. Littoral land is different from riparian land, which borders on the bank of a watercourse or stream.


Word of the day

Master Plan

A comprehensive plan to guide the long-term physical devel­opment of a particular area.


Word of the day

Improvements

Valuable additions made to property that amount to more than repairs, costing labor, and capital, intended to enhance the value of the property or extend the useful remaining life. Improvements of land include grading, sidewalks, sewers, streets, utilities, and the like. Improvements to land include buildings, fences, room additions, new roofs, and similar constructions. An improvement could also be an alteration of the land’s surface, such as an irrigation channel. 

Based on modern appraisal methods, the value of an improvement is generally determined by what it adds to the land in terms of production of income or amenities. A reasonable relationship should exist between a site and the character of the improvement placed on it. An over improvement, under improvement, or misplaced improvement detracts from the combined value of a lot and the building on it. 

For income tax purposes, improvements must generally be capitalized, with cost recovery deductions taken over a period of years, whereas maintenance and repairs that do not add to the value of the property can be deducted on income property as business expenses in the year incurred.


Word of the day

Encumbrance

Any claim, lien, charge, or liability attached to and binding on real property that may lessen its value or burden, obstruct, or impair the use of a property but not necessarily prevent transfer of title; a right or interest in a property held by one who is not the legal owner of the property. Also spelled incumbrance. 

There are two general classifications of encumbrances: those that affect the title, such as judgments, mortgages, mechanics’ liens, and other liens, which are charges on property used to secure a debt or obligation; and those that affect the physical condition of the property, such as restrictions, encroachments, and easements. 

A covenant against encumbrances guarantees that there are no encumbrances against the property except those specifically disclosed. If no encumbrances are disclosed as exceptions in the contract of sale, the buyer may proceed with the purchase on the assumption that none exist. Encumbrances should be noted on the deed following the property description.


Word of the day

Hypothecate

To pledge specific real or personal property as security for an obligation without surrendering possession of it. For example, a long-term tenant could hypothecate the tenant’s leasehold rights as security for a loan. The lender could even use its rights in a receivable mortgage as collateral for some loan to the lender. 

In a typical house purchase, the buyers pay a portion of the purchase price with their own cash and borrow the balance from a lending institution. The lender requires the buyers to hypothecate the property or pledge it as security for repayment of the loan, which repayment is accomplished by use of a mortgage or trust deed. The borrowers retain the rights of possession and control, and the lender secures an underlying equitable right in the pledged property.


Word of the day

Duress

Unlawful force or action by one person against another in an attempt to coerce the person to perform some act against her will; the threat of force is called menace. Duress is a useful defense against enforcing a contract because there is no genuine meeting of the minds. A contract entered into under duress is not enforceable against the forced party. Courts are reluctant to give much weight to economic duress in which a person maintains he was forced into a contract due to financial pressures.

Word of the day


Word of the day

Farm Area

A real estate licensee’s term to indicate either a selected geographical area or a group of people from which to solicit real estate business and to which a real estate salesperson devotes special attention and study. A good salesperson learns everything there is to know about a particular geographical area, including all recent comparable sales, and tries to solicit real estate business, especially listings from this community. In a similar manner, licensees seek business from their “people farm.”


Word of the day

Farm Area

A real estate licensee’s term to indicate either a selected geographical area or a group of people from which to solicit real estate business and to which a real estate salesperson devotes special attention and study. A good salesperson learns everything there is to know about a particular geographical area, including all recent comparable sales, and tries to solicit real estate business, especially listings from this community. In a similar manner, licensees seek business from their “people farm.”


Word of the day

Judgment

The formal decision of a court on the respective rights and claims of the parties to an action or suit. A judgment that has been entered and recorded with the county recorder usually becomes a general lien on the property of the defendant.

A purely statutory general lien on real and personal property belonging to a debtor. Usually the lien covers only property located within the county where the judgment is rendered; notices of the lien must be filed in other counties when the creditor wishes to extend the lien cover¬age. To collect the amount of the judgment, the court is asked to issue a legal document, called a writ of execution, directing the sheriff to seize and sell as much of the debtor’s property as is necessary to pay the debt and the expenses of the sale. A judgment lien differs from a mortgage in that a judgment lien does not have a specific parcel of real estate given as security at the time that the debtor-creditor relationship is created.

The law in the state where the real estate is located determines priority of liens. A judgment takes its priority as a lien on the debtor’s property on one or a combination of the following dates: (1) the date the judgment was entered by the court, (2) the date the judgment was filed for record in the recorder’s office, or (3) the date an execution was issued. Judgments are enforced through the issuance of an execution and the ultimate sale of the debtor’s real or personal property by a sheriff. When the property is sold to satisfy a debt, the debtor should demand a legal document known as a satisfaction judgment, which should be filed with either the clerk of the court or, in some states, with the recorder of deeds so that the record is cleared of the judgment.


Word of the day

Meridian

One of a set of imaginary lines running north and south used by surveyors for reference in locating and describing land under the government survey method of property description.

Word of the day

Holdover Tenant

A person who stays on the leased premises after the lease has expired. The landlord normally has the choice of evicting the holdover tenant or permitting the tenant to remain and continue to pay rent. The landlord may also elect to treat the holdover tenant as a tenant whose lease would continue from period to period, with the period to be that of the original lease, and for the same rent. The lease, however, would generally not exceed one year, because most state statutes of fraud require that leases for one year or longer be in writing. A holdover tenant usually has no rights whatsoever to the leased property—being deemed little better than a trespasser.

Word of the day

Legal Description

A description of a piece of real property that is acceptable by the courts of the state where the property is located for use in real property conveyance documents. The description is usually complete enough so that an independent surveyor can locate and identify that specific parcel of land. Oral testimony is not admissible as a way of describing the property more fully, except in certain cases involving fraud or mistake. Such descriptions are usually based on the field notes of a surveyor or civil engineer. Methods of description are lot, block and subdivision; government survey; and metes and bounds.


A legal description is required on all deeds, assignments of leases, and mortgages and is in most contracts for deed. Street addresses, tax-bill descriptions, and general descriptions (the Smith farm) are generally inadequate for use in recorded title documents because such identifying characteristics may not endure indefinitely. Use of such temporary descriptions could lead to obvious difficulties for someone searching the chain of title or trying to locate the property in the distant future. In gen¬eral, a legal description should be used in any instrument that is to be recorded. If the description is incorrect, then the document may be improperly indexed and thus may not be sufficient constructive notice to a third person under recording laws.

The general rules in case of conflicts in legal descriptions are: natural or artificial monuments prevail over courses and distances, natural monuments prevail over artificial monuments, courses govern over distances, and stated acreage or area is the least reliable method of describing a parcel.
 

Word of the day

Good Faith

Bona fide; an act is done in good faith if it is in fact done honestly, whether negligently or not. The recording laws are designed to protect a good-faith purchaser. Most antidiscrimination laws require a broker to transmit all good-faith offers to lease or buy. Many states add a requirement of good faith for a person to acquire title to someone else’s real property by adverse possession

Sometimes an act done in “bad faith” is punishable as a crime. For instance, if an investor-borrower applies for an owner-occupant loan and lies about his intent to occupy, this type of falsehood is punishable as a misdemeanor under the National Banking Act.


Word of the day

Junior Mortgage

A mortgage, such as a second mortgage, that is subordinate in right or lien priority to an existing mortgage on the same realty. In the event of a foreclosure, second and third mortgage loans are repaid only if funds remain after paying the first mortgage. Because they are riskier, they generally carry a higher interest rate.

Generally, the foreclosure of a senior lien extinguishes all junior liens, whereas the foreclosure of a junior lien has no effect on a senior lien; that is, the purchaser at the junior foreclosure sale buys the property subject to the senior lien. There is no legal limit on the number of junior mortgages that can be placed on a property, but there is a practical limit. A lender would never want the loan amount to exceed the borrower’s equity in the secured property.
 

Word of the day

Full Disclosure

A requirement to reveal fully and accurately all material facts, a requirement based on the theory that no fraud is committed if the purchaser has accurate and full information regarding the property to be purchased. A broker is under a legal obligation to disclose in full to a client all known, relevant facts affecting a proposed transaction. Many state subdivision and condominium laws, as well as the federal Interstate Land Sales Full Disclosure Act (concerning subdivisions), require a developer to disclose fully all material facts of a project to each prospective purchaser or lessee through required distribution of a public report.


Word of the day

Heirs and Assigns

Heirs are recipients of an inheritance from a deceased owner, whereas assigns are successors in interest to a property. The words heirs and assigns are customarily inserted in deeds and wills, and are considered to be words of limitation, not words of purchase. Words of limitation in a conveyance indicate what type of estate is created. Words of purchase indicate who takes the estate. For example, in a conveyance “to Harry Howe and his heirs,” the words to Harry Howe are words of purchase. The words and his heirs are words of limitation indicating a fee simple estate; they would not be present in the transfer of a life estate. Heirs and assigns are also generally responsible for the contracts of their predecessors, such as leases, options, mortgages, and contracts for deed.
 

Word of the day

Heirs and Assigns

Heirs are recipients of an inheritance from a deceased owner, whereas assigns are successors in interest to a property. The words heirs and assigns are customarily inserted in deeds and wills, and are considered to be words of limitation, not words of purchase. Words of limitation in a conveyance indicate what type of estate is created. Words of purchase indicate who takes the estate. For example, in a conveyance “to Harry Howe and his heirs,” the words to Harry Howe are words of purchase. The words and his heirs are words of limitation indicating a fee simple estate; they would not be present in the transfer of a life estate. Heirs and assigns are also generally responsible for the contracts of their predecessors, such as leases, options, mortgages, and contracts for deed. 


Word of the day

Exclusive Listing

A written listing of real property in which the seller agrees to appoint only one broker to sell the property for a specified period of time. The two types of exclusive listings are the exclusive agency and the exclusive right to sell. Generally, exclusive listings must stipulate a definite termination date and may not include a rollover clause. A listing for an indefinite period is frowned on by the courts, is illegal in many states, and is generally poor practice. This is to protect sellers who, unaware that the listing is still in effect after the end of the initial listing period because they failed to give a cancellation notice, may list the property with another broker and thus find themselves liable for the payment of two full commissions.


Word of the day

Median

The middle figure in a set of numbers. If sales prices were $70,000, $90,000, and $180,000, the median would be $90,000. Some lenders define eligible income as being 80 percent or less of the area median income.

Word of the day

Fee Simple

The maximum possible estate one can possess in real property. A fee simple estate is the least limited interest and the most complete and absolute ownership in land; it is of indefinite duration, freely transferable, and inheritable. Fee simple title is sometimes referred to as “the fee.” All other estates may be created from it, which means that all other estates must be something less than fee simple (such as life estates or leaseholds). Any limitations that exist on the control and use of the land held in fee do not result from the nature of the estate itself but are founded on public or private controls governing the use of the land (zoning ordinances and building codes or restrictions and conditions). The fee may also be encumbered, either by voluntary (e.g., mortgage) or involuntary (e.g., tax lien) encumbrances. Such encumbrances tend to reduce the value of the fee interest. 

Word of the day

Listing

A written employment agreement between a property owner and a real estate broker authoriz¬ing the broker to find a buyer or a tenant for certain real property. Listings can take the form of open listings, exclusive-agency listings, or exclusive-right-to-sell listings. Most brokers prefer the exclu¬sive-right-to-sell listing.

Note that net listings, although not specifically illegal, are unenforceable under many state stat¬utes of frauds and therefore are not generally recommended.

A broker should be careful to check the true ownership of the property at the time of listing in order to avoid taking listings signed by unauthorized parties. It is important that all owners of record sign the listing agreement. The broker also has the legal and ethical duty to inspect the listed prop¬erty to ensure that all information included in the listing agreement is accurate and complete. Owners should not be relied on to confirm the accuracy of technical or detailed matters about which they could not know, such as the legal effect of certain recorded restrictions on the property.

Listings are personal service contracts, and as such they may not be assigned to another broker. This does not, however, prevent the broker from delegating to the sales office the task of procuring buyers for the property.

The time limit included in the listing agreement is extended by implication if negotiations to sell the property are in progress at the time the listing expires.

The listing usually states the amount of commission the seller will pay the broker upon the hap¬pening of certain stated conditions. If a listed property is transferred by way of an involuntary sale such as a foreclosure, condemnation, or tax sale, the broker is usually not entitled to a commission.

In a buyer’s listing, the buyer employs the broker to locate a property. 

The broker must give a copy of the listing agreement to all the parties signing it at the time of signing. The broker should not show the listing contract (including MLS listings) to the buyer—the listing is an employment contract strictly between the seller and broker and is confidential.
 

Word of the day

Injunction

A legal action whereby a court issues a writ that forbids a party defendant from doing some act or compels the defendant to perform an act. An injunction requires the person to whom it is directed to refrain from doing a particular thing, such as violating deed restrictions or house rules prohibiting pets.

Word of the day

Goodwill

An intangible, salable asset arising from the reputation of a business; the expectation of continued public patronage; including other intangible assets like trade name and going-concern value. When a business is sold, the sales price often reflects its goodwill value. Goodwill is not a depreciable asset, although it is a capital asset. Thus, a seller prefers to place a high value on the goodwill (and obtain a capital gain), while a buyer prefers a lower value (because goodwill cannot be depreciated). If goodwill is considered in a market value appraisal, the appraiser should specifically identify it.

Word of the day

Lateral and Subjacent Support

The support a parcel of real property receives from the land ad¬joining it is called lateral support. It is not a right in the land of an adjoining owner, rather a right incident to ownership of the property entitled to the support. Subjacent support is that support the surface of the earth receives from its underlying strata.

The basic rules of support are the same for both. In essence, an adjoining landowner (or holder of mineral or other rights beneath the land of another) has a duty to support a neighbor’s land in its natural state. This duty of support does not run specifically to any of the improvements on the land but does impose liability for damage to improvements on the neighbor’s land if the land would have subsided as a result of a landowner’s excavation, even without the weight of the improvements. In general, a property owner can lessen any exposure to liability by giving neighbors adequate notice of intent to perform excavation work on the property so they can take the necessary precautions.

Word of the day

Hold-harmless Cause

A contract provision whereby one party agrees to indemnify and protect the other party from any injuries or lawsuits arising out of the particular transaction. Such clauses are usually found in leases in which the lessee agrees to “indemnify, defend, and hold harmless” the lessor from claims and suits of third persons for damage resulting from the lessee’s negligence on the leased premises. Hold-harmless clauses are also found in property management contracts when the owner holds the agent harmless for all damages except those caused by the agent’s negligence or fraud.

Word of the day

External Obsolescence

A loss of value (typically incurable) resulting from extraneous factors that exist outside of the property itself; a type of depreciation caused by environmental, social, or economic forces over which an owner has little or no control. If there is a change in zoning, external obsolescence is likely to occur, as in the following examples: to a residence if an industrial plant is built next to it; to a well-maintained house in a deteriorating neighborhood; and to a motel if a new highway is built that results in difficult access to the motel. Other causes might be proximity to nuisances and changes in land use or population. Also called locational or environmental obsolescence.

Word of the day

Imputed Interest

- Interest implied by law. When an installment contract, such as a land contract or a mortgage note, fails to state an interest rate or sets an unreasonably low rate, the IRS imputes, or assigns, interest at a prescribed rate (computed semiannually). The applicable federal rate depends on the term of the note and is determined by the IRS and published monthly. This rule does not apply to installment sales under $3,000. Section 483 of the Internal Revenue Code, “Interest on Certain Deferred Payments,” and Sections 1271 through 1274, original issue discount rules, prevent the seller from treating as capital gain the part of the selling price that really represented interest on deferred payments. In effect, they prevent deferred payments from being treated wholly as principal. Before the enactment of these sections, parties to a real estate installment sale frequently would omit interest from the contract and raise the purchase price to reflect this omission. Buyers may deduct for tax purposes, even though no interest is paid, the imputed interest per annum on the unpaid balances. By reallocating the face amount of the note to part interest and part principal (buyer and seller agreement), the buyer may not only carve out an interest deduction but also reduce the basis of the property acquired.

Word of the day

Love and Affection

Usual consideration when a gift is intended, it is different from valuable consid¬eration. The difference between the two is important in those areas of the law requiring a valuable consideration, such as under the recording acts, which protect the rights of bona fide purchasers for value. A common example of a grant deed supported by love and affection is a gift transfer of the family home by a father to his son “for love and affection.”

Word of the day

Fair Market Value

An appraisal term for the most probable price in terms of money that a property, if offered for sale for a reasonable period of time in a competitive market, would bring to a seller who is willing but not compelled to sell, from a buyer who is willing but not compelled to buy, both parties being fully informed of all the purposes to which the property is best adapted and ways it is capable of being used. The accepted term today is market value.

Word of the day

Minor

A person under the legal age of majority; a legal infant who is not a completely competent legal party. The legal age of majority is set by state law and may vary depending on the purpose of the law, such as the legal age to drive, drink, or enter into contracts. Most contracts, except those for necessities such as food and clothing, entered into by a minor are generally voidable at his or her option. However, if the minor does not disaffirm the contract within a reasonable time after attaining majority, then the contract becomes fully enforceable against him or her. For example, if a minor lists property with a broker, the broker could not collect an earned commission if when the broker finds a ready, willing, and able buyer the minor decides to repudiate the listing contract. In any event, a minor could not sell the property without court approval, because such a person has neither the legal capacity to transfer title to property nor the power to make a valid will.

Even if the minor misrepresents his or her age, the minor can still disaffirm the contract, although misrepresentation may lead to an action in damages for fraud.

A deed by a minor is voidable, although a minor may be a grantee and may receive realty by gift or inheritance. A minor is generally deemed incapable of appointing an agent to sell his or her property; thus any power of attorney executed is void.

If land owned by a minor must be sold for the minor’s maintenance or for investment, court proceedings to appoint a guardian must be instituted, in which case the minor becomes a ward of the court. The court can grant the guardian a special license to sell the property if the guardian posts a bond (the guardian does not need a real estate license).

Generally, title by adverse possession cannot be established against a minor unless the adverse possession continues for the prescription period after the minor reaches majority.

Word of the day

Gap Financing

The financing used to make up the difference between the underlying loan (floor loan) and the total amount required. Gap financing usually fills a temporary need until permanent financing is obtained, and thus is sometimes called a bridge loan or swing loan. Gap financing may also be used when permanent takeout financing is difficult to obtain or is too expensive. By obtaining gap financing and waiting, it is possible that more favorable terms may be reached.

Word of the day

License

1. Permission or authority to do a particular act on the land or property of another, usually on a 1. nonexclusive basis. A license is a personal, revocable, and nonassignable right, but unlike an easement, it is not considered an interest in the land itself. If a right to use another person’s land is given orally, it is generally considered a license rather than an easement. The land¬owner may revoke such a right at any time, unless it has become irrevocable by estoppel. A license ceases upon the death of either party and is revoked by the sale of the land by the licensor. For example, a landowner who grants a friend permission to enter his property for hunting purposes thus grants the friend a license to use the land. If an owner mistakenly builds a rock wall across the boundary line so that it encroaches onto the neighbor’s prop¬erty, the owner sometimes pays the neighbor for a license to keep the rock wall in place. This arrangement should be reduced to a formal encroachment agreement that is signed and recorded so that it runs with the land. 

2. Formal permission from a constituted authority (such as a state real estate commission) to engage in a certain activity or business (such as real estate brokerage or real estate appraisal).
 

Word of the day

Early Occupancy

Refers to the practice of allowing the buyer to take possession of real property before closing. Such a practice should be carefully evaluated because of the risks of mechanics’ liens, inadequate insurance coverage, and “buyer’s remorse” with possible lawsuit. In addition, the buyer who moves in is not generally subject to landlord-tenant rules, so if the buyer fails to buy, the seller may have a great deal of difficulty evicting the buyer. The parties should sign a written early-occupancy agreement to cover these risks.

Word of the day

Market Value

The most probable price a property should bring in a com¬petitive and open market under all conditions requisite to a fair sale under guidelines published by federal lending institutions (Fannie Mae, Freddie Mac). Such conditions include the assumption that the buyer and the seller acted prudently and knowledgeably and that the price is not affected by undue stimulus. Implicit in this definition are the consummation of a sale as of a specified date and the passing of title from seller to buyer under the following conditions:
 
  • Buyer and seller are typically motivated.
  • Both parties are well-informed or well-advised, and they are acting in what they con¬sider their own best interest.

A reasonable time is allowed for exposure in the open market.

Payment is made in terms of cash in U.S. dollars or in terms of comparable financial arrangements.

The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
 

Word of the day

Key Lot

A lot that has added value because of its strategic location, especially when it is needed for the highest and best use of contiguous property; a lot that adjoins the rear property line of a corner lot and fronts on a secondary street. Also, the piece of property that is essential to the development of a project.

Word of the day

Double Taxation

"Two or more taxes paid for the same asset or financial transaction, and often used in reference to income taxes assessed first on the corporate level and second as dividend income on the earnings distributed to the shareholders. Under the corporate form of ownership, as a separate legal, taxable entity for income tax purposes, a corporation must pay tax on its earnings. Earnings distributed to the stockholders are also taxed as regular income.

S corporations, real estate investment trusts (REITs), limited liability companies, mutual funds, and partnerships are pass-through entities that are not subject to corporate taxes, thus effectively avoiding double taxation.

Double taxation also refers to the situation of paying two separate taxes on the same property, such as the payment of state and federal taxes in more than one state. It may also refer to the situation when federal estate taxes are paid once upon the death of one joint tenant and again upon the death of the surviving joint tenant."

Word of the day

Just Compensation

An amount of compensation to be received by a party for the taking of property under the power of eminent domain. Under both federal and state constitutions, private property may not be taken for public use without just compensation having first been determined by the court. Determination of just compensation is probably the most difficult problem in condemnation proceed¬ings. A condemnee can generally accept the offered compensation or can request and receive a court hearing for determining the appropriate amount of compensation.

Word of the day

Discount Points

An added loan fee charged by a lender to increase the yield on a lower-than-market interest loan and to make the loan more competitive with higher-interest loans. Borrowers often pay discount points upfront in order to gain a long-term, lower interest rate, an advantage for the buyer who plans on keeping the loan for a long period of time, and not so useful for loans held only a few years. Each point is equal to 1 percent of the loan amount. Either the buyer or the seller may pay the points. Points paid for residential real estate can usually be used to reduce taxable income in the year in which they are paid, a benefit to the buyer, even if the seller pays the points.

Word of the day

Judgment Lien

A purely statutory general lien on real and personal property belonging to a debtor. Usually the lien covers only property located within the county where the judgment is rendered; notices of the lien must be filed in other counties when the creditor wishes to extend the lien cover¬age. To collect the amount of the judgment, the court is asked to issue a legal document, called a writ of execution, directing the sheriff to seize and sell as much of the debtor’s property as is necessary to pay the debt and the expenses of the sale. A judgment lien differs from a mortgage in that a judgment lien does not have a specific parcel of real estate given as security at the time that the debtor-creditor relationship is created.

The law in the state where the real estate is located determines priority of liens. A judgment takes its priority as a lien on the debtor’s property on one or a combination of the following dates: (1) the date the judgment was entered by the court, (2) the date the judgment was filed for record in the recorder’s office, or (3) the date an execution was issued. Judgments are enforced through the issuance of an execution and the ultimate sale of the debtor’s real or personal property by a sheriff. When the property is sold to satisfy a debt, the debtor should demand a legal document known as a satisfaction judgment, which should be filed with either the clerk of the court or, in some states, with the recorder of deeds so that the record is cleared of the judgment.
 

Word of the day

General Agent

One authorized by a principal to perform any and all acts associated with the continued operation of a particular job or a certain business of the principal. The essential feature of a general agency is the continuity of service, such as that provided by a property manager of a large condominium project. Most real estate brokers are treated as special agents when they are given limited authorization to act under a listing agreement but not to make decisions.

Word of the day

Intestate

Dying without a will or having left a will that is defective in form. An intestate decedent’s property passes to the heirs according to the laws of descent in the state where such real property is located. These laws of descent vary from state to state and determine who is entitled to the decedent’s property, which then must pass through probate in the state. Descent laws do not affect the distribution of jointly held property or life insurance proceeds.

State laws of descent vary greatly: in some states, an unmarried person’s estate passes to the deceased’s parents; in other states, the decedent’s parents may have to share the estate with the intestate person’s lineal brothers and sisters. A married person’s property may pass to the spouse and children or descendants of children in varying shares; if the deceased left no children or descendants of same, the surviving spouse may be the sole heir in some states or may have to share with the decedent’s parents in others. Many states allow a surviving spouse to take a special marital share of the estate, such as dower, curtesy, or an elective share. In states that recognize community property, a surviving spouse legally owns one-half of all community property, so it is only the half-interest owned by the decedent that passes to his or her heirs according to the state laws of descent.
 

Word of the day

Joint Tenancy

An estate or unit of interest in real estate that is owned by two or more natural persons, all owning equal shares with rights of survivorship. The basic idea of a joint tenancy is unity of own¬ership; title is held as though all owners collectively constituted one person, a fictitious entity. The death of one joint tenant does not destroy the owning unit—it only reduces by one the number of persons who jointly own the unit. The remaining joint tenants receive the deceased tenant’s interest by the right of survivorship. Thus, the decedent’s interest cannot be transferred by will or descent. As each successive joint tenant dies, the remaining tenants acquire the interest of the deceased. The last survivor takes title in severalty, fully inheritable at the survivor’s death by heirs and devisees.

Some form of joint tenancy is recognized in most states, although several states have opted to eliminate the right of survivorship as a distinguishing characteristic. Sometimes called the “poor man’s will,” the fact that one holds title to property as a joint tenant is no reason for a person not to make a will. Joint tenancy does avoid a formal probate proceeding, however.

Traditionally, four unities are required to create a joint tenancy: unity of title, unity of time, unity of interest, and unity of possession. All unities must be present when title is acquired by one deed, executed and delivered at one time that conveys equal interests to all the grantees, who hold undivided possession of the property as joint tenants.

A joint tenancy can be created only by grant or purchase (by a deed of conveyance) or by devise (will)—it cannot be created by operation of law. The grantees or devisees must be specifically named as joint tenants. In most states, a deed or will that is unspecific about the grantees’ or devisees’ tenancy will pass title to the parties as tenants in common. Typical wording used to create a joint tenancy may be as follows: “To Morton Charles and Seymour Berkowitz, and to the survivor of them, and his or her heirs and assigns as joint tenants, with rights of survivorship, and not as tenants in common.”

Debtors cannot protect themselves from creditors’ claims by taking title to property in joint tenancy. The creditor has every right to attach the debtor’s interest in jointly held property and force a partition. However, if the joint tenant dies before the creditor seizes that tenant’s interest then the creditor loses his interest because the surviving tenant takes the property free from the claims of the decedent’s creditors. On the other hand, a creditor of the surviving joint tenant has substantially increased his security.

One principal advantage of joint tenancy is avoiding the delay and expense of probate proceed¬ings because the surviving joint tenant immediately becomes the sole owner of the property. The current value of the property is not included in the total value of the estate on which probate fees are assessed. In addition, the survivor holds the property free from the debts of the deceased joint tenant and from heirs against her interest.

Joint tenants give up the right to dispose of their individual interests by will, thus precluding the use of estate planning to minimize the estate taxes. Although not subject to probate proceedings, joint tenancies are subject to gift taxes, income taxes, and inheritance taxes, in addition to federal estate taxes. A purchaser should discuss these tax consequences with experienced tax counsel before deciding whether to hold title to the property in joint tenancy. In addition, joint tenancy or tenancy by the entirety may not be appropriate for people with children from a prior marriage.
 


Word of the day

Description

The portion of a conveyance document that defines the property being transferred. To be valid, documents such as deeds, assignments of leases, certain leases, and mortgages must contain a full legal description of the property to be conveyed. Usually a contract for the sale of real property need only contain a description sufficient to identify the property, such as street address and/or tax map key number. 

In a deed, the description is normally divided into two parts: the general and the specific. The general description usually identifies the parcel in question by location, name, or reference to previous known owners. It leads into the specific description with the phrase “more particularly described as follows,” or by reference to public maps, plats, or other recorded information. 

The specific description exactly defines the limits of the property involved. These limits may be defined by one (or any combination) of three basic methods of real estate description: metes and bounds, government (rectangular) survey, and subdivision plat. 

Great care must be exercised to avoid ambiguities. For example, the “next contiguous 40 acres” is ambiguous because an acre can have any shape; the “south one-half of the farm” is adequate if the lot is rectangular but not if it is irregular in shape. 

Some contracts for large, bulk real estate sales include what are known as Mother Hubbard clauses. These clauses state that the description includes all property owned by the seller at the location or, if appropriate, all real estate owned by the seller in that particular area.
 

Word of the day

Deferred Maintenance

Physical deterioration or loss in value of a building resulting from postponed maintenance to the building. This type of deterioration, sometimes called curable physical depreciation, is normally curable by making the necessary repairs and improvements.

A prospective purchaser of a building in which there is a significant amount of deferred maintenance should be especially careful to factor the estimated repair and replacement costs into an investment analysis of the property.
 

Word of the day

Muniment of Title

A legal document evidencing title to real property. An example is a deed or con¬tract, which is proof of ownership and enables an owner to defend his or her title. To register prop¬erty in the Torrens system, an applicant must file with his or her application a file plan, an abstract of title, and all original muniments of title within his or her control mentioned in the schedule of documents.

Word of the day

Escheat

The reversion of property to the state or county, as provided by state law, in cases where a decedent dies intestate and there are no heirs capable of inheriting or when the property is abandoned. In some states, bank accounts unused for more than seven years escheat to the government.

Word of the day

Foreign Corporation

Any corporation organized under the laws of another state or country and not organized under a given state’s laws but that conducts a portion of its business in that state. All foreign corporations that do business in a state or attempt to take, hold, demise, sell, or convey real estate there must generally qualify to do business and obtain an annual license to do business in the state.

Word of the day

Deed in Trust

A form of deed by which real estate is conveyed to a trustee, usually to establish a land trust. Under the terms of such an instrument, full powers to sell, to contract to sell, to mortgage, and to subdivide are granted to the trustee. The trustee’s use of these powers, however, is controlled by the beneficiary under the provisions of the trust agreement. Deeds in trust are used in those states that recognize land trusts.

Word of the day

Dedication

The transfer of privately owned land to the public without consideration, with the intent that the land will be accepted and used for public purposes. A landowner may dedicate the entire fee simple interest or an easement such as a public right-of-way across the landowner’s property.

There are two types of dedication: statutory and common law. A statutory dedication is accomplished by recording a subdivision map approved by local officials and expressly indicating on the map those areas dedicated to the public, such as parks and streets.

A common-law dedication is a matter of contract and thus requires an offer, evidenced by an intention and an unequivocal act of dedication on the part of the owner and acceptance on the part of the public. The dedication may be express (as when a developer or subdivider deeds roads to the county) or implied (as when the owner has acquiesced to the public use of the owner’s property, usually for the prescriptive period). (See cession deed.)

For example, to prevent the public from claiming a dedication, the Rockefeller Center closes off its streets and sidewalks for one day out of the year. This shows that the public’s right to use the property is a mere license and that Rockefeller Center is definitely not dedicating its property to the public. Some owners also imbed into their sidewalk a metal plaque stating, “Private Property, Permission to Use Revocable.” Signs that say “No Trespassing” may be insufficient for purposes of preventing the public from claiming a dedication.

The fee interest acquired by dedication is similar to a qualified fee. For example, upon abandonment of the dedicated public use, the fee goes to the owner under a possibility of reverter, while the government may not divert the property to a new use.

Dedication of property such as streets and open spaces is sometimes made a prerequisite to governmental approval of a proposed development. In some cases, the developer can pay a fee rather than dedicate land.

Word of the day

Debt Service

The amount of money needed to meet the periodic payments of principal and interest on a loan or debt that is being amortized. If the periodic payments are constant, in equal amounts, then a portion will pay off accrued interest with the remainder reducing principal.

Word of the day

Damages

The compensation recoverable in a lawsuit by a complainant who sustained an injury, to person or property, through the act or default of another. Determining the appropriate measure (amount) of damages for specific types of injuries is complex. In cases of fraud, courts often use the benefit-of-bargain rule, awarding as damages the cash difference between the actual value of the property and the value of the property as fraudulently represented to the buyer. In some cases, the courts apply the “out-of-pocket” rule, awarding as damages the difference, if any, between the actual value of what the plaintiff (the person seeking damages) paid (i.e., the consideration) plus any amounts expended in reliance on the fraudulent party and the actual value of what was received. Often the seller in a real estate contract retains the buyer’s deposit money as damages when the buyer decides not to perform the contract to purchase the property. Sometimes the parties agree when signing their contract that a defaulting party will pay a certain amount to liquidate or settle any damages. Damages recoverable by an owner for a lessee’s breach of contract to lease would be the excess (if any) of the agreed or contract rent, over and above the rental price the owner would be forced to accept in reletting the premises in a pressure situation. The burden of proving damages is always on the plaintiff.

Word of the day

Customer

The unrepresented third party in an agency relationship. For example, the listing broker’s client is the seller. The broker can “work with” the unrepresented buyer as a customer. On the other hand, if the broker represents a buyer, the broker can “work with” an unrepresented seller as customer. Most state laws require that real estate licensees who work with customers exercise reasonable skill and care, disclose material and relevant facts about the property, disclose from whom the licensee will receive compensation, and follow any other duties required of the licensee in law or regulations

Word of the day

Covenants and Conditions

Covenants are unconditional promises contained in contracts, the breach of which entitles a person to damages. Conditions, on the other hand, are contingencies, qualifications, or occurrences upon which an estate or property right (like a fee simple) would be gained or lost. Covenants are indicated by words such as promise, undertake, agree; conditions are indicated by words such as if, when, unless, and provided. Because both are limitations only and do not create obligations, failure of the condition to occur will not entitle either party to damages against the other party. Covenants are unconditional promises contained in contracts, the breach of which entitles a person to damages. Conditions, on the other hand, are contingencies, qualifications, or occurrences upon which an estate or property right (like a fee simple) would be gained or lost. Covenants are indicated by words such as promise, undertake, agree; conditions are indicated by words such as if, when, unless, and provided. Because both are limitations only and do not create obligations, failure of the condition to occur will not entitle either party to damages against the other party.


Conditions may be either precedent or subsequent. A condition precedent must happen or be performed before a right or estate is gained; a condition subsequent causes a right to be lost or an estate to be terminated upon its occurrence. 

For example, a lease may contain covenants to repair, or pay taxes, assessments, or rent. If the tenant breaches a covenant, the landlord may sue the tenant for damages. If the lease contains a certain condition and the tenant breaches the condition, then the leasehold interest terminates. Thus, a commercial lease often contains a condition in a defeasance clause that the tenant will forfeit the lease upon the tenant’s being declared bankrupt or upon illegal use of the premises. 

Promises may be both conditions and covenants. For example, the concurrent conditions found in contracts for sale are also covenants. The delivery of the deed by the seller and the payment of the purchase price by the buyer are concurrent conditions; also, they are covenants. Thus, the buyer could sue the defaulting seller for damages only after the buyer met the condition of tendering performance (by placing the purchase money into escrow).
 

Word of the day

Counteroffer

A new offer made in response to an offer received from an offeror. A counteroffer has the effect of rejecting the original offer, which cannot thereafter be accepted unless revived by the offeror’s repeating it.

Once the buyer submits an offer to buy for the seller’s acceptance, if the seller makes any change to the offer—no matter how slight—such change constitutes a counteroffer, and terminates the original offer and bars its subsequent acceptance. Thus, if the seller changes the suggested closing date from 10:00 am November 10, 2013, to 11:00 am November 10, 2013, initials the change, and signs the sales contract, the seller has made a counteroffer. The roles of the parties then reverse. There is no obligation on the buyer to either accept or reject the counteroffer. To create a valid contract, the buyer must accept the terms of the counteroffer within a certain period of time. Note that a simple inquiry as to whether the offeror would be willing to change the terms of an offer is not sufficient to constitute a rejection of the offer or a counteroffer.

A common practice has been for the seller to make a change to the buyers’ sales contract, initial and date the change, and transmit it to the buyers for acceptance. If the buyers then wanted to make a change to the altered contract, they in effect would be making a counter-counteroffer.

It is poor practice to rely on a contract that has many initialed changes, because it is difficult to determine at what point a valid contract actually exists. The parties should execute a written counteroffer. If a buyer wishes to make a counteroffer in response to the seller’s counteroffer form, the buyer should probably begin the process anew by completing a new sales contract offer.

Because it is important to be able to determine the chronology of events, each change should be time-dated. In addition, the broker must give a copy of the changes to the signing party at the time such changes are made, not afterward.
 

Word of the day

Corporate Resolution

A summary of a specific action taken by the board of directors of a corporation normally recorded by the corporate secretary in the corporation’s minute book.

Lenders often request a certificate of resolution to verify that the corporate board has authorized the borrowing of money or the opening of an account. This is called a borrowing resolution and usually uses language similar to the following: “Upon motion duly made, seconded, and unanimously passed, the following resolution was adopted on the 5th day of October, 2012. Resolved that the Corporation hereby authorizes the borrowing of $250,000 from the Bank of Paradise to purchase a grocery store.” 

When a corporation is the seller of real property, the purchaser should request a resolution from the seller’s board of directors authorizing the sale and designating an authorized officer to sign the conveyance instrument. As a rule, if the corporation is selling most of its assets, a resolution of the shareholders to authorize the sale is also required.
 

Word of the day

Cooperating Broker

- A broker who assists another broker (usually the “listor”) in the sale of real property. Usually, the cooperating broker is the (selling) broker who found the buyer who offers to buy a piece of property listed with another (listing) broker. The cooperating broker has no contractual relationship with the seller and therefore must look solely to the listing broker for a commission. Cooperating brokers should be aware that cooperation does not necessarily mean compensation; they should always verify the compensation offered by the listing broker. 

Negotiations concerning property listed exclusively with one broker should be carried on with the listing broker, not with the owner (except with the consent of the listing broker).
 

Word of the day

Conversion

1.    The process of transforming an income-producing property, such as a rental apartment building or hotel, into condominium apartments for sale to separate owners. The building is often renovated, the existing leases are allowed to lapse or are terminated, and the project is registered with the proper state agency and the title brought under the condominium act. The process requires considerable expertise in each of the following stages: cost and market analysis, purchase, initial remodeling, appraisal, interim and long-term financing, tenant relocation, and sales. State law often requires the developer to give existing tenants a long period in which to relocate if they elect not to purchase their unit. Due to increased construction costs, many developers are exploring condominium conversion as the answer to housing shortages. Yet, because of tenant displacement problems, many communities have placed restrictions (and even moratoriums) on condominium conversions.

2.    The appropriation of property belonging to another. The conversion may be illegal (as when a broker misappropriates client funds), or it may be legal (as when the government condemns property under the right of eminent domain). 

3.    The process of converting from one use to another for tax purposes, for example, changing a personal residence into a rental property
 

Word of the day

Contingency

A provision in a contract that requires the completion of a certain act or the happening of a particular event before that contract is binding. Often a buyer will submit an offer to purchase contingent on obtaining financing or rezoning. In such a case, the seller should be sure that the contingency is specifically detailed and unambiguous and that there is a definite cutoff date; otherwise, the buyer could tie up the seller’s property indefinitely while attempting to get financing or rezoning. Parties may waive any contingency clause that was inserted for their benefit. For example, the buyer could force the seller to sell the property even though the buyer was not able to obtain the zoning— the original contingency in the contract for sale. Contingency implies a promise to use one’s efforts to bring it about.

If a contingency is worded too loosely, such as “contingent on my deciding whether it is a good deal or not,” then the entire contract is considered “illusory” and unenforceable by either party due to lack of “mutuality of obligation.” If the sale is contingent on a “satisfactory” inspection or attorney’s review of lease, the courts will try to impose standards of good faith and reasonability so a party cannot back out just because of a change in that party’s plans.

A contingent sale is different from an option. In an option, the optionee has absolute discretion whether to exercise the option. In a contingency, the buyer must buy upon the occurrence or nonoccurrence of a specified event, such as loan qualification.

The financing contingency is not only the most frequently used contingency, it is also the most controversial. Even a well-written contingency statement can cause problems. For instance, assume that a financing contingency stated that the offer was contingent upon buyer obtaining a first mortgage loan commitment for $167,500 with interest not to exceed 5 percent per annum and for a term of not less than 30 years, and monthly payments for principal and interest not to exceed $800.18 plus ¹⁄₁₂ the estimated annual real property taxes and ¹⁄₁₂ the annual insurance premium. Buyers agreed to use good faith and due diligence in obtaining such a loan. Buyers qualified for the loan but refused to take it because the lender added an interest rate escalation clause. Even though a court might allow some deviation in the financing commitment, the inclusion of an escalation clause is a material deviation of the terms of the offer to purchase and thus the buyer would not be in breach of the contract for refusing to complete the purchase; the buyer is entitled to a return of the deposit money. However, a buyer who did qualify for financing on the terms stated in an offer but who later gets divorced or otherwise changes circumstances so as to not be qualified at the time of closing may have difficulty defending a lawsuit for enforcement of the purchase contract. Sometimes, a cautious seller might add a clause to the effect that “the execution of any loan documents by the buyer shall be deemed to be an acceptance of such loan and a waiver of this contingency.”

Word of the day

Contiguous

In proximity to; adjoining or abutting; near, coterminous (having the same boundaries). Many state subdivision laws define a subdivision to include any land consisting of two or more lots, contiguous or not, offered as part of a common promotional plan of advertising and sale. Condominium property does not have to be contiguous either (as when it includes a parking lot across the street), but it must be in the same vicinity. Contiguous owners must yield, to a reasonable degree, their privacy to the general welfare of the community. For example, reasonable inconvenience may be suffered by owners whose properties are contiguous to commercial enterprises and railroads.

Often a partial release clause in a mortgage may require that a partial release be given only on a parcel that is contiguous to a parcel previously released. The term contiguous should be precisely defined so the release clause will not be challenged on grounds of uncertainty and vagueness.
 

Word of the day

Constructive Notice

Notice of certain facts that may be discovered by due diligence or inquiry into a public record; a legal presumption that a person is responsible for knowing these facts. The proper recording of a document gives constructive notice to the world of the document’s existence and contents. Possession of property also imparts constructive notice of the rights of the party in possession. Examples of rights of parties in possession are rights under an unrecorded deed, contract for deed, lease-option, and rights of adverse possession. Constructive notice is also referred to as legal notice and is in contrast to actual notice, which is express or direct knowledge acquired in the course of a transaction.

Word of the day

Constructive Eviction

Conduct by the landlord that so materially disturbs or impairs a tenant’s enjoyment of the leased premises that the tenant is effectively forced to move out and terminate the lease without liability for further rent. This concept is a product of modern property law, which now tends to place more emphasis on the quality of possession or habitability under a lease. Constructive eviction might occur when a landlord cuts off the electricity or fails to provide heating, makes extensive alterations to the premises or attempts to lease the property to others, or fails to provide elevator service in a highrise building. There can be no constructive eviction without the tenant’s vacating the premises within a reasonable time of the landlord’s act. The tenant’s duty to pay rent is not terminated if the tenant remains in possession.

The tenant can sue to recover possession or bring an action for damages based on breach of the covenant for quiet enjoyment.
 

Word of the day

Comparables

Recently sold or leased properties that are similar to a particular property being evaluated and are used to indicate a value for the subject property. “Comps” need not be identical to the subject in physical characteristics or location, but the highest and best use, land-to-building ratio, terms of the sale, and the market conditions should be similar, or relatively easy to adjust for comparison.

    In addition to adjustments for financing, time, and conditions of sale, adjustments may be necessary for differences in location and all features that are recognized by the market as having value.

In general terms, the more recent the sale and the fewer the dissimilarities, the better the comparable. Comps must also fit the definition of value to be applied. Distressed properties are not arm’s length. Sales of distressed properties generally do not fit the definition of market value. The appraiser must carefully select only those comparables that actually fit the definition of value being used.
 


Word of the day

Common Elements

Parts of a property necessary or convenient to the existence, maintenance, and safety of a condominium, or are normally in common use by all of the condominium residents. All condominium owners have an undivided ownership interest in the common elements. Maintenance of the common elements is paid for by the condominium owners’ association, and each owner must pay a monthly maintenance assessment prorated according to his or her individual common interest. Typical common elements are elevators, load-bearing walls, floors, roofs, hallways, swimming pools, and so on.

Word of the day

Commingling

To mingle or mix; for example, to deposit client funds in the broker’s personal or general account. Licensees found guilty of commingling funds may generally have their license suspended or revoked by the state licensing agency. Some commingling situations are rather obvious; others are more involved, such as a broker acting as property manager who takes a fee out of the tenant’s security deposit.

Commingling may occur when a broker fails to deposit trust funds into escrow, a client trust, or earnest money account at a bank or recognized depository within the time frame mandated by rule or regulation. 

Commingling does not occur when the broker keeps a minimum amount of the broker’s own money in the client trust account in order to keep the account open. The amount is often regulated by rule or regulation. In many states (but not all), it is permissible to hold an uncashed check until acceptance of an offer when directed to do so by the buyer (offeror); however, before the seller accepts the offer, the broker must specifically disclose the fact that the check is being held in an uncashed form.

As a matter of policy, not cashing checks until an offer is accepted may prevent problems for the broker. Often a buyer submits an offer with a personal check as an earnest money deposit. If the broker deposits the check in the client’s trust account and the offer is rejected, then the broker may be in a position of having to refund the earnest money deposit before the broker knows whether the buyer’s check has cleared. If the broker delays in returning the earnest money deposit, the buyer will be irritated and their business relationship ruined. Yet, if the broker returns the deposit and the check bounces, the broker is out the money. 

A more serious offense than commingling is conversion, which is the actual misappropriation of client monies.
 

Word of the day

Code of Ethics

A written system of standards of ethical conduct. Real estate brokerage is a profession, an occupation that requires special skill and advanced training. Because of the nature of the relationship between a broker and a client or other persons in a real estate transaction, a high standard of ethics is needed to ensure that brokers act in the best interests of both their principal and any third parties. 

Most professional organizations incorporate a set of self-governing rules that also include the application of penalties for inappropriate behavior or negligence. Although technically only members are held to these standards, increasingly, courts look to the profession’s code of ethics. 

Members of the National Association of REALTORS® (NAR) subscribe to a code of ethics that is in a constant state of flux. NAR has published the booklet Interpretation of the Code of Ethics, applying the code to practical situations. There are also approved Standards of Practice, which interpret some of the articles of the Code of Ethics, which may be cited as additional support for alleged violations of the code. REALTORS® are required to complete ethics training within each four-year cycle. The Code is available in six languages: English, Chinese, Korean, Spanish, Tagalog, and Vietnamese at www.realtor.org.
 

Word of the day

Closing Statement

A detailed cash accounting of a real estate transaction prepared by a broker, escrow officer, attorney, or other person designated to process the mechanics of the sale, showing all cash received, all charges and credits made, and all cash paid out in the transaction. A closing statement may also be called a settlement statement or adjustment sheet—in all federally related loans, the HUD-1 settlement sheet is used. The statement shows how all closing and adjustment costs plus prepaid and unpaid expenses are allocated between the buyer and the seller. In many areas, separate closing statements are prepared for the buyers, showing credits, charges, and the balance due from them at closing; for the sellers, showing credits, charges, and the proceeds they will receive at closing; and for the broker, showing a detailed accounting of all monies received and disbursed in the transaction.

Word of the day

Caveat Emptor

Latin for “let the buyer beware.” Buyers should inspect the goods or realty before purchase because they buy “as is” and at their own risk. 

The modern judicial trend is to soften the effect of this ancient doctrine. Today, the seller has more of an affirmative duty to disclose any and all factors that might influence the buyer’s decision to purchase. For residential properties of one to four units, many states now require that sellers deliver to the buyer a written disclosure about certain conditions about the property. Buyers should not rely on the seller’s disclosure as either a warranty or a guarantee. Buyers have not only a right but also a responsibility to “discover” issues about the property that are important to them. In other words, the written seller’s disclosure places the burden on the seller to disclose and on the buyer to discover. 

Although some sellers may “forget” to make certain disclosures, buyers should also remember that sellers cannot disclose that of which they are not aware. Licensees must still disclose those issues of which they have knowledge because the courts have generally held that a prospective purchaser, as a member of the public, can rely on the statements made by a licensed salesperson or broker. 
The doctrine of caveat emptor has been substantially altered with respect to residential leases. In the past, a landlord would lease residential premises “as is” with no obligation to make them habitable or to make repairs. In several states, this doctrine has been replaced in residential leases by an implied warranty of habitability, whereby the landlord has an obligation to make the premises fit before the tenant moves in and to continue to keep the premises fit during the lease.
 

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Cashier’s Check

A bill of exchange (check) drawn by a bank (usually signed by its cashier) upon itself as drawer and payable upon demand, like a promissory note executed by the bank. A cashier’s check is preferred to an ordinary personal check, and it (or a certified check) is usually required of the purchaser of property by the contract terms to close a transaction. 

A cashier’s check, however, is still subject to a stop-payment order of the maker. The certified check is subject to a stop-payment order only if the maker obtains the bank certification, not when the payee has the maker’s check certified in the maker’s bank.
 

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Cash Flow

The spendable income from an investment after deducting from gross income all operating and fixed expenses, including principal and interest. The amount of cash derived over a certain measured period of time from operation of income-producing property after debt services and operating expenses, but before depreciation and income taxes. “Net after-tax” cash flow, or cash available for distribution, includes an allowance for income tax attributable to the income. Pre-tax cash flow is sometimes called cash throw-off. 

Cash flow is different from “net profit.” To arrive at net profit, the owner will make a deduction for depreciation but will not deduct for loan amortization. 

Two benefits of investing in improved, income-producing real property are the tax shelter provided during ownership and the anticipated appreciation in the property value that may be realized upon its sale. Thus, an investment can turn out to be profitable even if there is monthly negative cash flow. Under the 1986 Tax Reform Act, real estate tax shelters were severely limited.
 

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Capitalization (CAP) Rate

The percentage selected for use in the income approach to valuation of improved property. The CAP rate is designed to reflect the recapture of the original investment over the economic life of the improvement to give investors an acceptable rate of return (yield) on their original investments and to provide for the return of the invested equity. In other words, if the property includes a depreciating building, the CAP rate provides for the return of invested capital in the building by the end of the economic life (the recapture rate that allows for the building’s future depreciation) and the return on the investment in the land and the building (similar to yield). 

Example: If a building has a 50-year economic life, then the recapture rate is set at 2 percent per year. If the rate of return on the investment is 8 percent and the recapture rate is 2 percent, then the overall capitalization rate applicable to the building is 10 percent. 

An appropriate CAP rate is influenced by the conditions under which the particular investment is being operated, as well as the availability of funds, prevailing interest rates, and risk. If the property earns $100,000 per year and the cap rate is 9 percent, then determining what the property is worth to the investor is as follows: $100,000 ÷ 0.09 = $1,111,111. Only an experienced appraiser can select the appropriate CAP rate—a mere 1 percent difference in the suggested CAP rate could make a 12½percent difference in the value estimate. 

The CAP rate measures the risk involved in an investment; thus, the higher the risk, the higher the CAP rate; the lower the risk, the lower the CAP rate.
 

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Bylaws

The regulations, rules, or laws adopted by a condominium owners’ association or corporation for the condominium’s management and operation. Bylaws cover such matters as the manner and selection of the board of directors and the duties and obligations of the corporation members. These self-imposed rules are a form of private law. Whereas a corporate resolution applies to a single act of the corporation, a bylaw is a continuing rule to be applied on all future occasions. Condominium bylaws are initially established by the developer and then are subject to change when the owners’ association takes over. The bylaws may be amended as noted in the original condominium declaration.

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Buyer’s Broker

A broker who represents the buyer in a statutory or fiduciary capacity. Some buyer’s brokers practice single agency, in which they represent either buyers or sellers, but never both in the same transaction. Some buyers’ brokers represent only buyers and refer prospective sellers to other brokers—these brokers are called exclusive buyer brokers. The broker is paid by the buyer, or through the seller or listing broker at closing, provided all parties consent. 

With the widespread acceptance of buyer representation, there is a good probability that the listing firm will also have a buyer-client interested in one of its listings. Many companies develop office policy based on whether to continue representing both clients under a consensual dual agency or to practice single agency by referring one of the parties to another brokerage.
 

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Business Opportunity

Any type of business that is for sale (also called business chance brokerage or simply business brokerage). The sale or lease of the business and goodwill of an existing business, enterprise, or opportunity, including a sale of all or substantially all of the assets or stock of a corporation, or assets of a partnership or sole proprietorship. 

Generally, if real property is an asset of the business, a real estate broker’s license is required to sell the business. Because a broker may not be aware of many of the special problems involved in selling a business, however, the advice of an experienced business counselor or attorney may be appropriate. Both seller and buyer should be aware of the application of the bulk transfer laws on the sale of the business. They should also be aware that, under the Uniform Commercial Code, any contract involving the sale of goods of $500 or more must be in writing to be enforceable.
 

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Business Day

A day of the week, except Saturdays, Sundays, and holidays; a normal working day. Because of accepted custom and practice, the term business day is preferable to the term banking day or working day. 

Some laws require notice within five business days; for example, notice to quit for tenant’s failure to pay rent; other laws refer to calendar days. A dispute can arise if a contract fails to state whether the notice be within business days or calendar days, although the usual interpretation is that it is calendar days unless specified otherwise.
 

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Bundle of Rights

An ownership concept describing all the legal rights that attach to the ownership of real property, including the right to sell, lease, encumber, use, enjoy, exclude, and devise by will. These rights also include the rights of use, occupancy, cultivation and exploration, and the rights to license, dedicate, give away, share, mortgage and trade, or exchange. When purchasing real estate, the buyer actually buys the rights previously held by the seller, except those that are reserved or limited in the sale. These rights are called beneficial interests associated with real property interests.

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Building Permit

A written governmental permission for the construction of a new building or other improvement, the demolition or substantial repair of an existing structure, or the installation of factory-built housing. The proposed construction must conform to local zoning and building codes and usually must be inspected and approved upon completion. In most cases, a building permit must be obtained before the start of a project, which provides a convenient way for local authorities to monitor compliance with the zoning code.

A prudent developer should include in the purchase agreement for a proposed development site not only a condition that the developer obtain a building permit but that it is obtained by a stipulated deadline. Otherwise, the developer could unreasonably delay seeking the permit while keeping the seller’s property off the market. 

Any owner contemplating an addition and/or change to property should first check with the appropriate county or municipal building department to avoid any building code violations, which will generally render a seller’s title unmarketable. Failure to disclose such violations may constitute a material misrepresentation, entitling the buyer to rescind the transaction and obtain the return of his or her money.
 

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Broker Price Opinion (BPO)

A broker’s written opinion of the value of a particular property, often in the form of a competitive market analysis. Depending on state law, the broker may charge a separate fee for a BPO, provided it is not used in connection with originating a federally related loan and is not labeled as an appraisal. BPOs are often requested by relocation companies and lenders involved in “short sales” of distressed properties.

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Bridge Loan

1.    Short-term loan to cover the period between the termination of one loan, such as an interim construction loan, and the beginning of another loan, such as a permanent takeout loan; the loan between the acquisition of a property and its improvement or development to make it qualify for a permanent loan. A bridge loan is sometimes used to provide funds for the costs incurred in converting an apartment house into a condominium. (See gap financing, swing loan.)

2.    A residential financing arrangement in which the buyer of a new home borrows money and gives a second mortgage on the buyer’s unsold home to fund the acquisition of a new home. This loan is useful where the seller of the new home will not accept an offer “subject to the sale of the buyer’s home” or where the buyer needs to raise the down payment by a certain date or else lose the new home.

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Blanket Mortgage

A mortgage secured by several properties or a number of lots. A blanket mortgage is often used to secure construction financing for proposed subdivisions or condominium development projects. The developer normally seeks to have a “partial release” clause inserted in the mortgage in order to obtain a release from the blanket mortgage for each lot as it is sold, according to a specified release schedule. For example, if a developer obtains a $500,000 mortgage to cover the development of 50 lots, he might be required to pay off $12,500 of principal to get each lot released from under the blanket mortgage. Sometimes, land developers have a “special recognition” clause put in the blanket mortgage whereby the lender agrees to recognize the rights of each individual parcel owner, even if the developer defaults and there is a foreclosure. Occasionally, the federal government secures a blanket lien against all properties owned by persons who have defaulted on their income taxes. 

A blanket mortgage may also be used when a purchaser buys a house plus an adjacent vacant lot and finances the purchase with a single mortgage that covers both properties. It may also be used where the equity in one property is insufficient to meet the lender’s requirements.

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Bill of Sale

A written agreement by which one person sells, assigns, or transfers to another a right to, or interest in, personal property. A bill of sale is sometimes used by the seller of real estate to evidence the transfer of personal property, such as when the owner of a store sells the building and includes the store equipment and trade fixtures. The transfer of the personal property can be affected by mention in the deed or, as is more common, by a separate bill-of-sale document. A bill of sale may be with or without warranties covering defects or unpaid liens of the property. 

A bill of sale is normally used when the purchaser is an investor and, for tax reasons (faster depreciation write-off), wants a separate accounting for the personal property involved, especially if the property is valued at an amount greater than the standard price for similar property. The broker in a transaction involving personal property should see that an accurate inventory is taken of the items included in the bill of sale.
 

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Bilateral Contract

A contract in which each party promises to perform an act in exchange for the other party’s promise to perform. The usual real estate sales contract is an example of a bilateral contract in which the buyer and the seller exchange reciprocal promises respectively to buy and sell the property. If one party refuses to honor a promise and the other party is ready to perform, the nonperforming party is said to be in default. Neither party is liable to the other until there is first a performance, or tender of performance, by the non-defaulting party. Thus, when the buyer refuses to pay the purchase price, the seller usually must tender the deed into escrow to show readiness to perform. In some cases, however, tender is not necessary. 

Depending on its wording, a listing form may be considered a bilateral contract, with the broker agreeing to use best efforts to locate a ready, willing, and able purchaser for the property, and the seller promising to pay the broker a commission if the broker produces such a buyer or if the property is sold. Once signed by the broker and the seller, such a listing contract becomes binding on both.
 

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Balance Sheet

An itemized financial statement setting forth personal or corporate assets, liabilities, and net worth (the difference between assets and liabilities) as of a specified date. It is a quick cross section analysis of the business. Most lending institutions require an applicant for real estate financing to submit a balance sheet, usually on a form attached to the loan application. Some lenders also require a profit and loss statement showing income and expenses. Some states have enacted false statement acts to penalize the falsification of statements used in the loan process.

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Backup Offer

An offer to buy submitted to a seller with the understanding that the seller has already accepted a prior offer; a secondary offer. Sometimes the seller accepts the backup offer contingent on the failure of the sales transaction on the part of the first purchaser within a specified period of time. The seller must be careful in how she proceeds, however, when the time for buyer’s performance under the first contract has expired. Rather than just immediately treat the contract as terminated and arrange to convey the property to the backup buyer, the seller should make sure that the seller has fully performed, or made a full and adequate tender of such performance, to the first purchaser. Otherwise, the seller may be contractually bound to convey the same property to two different buyers. The best practice is to obtain a release from the first purchaser. 

The real estate agent should be cautious about encouraging the seller-client to breach any existing contract in order to accept a better second offer. The agent might be sued by the first buyer for the tort of intentional interference with contract. 

Buyers should consider reserving the right to withdraw from the accepted backup offer at any time prior to notice that the seller has canceled the first contract. This gives the buyer some flexibility in continuing to look for other properties.


Word of the day

Backup Offer

An offer to buy submitted to a seller with the understanding that the seller has already accepted a prior offer; a secondary offer. Sometimes the seller accepts the backup offer contingent on the failure of the sales transaction on the part of the first purchaser within a specified period of time. The seller must be careful in how she proceeds, however, when the time for buyer’s performance under the first contract has expired. Rather than just immediately treat the contract as terminated and arrange to convey the property to the backup buyer, the seller should make sure that the seller has fully performed, or made a full and adequate tender of such performance, to the first purchaser. Otherwise, the seller may be contractually bound to convey the same property to two different buyers. The best practice is to obtain a release from the first purchaser. 

The real estate agent should be cautious about encouraging the seller-client to breach any existing contract in order to accept a better second offer. The agent might be sued by the first buyer for the tort of intentional interference with contract.

Buyers should consider reserving the right to withdraw from the accepted backup offer at any time prior to notice that the seller has canceled the first contract. This gives the buyer some flexibility in continuing to look for other properties.

Word of the day

Back-to-Back Lease

An agreement made by a landlord as a concession to a prospective tenant, in which the landlord agrees to take over the tenant’s existing lease in return for the tenant’s agreement to lease space in the landlord’s commercial building (office building, industrial park).


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Avulsion

The loss of land as a result of its being washed away by a sudden or violent action of nature. A riparian owner generally does not lose title to land lost by avulsion—the boundary lines stay the same no matter how much soil is lost, and the former owner can reclaim the lost land. In contrast, the riparian owner loses title to land washed away by erosion, which is the gradual and imperceptible washing away of soil.


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Attractive Nuisance

A doctrine of tort law stating that persons who maintain on their property a condition that is both dangerous and conceivably inviting to children owes a duty to exercise reasonable care to protect children from the danger. Thus, an owner who maintains a swimming pool or unmarked open pit, or discards a refrigerator or freezer may be liable for injuries to trespassing children. Construction sites should be adequately secured to prevent inquisitive children from being injured.

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Attorney-in-Fact

A competent and disinterested person authorized by another person to act in her place. In real estate conveyance transactions, an attorney-in-fact, who has a fiduciary relationship with the principal, should be so authorized by way of a written, notarized, and recordable instrument called a power of attorney. The attorney-in-fact need not be an attorneyat-law, although people often give a power of attorney to their lawyers. 

An attorney-in-fact may have a general or specific power; however, even one with general powers may not act in any way contrary to the principal’s interests (for instance, selling the principal’s property for inadequate consideration) or act in his own interests (for example, conveying the principal’s land to himself). The listing broker should think carefully about possible conflicts of interest before accepting a power of attorney from the client and should also consider having separate written instructions detailing exactly what actions, and/or on what terms, the broker is authorized to act. 

An attorney-in-fact appointed by a minor is not competent to convey title to real property owned by the minor. 

A husband cannot be his wife’s attorney-in-fact for purposes of releasing her dower rights.
 

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Attachment

The legal process of seizing the real or personal property of a defendant in a lawsuit by levy or judicial order, and holding it in court custody as security for satisfaction of a judgment. The lien is thus created by operation of law, not by private agreement. The plaintiff may recover such property in any action upon a contract, express or implied. 

Real property is attached by recording a copy of the writ of attachment in the public record. The attachment thus creates a lien against the property before entry of a judgment so that the plaintiff is assured there will be property left to satisfy the judgment. The lien can be enforced by issuance of an execution after a judgment for the plaintiff. 

An attachment may arise from an action for payment of money upon an unsecured contract. The property may not be sold or encumbered free of the attachment without satisfaction or release of the attachment, or without the posting of a cash bond equal to plaintiff’s claim plus costs. An attachment is not available when a party brings an action to collect payment of a secured obligation (mortgage).

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Assessed Valuation

The value of real property established for the purpose of computing real property taxes. In general, property is valued or assessed for tax purposes by county and township assessors. The land is usually appraised separately from the building, and the building value is usually determined from a manual or set of rules covering unit cost prices and rates of depreciation, although some states require assessments to be a certain percentage of true or market value (assessment ratio). State laws may provide for property to be reassessed periodically. Each taxing district has its own methods for constantly updating assessments, although most use a combination of building permit records, on-site inspections, and conveyance tax records. Generally, property owners claiming that errors were made in determining the assessed value of their property may present their objections to the local boards of appeal or boards of equalization.

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“As Is”

Words in a contract intended to signify that the seller offers the property in its present condition, with no modifications or improvement, and is usually intended to be a disclaimer of warranties or representations. The recent trend in the courts is to favor consumers by preventing sellers from using as-is wording in a contract to shield themselves from possible fraud charges brought on by neglecting to disclose known material defects in the property. 

Even though an as-is clause may give some protection to the seller from unknown defects, the clause is inoperative when the seller actively misrepresents the condition of the property. It does not shield the seller who fails to disclose a readily observable defect, basically saying, “You take it as you see it.” The idea is that the buyer takes the visible condition into account when making an offer and setting the purchase price. Therefore, if a buyer should be expected to discover a defect upon a reasonable inspection, the buyer will be charged with notice; otherwise, the broker and/or seller have the affirmative duty to inform the buyer of the defect, preferably in writing. 

Sellers can protect themselves by being specific in the contract, for example, about recurring plumbing problems, a cracked foundation, leaky roof, den built without a building permit, all in as-is condition. If, for example, the roof defect was not obvious, and the buyer did not know of this material defect but the seller did know, then a general as-is clause is probably worthless. 

Many contracts contain standard language that must be evaluated in light of an as-is clause. For example, the seller may still be required to provide a pest control report even though the property is sold as is. In such a case, the seller may want to affirmatively delete the standard termite clause. Also, “as is” does not normally cover title or encroachment matters unless specifically noted. 

Even where an as-is clause can protect a seller, many courts hold that a broker cannot use the as-is clause to avoid liability for misrepresentation because the broker is not a party to the contract in which the as-is clause is contained. 

In appraisals, “as is” is an indication that the value estimate is made with the property in its current condition, which may not be the highest and best use or may not include needed repairs. 

 

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Arm’s-length Transaction

A transaction in which the parties are dealing from equal bargaining positions. Parties are said to deal “at arm’s length” when each stands on the strict letter of her rights and conducts the business in a formal manner without trusting the other’s fairness or integrity and without being subject to the other’s control or dominant influence (as is sometimes the case in transactions between family members). The absence of an arm’s-length transaction may give rise to tax consequences when property is transferred at less than fair market value. Whether a transaction was at arm’s length is also relevant to the “willing-buyer, willing-seller” concept in the estimation of market value.

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Arbitration

The nonjudicial submission of a controversy to selected third parties for their determination in a manner provided by agreement or by law. Disputes between listing REALTORS® and cooperating REALTORS® are often settled by arbitration, with both parties agreeing to comply with the final decision of the arbitrator.

Many disputes are settled according to detailed rules established by the American Arbitration Association. (See Appendix A.) The prime feature of a binding arbitration is that it is fast and final, as well as the fact that the findings remain “private.”

 

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Appurtenance

That, which belongs to something, but not for all time; all those rights, privileges, and improvements that belong to and pass with the transfer of property but are not necessarily a part of the actual property. Appurtenances to real property pass with the real property to which they are appurtenant unless a contrary intention is manifested. A deed normally describes the property granted and then states, “together with all appurtenances.” Typical appurtenances are rights-of-way, easements, water rights, condominium parking stalls, and property improvements.

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Appraisal Report

A report that contains the definition of value to be applied; the estimate and effective date of the valuation; the appraiser’s signature and certifications, along with any limiting conditions; description of the property and rights being appraised; general and specific data; sufficient justification to support the value estimate; consideration of each of the three approaches; and the reconciliation. It is common for the report to include such supporting documentation as maps, floor plans, and photos.

 

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Antitrust Laws

State and federal laws designed to maintain and preserve business competition. 

Antitrust situations include price-fixing, certain types of boycotts, allocation of customers or markets, restrictions on competition in shopping center leases, and certain restraints placed on franchisees by franchisors. Also challenged are certain “tie-in” arrangements, as when a developer conditions a sale by insisting that the buyer promise to list the property with the developer if the buyer wishes to resell, or when a property manager attempts to force a client’s commitment to list with the manager in the event of sale. 

Certain real estate brokerage activities have come under public scrutiny by the Federal Trade Commission and the Department of Justice. These activities include the fixing of general commission rates by local boards or groups of brokers and the exclusion of brokers from membership in local boards or in multiple-listing arrangements due to unreasonable membership requirements. As a result of court cases, local real estate boards no longer directly or indirectly influence fixed commission rates or commission splits between cooperating brokers. Moreover, in some states, clients must be specifically informed that the commission rates are negotiable between client and broker.

 

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Anticipatory Breach

A declaration of intention not to perform made by a buyer or a seller through words or acts prior to closing. At that time, the other party, not being in default, is entitled to enforce the contract in court without first having to offer or tender performance.

 

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Antenuptial Agreement

A contract entered into by two people contemplating marriage for the purpose of settling the property rights of both in advance, also called a prenuptial (“prenup”). It is advisable for each person to have his own legal counsel to negotiate such a contract. The enforceability of an antenuptial (or prenuptial) agreement may depend on the completeness of disclosure and the existence of independent counsel for each party.

 

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Annual Percentage Rate (APR)

An expression of the relationship of the total finance charge to the total amount to be financed as required under the federal Truth in Lending Act. Tables available from any Federal Reserve banks may be used to compute the rate, which must be calculated to the nearest one-eighth of 1 percent. Use of the APR permits a standard expression of credit costs, which facilitates easy comparison of lenders. (The act permits use of the abbreviation APR.)

 

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Anchor Tenant

A major department or chain store strategically located at a shopping center so as to give maximum exposure to smaller, satellite stores. An anchor tenant is called a magnet store or a traffic generator. In the typical strip shopping center, two anchor stores, such as a supermarket and a large drugstore, are located at opposite ends of a mall, with smaller stores in between. This helps to generate maximum sales volume in the entire shopping center. This strategy is important to the lessor because most commercial lease rents are based on a percentage of gross sales. 

In recent years, the Federal Trade Commission has sought to limit the powers of the anchor tenant in controlling the selection of satellite tenants and their merchandise.
 

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Alluvion

The material that constitutes the increase of soil on a shore or riverbank, added by the process of accretion. Also called alluvium or alluvial deposits, it is the fine material, such as sand or mud, carried by water and deposited on land. The words alluvion and accretion are sometimes mistakenly used synonymously.

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Alienation Clause

A provision sometimes found in a promissory note or mortgage that provides that the balance of the secured debt becomes immediately due and payable at the option of the mortgagee upon the alienation of the property by the mortgagor. Alienation is usually broadly defined to include any transfer of ownership, title, or an interest or estate in real property, including a sale by way of a contract for deed. Also called a due-on-sale clause.

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Highest and Best Use

An appraisal term meaning that reasonable use, at the time of the property appraisal, which is most likely to produce the greatest net return to the land and/or the building over a given period of time. The use must be legal and in compliance with regulations and ordinances within the police power of the county and the state, including health regulations, zoning ordinances, building code requirements, and other regulations. The highest and best use is determined by evaluating the quantity and quality of income from various alternative land uses. Net return normally is interpreted in terms of money, although consideration may be given to such things as amenities.

For example, vacant land in a central business district currently used as a parking lot may or may not be employed at its highest and best use, depending on whether the surrounding market is ready for further commercial development. A gas station site may be more effective as a fast-food facility or a dry cleaner.

For appraisal purposes, land is always valued as though vacant and available for development to its highest and best use. The estate taxes and the real property taxes paid by an owner of unimproved real estate are usually based on the highest and best use of the land rather than the use to which it is actually devoted.

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Inverse Condemnation

An action for just compensation brought by a person whose property has been effectively taken, substantially interfered with, or taken without just compensation. For example, when a governmental authority announces it will condemn an owner’s property and then unduly delays in taking the property, the owner can bring legal action to force a condemnation and payment for the taking. Or if the noise of low-flying government aircraft damages the owner’s use of the land, there may be inverse condemnation, or a taking of property for which compensation must be paid. Another example is where some public works are undertaken with resultant damage to a private owner, but no condemnation action is taken by a public body. Such cases are called inverse condemnations because they are started by an owner who seeks compensation from the condemning agency and the payment is for land not directly condemned. (See condemnation.)

Courts have held that a zoning action that merely decreases the market value of property does not constitute a compensable taking actionable under a theory of inverse condemnation as long as a reasonably viable economic use exists. An inverse condemnation suit is not available before there has been an actual taking or physical interference with the subject property.

Inverse condemnation is the flip side of eminent domain and occurs when a public entity indirectly “condemns” private property by acting (e.g., a restrictive use regulation like downzoning), or failing to act when it should have, and property loss or damage results. The taking is not by legal action but by conduct. It is irrelevant whether the act or failure to act was negligent.
 

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Equal Dignities Rule

A rule of agency law stipulating that when a contract is required by law to be in writing, the authority of an agent to enter into such a contract on behalf of the principal must also be in writing. For example, a power of attorney for real estate contracts must be in writing because state statutes of fraud generally require that all real estate contracts be in writing and that the agent’s authority likewise be in writing. Usually, the power of attorney must also be recorded if the real estate contract (such as a land contract for deed) is expected to be recorded.

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Name, Change Of

Use of a new name. A person may change his or her name merely by using another name with the intention to make that the legal name, as long as the change is not done with fraudulent intent. However, because of potential identification problems, most parties changing their names go through a formal name change procedure that usually involves filing a petition with the proper state authorities. They may also be required to publish the change in the local newspaper for a statutory period of time.

A name change can also be embodied in a divorce decree permitting a woman to resume use of her maiden name or that of another former husband. A corporation can change its name by an amendment to its articles of incorporation, which must be filed in the state of incorporation.
People who change their names should be sure that the new name is properly noted at the registrar of titles if they own registered property and at the recorder’s office if they own any other recorded properties. For example, a recorded document should be amended to read, “Cathy Jones, being the same person who acquired title as Cathleen J. Arbuckle.”

If a person uses one name as a grantee of property and then grants the same property under another name, there will be a potential defect in the recorded title. When the second deed is recorded, it will not be recorded in the proper chain of title and therefore will not give constructive notice to the world of its contents. For example, if Patty Lee, a single woman receiving title as such and later changing her name through marriage, should convey title as Patty Wilson, there would be a defect in the record title. Patty Lee should convey title as “Patty Wilson, formerly known as Patty Lee.” An appropriate entry would therefore be made in the grantor-guarantee index so that a title company searching the title could see that the new deed was derived from the chain of title in which Patty Lee was the grantee.

It is helpful to title searchers for a married woman to continue using the name given by her parents. For instance, Patty Ann Lee would become Mrs. Patty Ann Wilson or Mrs. Patty Lee Wilson, not Mrs. Robert Wilson.

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Straw Man

One who purchases property for another so as to conceal the identity of the real purchaser; a dummy purchaser; a nominee; a front.

At one time, it was necessary for an owner who wanted to change a title to joint tenancy from severalty to convey the property to a straw man, who would then convey it back to the owner and joint tenant. Many states no longer require that the joint tenancy be created at the same time by one and the same instrument. Thus, an owner can convey to himself and another party as joint tenants, or convey to herself and a spouse as tenants by the entirety without using a straw man.

Where several tracts of land are being assembled for development, confidentiality may be important—hence the desirability of nominees and straw men. However, a federal court has held that if the nominee misrepresents the identity of the principal, with knowledge that the seller would not have negotiated if in possession of the true facts, the seller may set aside the transaction. In addition, if the nominee or straw man exercises any managerial control over the property, then he may be held to be the real owner for tax purposes.

If a broker or a salesperson attempts to use a straw man to purchase property listed by the broke or the salesperson, this relationship with the buyer must be specifically disclosed in writing to the seller. Failure to do so may result in license suspension or revocation.

In a presale of a condominium, a developer normally must attain a certain percentage of purchases before a lender commits to lend money; straw men are sometimes used to meet this minimum requirement, though this practice is clearly against the lender’s policy and would be illegal in connection with VA and FHA loans.

Word of the day

Attornment

The act of a tenant formally agreeing to become the tenant of a successor landlord; as in attorning to a mortgagee who has foreclosed on the leased premises. Attornment establishes a new tenancy, with the mortgagee being the landlord, and acts as a defense against the defaulting mortgagor’s claim for rent.

In a long-term lease situation, an attornment agreement is typically entered into by a sublessee with a fee owner of the land and a mortgagee holding a mortgage on the fee or on the master leasehold estate. The sublessee seeks to protect his estate from destruction by reason of the premature termination of the master leasehold or from loss by reason of the foreclosure of the mortgage when the sublessor defaults. The attornment agreement provides that, in the event of termination or foreclosure, the sublease will continue, just as though the owner or the mortgagee were the lessor in a lease with the sublessee for a term equal to the unexpired term of the sublease, and upon the same terms and provisions.

Word of the day

Gratuitous Agent

An agent who receives no compensation for services. Real estate agents typically work on a payment basis contingent on selling a property. Even though unpaid, the agent still owes full fiduciary or statutory duties to the principal. This may be true even though a licensed agent may have volunteered to help a friend.

Word of the day

Deficiency Judgment

A judgment against a borrower, endorser, or guarantor for the balance of a debt owed when the security for a loan is insufficient to satisfy the debt. A deficiency occurs when the foreclosure sale of a property produces less than the amount needed to pay the costs and expenses of the action and to satisfy the obligation secured by the foreclosed mortgage. The deficiency is entered as a personal judgment against the original mortgagor and operates as a lien on the judgment debtor’s assets. It is enforceable and collectible in the same manner as any judgment at law. If this judgment proves uncollectible, the lender is probably entitled to claim a bad-debt deduction on the lender’s income taxes. In the case of a corporate mortgage, this would be a bad business debt and may fully offset against ordinary income.

In states where mortgages generally carry a power of sale, creditors must bring a separate action to obtain a deficiency judgment because the jurisdiction of a court is not invoked. If parties agree that the lender can look only to the collateral (the mortgaged property) in the event of a default, they include language to the effect that “this note is without recourse,” which has the effect of preventing a deficiency judgment. In California and other states, the mortgagee cannot recover a deficiency judgment on a purchase-money mortgage; these states have enacted so-called antideficiency legislation.

A purchaser who assumes the seller’s existing mortgage thereby becomes personally liable (along with the seller) for any deficiency. However, when purchasers buy property “subject to” an existing mortgage, they cannot be held personally liable for any deficiency; thus, upon default, the purchaser’s liability would extend only to the loss of the property.

Word of the day

Agreement of Sale

Terms that transfer ownership from one owner to another. In real estate, the agreement of sale (purchase agreement) includes agreements about price, timing, and interests. 

In a few states, an agreement of sale refers to a land contract or contract for deed.

Word of the day

Agent

One authorized to represent and to act on behalf of another person (called the principal). Unlike an employee, who merely works for a principal, an agent works in the place of a principal. The main difference between an agent and an employee is that agent may bind the principal by contract, if within the scope of authority, whereas an employee may not unless given express authorization. 

A real estate broker is the agent of the client (seller or buyer) to whom she owes a fiduciary or statutory obligation. A salesperson, on the other hand, is the agent of his broker and does not have a direct personal contractual relationship with either the seller or the buyer. This fact is relevant when a salesperson decides to change firms and becomes upset when the broker won’t let the salesperson take his listings. 

Note that minors cannot appoint an agent to execute their contracts, but an adult may designate a minor to act as an agent.

Word of the day

After Acquired

Acquired after a certain event takes place. An after-acquired title is obtained by a grantor of property after the grantor has attempted to convey good title. Upon the grantor’s obtaining good title, it will automatically pass by operation of law to the grantee. For example, Smith conveyed his farm to Jones on January 1, 2004, by warranty deed. However, Smith did not have valid title on January 1 because he held title to the property under a forged deed. On March 5, 2005, Smith did receive good title under a properly executed deed, so Jones automatically acquired good title on March 5. 

Note that an after-acquired title will not pass to a grantee under a quitclaim deed, because such an instrument only purports to transfer the grantor’s current interest in the land, if any. (See quitclaim deed.) 

Fixtures that are bought, paid for, and installed by the property owner-mortgagor are subject to the lien of the mortgage. In addition, many mortgages provide that all fixtures found on the property after the mortgage has been made are subject to the mortgage. The Uniform Commercial Code (UCC) has established guidelines to settle conflicting claims between mortgagees and chattel security claimants involving prior rights to after-acquired property, such as appliances bought on time and installed on the mortgaged premises. Under the UCC, a debtor can grant a superior security interest in such after-acquired property to a chattel mortgagee.

 

Word of the day

Affordable Housing

Housing for individuals or families whose income is a certain percentage of or below the median for the area as determined by HUD and adjusted for family size. Affordable housing projects are usually developed in conjunction with governmental assistance and/or as a condition of a development agreement with the appropriate government authority. 

The intent of affordable housing projects is to recognize the acute shortage of housing and to provide housing for persons otherwise unable to afford it. An affordable housing unit may be subject to certain conditions, restrictions, and requirements in respect of resale and occupancy requirements.

 

Word of the day

Affidavit

A sworn statement written down and made under oath before a notary public or other official authorized by law to administer an oath. The term literally means “has pledged one’s faith.” The affiant (person making the oath, sometimes called the “deponent”) must swear before the notary that the facts contained in the affidavit are true and correct. An affidavit is a complete instrument within itself, whereas an acknowledgment is always part of, or an appendage to, another instrument. An affidavit is sworn to, but an acknowledgment is not. 

The purpose of an affidavit is to help establish or prove a fact, such as identity, age, residence, marital status, and occupancy of property.

 

Word of the day

Adverse Use

The prescriptive acquisition of the right to a limited use of another’s land; for example, a pathway easement across another’s property. To acquire an easement by adverse use, the claimant must generally satisfy the same requirements as those for adverse possession, including the prescriptive period. Whereas most easements cannot be lost by mere nonuse, an easement created by adverse use can be terminated by nonuse for the prescriptive period of adverse possession.

 

Word of the day

Adverse Possession

The acquiring of title to real property owned by someone else by means of open, notorious, hostile, and continuous possession for a statutory period of time. The main purpose of adverse possession statutes is to ensure the fullest and most productive use of privately owned land. The burden to prove title is on the possessors, who must show that four conditions were met: (1) They have been in possession under a claim of right. (2) They were in actual, open, and notorious possession of the premises so as to constitute reasonable notice to the record owner. (3) Possession was both exclusive and hostile to the title of the owner (that is, without the owner’s permission and evidencing an intention to maintain the claim of ownership against all who may contest it). (4) Possession was uninterrupted and continuous for at least the prescriptive period stipulated by state law. In this regard, successive occupation of the premises by persons who are successors in interest (that is, by privity of contract or descent) can be added together to meet the continuous-use requirement. For example, a father adversely occupies a certain parcel of land for four years. Upon his death, his son succeeds to his interest and “tacks on” to his father’s four-year prior possession. Two words can serve as memory aids: POACH (possession is open, actual, continuous, and hostile); CANOE (possession is continuous, actual, notorious, open, and exclusive). 

The statutory period does not run against any individual under a legal disability (insanity) or until the individual has a legal cause of action to oust the possessor. For example, an adverse possessor could acquire title against a life tenant but not against the remainderman, who has no right to possession until the prior life estate is terminated. 

Persons who claim title to property by adverse possession do not have readily marketable title until they obtain and record a judicial decree “quieting” the title or obtain a quitclaim deed from the ousted owner. When all requirements have been met, the owner’s title is extinguished, and a new title is created in favor of the adverse possessor. The effective date of the new title, as far as the original owner is concerned, is the first adverse entry. Thus, suits by the former owner based on trespass, profits, or rents during the adverse period are barred. 

Most states do not require the claimant to have paid taxes on the property for any certain period of time (although in some states, a claimant’s paying taxes may shorten the prescriptive period). However, a court might consider that failure to pay taxes is evidence that the claimant really did not claim ownership of the property. 

The courts do not usually allow a claim of adverse possession if owner and claimant have a close family relationship, such as father and son or husband and wife, because in these cases, hostile claims are too difficult to prove. Cotenants normally cannot claim adverse possession against each other without an actual and clear ejectment of one cotenant by another.

Prescriptive rights in general are not usually favored by the law, insofar as they cause others to forfeit their rights. There is often a presumption that, when a person has entered into possession of another’s property, such possession was with the owner’s permission and consistent with the true owner’s title. 

Generally, one cannot take title to state or federal lands by adverse possession. However, the federal Color of Title Act provides that a claimant who has met all four tests of adverse possession on public land may receive a patent to such land, provided that the land does not exceed 160 acres and that all taxes are paid. The United States, however, reserves the right to all coal and mineral rights to the property. In addition, title to Torrens-registered property usually cannot be taken by adverse possession.

 

Word of the day

Advance

To give consideration before it is due.  Money is advanced by one party (such as a mortgagee or vendor) to cover carrying charges (such as taxes and insurance) on the property that were not properly paid by the other party in default.  These amounts are credited to the account of the advance-ing party.  For example,  a second mortgagee might advance delinquent first-mortgage payments of the borrower in order to prevent a foreclosure of the secured property.    

An important issue for lenders is whether a recorded mortgage securing future advances takes priority over a subsequent mortgage recorded before the date of the advance but subsequent to the recording of the first mortgage.  Other advances include additional funds disbursed under an open-end mortgage or advances made by a construction lender to a developer-borrower. 

 

Word of the day

Ad Valorem

Latin for "according to valuation," usually referring to a type of tax or assessment. Real property tax isanad valorem tax based on the assessed valuation of the property.  Each property bears a tax burden proportionate to its value, as opposed to  a specific tax per unit based on quantity, such as a tax per gallon of gasoline or package of cigarettes. 

Word of the day

Adjusted Basis


The original cost basis of a property reduced by certain deductions and increased by certain improvement costs. The original basis determined at the time of acquisition is reduced by the amount of allowable depreciation or depletion allowances taken by the taxpayer, and by the amount of any uncompensated property losses suffered by the taxpayer.

It is then increased by the cost of capital improvements plus certain carrying costs and assessments. The amount of gain or loss recognized by the taxpayer upon sale of the property is determined by subtracting the adjusted basis on the date of sale from the adjusted sales price.

Adjustments
 
  • In appraisal, the increases or decreases to the sales price of a comparable property to arrive at an indicated value for the property being appraised. Adjustments may be made for several reasons. The first adjustment is for seller concessions or conditions of sale; then for financing terms. Another is for time of sale if there has been a change in market conditions since the comparable sale. Adjustments are then made for location and dissimilarities between the physical characteristics of the subject and the comparable property. The indicated value is increased or decreased for each difference or dissimilarity. 
 
  • In real estate closings, the credits and debits of a settlement statement, such as real property tax, insurance, and rent prorations.

Word of the day

Adhesion Contract

A contract that is one-sided, favoring the party who drafted the document. In fact, an adhesion contract can be so one-sided that doubt arises as to its being a voluntary and uncoerced agreement because it implies a serious inequality of bargaining power. Courts will not enforce provisions in adhesion contracts that are unfair and oppressive to the party who did not prepare the contract. Also called a take-it-or-leave-it contract. 

Contracts with a lot of fine print, such as franchise agreements, mortgages, and leases, are sometimes challenged as adhesion contracts on the basis that the non-drafting party did not have a chance to bargain on the various provisions of the agreement. 

An insurance contract (property, title, life) also is sometimes challenged as being an adhesion contract. Courts have held that any ambiguity is to be construed in favor of the insured, and any exclusion from coverage must be clearly and conspicuously stated. Courts will also apply the doctrine of unconscionability.

Word of the day

Additional Deposit

The additional earnest money given by the buyer to the seller or to escrow under a purchase agreement. The additional deposit is usually tendered within a short period of time after acceptance of the offer. For example, the buyer might deposit $1,000 with her offer to purchase the seller’s $150,000 condominium unit and agree to pay an additional deposit of $4,000 within five working days after the seller’s acceptance. 

If the buyer breaches the contract, the seller may elect to keep all deposit money, including the additional deposit, as damages. If the buyer is late in making the additional deposit payment, the seller may be able to terminate the contract if a court holds that failure to make timely payment is a material breach. One way for the seller to ensure this result is to make the seller’s acceptance conditioned upon timely payment of the additional deposit.

Word of the day

Addendum

Additional material attached to and made part of a document. If there is space insufficient to write all the details of a transaction on the sales contract form, the parties will attach an addendum or supplement to the document. The sales contract should incorporate the addendum by referring to it as part of the agreement. The addendum should refer to the sales contract and be dated and signed or initialed by all the parties.

Word of the day

interpleader

A legal proceeding whereby an innocent third party (stakeholder), such as an escrow agent or broker, can deposit with the court property or money that the party holds and that is subject to adverse claims so that the court can distribute it to the rightful claimant.

The distribution of deposit or earnest money held in escrow is often a problem when the buyer and the seller are in dispute over the purchase contract. Generally, the escrow agent will not release the funds until all parties—including the broker—sign a cancellation of escrow form. If one of the parties refuses to cancel the escrow, then no one can recover the deposit money. If the escrow agent cannot get the parties to agree on the disposition of the deposit money, one recourse is to file an interpleader action asking the court to accept the money and distribute it to the rightful claimant.

Word of the day

Unreasonably Withheld Consent

Many legal documents, such as leases and contracts for deed, contain a transfer clause that states in effect that the property may be transferred only with the owner’s consent, “which consent shall not be unreasonably withheld.” There is no acceptable definition of what is unreasonable. For example, it might be reasonable for a lessor to refuse to transfer a lease to a new tenant whose business would directly compete with another tenant in the same shopping center complex (i.e., poor tenant mix).

In a contract for deed situation, it would generally be unreasonable for the vendor to refuse an assignment or to demand a share in the profits where the assignee is as good a credit risk, if not better, as the assignor-vendee.

To avoid lawsuits, it would be best to set forth some criteria for reasonable consent in the transfer clause itself.


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