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Word of the day

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.

Word of the day

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.
 

Word of the day

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.

Word of the day

Letter of Intent

An expression of intent to invest, develop, or purchase without creating any firm legal obligation to do so. It may refer to a specific project, or it may be a general letter of intent without regard to a specific project. The following is the kind of language used in a letter of intent to negate any legal duty to carry out the terms of the letter:

Because this instrument consists only of an expression of our mutual intent, it is expressly understood that no liability or obligation of any nature whatsoever is intended to be created as between any of the parties hereto. This letter is neither intended to constitute a binding agreement to consummate the transaction outlined herein nor an agreement to enter into contract. The parties propose to proceed promptly and in good faith to conclude the arrangements with respect to proposed development, but any legal obligations between the parties shall be only those set forth in the executed contract and lease. In the event that a contract and lease are not executed, we shall not be obligated for any expenses of the developer or for any charges or claims whatsoever arising out of this letter of intent or the proposed financing or otherwise and, similarly, the developer shall not be in any way obligated to us.


Word of the day

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.

Word of the day

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


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

Declaration of Restrictions

A statement of all the covenants, conditions, and restrictions (CC&Rs) that affect a parcel of land. When recording the subdivision plat, restrictions may be noted on the map or plan or, if numerous, on a separate document called a declaration. The restrictions usually aim for uniformity by requiring all lot owners to comply with certain building standards and conform to certain restrictions. For example, the CC&Rs may require lot owners to construct homes valued over a certain amount or to obtain prior design approval from a designated architectural control committee. Once recorded, these restrictions in the declaration run with the land and bind all future lot owners unless terminated by a lapse of a specified time or by agreement of all benefited parties. An owner can enforce the restrictions against any other owner who violates any of the restrictions.

The following are typical provisions of a declaration of restrictions:
  • “Each building or other structure shall be constructed, erected, and maintained in strict accordance with the approved plans and specifications.”
  • “No building shall be located on any lot nearer than 35 feet to the street lot line, nearer than 30 feet to the rear lot line, or nearer than 10 feet to the side lot lines.”
  • “No building or structure shall be more than 25 feet in height as measured from the highest natural grade at any point on the perimeter of the foundation of the structure to the highest point of the roof.”
  • “No animals, livestock, or poultry of any kind shall be raised, bred, or kept on any land ■■ in the subdivision except by special permit issued by the board of directors. However, a reasonable number of dogs, cats, or other common household pets may be kept without the necessity of obtaining such permit.”
Restrictions may not violate public law, such as referencing race or religion. They should be carefully drafted to avoid ambiguity. For example, if trailers are prohibited, does that prohibition also exclude mobile homes? Does the word structure include a swimming pool or fence? What is a home business?

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

Chain of Title

The recorded history of matters that affect the title to a specific parcel of real property, such as ownership, encumbrances, and liens, usually beginning with the original recorded source of the title. The chain of title shows the successive changes of ownership, each one linked to the next so that a “chain” is formed.

Ownership of a particular property frequently passes through many hands subsequent to the original grant. If any link is broken in a property’s chain of title, then the current “owner” does not have valid title to the property. For example, if a forged deed were somewhere in the chain, then no subsequent grantee would have acquired legal title to the property.

An abstracter searches and notes the chain of title (also called running the chain of title) in an examination of the title at the office of the county recorder or clerk, tracing the title from the original grant up to the present ownership. In the United States, chains of title in colonial states frequently date back to a grant from the king of England. In those states admitted to the Union after the formation of the United States, the deeds of conveyance in chains of title generally stem from the patent issued by the U. S. government. In a few states, such as Louisiana and Texas, chains of title generally date back to a point before acquisition of the land by the federal government.

To be within the unbroken chain of title, the instrument must be discoverable or traceable through linking conveyances from the present owner through successive owners to a common grantor. If not, a “gap” exists in the chain, creating a “cloud” on the title. In these cases, it is usually necessary to establish ownership by a court action called a suit to quiet title.

All documents recorded in the chain of title are said to give constructive notice of the document and its contents. However, if a document is not recorded in the chain of title, so that even a diligent search using the grantor-grantee index will not reveal its presence, then there is no constructive notice given of the existence of the unrecorded document. A deed not properly recorded is said to be a wild deed and is not valid against a subsequent recorded deed to a good-faith purchaser.

In practice, abstracters rarely search back more than 60 years. Some states have adopted a marketable title act that extinguishes certain interests and cures certain title defects that arose before the “root of title” was recorded. The root of title is the most recent conveyance (deed, court decree) that furnishes a basis for title marketability and has been of record for 40 years or more.

Other chain of title problems arise when a person acquires title using one name and then conveys the property under another name. In such cases, the grantor should indicate the name by which she acquired title; for example, “Sally Hines, who acquired title as Sally Fromm.” Because of the importance of the chain of title, it is necessary that the parties’ names be consistent and spelled out properly in all documents.

Word of the day

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.

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

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.”

Word of the day

Air Rights

Rights to the use of the open space or vertical plane above a property. Ownership of land includes the right to all air above the property. Until the advent of the airplane, this right was unlimited, but now the courts permit reasonable interference with one’s air rights, such as is necessary for aircraft, so long as the owner’s right to use and occupy the land is not lessened. Thus, low-flying aircraft might be unreasonably trespassing, and their owners would be liable for any  damages. Governments and airport authorities often purchase air rights adjacent to an airport, called an avigation easement, to provide glide patterns for air traffic. (See avigation easement, trespass.)

The air itself is not real property; airspace, however, is real property when described in three dimensions with reference to a specific parcel of land, as in a condominium unit. (See real property.)

A Maryland case has decided that separate owners of the land and the air rights may be separately assessed for tax purposes. Air rights may be sold or leased and buildings constructed thereon, as was done with the Pan Am Building constructed above Grand Central Station in New York City.

Air rights may also be transferred by way of easements, such as those used in constructing elevated highways or in acquiring scenic easements or easements of light and air. Because of the scarcity of land, many developers are examining the possibilities for developing properties in the airspace above prime properties owned by schools, churches, railways, and cemeteries.

Word of the day

All-inclusive deed of trust( AIDT)

A purchase-money deed of trust subordinate to, but still including, the original encumbrance or encumbrances. It is similar to a wraparound mortgage, except that a deed of trust is used rather than a mortgage.

Word of the day

Acceleration Clause

A provision in a mortgage, trust deed, promissory note, or contract for deed (agreement of sale) that, upon the occurrence of a specified event, gives the lender (payee, obligee, or mortgagee) the right to call all sums due and payable in advance of the fixed payment date. This event might be default on an installment payment, destruction (waste) of the premises, placement of an encumbrance on the property, or its sale or assignment. Usually the payee has the option to accelerate the note upon default of payment of any installment of interest or principal when due, provided he or she gives adequate notice and specifies a time within which the defaulting party may cure the default. The payee may also accelerate for other breaches of provisions in the contract, such as failure to pay taxes and assessments or to keep the property insured or in repair. A lender may also exercise acceleration when it is discovered that the borrower (mortgagor) does not hold good title to the mortgaged property, contrary to prior claims at the time the mortgage was created, or upon condemnation of all or part of the premises.

The provision for acceleration does not exist unless it is expressly set forth in the mortgage or contract-for-deed document. The acceleration provisions stated in the mortgage should be consistent with those stated in the promissory note. An acceleration clause is also called a due-on-sale clause or alienation clause when it provides for acceleration upon the sale of the property. A court might hold an acceleration clause to be unenforceable if it is deemed an unreasonable restraint or restriction on alienation.

The seller under a contract for deed usually inserts an acceleration clause in order to declare the entire balance due and payable when the buyer fails to cure a default. Without this clause, the seller would have to sue the buyer as each installment payment became due and unpaid.

Word of the day

“no deal/no commission” clause

A clause in a listing contract that stipulates paying a commission only if and when title passes. This nullifies the generally accepted principle that a broker earns commission when the broker has brought an acceptable “ready, willing, and able” buyer to the seller for the price and under the terms specified in the listing agreement.

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

Equity Participation

The arrangement between a potential buyer and an investor in which the investor shares an equity interest in a real property purchase in exchange for assisting with the financing of the acquisition. The investor may provide all or part of the down payment, closing costs, or monthly payment. Investors may be private parties, corporations, mortgage lenders, or even the seller. It is most important to obtain competent tax advice on the proper allocation of tax deductions such as mortgage interest, depreciation, and property tax.

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

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

BOOT

Money or other property that is not like-kind, which is given to make up any difference in value or equity between exchanged properties. Boot may be in the form of cash; notes; gems; or the market value of an asset such as a mortgage, land contract, personal property, goodwill, or a service or a patent offered in an exchange. The taxable gain in a like-kind exchange is recognized immediately to the extent of boot, whereas other gain from the exchange may be deferred until subsequent transfer.

Where liabilities (mortgages, deeds of trust) are assumed by both parties to an exchange of property, the amounts of the liabilities are netted to determine a net boot. An excess amount of liability assumed by one party to the exchange is boot to the other party. This is true whether the party to whom the property is transferred assumes the liability or merely takes the property subject to the liability.

Word of the day

FRAUD

Any form of deceit, trickery, breach of confidence, or misrepresentation by which one party attempts to gain some unfair or dishonest advantage over another. Unlike negligence, fraud is a deceitful practice or material misstatement of a material fact, known to be false, and done with intent to deceive, or with reckless indifference as to its truth, and relied on by the injured parties to their damage. For example, in response to a buyer’s question regarding termites, the seller produces a falsified termite report. Not disclosing known defects or remaining “silent” can be considered fraud; in some cases, silence may not be golden.

It is important to distinguish between fraud in the inducement and fraud in the execution of a contract. If the party knows what he is signing, but the consent to sign is induced by fraud, the contract is voidable. If the party does not actually know what she is signing because of deception as to the nature of such an act, and if the deceived party did not intend to enter into a contract at all, then the contract is void. The voidable contract is binding until rescinded, whereas the void contract has no force or effect whatsoever.

The state statute of limitations for a court action based on fraud is generally computed from the date of the fraud or from the time the defrauded person could discover, or should have discovered, the fraud.

In accordance with the REALTORS® Code of Ethics, it is the duty of a REALTOR® to protect the public against fraud, misrepresentation, or unethical practices in real estate. All state licensing laws provide that a broker’s license can be suspended or revoked for fraudulent acts.

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

Finder's Fee

"A fee paid to someone for producing either a buyer to purchase or a seller to list property; also called a referral fee. A finder is a person who finds, interests, introduces, or brings together parties in a deal, even though the finder has no part in negotiating the terms of the transaction.

In many states, a broker can split a commission only with another real estate licensee or with a real estate broker from another state who does not participate in any of the negotiations within the state. The question sometimes arises as to whether an owner can pay a finder’s fee to an unlicensed person such as a tenant in a building for referring other prospective tenants. In accepting such a fee, the finder runs the serious risk of being classified as a real estate salesperson and found in violation of state license laws for accepting compensation without being licensed.

The federal Real Estate Settlement Procedures Act prohibits kickbacks (i.e., paying a fee or other thing of value in exchange for receiving a referral when the transaction itself involves an original federally related mortgage loan). This provision does not cover payments made for services actually rendered or performed by a finder.
NOTE: How are Finder's Fees regulated in your state?"

Word of the day

Good Funds

State law requiring assurance by escrow companies of receipt of loan funds (deposit or electronic wiring) prior to closing a transaction, thus eliminating a practice in which lenders obtained several days of float on the loan proceeds.

Word of the day

Prorate

"To divide or distribute proportionately. With the exception of principal payments on a mortgage, most real estate expenses such as rent, insurance which is frequently prepaid for several years’ coverage and the like are paid in advance. Some expenses, however, such as real property taxes and interest on a mortgage, are paid in arrears. Upon closing a real estate transaction, these various expenses are prorated between the buyers and the sellers to ensure that each is responsible for the operating expenses of the property during their ownership. For example, if sellers who pay the fire insurance policy for a three-year period were to sell the property after the second year, they would be credited with a prorated amount equal to the cost of the remaining year. The buyer then is responsible for insuring the property and thus receives the benefit of the policy for that last year. Expenses are usually prorated as of either the date of closing or the date of possession.

In certain cases, a seller might negotiate a provision into the sales contract to the effect that any buyer credits would be applied against the balance due on a purchase-money mortgage taken back by the seller.

Some of the most common items to be prorated are sewer charges, interest on loans, insurance premiums, rent, mortgage impounds, utilities, and real property taxes."

Word of the day

On Or Before

"A phrase in a contract referring to the time for performance of a specified act, such as the payment of money or the closing of a transaction. Such a provision in a promissory note may be so written as to permit prepayment without penalty. If, for example, a seller wants a transaction to close in tax year 2017, the seller should not permit the purchase contract to have the closing set for “on or before January 1, 2018.”

Caution: some printed form contracts may pre-print the phrase ""on or before"" in front of the blank line to fill in the projected closing date."

Word of the day

A situation in which more than one party is liable for repayment of a debt or obligation and a creditor can obtain compensation from one or more parties, either individually or jointly. General partners are jointly and severally liable for partnership debts and obligations, as are the grantee and grantor for any unpaid common expenses in the sale of a condominium unit. Usually a right of contribution exists among persons who are jointly and severally liable, so that the person who is actually forced to repay the debt can try to collect equal amounts from the others who also are liable. 

Word of the day

Quiet Title Action

"A court action intended to establish or settle the title to a particular property, especially where there is a cloud on the title. All parties with a possible claim or interest in the property must be joined in the action. A quiet title action is frequently used by an adverse possessor to substantiate the title, because having official record title makes it easier to market the property. Once the judgment or decree of the court has been recorded, proper record notice of the claimant’s right and interest in the property is established.

A quiet title action can generally be used to extinguish easements; remove any clouds on title; release a homestead, dower, or curtesy interest; transfer title without warranties; clear tax titles; or simply release an interest when the grantor may have some remote claim to the property. The seller who holds a forfeited contract for deed, which the buyer had recorded, sometimes brings a quiet title action to clear the cloud on title produced by the recorded contract for deed, especially where the buyer refuses to release or quitclaim the interest."
 

Word of the day

Open Listing

A listing given to any number of brokers who can work simultaneously to sell the owner’s property. The first broker to secure a buyer who is ready, willing, and able to purchase at the terms of the listing earns the commission. In the case of a sale, the seller is not obligated to notify any of the brokers that the property has been sold.

Unlike an exclusive listing, an open listing need not contain a definite termination date. The listing terminates after a reasonable time, usually whatever is customary in the community. Either party can, in good faith, terminate the agency at will. Note, however, that some state license laws require all listings to contain definite expiration dates.

This type of listing is often used by contractors or builders. Unless stated otherwise, a listing is treated as an open listing in the form of a unilateral contract.

Word of the day

Nondisturbance

1. A mortgage clause stating that the mortgagee agrees not to terminate the tenancies of les-sees who pay their rent in the event that the mortgagee forecloses on the mortgagor/lessor’s building. Without such a clause, a lessee whose lease was signed subsequent to the mortgage could have the lease terminated by a foreclosure action.

2. When a seller chooses to keep mineral rights to conveyed property, a nondisturbance agreement is made between seller and buyer to the effect that the seller will not interfere with any building or development on the surface of the land itself.  

Word of the day

Latent Defects

Hidden structural defects, known to the seller but not to the purchaser and not readily discoverable by inspection. The seller or the broker who is aware of such defects, such as termite damage, leaking roof, a defective water heater, or a dangerous stairway behind a basement door, must disclose them to the prospective purchaser. Failure to disclose such information is a tacit misrepresentation and may be grounds for the buyer to rescind the contract.

Word of the day

WORD OF THE DAY - Lease Option

A lease clause that gives the tenant the right to purchase the property under specified conditions. Following are some important features of a lease option:

*It usually runs with the land, so that if the lease is assigned, the option to purchase is likewise assigned.
*Usually it does not extend beyond the term of the lease.
*The supporting consideration can be the paid rent. A default in rent may result in termination of the option.
*It can be assigned separately from other provisions in the lease.

The lessor/optionor must be careful to structure the transaction so that the economic reality of the transaction makes it a lease rather than an outright sale. For example: If the total payments under the lease are substantially equal to the purchase price payment under the option, and if the payments are applicable to the purchase price, the IRS may characterize the deal as a sale because the lessee has no other economic choice but to exercise the option.

An option in a lease is inseparable from the integrated lease contract, and therefore an extension of the lease usually prolongs the life of the option, unless the lease states otherwise.

In addition to an option to purchase, other lease options include options to renew and options to extend. Under the latter, the original lease is continued on the same terms, including the extension provision. With an option to renew, the lessee is entitled to a new lease on set terms, not including the original renewal provision.


Word of the day

Mitigation of Damages

A principle of contract law that refers to the obligation of an injured party to take reasonable steps to reduce or eliminate the number of entitled damages for that party. For example, a landlord may have a duty to try to locate a replacement tenant for space vacated or abandoned by a prior tenant in breach of the lease.

Word of the day

ESCROW

The process by which money and/or documents are held by a disinterested third person (a stakeholder) until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) has been achieved. Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place. Although in some states a real estate broker is authorized to handle escrow functions, the common practice is to employ the services of a licensed escrow company, title company or lending institution. In some states, it is called a settlement service.

Escrow can generally be used to close the following types of real estate transactions: sales, mortgages and exchanges; sales by means of a contract for deed; and leases of real estate. In all cases, the escrow holder acts as a fiduciary and retains documents and entrusted assets until specified conditions are fulfilled. The holder is the special and impartial agent for both parties and acts in accordance with the escrow instructions given by both. The sales contract usually serves as the basis for escrow instructions for both seller and buyer because it contains (or should contain) the agreement of the parties concerning who must pay the various expenses, the proration date and the like. This importance of the sales contract underscores the critical role of the real estate salesperson or broker whose responsibility is to advise the parties and properly complete the sales contract form (and advise the parties to seek legal counsel if appropriate). If the contract has been unprofessionally prepared, the escrow company may be delayed or even prevented from closing the transaction. It is important to remember that an escrow agent does not prepare or review the legal documents—escrow merely takes directions from the parties to the contract and acts on them in a confidential manner. Thus the parties should not rely on the escrow agent to discover defects in the transaction. If an established escrow company is not involved in the transaction, an attorney should be consulted about the preparation of proper escrow instructions.

Because of the escrow’s limited duties of disclosure and the confidentiality of the escrow in general, facts known to the escrow holder are normally not imputed or implied to the other party. Escrow is a limited agent for both parties, but once the conditions to the escrow transaction have been performed, the nature of the dual agency changes—escrow then becomes the agent for the seller for the money and the buyer for the deed. Escrow acts as the “clearinghouse” for the details of the transaction. Escrow cannot be unilaterally revoked, and in the event of disagreement the escrow can only be amended, changed or revoked by mutual agreement.

In closing a real estate transaction, the escrow company may perform such duties as paying liens, computing prorations, ordering title evidence, having new documents prepared, drawing up closing statements, obtaining necessary signatures, recording documents and receiving and disbursing funds. After payment of their respective closing costs, the buyer is thus assured of receiving a clear title and the seller is assured of receiving the appropriate funds. Typically, escrow fees are split equally between buyer and seller.

Some special situations to which an escrow arrangement is most appropriate are closing of sale and immediate resale or purchase; closing when several lenders are involved either in new mortgages or releases of prior encumbrances; closing an entire condominium project when purchasers’ funds must be escrowed under state law; closing a VA or an FHA loan (an FHA and VA requirement).

Once a valid escrow has been set up and a binding and enforceable contract of sale has been deposited with the escrow holder along with a fully executed deed, the death or incapacity of one of the parties to the escrow will not terminate the escrow. Upon performance of the decedent’s part of the contract, the other party is entitled to have escrow concluded according to the terms of the contract.

An escrow is usually not opened until major contingencies in the contract of sale have been met. Such major contingencies might be the arrangement of new financing or the approval of a loan assumption, building permit, zoning change or the like. Among the contingencies that can be taken care of after the start of escrow are the appliance check, the termite inspection and the signing of bylaws or house rules.

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.


Word of the day

DEFAULT

The nonperformance of a duty or obligation that is part of a contract. A default is normally a breach of contract, and the nondefaulting party can seek legal remedies to recover any loss. Defaults in long-term leases or contracts for deed include nonpayment of money when due, failure to renew insurance policies, failure to pay real estate taxes, damage to the property, and so forth.

Note that a buyer’s good-faith inability to obtain financing under a contingency provision of a purchase agreement is not considered a default (the performance of the contract depends on the buyer’s getting the property financed), and in this case, the seller generally must return the buyer’s deposit.

Junior mortgages usually contain a clause authorizing the holder of the junior mortgage to advance money to cure any default of the mortgagor under a prior mortgage. Were the first mortgage to remain in default and the lender to foreclose, it would have the effect of wiping out the junior mortgage.

Word of the day

hold-harmless clause

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

Disparate Impact

A legal doctrine used in federal discrimination cases to show a violation even when the defendant’s actions have no apparent relationship to a protected class. In a disparate impact case, intent to discriminate is not necessary. The disparate impact doctrine prohibits a neutral restriction that has a statistically greater effect on a protected class than on other classes. Once a plaintiff shows that there is a substantial disparate impact on a protected class, the burden is shifted to the defendant to show that there is a valid nondiscriminatory reason for the statistical imbalance.

For instance, the U.S. Supreme Court has held that aptitude tests that are a prerequisite to employment and that fail substantially more African Americans than whites constitute a disparate impact. A disparate impact analysis might be applied to a condominium association’s house rules and their impact in a familial status or handicap case.

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

Client Trust Account

A separate bank account set up by a broker to keep a client’s monies segregated from the broker’s general funds; also called a trust account. In general, each broker is required by state law to deposit funds (which are not immediately released to escrow) into a trust fund account with a bank or recognized depository within a certain time after receipt. The broker is the trustee of the client trust account, and all funds deposited in the account must be available for withdrawal upon demand. A single client trust account can usually serve all the broker’s clients, provided that detailed records are maintained and made subject to inspection by the proper state licensing agency.

The principal broker in an agency is responsible for all trust monies and, although the broker will usually authorize a salesperson in writing to deposit client monies, the broker is ultimately responsible for the account. These accounts may or may not earn interest, according to state regulations, and if interest is earned, the state will specify who may benefit from interest earned. The broker may suggest the use of an interest-bearing account when substantial funds are involved—there should be a clear understanding of who will benefit from the interest (usually the buyer, not the seller or the broker).
A main reason for requiring a broker to maintain a client trust account separate from the general account is to protect these monies from possibly being “frozen” during legal actions against the broker, such as creditor attachments or probate of a deceased broker’s estate. In addition, because the account is custodial in nature, the Federal Deposit Insurance Corporation personally insures each client’s funds up to $250,000 if each account is specifically designated as custodial and the name and interest of each owner in the deposit is disclosed on the depositor’s records. This insurance will not apply if the broker commingles personal or business funds with clients’ funds.

In addition to a client trust account for use with earnest money deposits, it is good practice for a broker to set up a management trust account when acting as property manager for several income rental properties. It is not necessary to open a separate trust account for each transaction; rather, a simple ledger system is sufficient.

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