Real Estate Glossary D [Part 2]
Depositors Insurance Fund (DIF)
The Federal Deposit Insurance Reform Act of 2005 merged the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund to make the Private Deposit Insurance Fund (PDISF). PDISF is a private insurance fund that is sponsored by businesses (SAIF). The DIF insures all deposits that are more than what the FDIC will cover. Since March 31, 2006, the DIF has been paid for by the banks when they pay their insurance premiums. The Dodd-Frank Act requires a minimum designated reserve ratio (ORR) of 1.35 percent of estimated insured deposits. It also requires the FDIC to figure out how to restore the fund’s balance if it falls below 1.35 percent and pays dividends to the industry if the fund balance is more than 1.5 percent. All deposits over the FDIC’s limits are covered by the DIF.
Each person who puts money in an insured account can get up to $250,000.
Depository Institutions Deregulation and Monetary Control Act (1980)
Federal legislation that phased off limitations on the rates that banks could pay on savings and time deposits and halted broad deregulation of federally regulated commercial banks and savings and loan institutions. The act deregulated the mortgage market by removing state usury ceilings that limited the interest rates that banks may charge for main mortgage loans, making more house loans available. The act allowed savings and loans to make consumer loans of up to 20% of total assets, including auto loans and credit card loans. It also increased deposit insurance for banks and credit unions in the United States from $40,000 to $100,000.
In general, the value of the purchased property less the value of the land (also known as the original cost basis).
The time span over which an asset’s cost recovery is to be allocated. Depreciable life may be less or greater than projected service life for tax purposes.
The amount of years that an asset can be depreciated for tax reasons.
Property that is eligible for a tax-deductible depreciation allowance.
Depreciable real property (accounting)
Wear-and-tear property utilized in a trade or business or held for the purpose of generating income. As a result, the taxpayer’s personal dwelling and land are not depreciable. If the taxpayer utilizes part of his home for business, he can claim a pro rata depreciation deduction for that portion. The business deduction, however, is subject to strict conditions under the tax code.
The 1986 Tax Reform Act drastically altered real estate depreciation laws. Cost recovery times have been lengthened, and rapid cost recovery methods have been phased out.
It is usually sufficient that the property is held with the prospect of creating revenue or making a profit, rather than the property actually producing income. Depreciation will be limited if a property is considered to be used for “hobby” reasons. Only improvements to real property, such as buildings, sidewalks, and fences, can be depreciated. Despite the fact that depreciation deductions have been replaced by “cost recovery,” the latter is still limited to depreciable property and the depreciable portion thereof.
There is a drop in the value of the home.
An expenditure that reflects the depreciation of real estate improvements.
The deterioration of an asset’s value as it matures.
The loss of an asset’s value or usable life as a result of wear and tear, the action of the elements, or obsolescence.
An annual deduction that allows investors to lower the amount of taxable income they report by an amount calculated to represent the wear and tear on the property over time.
The deterioration of an asset’s value over time.
A decrease in the value of a property as a result of time, decay, or changes in the neighborhood. The amount you can claim for tax reasons for the replacement of an asset is known as “book depreciation.”
A decrease in the value of a property.
The depreciation of a property’s utility and value.
The loss of a property’s utility and value.
A loss from the maximum value. A result of deterioration, obsolescence, or both.
A loss of value due to any reason; any condition that reduces the value of an improvement in the cost approach. Depreciation is classified into three categories for appraisal purposes: physical degradation, functional obsolescence, and external obsolescence. The straight-line or age-life approach was once the most prevalent technique of calculating depreciation, but today many appraisers prefer the breakdown method, which divides depreciation into all three classes and measures each class independently, whether the deterioration is curable or incurable.
Decomposition or disintegration of an improvement, fractures, wear and tear, foundation sinking, structural faults, elements’ actions, any loss of physical soundness, and termite damage are all signs of physical degradation.
Obsolete boilers, old plumbing, unreasonably high ceilings, out-of-date lighting fixtures, and outmoded architecture are all signs of functional obsolescence (inside property lines). Functional obsolescence can also be defined as a super-adequacy, such as a swimming pool that adds less to the property value than it costs.
Population declines, incompatible uses of land, legislative action (local, state, and national), changes in a neighborhood, and invasion of other factors that diminish the value of the property being appraised are all signs of external obsolescence (outside property limits). A shift in the market is defined as obsolescence that impacts the entire sector.
Accrued depreciation, often known as past depreciation, is depreciation that has already occurred as of the assessment date. Future depreciation, on the other hand, is an estimate of the value loss that will occur in the future.
It is improbable that any two properties will be appraised identically due to depreciation effects. Consider two structures that were created at the same time and with identical materials. Due to the independent influence of depreciation forces on the individual structures, the properties would have different values after two years; for example, one building may now contain termites.
A deduction utilized to recoup the cost of an investment in depreciable property. Depreciation can occur even if the market value of a property rises. Non-income-producing property, such as a personal dwelling, cannot be depreciated.
The annual amount of the depreciation deduction is determined by arbitrarily distributing the building’s initial investment throughout its useful life. Consequently, tax depreciation is a statutory concept that occurs even if the property itself has increased in value. Land is not depreciable (although the cost of landscaping may be depreciated in certain cases). Therefore, there must be a basis allocation between the land and the structure. The majority of taxpayers utilize the allocation determined by the state tax assessor.
If the taxpayer does not take depreciation, the Internal Revenue Service will calculate the permissible straight-line depreciation and apply it to the taxpayer’s basis upon the sale of the property. The taxpayer who is eligible for the depreciation deduction is the one who suffers the economic loss owing to the decline in value. Typically, this is the owner, however formal title alone is insufficient. A life renter, for instance, is entitled to the deduction as if she were the only owner of the property. When the life tenant dies, the depreciation deduction, if any, falls to the remainderman.
The accounting charge applied to account for the possibility that the asset will become economically obsolete before it deteriorates physically. The goal is to write off the initial cost by spreading it out over the asset’s expected useful life. It shows on the profit and loss statement as well as the balance sheet.
A tax-deductible allowance for the loss of value or usable life of an asset as a result of wear, tear, obsolescence, or the action of the elements.
Excess depreciation taken on real property is liable to income tax when the property is sold; gains owing to recapture of depreciation deductions are taxable at 25%.
The amount of cumulative depreciation incurred on a property up until the resale period is restricted to the excess of the sales revenues over the initial cost.
The total amount of depreciation absorbed since the property was brought into use. When/if the property is sold, this sum is normally taxed at the depreciation recapture tax rate.
Depreciation recapture rate
When/if the property is sold, the tax rate that is applied to the depreciation recapture part of the gain on sale.
Division 40 (plant and equipment) and Division 43 (capital works allowance) are both non-cash deductions that can be claimed when you file your taxes. The tax depreciation schedule is the basis for these deductions.
Some assessors utilize percentage tables to give a uniform system of measuring the additional value of lots that accrue due to added depth, with the extra depth assessed according to the added utility it produces ( called depth influence). Tax assessors utilize depth tables to establish standardization in their assessment processes. The “4-3-2-1 rule,” which said that the front quarter of the lot carries 40% of the value, the second, 30%, the third, 20%, and the fourth, 10%, was one of the first depth tables produced. The percentages for each few feet of the lot have been added to this rule. Many appraisers believe that standard preprinted depth tables are unreliable because they do not reflect the particular property’s specific time and market conditions.
To show that someone owns land; to find the title.
The progressive withdrawal of water from dry ground.
Demand for a good or service that results from its usage in the creation of something else.
When an heir dies without leaving a will, the act of gaining property is known as intestate succession.
The acquisition of an estate by inheritance occurs when an heir inherits the property by operation of law. The hereditary succession of an heir to the property of an ancestor who dies intestate is referred to as descent.
Rights under descent laws differ from one state to the next. The law of the state in where the property is located will not only specify who will inherit the property, but it will also specify how much each individual will receive. When a person dies leaving a spouse and one child, the spouse and child normally divide the estate equally, with certain jurisdictions granting only one-third to the surviving spouse. If a spouse and two or more children survive, it is normal for the spouse to take one-third of the estate and the children to divide the remaining two-thirds equally among themselves. If there is a spouse but no children or descendants of the children, some state statutes give the spouse one-half of the estate and the other half is divided equally among collateral heirs such as the decedent’s parents, siblings, and sisters; in other places, the surviving spouse takes all.
Every state makes provisions for lawfully adopted children, who are usually considered the adopting parents’ heirs. They are not considered heirs of the adoptive parents’ ancestors.
Illegitimate children inherit from their mother in most states, but not from their father unless he has admitted fatherhood in writing or parentage has been legally proven. Naturally, if he formally adopts such a child, that child will inherit as an adopted child. It is necessary to consult state law.
The section of a conveyance document that describes the property that is being conveyed. Documents such as deeds, lease assignments, certain leases, and mortgages must provide a detailed legal description of the property to be transmitted in order to be valid. A contract for the sale of real estate typically requires simply a description adequate to identify the property, such as a street address and/or tax map key number.
The description of a deed is typically separated into two parts: general and specific. The broad description typically identifies the lot in question through its location, name, or reference to prior known owners. It begins the specific description with “more particularly described as follows,” or with a reference to public maps, plats, or other recorded facts.
The specific description precisely outlines the boundaries of the property in question. These boundaries can be defined by any of three fundamental types of real estate description: metes and bounds, government (rectangular) survey, and subdivision plat.
To avoid ambiguity, extreme caution must be applied. The “next contiguous 40 acres” is unclear since an acre can be any shape; the “south one-half of the farm” is sufficient if the property is rectangular but not if it is irregular in shape.
Mother Hubbard clauses are included in some contracts for large, bulk real estate sales. These provisions state that the description comprises all of the seller’s property at the location or, if applicable, all of the seller’s real estate in that specific area.
A formal representation of a property’s measurements and location.
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A statistical application that uses numerical expressions to describe the characteristics of a sample or the underlying population.
The procedure through which the architect develops the building’s blueprints and specifications after receiving approval of the conceptual design.
A downpour of a certain strength and frequency of occurrence that serves as the foundation for stormwater management.
A method of constructing massive constructions in which the roles of architect and general contractor are combined.
A designated agent is classified under state law as the agent for either the buyer or the seller to the exclusion of all other agents in the brokerage in some states where it is allowed by law; another salesperson in the firm could be designated as the agent of the other party without creating a dual agency for the individual agents. A designated agency is a way to avoid a potential conflict of interest in an internal transaction.
When a brokerage business acts as an agent for both a selling and a buyer, the firm may assign one salesperson to service the buyer and another to assist the seller. The two salespeople are supposed to respect the privacy of the party they represent and to act in the best interests of that party.
Geographic information systems (GIS) software is designed for visual presentation and descriptive analysis of geo-coded data, and it offers a wide range of operations, queries, and mapping capabilities for use in desktop applications.
A single-family home that stands alone on its own piece of land.
A dwelling that is unattached to any other building and is occupied or intended to be occupied as a single dwelling.
A storm water management approach in which runoff is retained on-site and released later at a predetermined pace.
A neighborhood where the properties have been neglected and are in poor condition.
A person who prepares raw land for development by establishing roads, utilities, and other infrastructure; may also be a builder (one who actually constructs improvements on real estate).
A person who transforms undeveloped land into valuable real estate.
a person who acquires land and increases its worth by upgrading it (for example, by subdivision or development).
A person who tries to put land to the best possible use by building improvements such as commercial condominiums or subdivision projects. The developer plans and oversees the entire project, from site acquisition to construction and final sales, and occasionally even project upkeep.
Although the financial incentives for the creator can be great, the risks are also high. All elements of development are getting increasingly specialized and complex, thus developers commonly hire consultants, such as construction and finance specialists, to help them through the various stages.
A region that is rapidly expanding because of the recent construction of new homes.
A real estate activity including the addition of improvements such as buildings.
A contract between a developer and a buyer under which the developer will build a specific sort of property and the buyer will acquire it within a certain time frame.
A measure of the intensity of development or land use, as defined by the area covered by housing units, impervious surfaces, or building floor area, for example.
A developer is compensated for managing a development project on behalf of a client, such as a corporate or public sector agency.
Development impact fee
A fee that a local government charges a developer to cover the costs of providing essential services for the proposed project, like fire and police protection and road maintenance.
An interim loan to cover the expenditures of property improvement. In most cases, a property subdivider seeks funding to cover the costs of both on-site and off-site improvements (site preparation, roads, sewer, water, and drainage) to bring individual lots up to a standard that may be successfully marketed. The development loan frequently includes a schedule of partial releases that allows individual lots to be sold free and clear of the loan encumbrance. Large subdivision development loans are frequently organized in phases to correspond with the project’s progressive development.
A loan used to make renovations to real estate.
The process of preparing raw land for the purpose of constructing; it typically include acquiring required government approvals, clearing and grading property, and establishing roads and utility facilities.
The rights to develop and improve a property that a landowner sells to another. Development rights are the premium paid by the developer for the opportunity of developing the property and bringing the future seller and the landowner together to create the leasehold estate in some regions where residential units are developed on land to be leased at economic or market pricing. Only the development rights are sometimes offered, and the purchasers lease the land directly from the landowner after the improvements are finished and sold. Frequently, a developer will buy a master lease along with development rights and then sublease the upgraded lots to the final buyers. The developer may sell development rights to a sub-developer if the landowner agrees to the assignment.
A variety of public and private partners hired by a developer to assist in the planning, design, building, marketing, and management of a development project.
A bequest of real estate.
A willful transfer of real property. The devisor is the donor, while the devisee is the beneficiary. The real estate passes to the heirs if there is no will. In some states, a deed is not necessary to transfer property via devise because the donor’s will serves as the conveyance instrument.
A gift of real estate that comes from a will.
Conveyance or distribution of a decedent’s real estate by will.
A person who receives property as a result of a will.
Differential cash flow
The difference formed when the cash flows of one alternative are subtracted from the cash flows of another.
Products that differ sufficiently from competitors to lower the degree of substitutability. Producers of distinct items have some pricing control.
Diffused surface waters
Waters that run off the surface of the ground due to rain, snow, or subsurface springs.
Digital mortgage applications
The term “digital mortgage applications” refers to a digitised loan application form that uses available data to automatically pre-fill hundreds of fields before being transmitted to the lender’s loan origination system.
The process of turning a picture, map, or other visual into numerical format.
Alluvion is the gradual and undetectable washing away of soil along a river, with the resulting loss of soil; erosion is the polar opposite of alluvion.
Diminishing marginal utility
The economic notion that when more units of an item are owned or used per unit of time, the increased (marginal) utility of each subsequent unit is less than that of the preceding one.
DINK (Dual Income, No Kids)
Couples with two salaries or two sources of income who do not have dependent children; regarded strong chances for home ownership or other real estate ventures.
The procedure of calculating a property’s worth by dividing its yearly net operational revenue by an overall capitalization rate.
site expenses (acquisition price plus legal fees plus commission), plus improvement expenses (plans and permits plus professional fees plus construction).
An FHA-approved lender’s ability to obtain FHA single-family and multifamily mortgage insurance by adhering to FHA rules. Many of the FHA’s mortgage insurance programmes can be underwritten by an approved lender who verifies that the mortgage conforms with applicable FHA standards under the direct endorsement programme. The lender is responsible for all appraisal obligations as well as credit analysis. Direct endorsement exposes FHA to the risk of loss due to default, but it offers it control by allowing it to withdraw the lender from the programme.
Direct market extraction
Estimation of the appropriate capitalization rate based on comparable property transactions.
Direct participation program (DPP)
A programme that allows investors to directly participate in an investment’s cash flow and tax benefits.
Direct participation program licenses
Securities salesmen that offer real estate securities (such as resort condominiums with rental pools) and tax shelters in schemes that provide a direct “pass-through” of tax benefits are awarded national licenses by the nonprofit National Association of Securities Dealers (limited partnerships and REITs, but not stock in ordinary corporations). The Limited Representative License and the Limited Principal’s License are the two types of licenses available.
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Direct reduction mortgage
A mortgage that requires periodic payments of a set amount of principle (loan recapture). Because the interest percentage is reduced with each payment, the total payment varies. Financing between private parties is most likely to be found.
Because the amount paid on the principal is the same each month under the direct reduction payment plan, the mortgagor can readily determine how much has been paid on the principal. The amount of interest that is applied varies. As a result, the combined monthly principal and interest payments are higher in the early years of the loan than in a steady or level mortgage payment plan.
Direct sales comparison approach
A method of evaluating or appraising real estate based on the substitution concept (comparison). Using this method, an appraiser determines the worth of a property by comparing the prices paid for similar properties and arriving at a conclusion. The following are the three main steps in what was previously known as the market-data approach:
- Find comparable properties (properties with the same “highest and best use”) that have recently sold in arm’s-length transactions, usually within the last six months. Certain sales, like bankruptcy, short sales, or foreclosure sales, government sales, sales between relatives, and so on, are excluded. Adjust the contract sales price to an effective sales price, taking into account extraordinary seller concessions and market changes since the transaction.
- Compare these properties to the subject property and adjust the sales prices accordingly to account for any significant changes in the property, such as age, location, and physical attributes. Even when comparing vacant land, adjustments are required, such as utility hookups, soil type, and location. The amount of rooms, bathrooms, bedrooms, lot size, building age, style, and condition should all be identical.
- Bring all of the comparable data together and get to a value judgment.
The most trustworthy gauge of the market is the direct sales comparison approach, which is most commonly employed in evaluating residential property, where amenities are often difficult to measure.
This method can also be used in conjunction with the other two methods of determining value. Market data are utilized to establish the depreciation figure in the cost approach, while market data are used to determine the market rent and capitalization rate in the income approach. A live real estate market for the type of property being evaluated is required for the direct sales comparison approach.
Direct survey method
Personal interviews with key employees at all of the major firms in a given community to find out what percentage of each firm’s sales come from outside the local economy. This is done to estimate each firm’s basic employment and, by adding up all of the estimates, the total basic employment in that community. This is a costly and time-consuming method.
The general direction or location in which a community appears to be headed. Directional expansion is taken into account in mortgage underwriting and assessment because it affects supply and demand, highest and best usage, and the current and future value of real estate.
To repudiate or revoke a contract is a legal term. In the event that the contract is voidable, the injured party may choose to have it rescinded.
Demand segmentation entails disentangling and identifying the myriad of influences that shape the demand for a specific property in a specific market (in reference to tenure, household income, and geographic submarket).
Supply disaggregation refers to the steps used to determine what influences the availability of a specific property in a given market (including leased versus owned, unit type, price, and geographic submarket).
Money paid out or expended in a financial transaction, such as an escrow closing. Disbursements can be recorded as a credit or a debit on the closing statement (for example, when the net proceeds of the sale are paid to the seller) (as when attorney fees or the title search are paid). Construction loan draws and advances are other examples of disbursements.
The volume of water traveling through a cross section of a stream or swale per unit of time, generally expressed in cubic feet (or metres) per second, that flows through a stream channel or from a location.
When a loan is paid off, there is a fee.
Discharge of contract
The end or cancellation of a contract. Some common ways to get out of a contract’s obligations are mutual cancellation, rescission, performance or nonperformance, accord and satisfaction, illegality, and in some cases, the statute of limitations, the statute of frauds, and the Bankruptcy Act, if the court won’t enforce the contract. If a contract is broken, there is no way out, but the party who did not break the contract has options.
A region with a high concentration of groundwater seepage and springs.
“There are no guarantees, representations, oral understandings, or agreements except as written above,” is a common phrase rejecting legal liability. However, making such a statement does not absolve the maker of any liability for fraudulent acts or misrepresentations. Exoneration clauses are sometimes known as exculpatory clauses.
“The material contained on this fact sheet is obtained from sources regarded as credible,” says a frequent disclaimer seen in a brokers’ information fact sheet. We cannot, however, guarantee the accuracy of such data." This form of disclaimer may be useful in protecting someone from liability for an unintentional factual error, but it will not protect someone who willfully makes a misleading statement.
Disclaimers are often enforced harshly against the party who drafted the disclaimer. As a result, a statement in a lockbox authorization form indicating the broker is not accountable for theft loss does not protect a broker who is negligent in giving out the lockbox combination.
To make known, to reveal A well-known risk-mitigation tool for real estate brokers.
The public disclosure of all relevant data, both good and negative, required to make an investment choice.
Disclosure and informed consent
Where a real estate agent fits in between the agency and the client.
Real Estate Glossary D [Part 4]