Continued from…
Real Estate Glossary I [Part 2]
Insurance
In exchange for a premium paid by the insured, one party promises to pay a sum of money to the other if the latter suffers a certain loss.
Compensation for losses caused by a specific risk or danger. There are many types of insurance to cover property or liability against different risks. Insurance can be written on buildings, their contents, and their equipment. It can also be written to cover things like loss of income due to damage or something else unexpected. You can also get insurance to cover your legal responsibility to other people. When a building is covered by an insurance policy, it is covered against certain risks, such as fire, explosion, and windstorm.
Property and liability insurance policies are personal contracts between an insurer and a specific insured. So, these policies don’t go with the land and can’t be given to someone else without the insurer’s permission. But if a loss happens, the right to the insurance money can be given to someone else.
When something is lost, the amount of the loss may be taken out of the policy. Then, you have to pay an extra premium to get the full amount of insurance back on the policy.
Most insurance policies have a clause called “pro rata liability,” which says that “the insurer is not responsible for a greater portion of any loss than the amount insured against bears to the total insurance carried on the property against the peril involved, whether collectible or not.” This keeps the owner from getting more money than what was actually lost if they have policies with more than one insurance company.
Public liability insurance covers the risk that a building owner takes on when the public is allowed to enter the building. A liability policy like this might pay for a person’s hospital bills and doctor’s bills if they were hurt in a building and said it was because the landlord didn’t take care of the stairs properly, which they said was their landlord’s fault. Most of the time, these policies are called owner’s, landlord’s, and tenant’s liability insurance.
There are two ways to figure out how much the claim is worth. One is based on the damaged property’s depreciated value, or actual cash value, and the other is based on the cost to replace it. If part of a building that is 30 years old gets broken, the wood and other materials are also 30 years old, so they are not as valuable as new materials. In order to figure out the actual cash value of the loss, the cost of new materials would be found and subtracted by an estimate of how much the item had lost value while it was in the building. The other way is to cover the cost of replacement. This would be the real amount a builder would charge at the time of the loss to fix the damaged property.
The rates for insurance are set by rating bureaus, which are overseen by the government. Under this system, the cost of the risk of possible damage is spread across all properties in the state. This is done by setting a premium rate for each risk based on how much damage it has caused in the past year (or several years). Underwriting bureaus change rates and keep them up-to-date based on the number of claims and the cost of fixing the damage.
If someone owned a $1 million building and thought it was in such good shape and was so well cared for and protected that it would be impossible to lose more than $100,000, they might buy a $100,000 policy. The building isn’t covered enough by insurance because its policy has something called a “coinsurance clause.” In the event of a loss, this clause says that the total amount of insurance on the building must equal a certain percentage of its value. If you don’t have enough insurance, the insurance company will pay out less on your claim. For instance, most commercial properties include an 80 percent coinsurance clause. When a loss happens, if the building owner has the right amount of insurance, the claim is paid in full up to the amount of the policy. The point of a coinsurance clause is to make sure that the insured has the right amount of insurance and pays the right amount of premium for this coverage.
Residential insurance policies also contain a coinsurance clause. For example, a house that would cost $100,000 to rebuild today would need to be insured for $80,000 in order to meet the 80% rule (note that some policies are increasing this percentage). All losses, whether total or partial, would be covered up to the face value of $80,000. But if the house is only insured for $40,000, it is only insured for half of the minimum amount. So, if the property loss is total, the homeowner would be paid up to the full face value. If the loss is only partial, the homeowner would be paid either the actual cash value (current replacement cost minus depreciation) or half the loss, whichever is greater. The idea is that the company will only pay out the amount of the loss that is equal to the amount of insurance carried. Even though the face value of the policy is $40,000, you might only get $14,000 back if the loss was $28,000 or less.
The three most common types of homeowner’s insurance are basic (HO-1), the homeowners (HO-3), and the condominium (HO-65). The HO-3 protects against many dangers, but not floods, earthquakes, or war. Flood insurance is always bought on its own.
To get hazard insurance, you must have an interest in the property that can be insured. With a contract for deed, both the seller and the buyer have an insurable interest in the property. Most contracts for deeds require the buyer to keep insurance up to a certain amount and pay the seller for any losses. If the sales contract says that the seller’s insurance policy will be given to the buyer and the cost will be split, the transfer should happen at the closing. The buyer then signs a form called an assignment of policy. This form won’t work until the insurance company or its authorized agent has accepted it.
Real estate brokerage firms should think about getting errors and omissions (E&O) insurance, which is similar to malpractice insurance for doctors. E&O insurance protects the broker if he or she is sued for lying about or hiding an important fact, whether on purpose or not.
A property manager is often in charge of getting the right insurance coverage for the properties they are in charge of. Some of the most common types of insurance coverage are standard fire, extended coverage and collateral fire, machinery and equipment, consequential loss, use and occupancy coverage, such as for business interruption and rental income, general liability insurance, and workers’ compensation insurance.
Property owners often pay for small damages themselves instead of filing a claim with their insurance company so that their rates don’t go up or they don’t lose their coverage. In any tax year, taxpayers can only deduct personal casualty losses that are more than 10% of their adjusted gross income. Few taxpayers can benefit because the amount of a casualty loss not covered by an individual’s insurance policy usually doesn’t exceed 10 percent of the person’s adjusted gross income.
A method of guaranteeing or indemnifying a person or company against loss caused by a specific hazard. For the payment of an agreed-upon premium, the insurer issues the insured a policy that provides financial protection for a specified period of time.
Insurance clause
Requires the borrower/mortgagor to have appropriate property casualty insurance, providing the lender shared authority over the use of the funds in the event of serious damage to the property.
Insurance coverage
The quantity of funds and form of insurance carried by a property.
Insured value
A structure’s insured value is its replacement cost, plus the cost of repairing or rebuilding it in the event of total destruction.
Intangible assets
Patents and copyrights are examples of nonphysical assets.
Intangible characteristics
Qualities that cannot be reduced to a numerical value but are still important to convey can do so in a more qualitative or abstract way.
Intangible property
Anything that does not have a tangible or physical existence, cannot be seen or touched, and gets any worth it may have from what it represents. Good will, for example, is intangible, as are the “sticks” in the bundle of rights.
Intelligent building
A structure with technologically advanced characteristics that assist communications, information processing, energy conservation, and tenant services.
Inter lease risk
The danger of replacing a tenant’s original lease with another contract with undetermined terms and circumstances.
Inter vivos trust
A “living” trust is different from a “testamentary” trust, which is made in a person’s will and doesn’t take effect until after the person dies. Inter vivos transfers are made between living persons (e.g., deeds or leases).
The inter vivos trust is often used when the trustor is unwilling or too inexperienced to manage the assets or when the trustor wants to get rid of insurance proceeds, pension benefits, and the estate (pour-over trust). When the trustor dies, probate proceedings can be avoided by putting property in an inter vivos trust.
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Intercept
In a regression, the base value estimate assumes that all explanatory variables are set to zero.
Interest
Rent or a fee for the usage of money. The bundle of rights owned by real estate owners may also be referred to as interest.
A monetary remuneration for the usage of money.
The amount paid or earned in exchange for using money. Interest is usually expressed as an annual rate, but the parties may not always call this payment interest because it may be hidden as points or mortgage prepayment penalties. Most of the time, interest is added to a promissory note and is due at the end of each payment period (monthly, semiannually, or as required by the lender).
Most of the time, state laws set the highest interest rate that can be charged on mortgage loans. However, there are some mortgage loans that are exempt from federal rules. Usury is when a lender charges interest on a loan that is higher than the legal rate, and lenders who do this are punished. In some states, a lender who charges too much interest on a loan can still get the money back, but only at the legal interest rate. In other states, a lender who charges too much interest may lose the right to get any interest or the whole loan amount, plus the interest. Most state usury laws don’t apply to loans made to corporations or by the FHA or VA.
Note that interest and real estate taxes related to the time a building was being built must be spread out over ten years. This capitalization rule still doesn’t apply to housing for people with low incomes.
Interest rates are given for a period of one year. Divide this interest amount by 12 to get the amount of interest due for one month. To find the interest charge for one month quickly, multiply the loan’s principal balance by the interest factor.
As long as the debt doesn’t go over $1,000,000, you can deduct all of the mortgage interest you pay on your main home, second home, or vacation home when you file your taxes. A buyer can also claim a tax deduction for the discount points they pay in the year they buy a home. Interest paid on amounts borrowed against the increased value of the equity in a first or second home (called “home equity debt”) cannot be deducted in full if it is more than $100,000.
Note the difference between nominal interest and effective interest. Nominal interest is the amount (percentage) of annual interest stated in the loan document. Effective interest is the amount of interest the borrower actually pays. Most of the time, the difference comes from how the debt is collected, such as by using discount points to raise the gross rate or by adding interest to the principal. See the section on Truth-in-lending laws to find out what the difference is between interest and APR.
Borrowing money from a lender comes with an additional cost.
Interest expense
Payments made in exchange for the usage of borrowed funds.
Interest in property
A legal right to own a piece of property, whether it’s the whole thing (called a “fee simple interest”) or just a part of it (as in a leasehold estate).
Interest rate
A fee based on a percentage of a sum of money.
The cost of borrowing money from a lender is represented by the interest rate. Prices will fluctuate and evolve over time.
Interest rate cap
The highest interest rate that can be charged on a loan with an adjustable rate at any one time during the loan’s life. The interest on the loan may also have a lifetime cap.
Interest rate risk
The danger that a shift in interest rates may cause the interest collected on assets in a low-interest rate environment to be inadequate to service payments due on liabilities incurred in a higher-interest rate environment, resulting in a shortfall. The interest rate risk is the possibility of a deficit (and the resulting change in the value of a security).
The possibility that changes in the overall level of interest rates will have an impact on the pricing of all assets and investments.
Interest rate spread
In the case of house mortgage loans, the gap between the retail interest rate and the wholesale rate recognised by the banking industry.
Interest rate swap
A legally enforceable agreement between two parties to exchange periodic interest payments on a preset principal amount, known as the notional amount. In most cases, one counterparty pays a fixed rate and receives a variable rate in return, while the other counterparty pays a constant rate and receives a variable rate.
Interest-only amortizing mortgage
A mortgage loan that is interest only for a set number of years, say ten or fifteen, after which the payment is increased to completely amortize the debt over the remaining period.
Interest-only balloon mortgage
A mortgage loan that is interest-only for the duration of its term and must then be refinanced or paid off in full.
Interest-only loan
For the most part, this is a short-term deal where you pay just the interest, not the whole amount you owe.
The borrower is required to pay interest during the loan’s term but not to amortize the principal, repaying it in one lump amount at the end.
Only interest is paid on a loan during the duration of the loan.
Borrowers pay just interest during the term of the loan and then repay the whole principle in one installment at loan maturity.
In this type of loan amortization, the principal is not repaid until the end of the loan’s term, but interest is paid on a periodic basis until the loan is paid in full.
Interest-only mortgage loans
A mortgage loan in which the borrower only pays the interest for a set period of time, usually five to seven years, after which the borrower either pays off the loan in full, refinances, or begins to pay off the debt.
Interim development order
allows a planning authority to keep an area under control until the final scheme is gazetted.
Interim financing
Financing utilized during the building period, which will be replaced with takeout financing after development is done.
Construction loans are short-term loans made during the construction period of a building project and are sometimes referred to as construction loans. The interim loan proceeds are disbursed in stages as work on the project progresses. Permanent funding is frequently sought to “take out” the temporary loan.
Prior to permanent funding, a loan is made.
A construction loan or a bridge loan is an example of interim finance.
Interim interest
Borrower’s interest on mortgage loan from day of closure to date of first payment covered by interest.
Interim use
There are a variety of uses that can be put to sites and renovated properties until they are ready for their most productive highest and greatest usage.
Interior features
Interior features are the components, traits, and designs found inside a building.
Interior finish
An internal framing material used to cover walls and ceilings.
Interior partitions
Non Load-bearing interior walls that surround or divide tenant space.
Interlocutory decree
A court order that won’t be final until a certain date or time or until a certain thing happens. Apart from divorce decrees, which often affect how real property is split, interlocutory decrees are often used in condemnation actions.
Intermediaries
Third-party professionals in real estate investing who utilize their skills and knowledge to invest and manage funds on behalf of customers.
Intermediate goods
Items that have been combined with other goods to become consumer products.
Intermediate theory
The legal notion that a mortgage is a lien on property until default occurs, at which point title passes to the lender.
Internal growth
A measure of the rate at which a population or the number of new households is changing as a result of natural increase (births minus deaths) and time (the ageing and maturation of that population), as young people have children and eventually start their own families.
Internal rate of return (IRR)
The most thorough explanation of historical return, covering capital contribution, income, and time. It is frequently referred to as a money-weighted return since it takes into consideration the amount invested in each period.
A financial analysis approach in which net present value is set to zero and a discount rate is found to fulfil the equality criterion; that is, the discount rate that makes present value precisely equal to the needed initial cash outlay.
The rate of interest (discount) at which the present value of cash inflows equals the present value of cash outflows; that is, the rate of discount at which the net present value equals zero.
The discounted rate that results in a net present value of zero. The internal rate of return may be thought of as the investment’s rate of return.
A discount rate at which the present value of future cash flows equals the initial capital investment exactly. When deciding whether to invest in real estate or something else, a person looks at two things: the return of the original capital and the return on the original investment. Most of the time, this return on investments is shown as a yield or annual return. The internal rate of return is a good way to figure out how much an investment is worth because it can be used to compare all kinds of investments, including stocks, bonds, real estate, and business ventures. The expected cash flows from the first investment are used to figure out the internal rate of return.
Even though the IRR is being used more and more, it still has some problems. The problem with using the IRR formula is that it assumes that the investments being looked at have similar risks. Also, the projected cash flows that are used as measurements are only as good as the person who made them. This is also known as discounted cash flow.
The annual rate of return is the percentage of profit made on an invested sum each year. An investment’s internal rate of return (IRR) is defined as the discount rate at which the sum of the present value of future cash flows equals the initial capital investment.
Internal rate of return (IRR) is a method for evaluating the relative merits of two investment options by comparing the difference in cash flows generated by the two options against the user’s opportunity cost.
Internal rate of return on equity
The present value of each after-tax cash flow plus the after-tax equity reversion is equated with the cost of equity using a discounted cash flow approach.
Internal rate of return on total investment
A discounted cash flow method for calculating the rate at which the current value of net operational income plus the predicted net selling price equals the total cost of an investment.
Internal revenue code
The legislation that governs how and what types of income are taxed, as well as what costs may be deducted.
Internal revenue code of 1986 (IRC)
The body of statutes that codifies federal tax laws and is managed by the Internal Revenue Service (IRS), which produces its own regulations interpreting those laws.
Internal revenue code public law 591 -chapter 736.
This statute (as later altered) serves as the statutory authority for the Internal Revenue Service’s income, employment, inheritance, and gift taxes. Generally referred to as the Code by tax professionals.
Internal revenue service (IRS)
Congress established the IRS to collect federal income taxes as well as to clarify and enforce tax rules and regulations.
The federal government agency in charge of collecting federal income taxes.
International council of shopping centers (ICSC)
A trade group for shopping centre owners, developers, and managers.
Internet
A global electronic network that connects government, academic, and commercial institutions to provide data, news, and opinions. Weeks before approaching a real estate licensee, over two-thirds of prospective homebuyers consult the Internet. Internet skills, including e-mail and attachments, are crucial for a real estate licensee in the twenty-first century.
Internet marketing
Use of the Internet to advertise real estate services, market properties, and give information about individual properties. While few homes are sold entirely on the Internet, it has become an important element in real estate marketing today.
Interpleader
When an innocent third party (stakeholder), like an escrow agent or broker, can deposit with the court property or money susceptible to adverse claims, the court can distribute it to the legitimate claimant.
When a buyer and a seller are unable to agree on the terms of a purchase agreement, it is common for the escrow account to become frozen until the matter is resolved. There are certain conditions that must be met before an escrow agent may release any money that has been placed in their custody, including the broker. Nobody can get their money back if one party refuses to cancel escrow. An interpleader action is an option if the parties are unable to reach agreement on the deposit money’s distribution, and if the court accepts the money, the rightful claimant will receive it.
Interpolation
A method of calculating values that lie between two tabular numbers.
Interstate
A situation in which two or more states are involved, resulting in federal law being applied, such as the federal securities laws.
Interstate land sales full disclosure act
A federal law passed in 1968 that regulates land sales between states by requiring real estate to be registered with the U.S. Department of Housing and Urban Development’s Office of Interstate Land Sales Registration (OILSR) (HUD). It requires that all full and correct information about the property be given to potential buyers before they buy. To follow the act, the developer must make a statement of record and register the subdivision with HUD. After the registration is complete, the developer must give the buyer the property report and get a receipt for it before the purchase agreement is signed. The developer has to give potential buyers seven calendar days to think about the information in the property report. Many big subdivisions are registered with HUD because HUD rules apply if the developer sells lots through the mail or any other way that involves interstate commerce.
The intrastate exemption to the rules of the act has a small scope and is interpreted very narrowly. The sub-divider can apply for the exemption if the subdivision has fewer than 300 lots that are sold or rented to residents of the same standard metropolitan statistical area (SMSA) where the subdivision is located. There is some wiggle room, though, so that no more than 5% of sales in any given year can be made to people from another state. Some of the most common reasons why you don’t have to file with HUD are:
- Subdivisions with fewer than 100 lots. If there are fewer than 25 lots, the act doesn’t apply at all, not just to the requirements for registration and disclosure.
- Subdivisions where all the lots are at least five acres (including easements)
- Subdivisions where the land is improved by a building or where the seller has agreed to build a building within two years
- Subdivisions where all the lots are at least five acres (including easements) Bulk sales of lots to another developer
- Sale to an adjacent owner
- Fewer than 12 sales per year
- Sales to a government agency
- Sales of cemetery lots
- Bulk sales of lots to another developer
HUD thinks of condo units as “lots in the sky,” and the developer of a condo may have to register it with both HUD and the local regulatory agency. The risk of not following the rules is highest in larger projects where the developer builds in stages but encourages the use of shared facilities that may not be finished for more than two years (such as a golf course).
A developer doesn’t have to register a condo with HUD if each unit is done before it goes on the market. In this case, “completed” means that the space is ready to be used. The developer can also avoid registration (and not have to give buyers a property report) if the unit is sold under a contract that requires the seller to finish building the development within two years of the sale, as long as construction isn’t held up by things beyond the developer’s control. Also, a developer doesn’t have to give a potential buyer a HUD property report before they make a reservation. They only have to give it to them before they sign a contract to buy.
When a registered sub-divider sells on an installment plan, the buyer must get back any payments over 15% of the purchase price (not including interest) if the buyer doesn’t pay. This rule can be skipped if the contract says that the sub-divider has to give legal title to the land within 180 days of the contract being signed.
When it comes to fraud, the three-year deadline doesn’t start until the fraud is found or should have been found.
Even though the law may say that a certain sub-divider or subdivision doesn’t have to be registered (like a 60-lot subdivision), it is still against the law to lie about such sales in interstate commerce. But if there are less than 25 lots, the sub-divider does not have to follow any of the rules in the act.
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Interstate offering
A gift to one or more states’ inhabitants.
Interval ownership
A common time-share ownership scheme in which the owner obtains title to a specific property for a specific week (or weeks) of the year.
Intestate
Without a will, a decedent’s property is conveyed.
A person who passes away without leaving a valid will.
Dying without a will or leaving a will in a faulty form. The property of an intestate decedent transfers to the heirs in accordance with the laws of descent in the state where such real property is located. These laws of descent differ by state and define who is entitled to the decedent’s property, which must subsequently be probated in the jurisdiction. The distribution of jointly held property or life insurance proceeds is unaffected by descent laws.
The laws of descent differ widely between states: in some places, an unmarried person’s inheritance belongs to the deceased’s parents; in others, the decedent’s parents may have to share the estate with the intestate person’s lineal brothers and sisters. If a married person dies without leaving children or descendants of children, the surviving spouse may be the only heir in some states or may have to share with the decedent’s parents in others. Many states permit the surviving spouse to receive a particular marital share of the estate, such as dower, courtesy, or an elective share. In states that recognize community property, a surviving spouse legally owns one-half of all community property, therefore only the decedent’s half-interest transfers to his or her heirs under state laws of descent.
Intrastate exemption
Exemption from federal registration requirements for securities offered and sold only to residents of a specific state, when the issuer of the security is a resident and conducting business in that state. If a corporation is incorporated and doing business in that state, and if the partnership’s assets and activities are likewise located in that state, the exemption applies. The Securities Act of 1933 and the Securities Exchange Act of 1934 nonetheless apply to intrastate offerings, even if they are excluded from the SEC’s cumbersome registration requirements. Interstate exceptions are interpreted and enforced very narrowly. Non-residents can no longer benefit from the exemption if the issuer makes a single sale or resale, or even an offer, to a non-resident.
Intrastate offering
A security issuance issued for sale primarily inside one state by an issuer who is a resident of that state or a corporation formed and doing business there. A suitable intrastate offering is exempt from federal registration requirements.
An offering in which all of the investors live in the same state as the property.
Intrinsic value
This is an appraisal term that means the result of a person’s choices and preferences for a certain area based on its features and amenities. For example, most people would say that a piece of property in a well-kept suburb near a shopping centre is worth more than a similar piece of property near a sewage treatment plant. In general, the more money a property can bring in when it’s sold depends on how much it’s worth on its own. Most land speculation is based on this idea of what the land is worth now versus what it will be worth in the future. What was farmland a few years ago might now be a booming town, and a smart investor knows how to find, buy, and sell these kinds of “speculative” properties at the best times.
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