A nonbinding declaration of intent subject to the approval and additional documentation of a third party.
A statement that you want to invest, build, or buy something, but you are not legally required to do so. It could be about a specific project or just a general letter of intent that doesn’t mention any particular project. This is the kind of language that can be used in a letter of intent to get out of any legal obligation to follow the letter’s terms:
Since this document is just a statement of what we both want, it is clear that no liability or obligation of any kind is meant to be made between any of the parties. This letter is not a binding agreement to complete the transaction described here, nor is it an agreement to sign a contract. The parties plan to move quickly and in good faith to finish making plans for the proposed development, but their only legal obligations will be those that are written in the signed contract and lease. If a contract and lease aren’t signed, we won’t be responsible for the developer’s costs or any charges or claims that come from this letter of intent, the proposed financing, or any other reason, and the developer won’t be responsible to us in any way, either.
A patent is a legal document that gives the person named in the patent the right to own land from the United States or a single state.
A short appraisal report that only talks about the property’s features, its value, and any suggestions.
A report from a title company about the state of the title as of a certain date, but it doesn’t cover the title.
During the amortization phase of a mortgage, the same payment is payable each month.
A loan with equal monthly payments that is fully amortizing.
A mortgage that is paid back over time in equal payments that include both the principal and the interest. When you make a payment, the money goes first to the interest on the decreasing principal balance. This means that the amount of money going to the principal gradually goes up, while the amount going to the interest gradually goes down. Most conventional, VA, and FHA loans include taxes and insurance in the mortgage payment, along with the principal and interest.
A loan having the same monthly payment each month for the duration of the loan.
A device for determining altitude or height.
The use of mortgage debt to assist in the financing of a capital investment.
Investing a small amount of funds and borrowing the rest to get the best return on your investment.
How borrowing money changes the return on an investment. Borrowing money to buy property with the hope that the value of the property will go up, so that investors will make a profit not only on their own money, but also on the money they borrowed. The practice of borrowing money to make a smaller investment earns a higher rate of return.
When an investor puts down a very small amount of money, this is often called “high leverage.”
Danita buys a condo for $75,000 with a $4,000 down payment and a five-year, interest-only contract for deed for the rest. Danita hopes to sell the house for $85,000 and make a profit by using money from other people. Her expected return on the purchase price of $75,000 is 13%, but the return on her main investment of $4,000 is 250%. This shows the benefit of using leverage. Danita can also get tax breaks for the whole improvement through depreciation (including the leveraged portion). When an investor pays a higher interest rate to borrow money than the rate of net income from a property, this is called “reverse leverage.” You can also call this “debt financing.”
The use of borrowed funds to make a purchase.
Investing with money borrowed from a bank.
The net rental revenue of the property after deducting any payments owed to the lender.
To evaluate; to seize or gather. To levy a tax, you have to look at a property and decide how much it should be taxed. To “levy an execution” means to legally take someone’s property to pay for something. Most of the time, sheriffs seize and take control of the personal property of a judgment debtor. Levying is not a judicial act; it is a ministerial one.
To levy or get access to a tax on a person or a piece of property.
In a double-entry accounting system, all amounts that are owed show up on the credit side. In a personal financial statement, “net worth” is the difference between “assets” and “liabilities.”
Being held accountable for what you did.
A broad phrase that refers to all sorts of debt and liabilities.
A claim or debt that is owing to someone.
Insurance coverage for a property that covers any claims arising from personal injury or damage to the property of others.
Latin means “book.” Most of the time, this word refers to the books at the county recorder’s office that have copies of all the documents that have been recorded about real estate in that county. A document is given a liber volume and page number when it is recorded (also called folio). Then, anyone who wants to look at this document can find an exact copy of it by looking up the right liber and page number.
The London Interbank Offering Rate is a short-term interest rate for loans among international banks located in London and is a typical gauge of interest rates for income producing property.
Privilege to access a licensee’s land in order to accomplish actions that would otherwise be deemed trespassing.
The right to use another person’s land for a defined and restricted purpose.
Permission or authority to perform a specific act on another’s land or property, usually on a nonexclusive basis. A license is a personal, revocable, and non-assignable right, although it is not considered an interest in the property itself, unlike an easement. A license rather than an easement is often considered when a right to use another person’s land is granted orally. Unless it has become irrevocable via estoppel, the landowner may cancel such a right at any moment. A license expires at the death of either partner and is canceled by the licensor’s sale of the land. A landowner who allows a buddy to enter his property for hunting reasons, for example, grants the friend a license to use the land. If an owner builds a rock wall across the boundary line, encroaching on the neighbor’s land, the owner may be required to pay the neighbor for a license to keep the rock wall in place. This arrangement should be formalized into a signed and recorded encroachment agreement that runs with the land.
Formal authorization from a constituted authority (such as a state real estate commission) to operate in a certain activity or business.
All states, the District of Columbia, and certain Canadian provinces have passed laws granting the states the ability to license and regulate real estate agents, salesmen, and appraisers. Certain details of the legislation differ from state to state, but the major requirements of each are nearly identical. The general goals of license laws are to (1) protect the public from dishonest or incompetent real estate practitioners, (2) regulate specific licensing standards and qualifications, and (3) elevate the real estate profession’s standards.
All states require licensing candidates to complete an exam designed to assess their real estate knowledge and competency in relation to federal and state-specific real estate legislation. Qualified individuals, as well as partnerships and organizations, are granted licenses or registration certificates. These licenses are legal permission to conduct a real estate brokerage firm in accordance with state legislation. To discover whether a license is required for actions such as appraising, mortgaging, auctioning, or exchanging real estate, each state’s law must be analyzed. Municipal governments’ attempts to assess local licensing fees are frequently preempted by state licensing.
Licenses are awarded for specific periods of time and must be renewed within those time frames. Each license is a personal right that expires upon the individual’s death or the dissolution of the partnership or corporation. While a license or registration certificate is in existence, each licensed person or entity’s activities are subject to the oversight of authorized state officials in accordance with state law. As a result, every licensed individual must be well-versed in the applicable state license laws. In most cases, violations of license law provisions result in the refusal, revocation, or suspension of a real estate license. A misdemeanor conviction for acting as a real estate broker or salesperson without a license is normally penalized by a fine and/or jail.
Certain people are exempt from license laws under state law. Owners dealing with their own property are normally exempt, as are trustees, executors, receivers, and others acting under court orders, public officials acting in the course of their duties, and, in some situations, attorneys.
Many states demand annual continuing education to renew or reactivate a license. Certified and licensed real estate appraisers are currently subject to state licensing rules.
The laws of a state that control real estate salespersons’ activity.
A person who possesses a current real estate or appraisal license. A real estate licensee can be an active or inactive salesperson or broker, as well as an individual, business, or partnership. Individuals can only be licensed as appraisers.
State legislation that allows anyone who satisfies certain standards to run a business or practice a profession.
A voluntary (as in the case of a mortgage) or involuntary (as in the case of a lien for unpaid property taxes) encumbrance against a property that serves as security for sums owing to the lien holder.
Claim against a property that permits the proceeds of a forced sale of the property to be used to pay off a debt.
A real estate interest that acts as security for a loan obligation. In the event of a default, the lien holder has the right to have the property auctioned to settle the obligation.
The right to keep property as security until the obligation secured by it is paid off. A mortgage is one example of a lien.
A debtor’s claim against a property.
A charge or claim placed on the property of another (lienee) as collateral for a debt or obligation by one person (lienor). A lien is always the result of a debt and can be created by the parties’ agreement (e.g., a mortgage) or by operation of law (e.g., a tax lien). A lien might be either generic or specialised. A general lien covers all of the lienee’s real and personal property. A unique lien solely affects one property, such as a mortgaged house. Statutory or equitable liens can also be voluntary or involuntary. A mechanic’s lien, for example, is an involuntary, statutory special lien, whereas a mortgage is a voluntary, equitable special lien. If, on the other hand, the mortgage lien was foreclosed and the proceeds from the foreclosure auction did not satisfy the amount, the resulting deficiency judgment, when recorded, would be a general lien on all of the debtor’s property. Each state’s statutes govern the lien procedure. Liens do not transfer title to the property; the debtor retains title until foreclosure. Unless a foreclosure suit is filed, certain statutory liens (mechanics’ liens and judgments) become unenforceable after a period of time from the date of genesis or recording.
The date of recordation is usually used to determine lien priority. As a result, it is critical to record the necessary document as soon as the lien is created. State property tax liens and assessments, on the other hand, take precedence over all other liens, including those previously recorded. As with mechanics’ liens, state law can vary the order of precedence. Because the lien is an encumbrance on the title, the lienor should execute and register a satisfaction of the lien (at the lienee’s expense) as soon as the lien is paid to remove this cloud on the title.
An encumbrance that imposes a financial obligation on a piece of property.
A court-ordered or state-authorized lien foreclosure sale involves the sale of property without the consent of the owner due to a debt that has resulted in a lien.
A document detailing the unpaid balance of a promissory note backed by a property lien, as well as the status of interest payments, maturity date, and any claims that may be brought. Also known as an offset statement.
A mortgage is seen as a lien rather than a transitory conveyance of title under legal theory.
Those states see a mortgage as nothing more than a security interest in the property being mortgaged, with the owner of the property keeping the title. The person who took out the mortgage has the right to all rents and profits from the property. The lien theory, also called the equitable theory of mortgages, says that the debt is the most important thing and that the mortgage is just security. It makes the person who took out the mortgage the owner of the equitable title and the person who took out the mortgage just the holder of a lien on the property as security for the debt. This is different from a title-theory state, where the legal title is actually given to the mortgagee and is only given back to the mortgager when the mortgage debt is paid off.
A life renter is given complete property rights for the rest of his or her life.
Any estate in real or personal property that is limited in duration to the owner’s or another designated person’s life. A life estate per autre vie is one in which the estate is measured by the lifetime of someone other than the owner. A life estate is not an estate of inheritance, while being defined as a freehold estate because it is a possessory estate of infinite existence. For example, Hai transfers his home to his son Quan while retaining a life estate for himself. Hai (the life tenant) has a life estate in the property, and Quan has a reversionary interest in it. When Hai dies, Quan inherits the fee simple property.
A life estate can be created by agreement of the parties (as with homestead, courtesy, or a wife’s dower rights), or it can be created by operation of law (as with homestead, courtesy, or a wife’s dower rights).
A life tenant
- She is entitled to ownership, ordinary uses, and profits of the land as if she were the fee owner;
- Obligated to keep the premises in a fair state of repair and clear of trash so that the realty can be returned to the grantor or remainderman in roughly the same condition in terms of its qualities and worth;
- Obligated to pay ordinary taxes, encumbrance interest (but not mortgage principal amortization), and a pro rata share of special assessments (together with the remainderman);
- Prohibited from acquiring any interest in the property that exceeds the measuring life; and
- There is no requirement to insure the premises for the benefit of future interest holders, who have independent, insurable interests and must seek their own insurance.
Life tenants may sell or encumber their interest subject to any deed limitations, and the interest is susceptible to execution sale if the life tenant has a money judgment against them. The transferee receives no more interest than the life renter had - that is, an estate that ends when the measuring life expires. As a result, selling or financing a life estate is complicated. As a result, the mortgagee of a life tenant’s interest would almost certainly need the life tenant to name the mortgagee the beneficiary of a term life insurance policy.
A life tenant deducts depreciation over the usable life of the property rather than over the tenant’s life expectancy for tax reasons. The remainder receives the deduction following the death of the life tenant.
When a taxpayer makes a gift of real property but retains a life estate, the entire value of the property is included in the estate of the deceased taxpayer for federal estate tax purposes.
The death of the person whose existence is the measuring life terminates a life estate.
Although no probate procedure is required to establish title in the remainderman (the person now entitled to the property), recording a death certificate to show the fact of death is good title practice.
The life estate is dissolved by merger if the life tenant obtains a fee simple title to the property. A surrender deed is used to combine a life estate with a reversion or residual interest.
A freehold interest in real estate that will terminate upon the owner’s death or the death of another person.
For the duration of the life or lifetimes of one or more individuals, a freehold estate is created.
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Individual who has complete property rights in a certain property for the rest of his or her life.
A person who owns a life estate.
A person who has the right to utilize property for the rest of his or her life or the life of another person.
A housing development designed to serve senior citizens with medical and skilled nursing care. Residents are offered a continuing care contract that includes independent living units for a monthly fee.
Intangible aspects of a community’s economy that contribute significantly to the residents’ sense of social and cultural belonging.
Population classification based on prospective consumer location (urban, suburban, rural, or small town), work (white or blue collar, retired), education (high school diploma versus college diploma), affluence and wealth, age, social status, and psychographics.
A provision in a junior loan instrument that allows the underlying mortgage or deed of trust (senior loan) to be replaced or refinanced as long as the amount of the new senior loan does not exceed the amount of the first lien outstanding at the time the junior loan was issued.
An opening in a window sash large enough to accommodate one pane of glass.
Owners have no natural right to light and air, and they have no recourse if a neighbor erects a construction that blocks their light and air. To avoid this risk, some adjacent property owners attempt to obtain a light and air easement over the neighbor’s property. An easement of this type should be granted in writing. For example, an owner with a lovely view of the mountains may request an easement of light and air over the neighbor’s property from the neighbor. If the easement was properly formed and recorded, neither the neighbor nor any successor would be able to construct a structure in this airspace. A light and air easement cannot be gained by prescription; that is, a person cannot claim to have acquired a prescriptive right to airspace just because he used the view for the prescriptive statutory time of, say, 20 years.
A zoning category for industrial use that includes primarily unobjectionable light manufacturing as contrasted to industries that create noise, air, or water disruptions, or pollution. Bakeries, dry cleaning, and food processing are examples of “clean” industries.
Exchanges of assets judged to be of similar kind under Internal Revenue Code Section 1031. Gains or losses on like-kind asset swaps must be delayed until the newly acquired (substitute) asset is disposed of. Transactions that are only partially like-kind may result in the recognition of complete or partial profits or losses. Also known as Section I 03 I exchanges or tax-free transactions.
A common way of delaying capital gains taxes that allows owners to swap their properties for another and avoid paying capital gains taxes at the time of the purchase under specific conditions.
A swap of like-kind property, as defined by the Internal Revenue Code, in which no gain in value is recognised until the property is transferred.
A federal word referring to the essence of real estate as opposed to its quantity or quality. Only like-kind property is eligible for a real estate exchange and the tax benefits that come with it.
Like-kind property is defined as any real property, whether improved or unimproved, held or to be held for investment or income purposes by the taxpayer, excluding dealer property and homes. The property must only qualify as like property to the party seeking the tax-deferred benefit of like-kind swaps. Personal dwellings are ineligible for exchange treatment as either leg of the transaction.
One property could be upgraded while the other is raw land, or one could be a shopping complex while the other is an apartment building. Both properties, however, must be owned by the same person. As a result, a fee simple interest cannot be exchanged for a leasehold interest. An IRS regulation, however, states that a leasehold interest of 30 years or longer is to be considered fee simple. The exchange of general partnership interests in partnerships with basically the same underlying assets has been upheld by the tax court. Current regulations require that the replacement property be a U.S. property if the swapped property is a U.S. property; however, exchange of foreign property for foreign property is permitted.
Property that is of the same type in a trade.
In the event of a furnace overheating, a safety mechanism will automatically shut it down. In addition, it has the ability to adjust blower cycles.
Time limit within which legal actions must be filed or else the action is barred.
A highway with access only at regular intervals, typically through ramps. This type of highway is intended to benefit through traffic while avoiding interference from adjoining traffic. A controlled access roadway is another name for it.
That unique class of common elements in a condominium complex that is reserved for the exclusive use of one or more residences. This includes allocated parking slots, storage units, and any common areas and facilities available to one or more, but not all, unit owners.
Any change to the condominium declaration that impacts the limited common elements requires the unanimous approval of all those who have reserved the usage. Any addition or modification to a limited common feature typically necessitates prior approval from the board of directors, which acts on behalf of the unit owners’ association.
The investor’s liability is restricted to the amount invested.
A hybrid form of ownership that combines the corporate advantages of limited liability with the tax advantages of a partnership.
A hybrid company entity that combines the qualities and benefits of limited partnerships and S corporations. An LLC, unlike a corporation, does not exist in perpetuity. The operating agreement, which is analogous to a corporation’s bylaws, is the primary governing document of an LLC.
Essentially, it’s a business form that combines the pass-through taxation of a partnership or sole proprietorship with the restricted liability of an LLC.
Investors who have no personal liability beyond their participation in a limited partnership.
A partnership in which one or more general partners and one or more limited partners share ownership. General partners are fully liable for the partnership’s obligations and have complete control over operations, whereas limited partners’ responsibility is limited to the amount of money contributed to the partnership or additional liability voluntarily undertaken.
In a partnership, one party (the general partner) undertakes limitless responsibility in exchange for authority over all material decision making. The responsibility of the limited partners is restricted to the amount of stock contributed to the company. Flow-through income and taxation benefit all parties involved; that is, the partnership is not taxed.
In this type of partnership, the limited partners’ personal liability is limited only to the amount of money they put in.
A partnership arrangement in which one person (referred to as the general partner) or a group of people organizes, runs, and is accountable for the whole joint effort. The other members of the partnership are essentially investors who have no role in the operation’s organization or direction. These passive investors, known as limited partners, receive a portion of the profits and reward the general partner for his work. Unlike a general partnership, in which each member is personally liable for the syndicate’s total losses (if any), limited partners stand to lose only the amount of their individual investments - usually nothing more. The general partner is thus entirely liable for any large-scale losses incurred by the investment. However, if a limited partner receives cash distributions from the partnership, either upon dissolution or during the investment period, and the partnership’s creditor obligations remain unsatisfied, the limited partner may be required to return such distributions in order to satisfy creditor claims.
The limited partnership has become popular in the syndication of real estate ventures because it allows investors with limited capital to participate in real estate projects that require significant capital and management expertise, limits their potential liability to their contribution, and allows “pass-through” of tax benefits of real property ownership.
The limited partnership’s organizer must ensure that the IRS does not recognize the partnership as an association taxable as a corporation (resulting in double taxation of income). An expert real estate tax attorney should carefully construct the limited partnership agreement to ensure that the partnership receives the proper tax status, in which all earnings and losses pass through the partnership and are taxed solely at the individual level. Thus, partnership status combines the direct tax benefits of an instant write-off of losses, if any, with the removal of a second corporate tax.
The Uniform Limited Partnership Act has been adopted by several states to govern the establishment and operation of limited partnerships. A certificate identifying the names and investments of each partnership participant must be filed with the business registration division or county recorder’s office, according to the act. A limited partnership does not become operational until a certificate is filed. Because a limited partner’s interest is considered personal property, her death does not result in the dissolution of the partnership. Furthermore, judgments and federal tax liens against a partner have no effect on partnership property, but they may affect the partner’s claim to earnings.
The passive loss requirements apply to limited partnerships under the Tax Reform Act of 1986. Losses from limited partnerships can only be used to offset income from other “passive investments,” not to conceal income from wage, interest, and dividends, as previously allowed by law. Passive investments are defined as any trade or business in which the taxpayer does not participate materially, as well as any rental activity in which the taxpayer participates materially. A limited partner’s interest is immediately classified as passive.
Because the sale of a limited partnership interest involves the sale of a security, it is subject to state and federal securities laws and must be registered with the SEC and the appropriate state securities authorities unless exempt.
A partnership in which the contributions and liabilities of some partners are restricted.
A partnership arrangement that allows a group of investors to pool their resources and participate in one or more assets. The general partner (GP) is required to have unlimited responsibility, whereas the other partners (LPs) are only required to have limited liability. The investment vehicle is free of taxes.
A limited power of attorney for a specific task, such as the transfer of a certain tract of property. In real estate transactions, most lenders and title insurance companies favor the use of limited or special powers of attorney over broad powers of attorney.
A salesperson with a valid real estate license who connects prospective buyer or seller leads to a brokerage firm in exchange for a referral fee upon closing. The lead is passed on to a full-time agent, and the referral agent no longer represents the client.
A broker who provides fewer services to the consumer than a typical real estate broker would. Limited services could involve explaining the usual offer form, producing adverts, assisting a buyer in obtaining financing, and following up in escrow. They may or may not entail advertising, displaying, or hosting open houses.
A deed that includes warranties for the duration of the grantor’s ownership.
A line of credit is a versatile transactional mortgage that allows you to access your cash via credit card, check, or EFTPOS. A line of credit is an excellent alternative for homeowners who want to use the equity in their existing property for investment or other uses such as repairs, vacations, or automobile purchases.
The most money a bank will grant to one of its more dependable and creditworthy customers without requiring a formal loan application. The borrower is thus assured of prompt loan service without the delay of a credit evaluation prior to fund distribution. A customer’s credit line is subject to periodic evaluations of the customer’s credit history and overall banking relationship.
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Stakes placed along the metes and bounds boundary lines of a plot of land.
A right that prohibits the use of land inside the easement area in any way that obstructs the view.
Real Estate Glossary L [Part 4]