Barney Fletcher Real Estate Study Guide 2023, Exams of Nursing

Download Barney Fletcher Real Estate Study Guide 2023 and more Exams Nursing in PDF only on Docsity! Barney Fletcher Real Estate Study Guide 2023 Bundle of Rights - ✔ Right to possess, control within legal limits, enjoy, use in any legal manner, exclude others from entering, using, encumbering or disposing of property by sale, will or other transfer. Real Estate - ✔ ️Physical land and permanent, man-made improvements on the land. Ex. Buildings. Real Property - ✔ ️Rights of ownership that extends from the center of the Earth upwards to the sky. Surface Rights - ✔ ️Right to control, occupy, and use surface area of a parcel, improvements, and growing of crops. Crops are personal property, the right to grow crops is real property. Air Rights - ✔ ️Right to control, occupy, and use airspace above the parcel, not unlimited. Laws prohibit owner from polluting air, and aircrafts can go over land if they don't bother the owner's rights. Mineral Rights (Subsurface) - ✔ ️Right to explore, drill, or dig below the surface for minerals and water, may be sold or leased and passed with transfer unless otherwise specified in the deed. Improvements - ✔ ️Additions to enhance property value, a relationship must exist between a parcel and character of the improvement. An over, under, or misplaced improvement detracts from the combined value of a lot and buildings. Ex.Grading, ponds, buildings, fences, etc. Fixtures - ✔ ️Once personal property but affixed to be real property. An owner sells his property, he takes personal property but real property passes to the new owner. Items difficult to classify are subject to dispute, to settle the courts determine intention. An object installed with intention to permanently improve, then becomes a fixture and passes unless otherwise stated in agreement. Method of Attachment - ✔ ️Ex.Freestanding fridge is personal property, but a built-in is a fixture. Constructive Annexation (Adaptability) - ✔ ️Items made for building features are fixtures. Ex.Keys Agreement - ✔ ️Written agreement between parties concerning certain items should be in a provision of the listing agreement, the agreement of sale and to avoid arguments or court cases later. Fructus Naturales - ✔ ️Permanent plantings that are real property. Relationship of the Parties - ✔ ️If a renter replaces a fixture with his own, it would remain the personal property of the renter but upon leaving, he would need to reset the landlord's fixture. Water Rights - ✔ ️Rights that are appurtenant over water occurring naturally (ponds, lakes, streams, oceans and seas) is real property. Landowners property that abuts or adjacent to water have the right to use it, but don't own it. Ex. riparian, littoral, prior appropriation. Navigable Waters - ✔ ️Water for commerce or transportation. Federal government determines water's use, by whom, and what conditions. They dredge, build dams, and take land through eminent domain. The U.S. Army Corps of Engineers legally enforces this. Ex.Waterways and marked channels. Littoral Land - ✔ ️Property borders on the shore of a lake, sea or ocean affected by tidal currents. State laws establish landowner's right to use and enjoy water and the shoreline at high tide mark. Riparian Land - ✔ ️Land bordering a moving watercourse like a stream or river. An owner enjoys the right to use water for irrigation, swimming, boating and fishing if it doesn't harm land upstream, downstream, alter the flow or contaminate. If the land borders a non-navigable waterway, the landowner owns the land beneath the water to the middle of the waterway. Prior Appropriation - ✔ ️Doctrine of water allocation, first in time, first in right theory. A Colorado court ruled that a non-riparian user who applied part of the water from a stream to a beneficial use had superior rights over a later riparian landowner who tried to claim a right to use all of the water. It separates water rights from land ownership, water rights can be sold or mortgaged and retains its original appropriation date. Each water right has yearly quantity, and water allotment is taken by date seniority. During droughts junior appropriation dates get reduced or no water amounts. Appurtenances - ✔ ️Rights, privileges, and improvements belong to, pass with property transfer but not physical part. Deed describes it granted, states,"together with all appurtenances." Ex.Parking Immobility - ✔ ️Land can't move except in accretion or erosion. Surroundings affect value. Indestructibility - ✔ ️Land can't be destroyed, but value can by changing conditions. Non-homogeneity / Heterogeneity - ✔ ️Property and parcels of land differ in size, shape, location, and appearance. Improvements to the land may be similar, but never the same. Accretion - ✔ ️Action of water causing land to build up on a parcel and subtract from another. Special Purpose Property - ✔ ️Churches, hospitals, nursing homes, colleges, cemeteries, and other properties that must comply with governmental zoning and use regulations. Public Property - ✔ ️Real estate acquired by the municipal, county, state and federal governments for a variety of public purposes. Ex. Parks, schools, libraries, offices, post offices, and highways. Legal Description - ✔ ️Description of a property essential to every real estate transaction. When a parcel is bought or sold it must be distinctly described by a legal description that's an explicit and singular identification of that property, recognized and acceptable in a court of law, and must contain the legal description to be enforceable. Deed, Assignment of Lease, or Mortgage - ✔ ️Legal description of the property should be complete. Sales Contract - ✔ ️Description need only be sufficient to identify the property such as an address. Raw Land - ✔ ️Complete legal description should always be used. Monuments Method - ✔ ️Least accurate method used in combination with metes and bounds method that uses physical land features such as marked trees, large rocks, lakes/streams to determine the boundaries of a parcel to legally describe it Metes and Bounds - ✔ ️Describes property by specifying its shape and dimensions used for unsubdivided, unimproved real estate, and irregularly shaped parcels. It starts at a well-marked point of beginning (POB) and establishes the boundaries of the parcel by courses and metes (length in inches, feet, yards, or miles) and bounds (directions based on landmarks, monuments, and angles) and returns to the POB. A legal description that doesn't return to the POB is defective. A surveyor uses both precision instruments and natural/artificial bounds to measure the exact angles and distances in order to establish the boundaries of a parcel. Surveyors denote direction in a metes and bounds survey by the use of compass angles. Government Survey (Geodetic or Rectangular) - ✔ ️In 1785 the federal government adopted this land description to facilitate the government sale of large tracts of land due to rapid western expansion in the United States. Employs the use of imaginary lines running north and south (meridians) and east and west (parallels). These lines are six miles apart and form a checkerboard pattern as they intersect, forming a township. This method works well for identifying large parcels, but not for describing small lots. A surveyor using the government survey method follows a standard procedure. From the prime meridian and the baseline, other lines are laid out at 24- mile intervals known as checks. The checks are further divided by lines every six miles, resulting in squares that are called townships. The east-west lines are township lines and the north-south lines are range lines. Townships are located by their distance north or south of the baseline and east or west of prime meridian. Townships are further divided into 36 numbered sections. Th Check - ✔ ️24-mile square formed by intersecting meridians and base lines and contains 16 townships (4 townships square). Standard Parallels - ✔ ️East-west lines, also known as base lines. Guide Meridians - ✔ ️North-south lines. Township - ✔ ️6 miles square, 36 square miles. Township Lines - ✔ ️East-west lines in a township. Range lines - ✔ ️North-south lines in a township. Section - ✔ ️Each square mile within a township (640 acres). There are 36 sections within a township. A section is the smallest subdivision surveyed by government surveyors. Survey Monument - ✔ ️A marker located at each section corner. Lot, Block, and Subdivision (Recorded Plat/Short Form Legal Description) - ✔ ️States that don't use the government survey method generally use the lot, block, and subdivision method. The size and location of each block and lot is shown on a plat, which is then recorded in the public recorder's, clerk's, or land records office of the county or city where the land is located. Each recorded plat is given a book and page reference number, and all map books are available for public inspection. If a parcel of real property is part of a recorded plat, the legal description need only include the lot and block number, tract name, map book reference, county, and state. Ex. Lot 3, Block A, Buckingham Subdivision, as recorded on page 16 of Plat Book 68 of the Public Records of Buckingham, VA. Subdivisions may be further subdivided or altered after the recordation of the initial plat. For instance, lots may be further subdivided or even combined but requires the making and recordation of new plats, partial plats reflecting the changes to the initial plat. When this occurs, t Lot - ✔ ️Individual parcel of land intended to be conveyed in its entirety. Block - ✔ ️Group of contiguous lots separated by roads. Plat - ✔ ️A map showing the various lots in a parcel of land. Vertical Land Description - ✔ ️When air rights or subsurface rights need to be described. In selling or leasing subsurface drilling or mineral rights the datum is often the surface of the parcel. Air lots are used to describe units in multi-story condominium projects. Both the parcel of land beneath the air lot, and the elevation of the air lot are described. Datum - ✔ ️The point, line, or surface from which a vertical height or depth is measured. Reference to Other Recorded Documents - ✔ ️Land can be legally described by referring to another publicly recorded document such as a deed or mortgage, if that document contains a full legal description of the parcel in question. Ex. All the land described in the deed from Flint to Moseley recorded in Book 198, page 412, County of Buckingham, Commonwealth of Virginia. Land Descriptions Not in Use - ✔ ️Street addresses and place names are informal references. They may be used in rental agreements, but are inadequate for a document that should be recorded in the land records. Contour (topographical) maps can be helpful to builders and subdividers by showing the shape, slope of the surface of the land and determining grading costs to level the sites, costs to build roads and determining drainage requirements; not used for legal descriptions. Assessor's Parcel Numbers - ✔ ️Assigned by the county or city tax assessor to parcels of real estate that are then recorded in map books and are part of the public records of many counties and cities, may be useful to real estate brokers and appraisers. 1 Mile - ✔ ️5,280 feet 1 Acre - ✔ ️208.708 feet x 208.708 feet or 43,560 square feet 1 Section - ✔ ️640 acres Title (evidence of ownership) - ✔ ️Right to or ownership of land. Title held individually, jointly, in trust, or in a corporation or partnership form.("Show me your title/deed"). Legal Title - ✔ ️Right of ownership, possession, use, occupancy, and enjoyment of a parcel of real property held by an owner. Equitable Title - ✔ ️Interest in a piece of estate held by a buyer under a sales contract, or contract for deed, to obtain absolute ownership of the property at a future date. Legal title is still being held by the seller in his name, but the buyer has the equitable right to obtain ownership upon performance when the terms and conditions of the contract are satisfied. Equitable interest in real estate or equitable title can be sold, assigned, mortgaged, and passed to a buyer's heirs upon his death. Bare Legal Title (Naked Title) - ✔ ️Title that lacks the usual rights and privileges associated with ownership. Ex. When a homeowner borrows money on his home, the lender may require that a trustee be appointed to hold title to the home until the debt is repaid. The trustee holds bare or naked title to the property, the homeowner still has the right of possession, use, occupancy, and enjoyment as long as he continues to repay the debt. Ownership - ✔ ️Right of possession, occupancy, use, enjoyment, and disposition of real property. Notice - ✔ ️Putting the world "on record" as to the ownership of real property, is a basic real estate principle. requirements. Lenders require a current survey before they will lend money on a piece of property. Owner's Policy - ✔ ️Covers the buyer to protect against forged documents, undisclosed heirs, misfiled documents, confusion arising from similar names, mental incompetence. Lender's Policy - ✔ ️Insures the lender against the same risks as an owner's policy plus any circumstance that would invalidate the lender's lien against the property. It only covers the lender up to the amount of outstanding mortgage debt. Color of Title - ✔ ️If title appears to be good and valid, but a defect renders it invalid, a person may obtain a good title under color of title. Ex. Jones buys a house from Smith in good faith but is unaware that Smith held the title under a forged deed. Jones records his deed and takes possession of the house. Smith's forged deed, Jones doesn't have clear title to the property. Jones can get legal title by occupying the property for a prescribed period of time by state law. If afterwards there has been no legal challenge to his ownership rights, Jones may apply to the court for clear title by means of adverse possession under color of title. Tacking - ✔ ️Under color of title, an adverse occupant may tack on his period of possession to that of a prior adverse occupant. A current adverse occupant can sell his claim to another adverse occupant until enough years accumulate to present a color of title claim in court. Ex. Jones occupies the property he bought from Smith for three years and then sells it to Garrison who occupies the property for another five years. Garrison can then take Jones' three years and "tack" to his five, giving him a total of eight. The original adverse occupant is not delivering a good, marketable title to the next adverse occupant; an adverse occupant does not acquire clear title to the property, rather he buys a claim to possible, future clear title. The Torrens System - ✔ ️Legal system provides registration of land to verify ownership. An owner petitions the state court to register his property. After a title search/public hearing, court issues a decree, if in order, will issue a Torrens registered certificate of title. (Don't confuse this with a certificate of title, or opinion of title, issued by a private title examiner.) This process is one way to establish a clear title and is similar to a quiet title suit. Once property is Torrens registered title can't pass, and encumbrances can't be enforced unless the conveyance or lien document is registered and is noted on the registered certificate of title. Allodial System - ✔ ️Free and full ownership rights in land by individuals, and is the basis of real property law in the U.S. This contrasts with the feudal system of ownership where all land is owned by a king or sovereign. Even under the allodial system of ownership the government has four powers that limit the rights of real property owners. Eminent Domain - ✔ ️Right of federal, state and local governments to assume ownership of private property (not exempt from this exercise) for a necessary public use, with just compensation paid to the owner. Quasi-public organizations, such as utility companies and railroads, are also permitted by state law to take land needed for utility lines, pipes, and tracks. State acquires land for streets, parks, public buildings, right-of-ways, etc. Taxation - ✔ ️State and local governments' right to tax property to raise general revenue. State and local governments also have the power to seize property if the taxes are not paid. The U.S. Constitution prohibits the federal government from taxing land. Tax liens are automatically placed on property when the tax is assessed. It is removed when the tax is paid. If taxes are not paid, the lien gives the government the right to force the sale of the property in order to collect the unpaid taxes. Escheat - ✔ ️The power that the state government retains over the title of real property owners to obtain title to property when an individual dies intestate (leaving no will) and leaves no known heirs, or when property is abandoned. Through this process the property escheats (reverts) to the state. Escheat solves the problem of property becoming ownerless. Encumbrances - ✔ ️Restrict the use of property, reduce its value, or both. Encumbrances should be noted on the deed following the property description. There are two general types of encumbrances: those affecting title, and those affecting the property physically. Rights to the use and conveyance of property may be limited (encumbrances) by individuals, as opposed to government action. Any interest held by any person other than the owner creates an encumbrance. Encumbrances Affecting Title - ✔ ️Liens are a form of private limitations on title, arise from a debt and impede on a clear title. Liens including mortgage, mechanics, and judgments liens. Deed Restrictions (Covenants and Conditions) - ✔ ️Private agreements contained in a deed, lease, or will restricting the use and occupancy of real property. The most common deed restrictions involve the size, price, design, and setback lines of improvements. Buyers of property subject to deed restrictions are said to receive a fee simple title subject to deed restrictions. Enforcement of deed restrictions is the responsibility of all owners of property affected by the restrictive covenants. Affected property owners may seek an injunction (a court order) to correct violations. Encroachments - ✔ ️Unauthorized infringements on owner's rights due to physical intrusion. It trespasses if it encroaches on land, and a nuisance if it violates a neighbor's airspace. Only an up-to-date survey will reveal this. It won't appear in any other document such as a deed or earlier survey that was completed before the encroachment occurred. Because of this, most title insurance policies don't warrant against encroachments. For this reason, lenders and buyers usually require a current land survey prior to transaction closing. Estate - ✔ ️The degree, quantity, nature, and extent of ownership interest that a person has in real property. A person who holds title to property has an estate, which is his interest in the property. Freehold Estate - ✔ ️Estate in land that is of indeterminable duration, not limited by a specific time frame. A freehold estate can be set up so that it exists forever, or it can be based upon a particular person's lifetime. Ex. A landowner who wants his waterfront property preserved in its natural condition could deed his land forever to an environmental organization such as the Nature Conservancy, with the deed requiring that the land be preserved. In most cases, however, freehold estates are based upon the lifetime of one or another person (the present owner or occupant, or a third party). Fee Simple Estate (Fee, Fee Simple, Fee Simple Absolute) - ✔ ️Highest and most complete type of ownership of land that is possible. A fee simple estate exists for an indefinite duration, and it can be sold, given away, and passed to heirs. Even though it is the least limited estate possible, it is still subject to the government and private limitations on title. Persons holding freehold estates are said to be seized of the land. Seisin - ✔ ️Possession of a freehold estate. Qualified Fee Estate (Fee Simple Defeasible, Defeasible Fee) - ✔ ️Fee simple estate that has certain qualifications or limits. The owner holds fee simple title subject to certain specified conditions. There are two types of defeasible (defeatable) fee estates: Fee simple determinable and fee simple subject to a condition subsequent. Though there are differences between the two, both are qualified fee estates and ownership is subject to conditions. Any transaction involving a defeasible fee should be referred to an attorney. Defeasible - ✔ ️Capable of being voided, annulled, or defeated. Life Estate - ✔ ️Fee simple estate that is conveyed to a person for the duration of someone's life. The duration of the estate can be tied to the life of the life tenant (the person holding the life estate) or to the life of a third party. The holder of a life estate has full rights, including the right to use, mortgage, and sell the property. Following a basic principle of property law that no one may transfer more than the interest that they possess, a life estate owner may not obligate the property beyond his ownership period. Ex. Harry wants to buy a hunting cabin from Sam. Sam doesn't have fee simple title, but does have a life estate interest in the hunting cabin (the duration of the estate is based upon his own lifetime). Harry decides that since Sam is twenty-six years old and appears to be in good health, it is worth the risk. He buys Sam's interest in the cabin. Sam dies unexpectedly two years later. Upon Sam's death, Harry no longer has any ownership interest in the hunting cabin. The huntin Pur Autre Vie - ✔ ️For another's life. Waste - ✔ ️Improper use or abuse of property by one in possession who holds less than fee ownership (such as a tenant, life tenant, mortgagor, or vendee). Remainder Estate - ✔ ️Future interest in real estate created at the same time and by the same instrument as another estate. The remainder estate arises automatically upon the termination of the prior estate. Remainderman - ✔ ️Person designated to take title upon the termination of the prior estate. Ex. Sam (a nice guy) has allowed his 80-year-old Uncle Bert to live rent free in an old log cabin that was given to Brown by his father. Brown doesn't really want Tenancy by the Entireties (Estate by the Entireties) - ✔ ️Exists only between a husband and wife. It is derived from the common law premise that husband and wife are one person. However, with the trend in modern law giving women increased rights separate from their husbands, this method of property ownership is recognized in fewer and fewer states. It is presently recognized in less than one-third of the states. For example, it is recognized in Virginia, but not in Georgia. Tenancy by the entireties is a special joint tenancy that places title to property in the marital unit. Each spouse owns the entire estate. The property ownership is an individual entirety. This type of ownership is often used to escape probate; if one spouse dies, the survivor automatically, by law, succeeds to sole ownership. Also, creditors of one spouse may not force the sale of property where ownership is held by the entireties. This is why mortgagees require that both husband and wife sign the mortgage documents. A tenancy by the entirety can be terminated by mutual Tenancy-in-Common (Estate in Common) - ✔ ️Most common form of co-ownership, and assumed unless another form of tenancy is clearly specified. Co-tenants hold title to property in fee simple, in their own names. They may have equal or unequal ownership interests, but each co-tenant has a unity of possession which is one of the four unities required for a tenancy-in-common. Tenants-in-common have undivided interest in the whole property and no co-tenant can exclude another; neither can one co-tenant claim ownership of a specific part of the property. Even if they own unequal shares in a piece of property, their percentage of ownership is a percentage of the whole. For example, Jones and Smith buy a house and two acres but Jones puts up 3/4 of the money so he owns 3/4 of the house and 3/4 of the two acres, while Smith owns 1/4 of the house and 1/4 of the two acres. Both have equal rights to possession of the entire property, but if the house sells, Jones will get 3/4 of the profits (or losses), while Smith will get 1/4. A tenancy- Partnership - ✔ ️Association of two or more persons who carry on a business for profit as co-owners. Partnerships are often created to hold title to real estate in the name of the partnership. There are two types of partnership tenancies: general and limited partnerships. General Partnership - ✔ ️Doesn't need to be in writing, though it is always advisable to get agreements in writing when possible. In a general partnership all owners are general partners and, as such, each is individually and totally liable for debts and obligations of the partnership. Limited Partnership - ✔ ️A certificate of partnership must be filed in writing to the office of the Secretary of State (or similar office) in the state's capital. Local jurisdictions may require that a certificate of limited partnership be recorded in the land records. The partnership is composed of one or more general partners, and one or more limited partners. General partners control the operation of the business and are individually and totally liable for debts and obligations. Limited partners must make a definite, declared investment of money or property, but not services of any kind. Limited partners are liable only to the extent of their investment but if they take part of the control of the business, they are automatically liable as a general partner. Tenancy in Trust - ✔ ️Fee simple title can be held in a trust and conveyed by a trustor to a trustee. Trustor - ✔ ️Grantor of Trust. Trustee(Individual or Corporation) - ✔ ️Holds title and manages it for the benefit of another, called a beneficiary. The trustee is a fiduciary and has a duty to protect, preserve, and enhance the value of the property. Beneficiary - ✔ ️Receives the benefits and the proceeds of the trust. Trust - ✔ ️Established by will, trust agreement or deed in trust. The trustor and beneficiary are the same person, as when a public office holder places certain assets in a blind trust to escape conflict of interest charges. If a buyer wants confidentiality, he can place title in a land trust. The name of the land trust will appear on the title, and the owner's name will not appear. Syndicate - ✔ ️Association of two or more individuals or companies who join together for a common investment. Such as a limited or general partnership, or a corporation or a joint venture (which is essentially a tenancy in common arrangement but is used for a single business purpose.) They raise money from investors to achieve the purpose. When raising money for investment purposes, a securities license may be required by federal and state laws(blue sky laws). Liens - ✔ ️Encumbrance on title and is the legal right that a creditor has over a debtor's real and/or personal property that serves as security for repayment of a debt. A lien always arises from a debt and can be created by agreement of the parties (as with a mortgage), or by operation of law (as with a tax lien or mechanic's lien). A lien does not transfer title to property, and does not affect the right of the owner to convey his interest to another. However, the lien, once properly established, attaches to the property. If a lien is not released prior to sale, the buyer buys the property subject to all existing liens and other encumbrances. Commonly thought of in negative terms, since they affect title to private property ownership. They are encumbrances or clouds on title, limitations on the rights of ownership. However, there is a positive aspect to liens as well. Liens make it possible for individuals and businesses to borrow large sums of money. There are not many people who can borrow $5 The Priority of a Lien - ✔ ️Determined by the date of recordation and important for the creditor to record appropriate doc as soon as the lien is created. Property tax liens and assessments take priority over other liens regardless of their recording date. Most states have passed laws that reorder the priority of certain liens such as mechanic's liens. Once recorded in the public record, a lien creates a cloud on the title. Satisfaction of Lien - ✔ ️The owner should make sure that the creditor executes and records a satisfaction of lien when the lien has been paid to remove the cloud on title. Enforcement of Lien - ✔ ️Creditor takes legal action and requests a court of proper jurisdiction to order the property sale. When a court orders that an encumbered property be sold to satisfy the unpaid debts, liens paid from proceeds in order of priority and enforced by court order. Ex. A court orders a piece of property sold to satisfy a mechanic's lien, which was recorded on May 18, 1991, subject to unpaid taxes and the first mortgage. It's sold in a sheriff's sale, the taxes are paid to the county. The outstanding balance of the mortgage loan is paid to the lender. The mechanic's lien of May 18th is paid, and after court costs and costs from the sale are paid, $500 remains. If there are no other court recognized liens or charges, the former owner will receive the $500. General Lien - ✔ ️Directed against individual debtor and attaches to all of his property, both personal and real. General liens result from court judgments, IRS taxes, estate and inheritance taxes. A specific (or special) lien is attached to one parcel of real estate. Specific liens don't attach to people. Therefore, if a buyer purchases a piece of property that has a specific lien filed against it, the new buyer doesn'tt become personally responsible for payment of the debt. However, if a court decides to order the sale of the property to repay the previously filed lien, the new owner could lose his newly purchased piece of property. Specific liens include mortgage liens, property tax liens, special assessment liens, utility liens, and mechanic's liens. Voluntary Lien - ✔ ️Entered into by agreement of the parties. Thus, a mortgage given to secure a promissory note is a voluntary lien. Involuntary Lien - ✔ ️Created by operation of law. Involuntary liens may either be statutory (legislated), or equitable (arising out of English common law). Statutory Lien - ✔ ️Established by or results from laws passed by legislature. The rights of the claimant are controlled by statutes of the state where property is located. Claimants take steps to enforce their claims within a period of time. Property taxes, special assessments, mechanics' and vendors' liens (when they are created by statute), are statutory liens. An equitable lien results from (1) a private, written contract that shows an intention to pledge property as security for a debt, or (2) a court decision based on English common law and a sense of "fairness." Property Tax Liens - ✔ ️Specific, statutory, involuntary liens filed against property at the beginning of each tax year (January 1). Some states the tax is payable 1-2 months after assessment, while others allow more time and provide installment payments. The effective date is when the taxes are assessed. They're superior liens, taking priority over other liens regardless of recorded date. Special Assessment Liens - ✔ ️Specific, statutory, usually involuntary liens filed against real properties that will benefit from a proposed public improvement. It would be voluntary if all affected property owners agreed to pay, and petitioned the local government for a public improvement. Ex. Sidewalks, curbs, sewers, drainage and recreational facilities. Those affected by the improvement are to pay the special lien, since they benefit from an enhanced value. Special assessments differ from property taxes in that property taxes are levied for the support of general functions of Commercial Easements in Gross - ✔ ️Property rights held by a business entity. Telephone, electric, and gas company right-of-ways are commercial easements in gross and attach to the utility company (utility easement), not to property so there's no dominant estate. The servient estate is the property that must give the utility company a right-of-way and the holder the right to sell, assign, or will the easement. Express Grant Easement - ✔ ️Created in writing by the landowner over his own land. This is most often done in the deed which also conveys title to the land. If the express grant is not contained in a deed, but is created in a separate instrument, it should contain all the formal elements of a deed, since it is conveying an interest in land. It should carefully describe the easement, the land subject to it, and should address such matters as repairs and maintenance. Furthermore, it should be signed, acknowledged, and recorded. Express Reservation - ✔ ️Created by express reservation when a landowner sells a portion of his property to another, but reserves an easement over the sold land by placing a reservation in the deed. The retained property with the right of use is the dominant estate, and the sold portion is the servient estate. Easement of Necessity - ✔ ️Created by operation of law (not in writing to be enforced against the servient estate) rather than by a formal written agreement. An example of easement by necessity is when a property is landlocked. The law provides that all owners should have the right of ingress to and egress from their property. If property is locked in by land on all sides the owner must be afforded an easement to a road through an adjoining parcel (usually through the land owned by the same person who sold or gave away the landlocked parcel). Implication - ✔ ️Arises by implication from the acts or conduct of the parties. Ex. a person who has acquired mineral rights on a property also acquires an implied easement to enter the property for the purpose of removing the minerals. Prescriptive Easement - ✔ ️Right acquired by an adverse user. This type of easement is only acquired by the adverse, hostile, exclusive, open, uninterrupted and continued use of another's property for a certain prescribed length of time (anywhere from seven to twenty years depending on the state). Do not confuse this type of easement with adverse possession. Although they are based on the same legal principle, adverse possession involves an ownership interest, while an easement by prescription involves the right of use only, gained by adverse means. Agreement - ✔ ️Created by a written agreement between the parties. An example is a party wall agreement whereby two adjacent owners agree to share a common wall. Typically, the wall will be located on the property line, it would provide structural support to both structures, and both owners would share equally in maintenance and repair costs. Such an agreement should be in writing, signed, acknowledged, and recorded. That wall would then become an appurtenance that would remain when either property is sold. Condemnation - ✔ ️Legal proceeding by which the government obtains ownership of private property. Just compensation is either agreed upon by negotiations or decided in a court of law. An easement by operation of law through the government's power of eminent domain in condemnation proceedings that are necessary for public purposes. As with all condemnation proceedings where private land is taken for public purposes, landowners must be fairly compensated for any loss in property value. Easements are terminated when: - ✔ ️Necessity for the easement no longer exists. Dominant and servient estates are merged. Easement owner (dominant estate) releases the servient estate. Dominant estate is abandoned. Servient estate is destroyed. Court terminates it (as with a quiet title suit). There are several mechanisms by which governments can control land use and development such as: - ✔ ️1. Building codes. 2. City and County Master Plans. 3. Zoning Laws, Ordinances, and Zoning Boards. Police Power - ✔ ️Right of government to adopt and enforce laws, ordinances, codes, and regulations to protect, promote, and support the order, health, safety, morals, and general welfare of the public. The United States Constitution reserves police power to the individual states. Individual states, in turn, may delegate certain powers to counties and municipalities. There are restraints on police powers. Controls arising from the use of police power must be uniform in nature, nondiscriminatory, and enacted to promote the general welfare. When they meet these requirements, such controls are not considered a "taking" of private land, and the government is therefore not required to compensate the property owner. Governments have traditionally exercised land-use control through city planning, zoning, building codes, subdivision regulations, and codes to regulate building safety (such as fire codes). But in recent years controls have expanded to include noise abatement, attempts to prevent air and water pol Building Codes - ✔ ️Building codes are established to protect the public health and safety and are a valid exercise of the state's police power. They are usually designed to establish minimum standards of construction in such areas as plumbing, electrical wiring, load limits, building materials, etc. In some cases, these codes are based on national standards, however certain areas with special problems have developed very specialized building codes (such as areas prone to earthquakes or frequent flooding). Building codes are enforced by the issuance of building permits in addition to the requirement for periodic inspections at certain phases of construction. A final inspection is required before a certificate of occupancy (CO) is issued. City and County Master Plans - ✔ ️Master or comprehensive plan has been adopted by most cities and many counties to guide and control the long-term use and development of land within their jurisdiction. Its purpose is to direct present and future growth in a logical fashion with an overall concept in mind, having defined values and stated goals. Such a plan must be flexible enough to deal with change. Zoning Laws, Ordinances, and Zoning Appeals Boards - ✔ ️Zoning is the systematic division of a city or county by legislative regulation (ordinances) into various districts or zones. The word "zoning" also refers to the implementation of ordinances related to use of land and buildings. The enforcement of zoning laws is usually accomplished by requiring that a building permit be obtained prior to the building of any structure. If the proposed structure does not conform to permitted zoning and local building codes, the building permit is not issued. Zoning ordinances regulate such things as use of land and buildings, structural and architectural designs, types of improvements permitted, height and bulk of buildings, density, lot sizes, and setbacks. (Setbacks specify how close improvements may be built to the street or property lines.) Zoning ordinances mean different things to different people. For city planners zoning ordinances are the primary tools for implementing the master plan. For the average homeowner they protect property values. Fo 1. The basic zoning categories, characterized according to use, are: 2. Zoning authorities take many types of actions within the parameters of zoning laws and ordinances: - ✔ ️1. Residential Commercial Industrial Agricultural Public 2. Granting variances. Issuing Permits of Nonconforming Use. Spot Zoning. Downzoning. Bulk Zoning. Buffer Zoning. Conditional Use Zoning Variance - ✔ ️The zoning board may grant this if an owner can prove that local zoning created an undue hardship because of unique circumstances, and shows that granting the variance will not greatly alter the character of the affected locality. Ex. an owner of a one-and-a-half-acre acre lot in a neighborhood zoned for two-acre homesites would need to apply for a variance before building. Legal Nonconforming Use - ✔ ️One that's inconsistent with, and doesn't conform to, the current zoning ordinance. It's one that existed prior to current zoning (grandfathering) and permitted to continue after a zoning ordinance prohibiting it has been established for the area. In most cases, if a particular use is legally nonconforming and the improvements are destroyed (such as by fire), they can't be rebuilt unless a variance is obtained. Spot Zoning - ✔ ️Exists when the zoning for a relatively small area differs significantly from the zoning of adjoining areas. In most states spot zoning is considered arbitrary and is illegal. Downzoning - ✔ ️Involves a change in zoning from a higher, more active category to a lower, less active (less profitable) category. Ex. A residential area is rezoned because of conservation concerns and the building of homes is no longer permitted. Sometimes deemed an exercise of police power, and not a taking of land through eminent domain, thus no compensation is owed the affected landowner. However, if the downzoning is so drastic that the property becomes essentially unusable, Condominium (Air Lots) - ✔ ️Composed of single units in a multi-unit real estate development. A unit is actually a cubicle of airspace that lies between the interior surfaces of the unit walls, and between the floor and the ceiling. In a condominium, an individual or other entity (such as a corporation) holds title to individual units in fee simple. Each individual unit is a statutory entity unto itself, and each unit has a separate and distinct legal description. Each condominium owner has exclusive ownership of his individual air lot (or unit) and therefore can mortgage, sell, will, or gift that lot separately and independently of all other lots. Units are assessed separately and taxed separately. The assessment for each unit is based on the value of the unit combined with the value of that unit's proportionate share of the common areas. If a condominium unit is the subject of a judgment that results in foreclosure, the foreclosure only affects the subject unit. Common Areas - ✔ ️Outside the air lots, or individual units, are the condominium's common areas. Common areas include the land on which the building is situated, the shell of the building itself, each unit's walls, hallways, stairways, elevators, lobby, garages, swimming pools, tennis courts, etc and are owned by individual unit owners as tenants-in-common, which means that all of the unit owners enjoy the unity of possession of these common elements, and they are all responsible for the maintenance and care of the common areas. Some condominiums have limited common areas that are used by some units, to the exclusion of other units. Common Wall - ✔ ️A wall separating two living units in a condo. These are considered to be part of the common elements. This is different from a party wall where ownership of a dividing wall is shared by two adjoining property or unit owners. Horizontal Property Acts(Condominium Acts) - ✔ ️Laws governing the development, marketing, sale, ownership, and management of horizontal slices of airspace. Horizontal property and condo acts make several requirements of developers/owners including management/documentation requirements. It's a term that distinguishes condominium ownership from the more traditional method of vertical ownership of property that includes the surface of the earth, the ground below, and the airspace above it (in a "V" shape). Condominium Instruments - ✔ ️Condominiums are created by the recordation of condominium instruments that include, but are not necessarily limited to, the declaration (or master deed), plats and plans, and by-laws providing for self- government by a unit owners' association. This association is often called a homeowners' association and is abbreviated as HOA. The declaration must include the project name, every city and county in which the project is located, legal description by metes and bounds, and a detailed description and location of every proposed unit. Units and improvements not completed must be labeled "NOT YET COMPLETED" and specific dates indicating when they are to be completed must be included. In addition, the documents must establish a Condominium Association and specify each unit owner's membership and voting rights in the Association and their liabilities for common expenses. The declaration must generally be recorded along with a copy of the by-laws governing the operation of the project. The decl Public Offering Statement - ✔ ️In addition to registration of condominium instruments, every condominium project must file a public offering statement that discloses the characteristics of the condominium and the units offered and all unusual and material circumstances or features affecting the condominium. A public offering statement usually must contain the following notifications: - ✔ ️ Condo will be governed by a unit owners' association in which each unit owner will have a vote. Certain decisions will be made by the executive body (board of directors). Operating expenses will be paid by unit owners. Owners will be periodically assessed on the basis of an operating budget. Unit owners' association may impose fines and may file a lien against any owner's unit if assessments are not paid. Declarants must pay assessments on unsold units. Provisions regarding resale of units, termination of the condominium, and amendments to condominium documents. Matters concerning the managing agent's performance of the routine operations of the unit owners' association. Public Grant - ✔ ️Transfer of title from the government to an individual. A special deed known as a patent deed is used for a public grant. Involuntary Alienation - ✔ ️May occur through descent and distribution, adverse possession, unintentional dedication of land for public use, accession, estoppel, foreclosure, eminent domain, and escheat. Descent and Distribution - ✔ ️Acquisition of an estate by inheritance when an heir succeeds to the property by operation of law. This is known as title by descent. Intestate Succession(Title by Descent) - ✔ ️If a person dies leaving no will he is said to have died intestate. When this happens, property is distributed to heirs according to state laws of descent. Adverse Possession - ✔ ️Acquisition of title to property owned by someone else by means of open, notorious, hostile, and continuous possession for a statutory period of time. When the true owner sleeps on his rights and doesn't eject an open/hostile trespasser, the owner will lose title to the trespasser. If an adverse possessor can prove all statutory requirements, then he may gain marketable title by applying to the courts for a judicial decree "quieting" the title against all other claimants. He may record the decree, thereby extinguishing the previous owner's rights to title. The theory behind it is that land is scarce, and should be put to productive use. If an owner shows no interest in his land for an extended period of time, and another puts it to productive use, then that other person deserves to own the land. Landowners, particularly those who own large tracts of undeveloped land, should periodically inspect their land for adverse users. Unintentional Dedication of Land for Public Use - ✔ ️Many owners who allow public access to, or through, their private property will erect barriers at regular intervals (once a year) just to evidence the public right to use the property is merely a license and not a right or interest in the property itself. Some owners have established permanent plaques that read "Private Property - Permission to Use is Revocable." Usually "No Trespassing" signs are insufficient to prevent a claim of public donation. Title by Accession - ✔ ️Acquisition of additional land/improvements under certain unusual circumstances. This can happen in a variety of ways. Ex A builds shed on B's property with no written provision for removal. B may acquire title to the shed by accession. Could happen if the court determined there's no agreed provision to remove the shed at a future date, then original intention was for the shed to remain on B's land forever. Acts of nature: Action of stream/river takes soil from one property (erosion) and adds it to another (accretion). Soil deposits are known as alluvion or alluvium. A loses land, and the B gains. He gains title to this alluvion by accession. While erosion is slow, avulsion is sudden removal of large amounts of soil by an act of nature such as an earthquake or mudslide. Title by Estoppel (Deed by Estoppel) - ✔ ️Legal principle where a person may obtain title to property over apparent owner, because they've failed to put everyone on notice to his rights in the property. Ex. Buyer fails to take possession of property and to record deeds. Original seller fraudulently sells the same property to a second buyer who has no knowledge of the prior sale. The second buyer records and/or takes possession. The court may recognize the second buyer as the true owner, in which case the first buyer will be estopped (stopped) from belatedly proving his title. Foreclosure - ✔ ️Due to unpaid debts (mortgage loans, property taxes and other liens) also results in the transfer of ownership of real property without the owner's consent. Eminent Domain - ✔ ️The government power of eminent domain that permits governments and quasi-public corporations and utility companies to take private land for public use through a condemnation suit results in involuntary alienation of real property. When land escheats to the state, it is considered a form of involuntary alienation. Intestate and Testate Succession - ✔ ️When an individual dies leaving a will, the will generally determines how ownership of real property passes to heirs or devisees. The heirs or devisees that take title pursuant to a will do so by virtue of testate succession, the term "testate" indicating the existence of a valid will. If a property owner dies without a will (or with a defective will), and there is no survivorship provision in the chain of title, he is said to have died intestate. Although the laws governing intestate succession vary from state to state, every state has passed a set of laws dealing with the descent and distribution of real and personal property belonging to those who die without a will. The laws of the state in which the property is located determine which person(s) will receive the property and what percentage each inherits. Bequest (Legacy) - ✔ ️Personal property conveyed by will. A gift of personal property by will. Probate - ✔ ️Whether a person dies with or without a will, the estate is subject to probate. Probate is the formal, legal process by which a court reviews the distribution of a deceased person's estate. In the case of a will, the court determines the validity deeds, etc. When found in a warranty deed, general or special, covenants are promises made by the grantor, and binding on his heirs and assigns, that warrant that the title is of a certain character. Furthermore, the grantor warrants that if the title should be found to be not of the promised character, then the grantor, his heirs and assigns, will compensate the grantee for damages suffered. In some deeds, the covenants of title are clearly stated. However, in other deeds the covenants are implied by the use of certain language, such as "convey and warrant," "warrant generally," or "warrant specially." Covenant of Seisin - ✔ ️Assurance (promise) by the grantor to the grantee that the grantor has the estate of title in the quantity and quality that the grantor claims to convey. This covenant would be broken, or in breach, if good title was actually held by a third party, or if the grantor did not hold the full extent of title that he claimed to be conveying. Ex. Sam Brown's sister Emily has been making poor, old Uncle Bert's life a nightmare. Uncle Bert, who has a life estate, decides that he would much rather live out his last days in a nice, quiet nursing home where all he has to do is play cards with the guys and make it to the cafeteria on time. So, Uncle Bert advertises in an out-of-state newspaper and finds a weary, city-dweller named Trusting Sucker whose analyst has told him to buy a nice, quiet cabin in the woods. When T. Sucker buys the cabin from old Uncle Bert, he pays cash, does not hire a lawyer to do a title search, and receives a deed from Uncle Bert that warrants that Uncle Bert is conveying Covenant of Quiet Enjoyment - ✔ ️Arises from the grantor's assurance that the grantee shall enjoy possession of the property in peace and without disturbance by hostile claimants. The covenant of quiet enjoyment is breached only by an eviction by reason of a title superior to that of the grantee. Using Uncle Bert again, this particular covenant would technically not be breached in a legal sense until poor, old Uncle Bert dies, and mean, old sister Emily moves to evict T. Sucker (even though his life-estate possession probably will be neither quiet nor enjoyable). Covenant Against Encumbrances - ✔ ️Grantor's guarantee that there are no encumbrances against the property except those specifically disclosed. Encumbrances should be listed in the deed after the property description. A covenant against encumbrances would not be breached or broken, however, by failing to list in the deed an open, visible encumbrance such as a power line or a drainage ditch. But if an encumbrance is not visible, and is not listed in the deed, the grantor will be liable for the grantee's expenses to correct the problem, or liable for damages. Covenant of Warranty - ✔ ️Forever assures the grantee of possession and continuance of the title transferred to the grantee, "the grantee will forever warrant the title to said premises " This covenant also promises the grantee that the grantor will bear the expense of defending the title against all third person claims. Covenant of Further Assurance - ✔ ️Grantor's promise to do such further acts as might be required in the future to guarantee or perfect the title of the grantee. This covenant is often used to force a grantor to execute a correction or quit claim deed if either one is needed to straighten out some error in the original deed. This covenant is breached (or broken) when the grantor refuses to take required action or pay proper expenses or charges. Covenant Against Grantor's Acts - ✔ ️Used in special warranty deeds where the grantor's a fiduciary such as an executor, trustee, or guardian (representative with control of property). The grantor promises he has done nothing to injure or adversely affect the title and warrants a deed against their own acts, but not against others and assumes no liability. Premises Clause (Granting Clause) - ✔ ️Contains the words of transfer, states parties involved, the extent of ownership, recites the consideration, and legally describes the property. Habendum Clause - ✔ ️The "to have and to hold clause" that follows the granting clause and indicates the type of estate or interest the deed is conveying, such as a fee simple estate, a life estate, etc. If there is any discrepancy between the extent of ownership described in the premises clause and the habendum clause, then the premises clause (granting clause) prevails. Testimonium Clause - ✔ ️Containing the statement "In witness whereof the parties to these present have hereunto set their hands and seals..." is the conclusion of a deed. General Warranty Deed (Warranty Deed) - ✔ ️Transfer where the grantor fully warrants or guarantees clear title to the property being sold and offers the best protection to the grantee. It's the most common type of deed used in real estate title transfers. Title protection is guaranteed (warranted) by either the expressed or implied covenants of seisin, covenant of quiet enjoyment, covenant against encumbrances, covenant of warranty forever, and covenant of further assurance. Special Warranty Deed - ✔ ️Transfer by which the grantor guarantees (warrants) the title he's conveying only against defects arising during the tenure of his ownership guardianship, and not against previous defects in title. This type of deed is identified with the language "by, through, or under the grantor, but not otherwise." It's used to convey property for non-payment of taxes (tax deed), or where any trustee conveys property (as with a sheriff's sale to satisfy a judgment). The trustee warrants title against his own actions, but not against the actions of the predecessors. Bargain and Sale Deed - ✔ ️Conveyance which the grantor conveys property but doesn't agree to warrant or defend the title. Grantors' actions imply that transferred title is valid, thereby implying the warranty of seisin. Trustees, fiduciaries, and officers of the court sometimes use a bargain and sale deed to convey property. Quitclaim Deed - ✔ ️Conveyance by which grantor transfers and releases any interest he might have in the property. The grantor doesn't agree to warrant or defend the quality of title, and doesn't promise that he has any interest or rights to convey at all. He merely agrees that if he does have an interest he will relinquish it. A quitclaim deed only transfers whatever right, title, or interest the grantor had in the land at the time the deed was executed. It doesn't cover any title or interest that the grantor might acquire after signing the quitclaim deed and used to clear up clouds on title. Correction Deed - ✔ ️Any type of deed used to correct a mistake in a prior deed. Minor mistake, Ex. Improper legal description, the misspelling of a name, or some other minor mistake of fact. Deed of Trust(Trust Deed) - ✔ ️Convey title to a third party trustee to be held as security for a debt. Deed in Trust - ✔ ️Conveys real property to a trustee to create a land trust. The trustee has power to sell, mortgage, and subdivide the property, but only under the direction of the beneficiary. A land trust agreement can be used to shield the identity of the property owner or owners. Guardian's Deed - ✔ ️Executed on behalf of a person who lacks legal capacity to convey title, such as a minor or any person judged incompetent by the courts. Deed in Foreclosure(Referee's or Commissioner's Deed) - ✔ ️When foreclosure is undertaken by a private mortgagee or a tax deed or sheriff's deed, when property is sold to pay taxes. This is a deed used to convey real property in a court-ordered foreclosure sale. This type of deed is equivalent to a special warranty deed. Deed in Partition - ✔ ️Issued by a court when property is sold at a partition sale for the purpose of dividing a joint tenancy or tenancy-in-common ownership. Patent Deed - ✔ ️Deed used to convey title to real estate from the United States Government to an individual. Contract - ✔ ️Legally enforceable agreement between competent parties who agree to perform, or refrain from performing, certain acts for consideration and refers to the exact meeting of the minds (the agreement) of the parties involved. Legally Competent Parties - ✔ ️There must be two or more legally competent parties to a contract. A person cannot deed property to himself, but he can deed property to himself and another person. In addition, both parties must have the legal capacity to enter into a binding agreement. Some persons have no capacity to contract, and their contracts are void. Others have limited capacity, and their contracts are voidable. In general, most adults, including those who are illiterate, have unlimited capacity to enter into a contract that is legally binding. A person with limited capacity to contract may enter into a valid contract; however, the legally binding aspect is limited to certain circumstances. Minors are persons under the legal age of majority according to state law (in most states individuals under 18 years of age), and they have limited capacity to contract. They are considered legal infants, not completely competent legal parties. A minor may enter into a valid contract; however, the contract is not enforceab Clearly Identified Property Description - ✔ ️Real estate must be described so that all parties can clearly identify the subject property. A sales contract frequently describes courts may not enforce oral sales contracts even if they are valid. All leases for more than one year must also be in writing and signed to be enforced in a court of law. However, oral leases for a period of one year or less, if valid, are enforceable in a court of law. The Parol Evidence Rule would prevent oral agreements from overriding written contracts. Statutes of Limitations - ✔ ️State laws that prescribe time limits on lawsuits seeking enforcement of contracts must be started within a specified period of time and are to protect people against stale claims. After the time limit expires, the claim is outlawed and may not be enforced by a court. Death of Parties - ✔ ️Sales contracts survives death of the parties. The death of either party terminates a personal service contract such as a listing and an offer that hasn't been accepted. Because offers aren't yet contracts. When parties have performed their obligations under a contract it's discharged, all conditions performed and contract terminated. Full performance is the way to discharge a contract, however there are other ways -that is, the agreement terminated. Performance; Abandonment by one party or both parties; Lapse of time, whether specified, or a reasonable time; Revocation by a party legally entitled to revoke; Breach by one party, giving the other party the right to terminate; and Rescission by a purchaser if exercised during the legally allowed time frame. If one party abandons their rights under the contract, and the abandonment is clear, the other party may be relieved of responsibility to perform. If the time for performing has expired or a party entitled to revoke the contract does Breach of Contract - ✔ ️Occurs when there is a violation of any of the terms or conditions of a contract without legal excuse. The injured party can seek action for money damages or an action for specific performance. In order to recover damages, the injured party must prove that he or she suffered pecuniary loss. In an action for specific performance, the court is asked to compel the breaching party to perform the contract. Rescission - ✔ ️Legal remedy that terminates the contract and returns the parties to their original positions. It is not necessary to prove that money damages were suffered in order to rescind a contract. Under some laws, purchasers are given a rescission period during which time they may rescind a contract for any reason whatsoever. It is usually from 3 to 10 days and is referred to as a cooling off period. The Federal Truth-in-Lending Law guarantees a rescission period as do most state time-share and condominium laws. A contract also may be rescinded by mutual agreement of the parties. Contracts are voluntary agreements that conform in character to certain laws governing their creation. Express Contract - ✔ ️Terms and conditions are mentioned and agreed to in writing, orally, or both. Implied Contract - ✔ ️Terms haven't been expressly stated, but they can be inferred from the nature of the transaction or the conduct of the parties. Unilateral Contract - ✔ ️When one party obligates to perform without receiving a promise of performance from the other party. The promise or obligation of the first party is technically only a unilateral offer. There is no real contract (meeting of the minds) until the second party decides to perform. For example, an open listing contract in which the seller agrees to pay a commission to the first broker who brings a ready, willing, and able buyer. The contract is not created by the seller's promise to pay (a unilateral offer), but rather by the broker's performance (which he is not required to do). When the requested act is performed, the unilateral offer and the performed act together give rise to a contract. Bilateral Contract - ✔ ️When both parties make promises of performance. Examples of bilateral contracts are (1) a real estate sales contract where the buyer promises to buy and the seller promises to sell; and (2) certain listing contracts signed by both seller and broker, where the seller promises to pay, and the broker also promises to do certain things such as advertise the property, use his best effort to sell the property, etc. Executory Contract - ✔ ️When one or both parties has not yet performed. An example would be a sales contract where a seller has pledged to sell, a buyer pledged to buy, but neither has yet performed. Executed Contact - ✔ ️When there is nothing left to be done by either party. For example, a real estate sales contract becomes executed at closing, upon delivery and acceptance of the deed. Written Covenant - ✔ ️Unconditional promise(s) intended as binding in real estate documents and an agreement or a pledge between two or more parties. Covenants are indicated by words like promise, agree, undertake, and pledge. The breach of a written covenant in a contract would entitle the injured party to collect damages. Condition - ✔ ️Something established, or agreed upon as a prerequisite to the doing or taking effect of something else. Ex. buyer may buy property contingent on obtaining financing (loan with amount and interest rate by specified date). Indicated by words such as if, when, unless, provided. If a condition fails to occur, parties aren't entitled to damages because they're limitations not obligations. Private Covenants, Conditions, and Restrictions(CCRs) - ✔ ️Restrictive covenants written into property contracts enhance property values since they insure homogeneity. Residential restrictive covenants cover lot size, architecture or building materials that can be used, and whether clothes lines are allowed. Residential subdivisions restrict types of vehicles(motorhomes or trailered boats)allowed parked within neighbors view. Private restrictions found in deed or mortgage restrictions, and used in single parcels and multi-unit developments. Illegal restrictive covenants (violate fair housing laws) are void and have no legal force. Buyers who discover illegal covenants may choose to buy ignoring this, or choose to insist on removal prior to purchase. They're not within their right to void the contract, but can hold the transfer of title until it's removed. Questions of Time - ✔ ️If specific times haven't been stated for performance, the law will imply that a reasonable time was meant. Reasonable is what may be fairly allowed and required considering the nature of the act to be performed. When parties specify a definite time and further agree that time is of the essence, the parties will be held exactly to the time period specified. Novation and Assignment - ✔ ️Substitution of a new legal obligation for an old one, such as the substitution of a new contract, the substitution of a new debtor, or the substitution of a new creditor. It would constitute novation if a mortgage lender allowed the original borrower to remove his name from the mortgage and note documents and substitute the name of a buyer. The new buyer becomes liable for the mortgage debt. A new contract, or new persons, are involved in novation (even if the other terms/conditions are the same), novation requires the essentials of a valid contract and must be accompanied by new consideration. Assignment - ✔ ️Transfer of right, title, or interest of an assignor to assignee. Most contracts are assignable(some aren't assignable), unless it's restricted or prohibited in the contract. Assignments may not take place when the obligations and duties involved are personal. Ex. a listing contract that creates an agency is personal in nature, and therefore may not be assigned. In an assignment the assignee becomes primarily liable, and the assignor remains secondarily liable. This differs from novation where the first party is completely relieved of any liability under the contract. Since assignments don't involve substitution, new consideration is not required. Power of Attorney - ✔ ️A power of attorney is a legal, written document in which one person appoints another to be his attorney-in-fact, and authorizes him to act on his behalf (for example, to buy or sell land, or to sign a lease). An attorney-in-fact may buy or sell a piece of real property for another without a real estate license, provided the attorney-in-fact is not actually engaged in a brokerage business and purposefully trying to evade the state's license law. A general power of attorney authorizes the attorney-in-fact to carry out a wide range of activities, whereas a specific or limited power of attorney would be limited to certain acts (usually one single act). The death of either party automatically revokes the power of attorney since it is a personal authorization. Thus, when an attorney-in-fact is conveying property on behalf of a grantor, proof is usually required that the grantor is alive at the time of the signing. Remember that the power of attorney is the document; the attorney-in-fact is Estoppel - ✔ ️Legal doctrine that stops, or prevents, a person from asserting certain rights, or stating certain facts, if such action is judged to be inconsistent with, or contrary to, a previous position. To give a simplified example: you tell a person yes and that person relies on, and acts upon your yes answer. Later you decide to change your mind and tell that same person no. That person appeals to the court. The court may rule that you are estopped from saying no. The court forces you to stick with your original position. Estoppel Certificate(certificate of no defense, estoppel letter) - ✔ ️Legal document that clarifies the exact amount of debt owed by one party to another party and/or the situation between the parties as of a certain, specified date. Such a document is used by lenders (e.g., when a loan is sold), to establish the mortgage amount owed as of a certain date, and by landlords and tenants to establish amounts owed (or not owed) as of a certain date. If properly drawn up and executed, all parties to the certificate are thereafter estopped from claiming any position to the contrary. Obedience - ✔ ️Legal instructions of the client must be followed without exception. Alternate instructions may be proposed by the licensee, but the final instructions of the client must be followed, as long as it is legal. A licensee who isn't able to comply with the instructions must withdraw.Ex. Broker Fred is in the process of listing Seller Steve's home when Seller Steve mentions that his neighbors are very careful about who moves into their area. Seller Steve goes on to mention that even though it may be a violation of the law, he does not want his home shown to any minority families. Since this is an illegal instruction, Broker Fred cannot comply with this request and must inform the seller that his request is in violation of state and federal law. Disclosure - ✔ ️All facts, rumors and other information that might affect the client's decision must be disclosed to the client. Any arrangements concerning the sharing of compensation, financial conditions of the other party to the transaction, and sales of comparable properties also must be disclosed to the client. Confidentiality - ✔ ️Any information given to the licensee by the client must be kept confidential if the client could suffer potential harm by disclosing this information. An exception to this would be the required disclosure of material defects in property even though the licensee represents the seller. For example, Broker Larry lists Ben and Stacy Kline's home and learns that they are selling since they are getting a divorce. The Klines tell Broker Larry to do anything he can to get their property sold, but they need as much as possible from the sale. Broker Larry needs to explain to the Klines that disclosing the fact that they are getting a divorce may encourage a quick sale but also might encourage low offers from buyers. Agreement from the Klines should be obtained, preferably in writing, whether their impending divorce should be disclosed to sub agents and potential buyers. This duty does not require a licensee representing the seller to withhold any material facts about the property or to misrepre Reasonable Care and Due Diligence - ✔ ️Reasonable care must be taken to stay informed about anything that might affect the client's decision. Licensees are expected to be more knowledgeable than the average person but are not expected to have the knowledge of other professionals such as lawyers, engineers, or accountants. Licensees should advise clients to seek the advice of such professionals whenever necessary. For example, Salesperson Jim works for Broker Pat and has been very successful in residential sales. One of Salesperson Jim's previous clients wants to sell his office building and asks Jim if he can handle it. Whether Salesperson Jim handles this transaction or not depends on a number of factors; Jim should realize that different skill and knowledge would be required in handling the sale of commercial property rather than residential property. If Salesperson Jim fails to use the special knowledge and skill expected of a licensee qualified to handle commercial property, this agency duty would be breached. Accounting - ✔ ️All money and property held by the licensee for the client must be protected and accounted for by the licensee. This would include any documents such as deeds, title policies, abstracts, or mortgages given to the licensee by the client. All money held by the licensee must be held in accordance with applicable rules relating to escrow or trust accounts. This would include deposits when a licensee is purchasing property for his own account. Duties of Clients to Agents - ✔ ️Even as the real estate agent has many duties and responsibilities to his client, the relationship is not totally one-sided. The client also has certain obligations to the agent. These include being available to consult with the agent, giving appropriate and complete information, and compensating and indemnifying the agent. Availability - ✔ ️Since the agent has limited authority, the client needs to be available to make decisions as needs arise. A licensee cannot act without instructions from the client, and the client's instructions may change due to market conditions. Informed - ✔ ️Any information related to the licensee's employment should be given to the licensee by the client. If the client is the seller, any information about the property should be given to the licensee. If the client is the buyer, information about the buyer's needs and financial requirements should be given to the licensee. Compensation - ✔ ️Any compensation referenced in the employment contract would be due the licensee after completing the object of employment. If the client is the seller, compensation usually is earned when a ready, willing, and able buyer offers to purchase the property on terms acceptable to the seller. When the buyer is the client, compensation would be earned when the buyer purchases an acceptable property. Indemnification - ✔ ️Under the principle of indemnification, the client should compensate the licensee if actions of the client cause financial harm to the licensee. Agent's Duty to Customers - ✔ ️Although brokers owe agency duties to clients, they also owe general duties of fairness and honesty to all parties in a transaction. Brokers and their agents (salespeople) must never make misrepresentations or false promises to third parties (customers). Licensees may not misrepresent material facts that they know to be untrue, or should have known to be untrue. For example, Broker Jones asks Seller Sam if his basement leaks and Seller Sam replies that it has never leaked, always been dry as a bone. Jones relays this information to Buyer Bart who has allergies and cannot tolerate a leaky, damp basement. It is the middle of a very dry summer and the basement does seem nice and dry. Buyer Bart buys the house and moves in. A month later the rains start and the basement floods regularly. Bart's allergic reactions are so bad that he is forced to move out of the house. Bart sues Jones. The court rules that, as an expert, Broker Jones should have known, or should have discovered for himself, Expressed - ✔ ️An agency relationship may be expressed between the parties with contract terms clearly stated, orally or in writing. Although listing agreements may be oral, a written listing signed by both parties is clearly preferable. Implied - ✔ ️Agency relationships also may be implied by actions or statements of the parties. If two people act as if an agency relationship exists then the chances are, if called upon to do so, a court will rule that such a relationship does exist even though there is no formal agreement to that effect. Ratification - ✔ ️Agency relationships may arise by ratification. To ratify means to approve, sanction, or make valid. For example: a broker performs a service for a buyer; it is an unauthorized service but the buyer does not discourage the broker and later shows approval; this buyer might find himself owing the broker a commission, since a court might decide that an agency relationship was established by ratification. Estoppel - ✔ ️Agency relationships can also be established by estoppel (recall that estoppel means "stopped"). For example, A does something (or says something) that leads B to believe that C is A's agent and is working on A's behalf. If B relies on this information, then A has created an ostensible agency (one that appears to exist), and may become liable for the acts of his agent, C. That is, A may be estopped (prevented) from later trying to deny the agency relationship he created by virtue of his actions. Termination of Agency - ✔ ️Because agency representation is a personal service employment contract it may be terminated by either party at any time. However, if the agency is terminated before the stated expiration date there could be claims for money damages. An agency relationship may be terminated by: - ✔ ️death or incapacity of either party; destruction or condemnation of the property; expiration of the agency; mutual agreement; renunciation by the agent/licensee (possible lawsuits); revocation by the principal/client (possible lawsuits); by operation of law (such as bankruptcy of the principal); and by completion of the agency (performance). Dual Agency - ✔ ️Broker who represents both buyer and seller in transaction and owes agency duties to both. It's a difficult situation since buyer and seller have opposing interests and in competition with each other. Though the dual agent obtains the required consents, the agent must be careful to act as a dual agent, not favoring either side. Escrow agents are dual agents. This agency can work when there is written, informed consent by all parties to the transaction, problems arise when a broker unintentionally creates an implied dual agency by careless words or actions and lack of proper disclosures. If a broker fails to disclose to all parties that he is a dual agent he risks his right to a commission and jeopardizes the entire transaction. If either the buyer or the seller can prove that a broker acted improperly as an undisclosed dual agent, they may be justified in rescinding the contract. Brokers who are representing sellers often spend several months with customers (buyers) trying to find the In-House Sales - ✔ ️Brokerage firms sometimes have transactions that are called in- house sales. Occurs when salesperson works for the firm representing the seller and another salesperson represents the buyer. Both the seller's and buyer's listing is in the name of the broker who is faced with becoming a dual agent. Designated Agency - ✔ ️Some states allow designated agency where the broker could appoint one salesperson to represent seller and another to represent buyer. This arrangement must be disclosed/consented by both, in most states not dual agency. Each separate email violation is subject to penalties of up to $16,000. Main requirements: - ✔ ️Don't use misleading or false header information. Don't use deceptive subject lines. Identify the message as an ad. Tell recipients where you're located. Tell recipients how to opt-out of receiving future emails. Honor opt-out requests promptly. Monitor what others are doing on your behalf. The National Do Not Call Registry - ✔ ️Applies to any plan, program, or campaign to sell goods or services through interstate phone calls. Telemarketers and sellers are required to search the registry at least once every 31 days and remove from their call list all consumers who have registered their phone numbers with the service. Any consumer who receives a telemarketing call despite being on the registry can file a complaint with the FTC. Violators can be fined up to $16,000 per incidence. The law allows a call to be placed to a former client for up to 18 months after the last transaction. An agent whose listing has expired may call the client for up to 18 months after expiration. This law doesn't limit calls by political organizations, charities, or telephone surveyors. Independent Contractor - ✔ ️One hired to do a job with little or no supervision as to how the work is to be accomplished. Independent contractors pay their own liability insurance and pay their own social security and income tax. Employee - ✔ ️One who works under the direct supervision of an employer. Employers direct employees as to office hours, they establish the tasks the employee must do, and usually set up procedures as to how the tasks are to be accomplished. Employers are liable for the actions of their employees within the scope of their employment. Employers must carry liability insurance, withhold social security and income tax from wages, and pay unemployment compensation tax. Most real estate licensing authorities hold the principal broker responsible for the actions of the employed licensees with respect to their real estate activities. However, many real estate firms prefer to treat their salespeople as independent contractors for tax purposes. Most salespeople receive 1099 IRS forms that state the amount of commission they have received. There are no regular salaries paid, and no withholding done. The IRS investigates real estate firms to make sure they are complying with regulations established by the U.S. T All real estate licensees who operate as independent contractors must comply with the following requirements: - ✔ ️Be licensed as a real estate agent; Have a written contract specifying that the licensee will not be treated as an employee (licensees may not receive anything that might be considered an employee benefit, and cannot have fixed office hours); and Be paid for services on the basis of sales production rather than the number of hours worked. A Listing Contract with a Seller - ✔ ️Broker's employment contract as an agent to handle a real estate matter for a seller/client. A listing contract is a personal service contract and therefore may not be assigned. It is an agreement between a client(s) and his agent and should not be shown to customers. Parties to a listing contract are the property owner(s) and the principal broker (not the salesperson). All persons having an interest in the property must be identified and should sign the listing. The brokerage firm and the licensee taking the listing should all be identified. The licensee taking the listing must give a copy of the listing to all parties who have signed it at the time of signing. Listing agents are obligated to present all offers received for the property to the seller as soon as possible. Elements of a typical listing contract include: - ✔ ️Date of contract Names and addresses of the parties Description of the property (in some states this must be the legal description, in others an address will suffice) Information about the property Selling price and terms Commission agreement and protection clause Required disclosures of agency relationships Notification of disclosures required of the seller concerning the property Broker's authority to place a "For Sale" sign on the property and advertise the property Broker as Agent - ✔ ️Empowered to act for and in the name of his client within the scope of his authority. Listing contracts usually give the broker the right to show the property, place a "for sale" sign, advertise the property, quote price and terms, and seek to bring a prospect into agreement with the client. The unauthorized acts of a broker are not binding upon the client. For example, Buyer A is a real hot prospect and willing to buy at the seller's stated price and terms. However, he hates the color of the house and wants the seller to repaint it. The broker says, "of course my seller will repaint, no problem." The buyer takes the broker at his word, and signs and hands over the stated down payment. Seller accepts. There is no written mention of repainting in the contract. There's a good chance this broker will spend his commission repainting this house. Though a broker may not assign his agency contract to another, he may delegate the finding of a buyer (or tenant) to his sales staff. The listing a Competitive Market Analysis(CMA) - ✔ ️Licensees advise sellers by comparing the seller's property to similar properties that have sold recently. Isn't a formal appraisal but it does give the seller a good idea of the proper market value of his property. If such comparables are not available, or if the licensee feels that the seller's property is special and unique, then the licensee should advise the seller to have the property professionally appraised. Listing Protection Clause - ✔ ️States that the broker is owed a commission for a specified time period after expiration of the listing if the broker can prove he was the procuring cause of the sale. To establish procuring cause the broker must establish that the seller met or made contact with the buyer originally through the broker. To protect sellers from the possible liability of owing two full commissions, these clauses usually stipulate that they are not enforceable if the seller relists with another broker. Open Listing Contract - ✔ ️Oral or written listing agreement given to any number of brokers. The owner is obligated only to the successful broker for a commission. The broker who earns the commission is said to be the procuring cause of the sale. The owner may sell the property himself and not owe a commission. This is an oral or written, unilateral, executory, personal service contract (not assignable) that does not have to have a definite expiration date. Exclusive Listing Contract (Exclusive Agency) - ✔ Written listing for real property whereby the seller/client agrees to list the property with a single broker (exclusive agent), and pay that broker a commission if a licensee sells the property, but the owner reserves the right to sell the property himself and not pay a commission. This is a written, bilateral, executory, personal service contract, that is not assignable and that must be for a specified period of time and have a definite expiration date. Exclusive Right to Sell - ✔ ️Contract is a written listing whereby the seller/client agrees to list the property with a single broker (exclusive agent), and also agrees to pay the broker his commission even if the owner sells the property. This is a written, bilateral, executory, personal service contract, that is not assignable and that must be for a specified period of time and have a definite expiration date. Listing agreements may be terminated in the following manners: - ✔ ️Abandonment by the broker, involving the broker's failure to act; Breach by one party, giving the other party the right to terminate; Lapse of either specified or reasonable time; Performance by the broker; Mutual agreement; Revocation by client; Death, insanity, or bankruptcy of either the client or the agent; and Foreclosure resulting in change of ownership. We should note that the death, insanity or bankruptcy of the salesperson who took the listing would not terminate the listing, as the listing contract is between the broker and the client, not the salesperson and the client. The client always has the power to revoke a listing contract, but may not have the right to do so. If an owner revokes a listing and the property sells within the time-frame and according to the terms of the listing, the owner may still be liable for the broker's commission. Net Listing - ✔ ️Agreement whereby the seller/client agrees to receive a set amount for the sale of his house. The broker is free to sell the house for as much as he can get and take all monies above the owner's set amount. Net listings are illegal in most states. Net listings include net sales agreements as well as net lease agreements. Lease example: An owner tells his real estate agent that he wants $600 a month for the rental of an apartment he owns, and agrees to let the licensee rent it for whatever he can get, with the licensee taking everything over $600. Multiple Listing Service (MLS) - ✔ ️Organization made up of many brokers who wish to exchange listing information. The seller lists his home with one broker who assumes primary agency responsibility. The listing agent then places the listing on the MLS with the permission of the seller. Most MLSs require that member brokers place all of their listings with the service, unless a seller refuses permission. Multiple listing services are undergoing many changes. Not long ago a listing broker, by placing his listing on the service, automatically offered all members the chance to assist in the sale as subagents of the seller. There was a presumption of subagency. If a member broker said nothing upon initial contact it would be assumed by all that Installment Sales Contract (Agreement for Deed, Land Contract, Contract for Deed and Conditional Sales Contract) - ✔ ️With a contract for sale the purchase price is paid in full at closing and title is transferred at closing. An installment sales contract, or land contract, a contract for deed is an agreement between a buyer(vendee)/seller(vendor) in which the payment of all/portion of the selling price is deferred. The purchase price is paid in installments over the period of the contract, with a balance due at maturity. When the buyer completes payments, the seller delivers the title. A written, bilateral, executory, assignable contract that is binding on assigns and heirs. The contract for deed resembles a financing transaction and contains a lengthy statement as to the rights and obligations of the parties, similar to what is found in a mortgage document. The contract for deed acts as a contract, a financing instrument, and a deed and should be recorded to protect the buyer. A sales contract is usually not recorded, unless there is to be an unusually long time between signing the agreement and clo Option - ✔ ️Agreement whereby an owner agrees to give a prospective buyer/lessee the right to buy or lease a particular piece of property for a fixed price any time during an agreed upon period of time. The prospective buyer/lessee may buy/lease the property only if he decides to do so within the specified time period. This is a written, unilateral, executory, assignable contract that must have a definite termination date. The parties to an option contract are the optionor (owner) and the optionee (prospective buyer). The optionor retains legal title, while the optionee gains an equitable title interest in the property. An option contract must contain all of the essential elements and terms of the underlying contract for sale, so that if the optionee decides to exercise the option, the option can then become a binding sales contract. If the option fails to cover all of the material terms of the future sales contract, then it becomes unenforceable. Example: if all terms and conditions are specified Right of First Refusal - ✔ ️Not a contract and need not be accompanied by consideration since the owner is not bound by the right until he actually entertains an offer to buy or lease from a third party. Thus, with an option, the option holder has the right to initiate the sale or lease; with a right of first refusal, the right to initiate the sale or lease of the property remains with the owner. Lease Contract - ✔ ️Agreement transferring the right of exclusive use and possession of real estate for a specified period of time. By transferring the right of use a lease does establish a legal interest in real property. However, a lease does not convey an interest in title and therefore is classified as personal property. It is an exchange of the possession and profits of the land in return for rent. Leases - ✔ ️Written or oral, bilateral, executory, sometimes assignable contracts that can be for a definite or indefinite period of time. Parties to a lease contract are the lessor (owner) and the lessee (tenant). The Statute of Frauds provides that a lease for more than one year must be in writing to be enforced in a court of law. Oral leases for one year or less may be enforced by a court of law. However, it is good business practice to commit all leases to writing. Non-Disturbance Clause - ✔ ️Used in mortgage contracts on income producing property to protect the continuation of the lease in the event of loan foreclosure. Tenants leasing income producing space should check to be sure the landlord has this clause in any mortgage contracts involving the leased property. A non- disturbance clause may also be included in the lease stating that should the landlord sell the property, the rights of the tenant are not affected. To determine whether or not a lease is valid, courts apply the laws governing contracts. The five essential elements of a real estate contract must be present in a valid lease: - ✔ ️Competent parties who have the legal capacity to contract; A meeting of the minds manifest in an offer and acceptance; Consideration, usually a rental amount; A legal description (an address is generally sufficient for a lease); and An intended use of the property for legal purposes. In addition to the above five elements, leases for more than one year (one year plus one day) must be in writing to be enforced. Lease Agreement - ✔ ️Both a contract outlining the rights and obligations of landlords and tenant and a conveyance creating a leasehold interest in real property. Since a lease conveys interest in real property the courts require that a lease of more than one year be signed by the landlord. The tenant's signature isn't essential if tenant has taken possession of the premises. A leasehold estate in real property concerns only the right to occupy the property. Leases are therefore classified as personal property. Estate/Tenancy for years for a definite period of time with termination date specified in the lease. Estate/Tenancy from year to year that automatically renews at set intervals (weekly, monthly, every two years, etc.) and requires proper notice to terminate. Estate/Tenancy at will for an indefinite period of time, requiring proper notice to terminate. Estate/Tenancy at sufferance where possession is without the landlord's consent. If a lessee leases a part of his interest (either a portion of the le Subordination Clause - ✔ ️States that the lease is subordinate to all present and future mortgages affecting the property. Option Clause - ✔ ️Gives the lessee the right to purchase the leased property at a specific price, for a specific period of time, under specific terms and conditions. If applied toward the purchase price, rent could be a valid consideration. A clause that allows for an up or down adjustment of certain payments is an escalator clause. For instance, an escalator clause in a lease might provide for a rent adjustment if and when taxes and insurance on the property increases by a certain amount. Sale-Leaseback - ✔ ️Real estate sales/financing technique whereby an owner sells property to an investor or lender, then leases that same property back. This gives the seller/lessee possibly much needed cash for his business venture, while assuring the buyer/lessor a guaranteed tenant, thereby reducing his investment risk. These are only a few of the covenants and conditions found in most leases. Other covenants or agreements might set forth what happens if the tenant sells his business, the right to sublet the premises, lease assignment, conditions of the premises, maintenance and repair responsibilities of tenant and landlord respectively, installation of trade fixtures, liability responsibilities, insurance coverage, security deposit requirements and disposition, and landlord rights in case of tenant default. Gross Lease (Fixed Lease/Flat Lease) - ✔ ️Lessee pays a fixed rate rent, and the lessor pays taxes, insurance, and all other expenses such as maintenance and repairs. Net Lease - ✔ ️Lessee pays a base rent (a fixed amount) and also pays a prorated share of the taxes, insurance, and specified operating expenses. The lessee's pro- rata share is usually based on the % of square footage he is leasing. The agreed upon expenses and operating costs to be paid by the lessee must be specified in the lease document. The base rent plus the pro-rata share of all the other expenses is referred to as the effective rent. Percentage Lease - ✔ ️Allows the landlord to participate in the good business fortunes of his tenants. The percentage lease usually requires a certain fixed minimum rent to be paid regardless of the tenant's business income. In addition to this the tenant pays a percentage of any business income that exceeds an agreed upon minimum amount of gross income. Graduated Lease - ✔ ️Provides for predetermined rental increases at specified times. An index lease adjusts the rent up or down periodically based on changes in a specified index, such as the Consumer Price Index (CPI). There is usually a cap set on the maximum change allowed over a previous period (such as 4% or 6%). Ground Lease(Land Lease) - ✔ ️Lease whereby an owner leases vacant land (or ground) to a tenant who then builds his own building. These are long-term leases (typically 50 to 99 years) as the builder (lessee) needs time to make good his investment. Proprietary Lease - ✔ ️Written lease that has no fixed rental amount. It is primarily used in cooperatives (see the discussion in Section 2). The lease is between the corporation (owner) and the stockholder (tenant). It is proprietary because the tenant is also a stockholder in the corporation that owns the building. Also, rather than paying a fixed rent, the tenant (stockholder) pays a proportionate share of the carrying charges of the corporation. When a unit is sold the proprietary lease is assigned to the buyer along with the seller's stock certificate. Revaluation Lease (Reappraisal Lease) - ✔ ️One in which rent is adjusted periodically, according to the revaluation (reappraisal) of the real estate. Silent Lease - ✔ ️Not actually a type of lease. It is a lease that says nothing about a particular issue. For instance, if a lease allows a lessor to charge a late payment fee but does not state what the late payment would be could be referred to as a "silent lease" on that matter. The amount of the permissible late payment would depend on state laws regarding the issue. Leases may be terminated by: - ✔ ️Expiration of the term; Proper notice; Destruction or condemnation of the property; Handicapped - ✔ ️With respect to a person, a physical or mental impairment that substantially limits one or more of such person's major life activities, a record of having such an impairment, or being regarded as having an impairment, but such term doesn't include current illegal use of or addiction to controlled substances or transvestites. Along with physical impairment, mental impairment is a protected class of handicap. AIDS victims are protected. Current illegal drug use isn't protected, and transvestite behavior is not a protected class. Most states have their own versions of fair housing laws, patterned somewhat after the federal laws. State laws can't be less inclusive than federal laws, but may be more inclusive, having more categories of protected classes. Governments in a democracy are constantly balancing the need to insure the health, safety, and well-being of all of its citizenry against the need to guarantee certain rights to individuals. Fair Housing Laws were enacted to ensure that peo Private Individual Owners - ✔ Single-family housing provided they do not own more than three (3) single-family houses at any one time, they do not employ a licensee, and they do not use discriminatory advertising. Single-family housing who do not occupy the house at the time of sale or were not the most recent resident, provided that they do not sell more than one such single-family house in any two-year period, do not employ a licensee, and do not use discriminatory advertising. Owner-Occupants - ✔ ️Who sell or rent rooms or units in multi-family dwellings provided they contain four (4) or fewer units. The owner must actually maintain one of the units as his legal residence. This is intended to exempt small rooming houses, people who must take in boarders to make ends meet, duplexes, etc. In these situations private individuals are usually trying to supplement their income, and would not be considered as running a business. This is known as the "Mrs. Murphy" exemption. Religious Organizations - ✔ ️Own or control property may operate dwellings for the benefit of their members only, as long as they are non-profit organizations, and as long as membership in that religion is not restricted on account of race, color, sex, etc. Private Membership Clubs - ✔ ️Bona fide clubs may own and operate lodgings for their own members provided they are non-profit clubs. In most states, if such clubs are exempt from taxation, then they are automatically exempt from Fair Housing laws. All-Elderly Housing Exemption - ✔ ️Housing for the elderly is exempt from the familial status protection if it falls into either one of the following two categories: Housing that requires all of its residents (excluding employees) to be 62 years of age or older. Housing that requires at least one person in 80% of its units be 55 years of age or older. In order to qualify for this exemption such housing must also provide services specifically designed to meet the needs of older people (such as common dining halls, bus service, recreational facilities, etc.), and the landlord must rent any units that come available only to those who qualify under this exemption. Threat to Health or Safety Exception - ✔ ️Nothing in this subsection (1988 Fair Housing Amendment) requires that a dwelling be made available to an individual whose tenancy would constitute a direct threat to the health or safety of other individuals or whose tenancy would result in substantial physical damage to the property of others. Occupancy Restrictions - ✔ ️Nothing in Title VIII limits the applicability of any reasonable local, state, or federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling. Example: You own an apartment house in Peaceful Retreat, VA. The dwelling contains six one bath/two bedroom units. You do not like children and do not want to rent to families with children. Unfortunately you do not qualify for either of the all-elderly housing exemptions, so you may not discriminate against families. However, since Peaceful Retreat has an ordinance that limits apartment occupancy to four people per bathroom; it will not be discrimination when you refuse to rent to a family of five. Discriminatory Practices - ✔ ️Putting legal language and court cases aside for a moment, the intent of the law is simple: everyone deserves to be treated equally. This is logical, American, and right. The Amendments Act of 1988 redefines discriminatory housing practice to include acts of interfering, coercing, threatening, or intimidating a person. However, though the language may be clear, the line between what is legal and illegal is not always so black and white. The best course for licensees is to be well informed about decisions of federal cases, keep up with amendments to the laws, and be very careful in their practice. The Fair Housing Law provides protection against discrimination in the following cases: - ✔ ️Refusing to sell, rent, or finance after a bona fide offer has been made; Refusing to deal or negotiate with any person; Discrimination in quoting terms or conditions of sale or rental. For instance, you may not jack-up a term such as the down payment required in order to discourage a sale to someone the owner feels is undesirable because of his nationality; Advertising that indicates any preference, limitation, or discrimination. There are certain trigger terms that HUD has identified as discriminatory such as white, black, Jew, Protestant, disadvantaged, private, etc. However, even directions to a real estate site, or pictures used, might be considered discriminatory: one block past the synagogue, next door to Martin Luther King High School, close to Yuppieville Country Club, or a picture showing 10 young white adults, all holding cold beers, used to advertise an apartment project (this picture says no families, no minorities); Representing that any dwelling is not available for insp Construction and the Handicapped - ✔ ️The Fair Housing Amendment Act of 1988 requires the design and construction of new multi-family dwellings to meet certain adaptability and accessibility requirements. Multi-family dwellings of four (4) or more units already existing or constructed for initial occupancy prior to March 12, 1991 must: - ✔ ️Allow handicapped persons to make reasonable modifications to existing living quarters and/or common areas at the expense of the handicapped person. Landlords may condition permission for such modification on a tenant agreeing to restore the interior of the unit only (not the common areas) where it is reasonable to do so. Reasonable will evidently depend upon whether or not the modification interferes with the use and enjoyment by future tenants (Example: it is reasonable to require removal of grab bars; it is unreasonable to require a widened doorway be restored to its original width). Where necessary to insure funds for restoration, the landlord may negotiate as part of the restoration agreement a provision that the tenant pay money periodically into an interest bearing escrow account, the total amount deposited not to exceed the cost of restoration. Multi-family dwellings of four (4) or more units constructed for initial occupancy after March 13, 1991 must have the following: - ✔ ️Public and common areas must be usable by the handicapped. Doors must allow passage of wheelchairs. Premises must have accessible handicapped routes (at least one building entrance must be an accessible route); switches, outlets, and other controls must be accessible; bathroom walls must be reinforced to allow for installation of grab bars; and there must be sufficient space in kitchens and bathrooms to allow a wheelchair to maneuver. All units must conform to the access accommodations in multi-level buildings with elevators. Ground floor units only must conform to the handicapped access requirements in multi-level buildings that have no elevator. The Act does not mandate the size, location or height of built-in appliances such as stoves, sinks, etc. Reasonable Accommodations - ✔ ️Changes in rules policies, practices, or services when such accommodations are necessary to afford a person with a disability the equal opportunity to use and enjoy a dwelling. An example would be an apartment complex that prohibits tenants from having pets should make an exception allowing a blind person the right to have a guide dog. Other types of disabilities may benefit from a support animal as well, such as emotional support from animals and others. Consumer Questions - ✔ ️Licensees need to be careful about answering questions from clients or customers about issues which are impacted by the fair housing laws. For instance, if a seller asks a licensee about the race of a person who made an offer on the property, the licensee should respond by saying words to the effect that "fair housing laws prohibit me from answering that question." Similarly, if a potential buyer asks a licensee about the racial, religious or ethnic characteristics of a neighborhood, it puts the licensee in a difficult position. Probably the safest response is to state that fair housing laws do not permit you to sell property based on such neighborhood characteristics and so you do not gather or convey such information to customers or clients. Affirmative Marketing - ✔ ️As amended in 1972, Title VIII requires that real estate brokers display HUD equal opportunity posters in all places of business, model home sites, and other related locations. Posters must contain the Equal Opportunity slogan, statement, and logo. FHA-financed developments must undertake an affirmative marketing program to attract a cross-section of the community. Enforcement - ✔ ️The Federal Fair Housing Law is administered by the Office of Equal Opportunity (OEO) under the direction of the Department of Housing and Urban Development (HUD). HUD has the authority to initiate complaints on its own Subordination Clause - ✔ ️Found in a junior mortgage, provides if an existing mortgage is paid or renegotiated it will remain subordinate and will not become a first mortgage. Junior mortgage holders usually receive higher interest rates and have no problem with maintaining their subordinate position. Subordination Agreement - ✔ ️Agreement whereby a superior mortgage, such as a first mortgage, agrees to take a subordinate or junior position with respect to a new or future lien. In a subordination clause in a mortgage, a junior mortgage agrees to always remain junior. In a subordination agreement, a superior mortgage agrees to move down the ladder and become junior. Power-of-Sale Clause - ✔ ️Gives a trustee in states that use deeds of trust the right to sell the property in the event of default. Some lien theory states also allow power- of-sale clauses to be included in mortgage contracts. Exculpatory Clause - ✔ ️May be included (but seldom is) in a mortgage or deed of trust, which states that the lender waives his right to a deficiency judgment. Escalator Clause - ✔ ️Provides for loan payments to be adjusted either up or down. The escalator clause can be used to cover many different situations. For instance, commercial leases frequently require that rent payments be adjusted up periodically to cover increases in taxes and insurance. Also, many long-term leases are tied to the consumer price index and go up or down periodically depending on what that index does. An escalator clause may also be used in a promissory note to increase the interest rate in cases of late payments or default. Partial Release Clause - ✔ ️Used by developers to provide for the release of lots as the principal amount of the loan is paid back. This allows the mortgagor/developer to sell a lot to a buyer who has arranged his own financing. The buyer pays the developer, the developer pays the mortgagee, and the mortgagee releases that lot from the "blanket lien" that encumbers the whole development. Assumption of Mortgage - ✔ ️When a buyer assumes personal liability for full repayment of the debt. If the property goes into default and a foreclosure sale does not satisfy the debt, the new buyer who assumed the loan will be liable for the amount of any deficiency judgment. In most cases, the lender will hold the seller and the buyer jointly and severally liable. That means that the lender may go after both of them, or either one individually. When a buyer purchases a home with an existing mortgage or deed of trust he may buy the property subject to the mortgage. This means that the new buyer is not personally liable for repayment of the debt. In the event of default on the loan and foreclosure the "subject to" buyer will lose the property, but his obligation ends there. If the sale of the property does not produce enough money to satisfy the entire debt the lender may file a personal judgment against the original mortgagor/seller, but he cannot file against the subject to the buyer. In lien theory states lende Equity of Redemption - ✔ ️If the delinquent borrower can come up with the money he has the right to redeem his property up to the time the bidding starts. If the property sells for more than all of the claims against it (taxes, mechanic's liens, all mortgage holders, etc.), then the delinquent borrower receives the excess money. When anyone, other than the delinquent borrower, buys the property at public auction, he receives a referee's deed in foreclosure or a sheriff's deed, and all unpaid junior liens against the property are eliminated. Property tax liens are not classified as junior liens and are never eliminated. However, if the original borrower buys the property, then junior liens are not eliminated. Statutory Redemption Laws - ✔ ️In effect in most lien theory states where mortgage contracts are used further complicate foreclosure proceedings. Statutory redemption laws give the foreclosed borrower from one month to one year or more to pay his judgment in full and redeem his title. In the meantime, the high bidder is given a certificate of sale that entitles him to a deed if the original owner fails to redeem the property within the statutory time period allowed. Title theory states are those states that recognize by law the right of a lender to hold bare legal title. to property that is pledged as collateral for a debt. The title that the lender holds is referred to as naked title or bare legal title because it is limited only to those rights that are necessary to carry out the terms of the trust. The borrower or owner retains the right to possess, use, enjoy, and sell the property as long as he does not default on the loan. As soon as the loan is repaid in full, the lender sends the note to the trustee along wi Deficiency Judgment - ✔ ️In the event a foreclosure sale does not produce enough money to cover the cost of foreclosure and pay off the entire debt, then the lender may file a personal judgment against the maker of the note and/or against any additional parties responsible for repayment of the debt, such as endorsers or guarantors on the note, and a subsequent purchaser who assumed the mortgage. Deed in Lieu of Foreclosure (Voluntary Deed) - ✔ ️When a delinquent borrower voluntarily deeds the encumbered property to the lender.. Both parties must agree to this. A borrower may agree to a deed in lieu of foreclosure in order to avoid the expense and publicity of a foreclosure proceeding, as well as a possible deficiency judgment proceeding. In return for the deed, the borrower receives a cancellation of the entire debt. A lender may decide to accept a deed in lieu of foreclosure in order to escape the expense and uncertainty of a foreclosure proceeding and resultant public auction sale. A voluntary deed also does away with the problem of waiting out any required redemption periods. However, lenders must be prepared to prove that they have dealt fairly with the delinquent borrower, as courts are very sympathetic to borrowers claiming that they have been dealt with unfairly. If the property is worth more than the debt, the lender must pay the defaulting borrower the difference. Also, junior liens are not wiped out, and the lender There are several advantages of a deed of trust over a mortgage: - ✔ ️If the owner of income-producing property defaults on a loan, the lender is authorized to take possession of the property to protect it, and to collect rents. The time between default and foreclosure is shorter in title theory states. The foreclosure process under a deed of trust is less expensive and simpler than it is with a court-ordered foreclosure process. Title is already in the name of the trustee, permitting the trustee to grant title to the purchaser after the foreclosure sale. After the foreclosure there is usually no statutory redemption period in title theory states. Financing - ✔ ️Part of the purchase price that is exclusive of the down payment. Most people cannot afford to pay cash for real property. There would be very few real estate deals and fewer commissions if it weren't for the existence of financial institutions that are willing to loan money to real estate investors (commercial, industrial, and residential home buyers alike). Most homebuyers would not classify themselves as "real estate investors," but that's exactly what they are. A financial institution is an intermediary institution that obtains funds from depositors and then lends those funds to borrowers with the purpose of earning a return (commercial banks, savings and loans, insurance companies, credit unions, and the like). Mortgage financing has a language all its own. Reserve Account (Reserve Fund) - ✔ ️An account used by lenders to hold money that will be used for future payment of items such as taxes, insurance, and deferred maintenance (customer's trust fund). A borrower is frequently required to pay a lump sum amount at closing to the lender to set up the reserve account. Thereafter, the borrower will be required to pay a monthly portion of the estimated taxes and insurance. This is part of the total monthly payment to the lender and is known as PITI payment. Secondary Mortgage Market - ✔ ️Market for the purchase and sale of already existing mortgages. Two different but complementing forces led to the creation of this market. They are business entities who want to invest built up cash reserves in real estate but do not want to get involved in loan origination and loan servicing (the primary market's job), and financial institutions in the primary market who need cash to originate more loans. These forces created the need for a secondary mortgage market where investors can buy mortgages to receive long-term investment opportunities, and originators can sell mortgages to receive cash for additional loans. Liquidity - ✔ ️Ability to sell an asset and convert it into cash. Liquid assets can be converted readily and easily into cash. Gold is a liquid asset. Real estate, on the other hand, is traditionally considered to be a long-term investment rather than a liquid investment. The secondary mortgage market allows banks and savings and loans to turn a traditionally non-liquid asset into ready cash. Intermediation - ✔ ️Process by which individuals place their money with financial institutions in savings accounts and time accounts. The financial institutions, acting as financial intermediaries, take the deposited funds of savers and invest them in money markets, mortgages, government securities, etc. Disintermediation - ✔ ️When individuals decide to invest money rather than deposit it in banks and allow the banks to invest it for them. This happens when people are able to earn higher yields in money markets and government securities than they can in savings accounts. When individuals invest their money they disrupt the normal flow of money in the financial marketplace. Federal Reserve Board (Fed) - ✔ ️Central banking system that has 12 districts, each served by a Federal Reserve Bank. The Fed was established to help manage the nation's economy. Fed policy has a tremendous impact on real estate through its regulation of bank's reserve requirements, determination of the discount rate (which directly affects interest rates), decisions of where to buy or sell government Fannie Mae (FNMA) - ✔ ️The Federal National Mortgage Association, referred to as Fannie Mae, was originally organized as a federal agency that purchased FHA- insured loans. It has since evolved into a government sponsored private corporation. Stock in FNMA is public and used to be traded on the New York Stock Exchange. Fannie Mae does not loan money directly. It generates funds for its secondary mortgage market operations by buying and selling FHA, VA, and conventional mortgages, and by selling securities, mortgage- backed bonds, and discount notes in the money market. When mortgage funds are in short supply Fannie Mae buys mortgages; when there is a surplus of funds Fannie Mae sells mortgages. FNMA buys and sells conventional mortgages, as well as FHA and VA mortgages. In 2008, as a result of the financial crisis, Fannie Mae was put into a conservatorship and is now controlled by the Federal Housing Finance Agency (FHFA), a federal agency. Ginnie Mae (GNMA) - ✔ ️The Government National Mortgage Association is a federally owned agency that's a division of HUD. It's a corporation without capital stock and was organized to operate the federal subsidy housing loan programs. Guarantees the timely payment of principal and interest on loans included in mortgage-backed securities such as mortgage pools. These pools include government insured or guaranteed loans, primarily FHA and VA loans. By guaranteeing these interest and principal payments, it makes it easier for lenders to sell their loans, gaining the return of their capital so they can originate more loans. Freddie Mac (FHLMC) - ✔ ️The Federal Home Loan Mortgage Corporation is a federal agency that operates under the supervision of the Federal Housing Finance Agency. In 2008, it was placed under a conservatorship along with Fannie Mae. Freddie Mac was organized to borrow money from pension funds and trust funds, purchase mortgages, pool them together, and sell bonds on the open market with the mortgages as security. FHLMC doesn't guarantee payment of Freddie Mac mortgages. This federal agency has great influence over financial practices in the real estate industry. It purchases conventional mortgages, FHA and VA mortgages, GNMA mortgages, and conventional mortgage-backed securities from S&Ls and banks in the secondary market. Mortgage Guaranty Insurance Corporation (MGIC) - ✔ ️An independent corporation that insures the top 12 to 30% of the principal on loans made by approved lenders to qualified borrowers. Hypothecation - ✔ ️Borrower retains the right to possess and use the property while it serves as security for a loan. A homeowner who borrows money to buy his home hypothecates the property to the lender (pledges it as security) for repayment of the loan; but if he complies with the terms of the loan agreement he retains full use and enjoyment of the property. This is accomplished through a mortgage agreement or trust deed. Qualifying lenders take risks when they loan money. To minimize their risk, lenders qualify borrowers (determine their ability to repay the debt), and may qualify the collateral (determine the value of the property). When the borrower and the property are qualified, and the lender feels that the risk is worth it, the lender will loan the borrower a percentage of what the lender has determined the property is worth. Equity - ✔ ️Interest or cash value remaining after all debts have been deducted. An owner's equity in a piece of property is usually considered to be the monetary interest the owner retains over and above the mortgage indebtedness. Example: A buyer purchases a house for $100,000 with a $20,000 down payment and an $80,000 mortgage. The owner's equity in this house is $20,000. Ten years later the owner sells the house for $150,000. Over the ten years he has paid down his mortgage amount by $40,000, leaving $40,000 owed on his original loan. This owner's equity, or cash value in the house, is now $110,000 ($20,000 original equity + $40,000 loan reduction + $50,000 appreciation = $110,000). In both of these cases the value of the house ($100,000 initially and $150,000 ten years later) was established by the sale of the house in the real estate marketplace as of a certain date. If there is no sale to establish the market value of the property a lender would require an appraisal, which would estimate th Leverage - ✔ ️Use of borrowed funds to purchase property. Borrowed funds are almost always involved in the purchase of real property. From the buyer's point of view this is the only way most buyers of real property could afford a piece of real estate; from the lender's point of view the risk of loaning money is minimized by the fact that the property is a tangible asset that can be pledged as security for payment of the debt. In the example used above, the homeowner buys the home with $20,000 down (a 20% down payment), and then he leverages the remaining 80% by taking out a loan. People may also borrow funds against their equity in one asset in order to purchase another asset. Using the above example again, let's say that, rather than sell his house after ten years, the homeowner decides to borrow against his built-up equity in order to purchase an income producing triplex. After ten years the homeowner's equity is $110,000. He finds a mortgage company that will take a second mortgage on his house i Loan-to-Value Ratio - ✔ ️Ratio between the mortgage loan amount and the sales price of the property (or the appraised value, whichever is lower). Example 1: A buyer pays $110,000 for a house that is appraised at $100,000 and an S&L loans him $80,000. His loan- to-value ratio is 80% [80,000/100,000 = .80 = 80%]. Example 2: a property is purchased for $60,000. The buyer puts $9,500 down and arranges a second mortgage for $10,000. The loan-to-value ratio on the first mortgage is 67.5% (60,000 - 9,500 - 10,000 = 40,500/60,000= .675 = 67.5%). The initial loan-to-value ratio when a property is purchased is based on the lower of the purchase price or appraised value. Loan Points - ✔ ️Lenders derive most of their loan origination profit from charging loan points. Each point is one percent of the loan amount. Discount points are also one percent of the loan amount, but are charged in return for a somewhat lower interest rate. The more discount points the borrower pays, the lower the rate of the loan. Buydown - ✔ ️Financing technique used in times of high interest rates, the lender is "prepaid" a portion of the loan interest rate so that the buyer's monthly payments can be lowered during the initial years of the loan. In times of very high interest rates builders sometimes use this technique to make it possible for buyers to qualify for loans. Thus, builders set aside funds to buydown the loan interest rate for a certain set period of time. At the end of the "bought down" time period, the interest rate reverts to the original amount. In certain financial times, the use of this technique can mean the difference between selling houses and not selling houses. Reduction Certificate - ✔ ️Document sets status of a loan. States the amount that is still to be paid, the interest rate of the loan, and the date of maturity. A reduction certificate is required when a home purchaser is going to assume a loan or take title subject to the existing loan. In this way all parties know the status of the loan, and know exactly what is owed as of a certain date. Equity Loans - ✔ ️Popular after the Tax Reform Act of 1986 disallowed tax deductions on consumer financing. An equity loan is typically a second mortgage on a home that is set up as a line of credit, commonly referred to as a Home Equity Line of Credit (HELOC). A HELOC is an open-end mortgage. The homeowner may borrow against this line of credit as needed, up to a certain set amount. The interest rate on this type of loan is usually tied to the prime rate, and although it is higher than the interest rate charged on most first mortgages, it is a lot lower than the rate of interest charged on money borrowed on a credit card. For this reason many homeowners are using equity loans to consolidate and pay off various consumer loans. Equity loans are also used to finance repairs or improvements on a home, such as a new roof, pool, or an addition. PITI - ✔ ️Payment that the borrower makes to the lender that includes the loan principal and interest, as well as the taxes and insurance that the lender pays on behalf of the property owner, is known as PITI, that is, principal, interest, taxes and insurance. The Lending Process - ✔ ️This country has long been committed to the idea of individual home ownership. It is often referred to as the great "American dream." Our federal and state governments have developed a vast network of laws and organizations to make this dream possible for as many people as possible. And most of these laws and organizations have to do with the lending of money since most homebuyers must borrow money to purchase a home. Pre-approval/Pre-qualification for Loan - ✔ ️Supplying lender with docs of your income/current debt. Lender will come up with a debt to loan ratio based on info supplied. Ex.Borrow money your monthly payments on outstanding debts added to monthly housing expenses, can't exceed 36% of your gross income. When a potential borrower contacts a lender he should inquire about the ratio the lender will be using. Underwriter - ✔ ️One who evaluates the extent of risk assumed in connection with a loan. Underwriting includes such things as determining the borrower's ability to repay, verifying the value of the property, and reviewing the title search. Loan Originator - ✔ ️One who handles the origination of a loan, from processing the application to disbursing the funds. Loan Servicing - ✔ ️Covers everything after the disbursing of funds until the loan is full paid off. Adjustable Rate Mortgage (ARM) - ✔ ️A loan that allows for a change in rates is an adjustable rate mortgage. The interest rate usually floats up or down according to a specified index. This interest rate index might be the 11th District Cost of Funds (COFI), the London Interbank Offered Rate (LIBOR) or sometimes the rate for U.S. Treasury Bills, which are short-term government securities. The interest charged to the borrower will be this index rate plus a "margin" (or "spread"). The amount of this margin will vary from one loan to another. The interest rate is "adjusted" at certain time intervals (such as six months or one year) Most adjustable rate mortgages will have limits, called "rate caps" on the maximum amount the rate can change at the time of any one adjustment and also a "lifetime cap" limiting the maximum rate over the life of the loan. Some ARMs have "payment caps" as well, which limit the dollar amount of any given payment. If a borrower takes advantage of a payment cap, negative amortization is likely to re Blanket Mortgage - ✔ ️A loan that covers more than one parcel of real estate is a blanket mortgage. Such mortgages usually contain a partial release clause that allows for the release of a parcel once a certain amount of the loan has been repaid. This type of mortgage is commonly used by builder-developers. Graduated Payment Mortgage (GPM) - ✔ ️A mortgage in which the early payments are lower and then gradually increase over the life of the loan is a graduated payment mortgage. Interim Mortgage - ✔ ️A short term mortgage loan which is usually an interest-only loan. There are various types of interim loans, including construction loans which are used to finance the construction of improvements and are typically due and payable upon completion, at which time a take-out loan is used for the permanent financing. Bridge loans are also a type of interim loan. Open-End Mortgage - ✔ ️Similar to open line of credit. Max amount that can be borrowed is established, but the borrower does not borrow it all at one time and only pays interest on the actual amount borrowed. Used on construction loans where the builder borrows money as portions of the project are completed. Package Mortgage - ✔ ️A mortgage that includes personal as well as real property is a package mortgage. For instance, if a home loan included the washer, dryer, and refrigerator as collateral, then it would be a package mortgage. Renegotiable Rate Mortgage (RRM) - ✔ ️Similar to adjustable rate mortgage except it adjusts every 3-5 yrs instead of every 6 months/one year. Limits on max change in interest rate 0.5% per year of the adjustment period. For example, if the loan had a 3 year adjustment period, the maximum rate change would be 1.5%. For a 5 year adjustment period, the maximum rate change would be 2.5%. Reverse Annuity Mortgage (RAM) - ✔ ️A reverse annuity mortgage allows elderly homeowners to receive monthly payments from their lender to help meet living costs. They do so by borrowing on the equity they have built up in their homes. The homeowner receives periodic payments based on accumulated equity. The loan comes due upon an occurrence such as the sale of the property or death of the homeowner. Shared Appreciation Mortgage (SAM) - ✔ ️With a shared appreciation mortgage, the lender loans money at below the current market interest rate in return for a share of the profit when the property is sold. In other words, the lender agrees to receive less now in exchange for a guarantee to share in the future appreciation of the property. The specific terms of the shared-appreciation agreement must be clearly stated in the mortgage or deed of trust and the note documents. Junior Mortgage - ✔ ️Any mortgage or deed of trust that is subordinate in lien priority and carries a higher interest rate since they also entail greater risk. Wraparound Mortgage - ✔ ️A new mortgage that includes the new balance borrowed and the balance owed on an older already existing mortgage is known as a wraparound mortgage. The older mortgage is not paid off, but rather the new mortgage "wraps around" the older one, and a single payment is used to satisfy both loans. The new mortgage is "junior" to the older one. The borrower pays the new lender and the new lender makes the payments on the original loan. In this way the new lender can protect his junior position. Purchase Money Mortgage (PMM) - ✔ ️When a seller accepts part or all of the purchase price in the form of a promissory note from the buyer along with a mortgage or trust deed, the mortgage or trust deed is known as a purchase money mortgage. In this case the seller is said to be "taking back paper." A seller may agree to do this if he does not want all cash for tax reasons, or may do it because the buyer cannot come up with enough cash using other financing channels. Lending Laws - ✔ ️Several federal laws have been enacted to protect borrowers of mortgage loans. They are the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act (RESPA), and the Fair Housing Act's prohibitions against redlining (putting a limit on loans in particular areas or neighborhoods), and most recently the SAFE Act. The SAFE Act - ✔ ️A key component of HERA, The Housing and Economic Recovery Act of 2008. The SAFE Act is designed to enhance consumer protection and reduce fraud in the mortgage industry. It establishes minimum standards for the licensing and registration of state-licensed mortgage loan originators. It also directs the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to establish and maintain a nationwide mortgage licensing system and registry (NMLSR) for the purpose of streamlining the licensing process, and enhancing consumer protections and supporting anti-fraud measures. Truth in Lending Law and Regulation Z - ✔ ️Passed in 1969 as part of the Consumer Credit Protection Act, and implemented by the Federal Reserve Board's Regulation Z. The purpose of this law is to ensure that borrowers in need of consumer credit receive meaningful disclosure of the costs of consumer credit. Allows consumers to compare terms and shop wisely. Regulation Z applies to all loans secured by an owner-occupied residence, except for seller financed loans (PMM - purchase money mortgage). It applies to personal loans for family or household use if they are for $25,000 or less. It does not apply to business or commercial loans, or to agricultural loans over $25,000. Regulation Z is concerned with disclosure of credit costs. It does not set interest rates, and does not require specific charges for credit. The Federal Trade Commission (FTC) is responsible for enforcing TILA with non-depository lenders, while the Consumer Financial Protection Bureau enforces it with depository lenders. There are four main disclosures that must be made before a contractual relationship is created between a borrower and a lender: - ✔ ️amount to be financed finance charge annual percentage rate (APR) total of all payments to be made over the term of the mortgage Finance Charge - ✔ ️Total of all costs the borrower must pay for obtaining credit. This includes such items as the interest amount, origination fee, loan servicing, loan- finder's fee, and discount points. The annual percentage rate (APR) is compiled by folding all of the finance charges into the interest rate. It is the relationship of the total finance charge to the total amount to be financed. It does not include such items as legal fees, appraisal fees, and credit reports. The total payment includes the number, amount in dollars, and timing of all payments due under the loan. Although some loan situations covered by Regulation Z allow the borrower three-days to rescind the transaction, the three day right of rescission does not apply to residential purchase money or first mortgage or deed of trust loans. It would apply to refinancings. Regulation Z Advertising - ✔ ️Regulation Z provides for strict regulation of real estate advertisements that include mortgage financing terms. Again, the reason for this is to give consumers the information they need so that they can compare the true cost of obtaining credit from various lenders and shop wisely. General phrases such as "easy financing terms" or "excellent credit available" may be used without triggering full disclosure. However, if any specific "trigger terms" are used in an advertisement, then the ad must include five specific disclosures. Trigger Terms - ✔ ️Include the amount or percentage of down payment, amount of any installment or monthly payment, number of payments, period of payments, finance charge, interest rate (can be used only if APR is also given), use of terms assume or assumable if any specific loan detail is also mentioned (these terms do not "trigger" if used alone). The disclosures are: cash price required down payment number, amounts, and due dates of all payments annual percentage rate total of all payments to be made over the term of the mortgage (unless the advertised credit refers to a first mortgage deed of trust to finance the acquisition of a dwelling) The following loans are exempt from Regulation Z: - ✔ ️Loans for dwellings of more than four-family units; Construction loans to a builder; Business or commercial loans; Agricultural loans of more than $25,000; This fact, coupled with the fact that you can neither move land nor increase its supply, basically explains why location is so important. See the Introduction for a more detailed analysis of these principles. Essential Elements - ✔ ️The value of real estate depends upon four essential elements (that you can remember by the acronym DUST) Demand - ✔ ️There must be a desire to buy, coupled with the ability to pay. Utility - ✔ ️Able to satisfy a human need/desire, such as shelter, income, or recreation. Scarcity - ✔ ️Is determined by a limited supply of the demand for a particular type of property. Increased value is caused by continued high demand for something, when the supply cannot be increased. Transferability - ✔ ️The relative ease with which ownership rights can be transferred from one person to another. Highest and Best Use - ✔ ️Highest and best use is an appraisal concept referring to the legal and reasonable use that, at the time of the appraisal of the property, is most likely to produce the greatest net return and give it its greatest current value. Substitution - ✔ ️An appraisal principle that states that an informed buyer will pay no more for a property than the cost of acquiring an equally desirable piece of real estate with the same utility and productivity. In other words, the maximum value of a piece of property tends to be set by the cost of acquiring an equally desirable and valuable substitute property. Conformity - ✔ ️Means that maximum value is realized if the use of land conforms to existerm-526ting neighborhood standards. Example: An overimproved property will tend to conform, and will decrease in value (a $150,000 house, constructed in a neighborhood of $90,000 houses, might only be worth $100,000). Increasing and Diminishing Return - ✔ ️After a certain point money spent on improvements will not add to the overall value of a property is that of increasing and diminishing returns. As long as money spent produces an increase in value, the "law of increasing returns" is applicable. When money spent no longer produces a proportionate increase in value, the "law of diminishing returns" applies. Plottage - ✔ ️The appraisal principle that holds that merging separately owned pieces of property into one large single lot will increase the value of the separate pieces is known as plottage. For example, a city block is made up of four lots of equal size. One lot has been on the market for more than a year at $200,000. A developer tells the listing agent that he does not want the single lot, but he will pay $1,000,000 for the entire block. The process of merging lots under one ownership is known as assemblage. Anticipation - ✔ ️A person will buy a property based on the benefit he expects to receive in the future. Example: An investor will buy a property now, based on its future potential income; a home buyer anticipates the benefit of tax shelters as well as future appreciation. Contribution - ✔ ️An improvement to real property is only worth whatever it adds to the market value of the property as a whole. For example, a homeowner adds an elaborate, expensive, freestanding garage to his home-site. When he puts his house on the market a year later, he discovers that his house is worth much less than houses with attached garages because buyers do not like free-standing garage arrangements. Regression and Progression - ✔ ️Addresses how dissimilar properties affect one another's value is known as regression and progression. Thus, a very luxurious house in a modest neighborhood would tend to be valued down toward the more modest range of values. Conversely, a modest home would tend to be valued up if located in a neighborhood of more expensive homes. Growth, Equilibrium, and Decline- here are three distinct stages that a single property (and whole neighborhoods) typically go through: - ✔ ️Growth is the development stage when improvements are made and demand and property values are typically increasing. Equilibrium is that stage when there are few vacancies left and the property enjoys a long stable period of high value. Decline happens when the property experiences increasing deterioration; the need for upkeep increases, while demand and value decrease. Change - ✔ ️As with all other things no physical or economic condition remains forever the same. Besides changes related to weather and natural wear-and-tear, there are changes in the real estate marketplace itself. People buy property for future benefits, and appraisers must be aware of past happenings and present trends in order to predict possible future change as accurately as possible. Competition - ✔ ️Holds that increased or excessive profits tend to attract competitors. As similar competitors move into an area profits will be seriously affected unless the increased numbers attract more shoppers (as can happen with a shopping center or merchandise mart). Unearned Increment - ✔ ️An increase in property value caused by external factors over which the property owner has no control (such as favorable rezoning or the building of a new expressway) is known as unearned increment. Appraisal Process - ✔ ️Established, formalized procedure that provides for the collection and systematic analysis of the facts necessary to determine the value of a piece of real property. Define the problem. The subject property, the kind of value to be estimated, and the most valid appraisal approach for that kind of property must be selected.Inspect the property.Gather, record, and verify the data. Information concerning the economic, social, and political conditions of the nation, region, city, and neighborhood must be obtained. Specific data about the subject property must be collected and verified. Apply the three approaches to value. Arrive at three estimates of value for the subject property by applying the market approach, the cost approach, and the income approach separately. (This is not always possible, but it is the most desirable situation). Reconcile the estimates of value. The reconciliation of the indicated value from each of the three approaches into a final value conclusion is not an avera Market Approach(Market Data Approach/Comparable Sales Approach/Direct Sales Comparison Approach) - ✔ ️Uses comparable property sales as data to arrive at a market value for the subject property and based on substitution. The market data approach is considered the most reliable when appraising residential property. It's the approach used, formally/informally, when arriving at the listing price for a residential property. In order for it to be most effective, there must be a fairly active market. "Market price" isn't "asking price." Not effective for special use properties. Even where there's an active market, no two properties are identical. Principle of Substitution - ✔ ️Value of property will not exceed the cost of acquiring a similar substitute. Appraisers have three steps comparison between subject property and the comparables: - ✔ ️Locate comparables. Make the comparisons, known as the adjustment process. Value the property. Locating Comparables - ✔ ️Similar in size, shape, design, location, and they must have sold fairly recently in an "arms-length transaction." An arms-length transaction is one in which a willing buyer and seller deal from equal bargaining positions in a formal manner without trusting solely to the other's fairness and integrity. The Adjustment Process - ✔ ️Accomplished by taking three to five comparables and adjusting the sales price of each comparable to allow for differences between it and the subject property. Market Conditions - ✔ ️Adjustments must be made if there have been significant changes since the sale of the comparable (such as economic changes, zoning changes, availability of financing, etc.). Location - ✔ ️One of the most important considerations. An appraiser might need to make locational adjustments between similar properties that are located in different neighborhoods; or even between similar properties in different locations within the same neighborhood; an interior lot in a subdivision would probably be more valuable than a lot on the edge, situated near a busy highway. Physical Characteristics - ✔ ️Differences in lot size, age, number of square feet, construction quality, landscaping, pool, garage, number of bathrooms, etc. Financing - ✔ ️Differences in the terms and conditions of sale, with respect to financing, must be compared and adjusted. An adjustment would need to be made between two similar houses if one offered owner financing and the other did not. Adjustment would need to be made between two comparables if one had a low-rate assumable first, and the other did not. There are five basic steps to determine value using the income capitalization approach: - ✔ ️estimate the annual potential gross income estimate the effective gross income estimate the net operating income select a capitalization rate apply the capitalization rate to determine the value. Estimating Potential Gross Income - ✔ ️When we talk of annual gross income we mean the "potential" annual gross, that is the income that "could be" produced if all units were rented at full market value. This would include all income from all sources, such as sales, rental income, concessions, garage rentals, laundry operations, and vending machines. In order to determine potential gross rental income an appraiser might use contract rent, market rent, or a combination of both. Contract rent is the rent called for in a lease contract. The appraiser would use this if the lease was long- term and the tenant was a good quality tenant. Market rent is the most probable rent the property could demand in the open market (determined by considering comparables using the market data approach). This would be used by an appraiser when lease contracts are non-existent or not a controlling factor. Estimating Effective Gross Income (EGI) - ✔ ️Total potential gross income minus the predicted vacancy and collection loss. This "predicted" loss is arrived at by analyzing the past record of the subject property and of comparable properties in the market. Estimating Net Operating Income (NOI) - ✔ ️Arrived at by taking the effective gross income (EGI) and subtracting from it all fixed and variable operating costs. Operating costs are such things as: real estate taxes, insurance, utilities, management fees, janitorial, garbage removal, yard maintenance. Not included in operating expenses are: financing costs (mortgage interest payments), costs of capital improvements, corporate income tax, depreciation, and any other business expenses not directly involved in the operation of the property itself. To determine net operating income, subtract the vacancy and collection losses from the gross income, yielding the effective gross income (EGI). From this sum, subtract the operating expenses, and the total is the net operating income (NOI). Potential gross income - Vacancy & collection losses = Effective gross income (EGI)- Operating expenses= Net operating income (NOI) Selecting a Capitalization Rate - ✔ ️This is the most difficult step in this approach. An appraiser's experience and judgment are critical in selecting an appropriate cap rate for the subject property. Most of you will never be licensed appraisers. For the purposes of this course you will need only a very general understanding of the concepts involved. When reading and reviewing the following explanation of the selection and application of a capitalization rate, strive for an understanding of the general concepts. It is not necessary that you be proficient in the details of the calculations. When using the income approach, an appraiser must determine the "percentage rate of return" that investors are currently receiving on the type of investment property that is being appraised. This rate of return is called the capitalization rate (cap rate). It is determined by comparing the relationship of net operating income to the sales price (SP) of similar properties that have sold in the current market. Applying the Capitalization Rate - ✔ ️Once an appropriate cap rate for the market and type of property involved has been selected, the appraiser then applies this cap rate to the subject property to arrive at the estimated value. In the fourth step of the income valuation approach (see above), we are given the NOI and the value or selling price in order to determine the cap rate of the comparable. I (NOI) ÷ V (Value, SP) = R (cap rate) In step five of the income approach, we are given the NOI of the subject property and the selected capitalization rate in order to determine the estimate of market value.I (NOI) ÷ R (cap rate) = V (estimated market value) So, for example, if the subject property is found to have a NOI of $18,000, and the selected cap rate is 8%, then the estimated market value for this property would be $225,000. Gross Rent Multiplier (GRM) - ✔ ️Crude method for obtaining a quick estimate of property value. A "multiplier" is arrived at by using comparable sales. In step one, the selling price of a comparable piece of property is divided by actual or estimated monthly rents in order to determine an acceptable average or gross rent "multiplier." In step two, the estimated monthly rent of the subject property is multiplied by the multiplier (GRM), thereby arriving at a rough estimate of the subject property's market value. The GRM method makes no allowance for vacancies, uncollectible rents, property taxes, management fees, private tax ramifications for different investors, and similar complicating circumstances. The Formula- (Month) Selling price (value) = GRM x GR = Estimated Market Value Gross rents (GR) Building A has a sales price of $112,500 and monthly rents of $1,250. What would be the value of a building having monthly rents of $1,158? Step 1: $112,500/$1,250 = 90 (GRM) Step 2: 90 x $1,158 = $104,220 Annual-Building A ha Real Estate Taxes - ✔ ️Governments are able to "stay in business" and operate thanks to their power to tax property and citizens. Although there are many forms of taxation, real estate property taxes are what finance much of the day-to-day operation of local government. In the case of ad valorem taxes (defined below) state approved taxing bodies can include local governments down to the county and village level, local school districts, water districts, local drainage and sanitation districts, and municipal authorities operating recreational parks and preserves. Enabling acts passed by each state legislature authorize these taxing bodies to levy taxes on private property, to impose liens on that property that are superior to all other liens regardless of filing date, and to enforce payment of property taxes by court ordered sale if necessary. Ad Valorem Taxes - ✔ ️Levied by various state and local governments. "Ad valorem" is Latin for according to value. These taxes are based on the value of the property being taxed. They are general real estate taxes levied against all real property for the general operation of government. Special Assessment Taxes - ✔ ️Local improvements and only affect properties that will benefit from the improvement (sidewalks, sewers, etc.). The value of the benefit must exceed the cost of the improvement. The Ad Valorem Process Appropriation - ✔ ️Each taxing district must adopt an annual budget. Each budget includes all expected expenditures for a designated 12- month period, which is then offset against all income expected from fees, other levels of government, revenue sharing, etc. The remaining net amount is the amount that must be raised from ad valorem real estate taxes. Each tax district must then go through an appropriation process, which usually involves the adoption of an ordinance, authorizing the proposed taxation. The taxing districts, governing body (such as the county board of supervisors) then takes formal action by voting a specific tax levy. Assessment - ✔ ️Each taxing district must adopt an annual budget. Each budget includes all expected expenditures for a designated 12-month period, which is then offset against all income expected from fees, other levels of government, revenue sharing, etc. The remaining net amount is the amount that must be raised from ad valorem real estate taxes. Each tax district must then go through an appropriation process, which usually involves the adoption of an ordinance, authorizing the proposed taxation. The taxing districts, governing body (such as the county board of supervisors) then takes formal action by voting a specific tax levy. Tax Rate - ✔ ️Each taxing body arrives at its tax rate separately. The amount of money needed by each taxing district is divided by the total assessment for all real estate located within the jurisdiction in order to arrive at that district's percentage (always divide the larger amount into the smaller amount if you want to get a percentage of the whole). This percentage is then converted to mills. Mill - ✔ ️One-tenth of one cent or 1/1,000 of a dollar ($.001). A tax rate is expressed as a mill ratio, which represents dollars per hundred, or dollars per thousand. For example, the total assessed value (assessment roll) of all real estate in Buckingham County, Virginia is $300,000,000. The local board of supervisors needs $10,200,000 in real estate tax revenues to meet its budget. $10,200,000 divided by $300,000,000 = .034 = 34 mill. 34 mill = $3.40 per $100 of assessed value = $34 per $1,000 of assessed value. A Buckingham County property owner whose real estate is assessed at $60,000 would owe property taxes of $2,040: $60,000 x 0.034 = $2,040. In most states the taxpayer is presented with one tax bill. In some areas of the country separate bills are prepared by each taxing district (school districts, water districts, and the like). Due dates for taxes are set by statute. Tax Sale - ✔ ️If real estate taxes go unpaid for a prescribed length of time the local taxing authority may seek a court order to sell the property at public auction. A defaulting taxpayer usually has an equitable right of redemption, that is, the right to redeem the property at any time before the auction by paying the back taxes, interest, and penalties. In addition to this remedy, some states provide for a statutory right of redemption during a limited period of time after a tax sale. Certificate of Sale - ✔ ️Issued to a buyer at auction if there is a redemption period extending after the sale. However, if the property is not redeemed within the statutory time period allowed, the buyer may then apply for a tax deed. owners may defer capital gains tax. The properties can be quite different as long as they are both investment properties and the owners have the same ownership interest. Example: Owner Karen is tired of managing her apartment complex and wishes to get rid of it. However, she bought it for $300,000, it is now worth $600,000, and she does not want to pay a capital gains tax. She places the property with a broker who finds a piece of unimproved timberland that is also valued at $600,000. The owners exchange properties and their taxes are deferred. When two properties in a tax deferred exchange are not equal in value then the difference in value may be made up in cash, a note, personal property, services rendered, or similar. This "unlike-kind difference" is called boot, and it is subject to capital gains tax. The laws governing tax deferred exchanges are The Real Estate Closing - ✔ ️A closing, or settlement, is the time when the buyer gives the seller the agreed upon purchase monies, and in return the seller gives the buyer a deed that transfers title to the buyer. However, a lot of activity and planning takes place prior to this bottom-line exchange of money and title. After a buyer and a seller agree on price and terms and both sign a real estate sales contract, all of the terms of the agreement must be accomplished, statements must be prepared with all expenses properly prorated, financing secured, title checked, insurance policies arranged, inspections accomplished, and all contract contingencies must be worked out. Most real estate closings involve at least two phases: - ✔ ️the loan closing between the lender and the borrower/buyer. the real estate sales closing between the buyer and seller. The real estate sales contract is the blueprint for the closing. After the documents have been properly executed and exchanged, then certain documents are recorded in proper order, such as the seller's satisfaction of mortgage, the seller's deed executed to buyer, and the buyer's mortgage or deed of trust. Escrow Closing - ✔ ️A closing in which a disinterested third party not only acts as escrow agent, but also acts as the closing agent and coordinates all closing activities. Closing is handled according to escrow instructions signed by buyer and seller. The closing agent prepares the closing statements and conducts the proceedings at closing. The closing agent may be a principal or supervising broker, an escrow agent, the buyer's or seller's attorney, a lender's representative, or a title company's representative. Closing Statement - ✔ ️Detailed accounting of all the financial aspects of the closing of a real estate transaction. Closing statements must be prepared for the buyer(s), the seller(s), and the real estate broker(s) involved in the transaction. The closing statements list the sales price, the earnest money deposit, and all adjustments and prorations to be made between buyer and seller. The purpose of the statement is to determine exactly how much money is due the seller at closing. The buyer receives credits for accrued expenses owed by the seller, which will be paid by the buyer after closing (such as property taxes paid in arrears - assessed January 1st, but not due until December 31st), and the buyer must reimburse the seller for prepaid expenses (such as unused insurance or fuel oil). The Real Estate Settlement Procedures Act (RESPA) - ✔ ️Federal law enacted in 1974 and amended in 1976. The primary purpose is to ensure that buyer and seller are fully informed as to all settlement costs, and to standardize real estate settlement practices. RESPA is administered by the U.S. Department of Housing and Development (HUD). Since RESPA is a federal law, it has jurisdiction only over those loans that involve federal money, loans that use federal insurance programs, and loans that might be sold on the secondary market to any federally backed agency. In effect, RESPA covers most institutional loans. RESPA regulations apply to loans on 1-to-4 unit residential properties, whether for purchase or refinance. RESPA does not apply to transactions financed solely by the seller, a buyer's assumption of a seller's existing loan, a land contract or contract for deed (installment sales contract), or residential property consisting of more than four family units. RESPA was not designed to set the prices of settlement services, rather it was d RESPA Prohibitions: - ✔ ️RESPA prohibits kickbacks or unearned fees. For instance, lenders may not receive a fee from an insurance company for sending customers to that insurance company. Lenders can recommend one particular company, they just can't collect a fee for doing so. RESPA prohibits the seller from requiring a buyer to purchase title insurance from one particular title company. RESPA prohibits the lender from collecting excessive amounts to cover property taxes and insurance payments in advance. Lenders may collect the amount needed to meet the buyer's share of taxes and insurance accrued prior to settlement, plus a two-month reserve that must be placed in an escrow account. TILA-RESPA Integrated Disclosure Rule (TRID) - ✔ ️Federal law enacted in 1974 and amended in 1976. The primary purpose is to ensure that buyer and seller are fully informed as to all settlement costs, and to standardize real estate settlement practices. RESPA is administered by the U.S. Department of Housing and Development (HUD). Since RESPA is a federal law, it has jurisdiction only over those loans that involve federal money, loans that use federal insurance programs, and loans that might be sold on the secondary market to any federally backed agency. In effect, RESPA covers most institutional loans. RESPA regulations apply to loans on 1-to-4 unit residential properties, whether for purchase or refinance. RESPA does not apply to transactions financed solely by the seller, a buyer's assumption of a seller's existing loan, a land contract or contract for deed (installment sales contract), or residential property consisting of more than four family units. RESPA was not designed to set the prices of settlement services, rather it was d The Purpose of the Loan Estimate Form - ✔ ️To give an accurate estimation of the costs associated with the mortgage and settlement costs. These costs are grouped according to their "error tolerances," which refers to the amount by which the actual costs at settlement can vary from these initial estimates. Zero Tolerance - ✔ ️These are costs for which the actual costs cannot exceed the estimated costs by any amount. These are items over which the lender has control, which would include any loan origination fee, third-party fees where the borrower must use the vendor specified by the lender (such as appraisal fees) and transfer taxes. 10% Tolerance - ✔ ️These charges include recording costs and charges for services for which the consumer can shop and where the borrower selects a vendor recommended by the lender. This could include title insurance, title search, and survey fees, among others. We should note that this 10% tolerance applies to this entire category, not to each individual estimated cost. Unlimited Tolerance - ✔ ️This category is for charges where the consumer is allowed to shop and where the consumer chooses not to use the provider recommended by the lender. There is no limit to how much these charges can exceed the amount listed on the Loan Estimate. If the actual costs exceed the estimated costs by more than the permitted error tolerances, the lender must refund any excess to the borrower. There are circumstances where a lender can issue a revised Loan Estimate, but it is significant to note that they cannot issue revised Loan Estimate merely because of a clerical or computational error on the part of the lender when the form was first issued. Revisions are generally allowed only in cases of changed circumstances, such as if some of the information provided by the applicant is inaccurate or if the borrower wants to change the type of loan being requested. It can also be revised if the interest rate was not locked and a change of rate affects the points or lender credits listed on the form. T Closing Disclosure - ✔ ️Shows the actual loan and settlement costs and must be received by the borrower at least three business days prior to the consummation of the loan (which is the date the borrower becomes obligated on the loan and is usually the settlement date). If the Closing Disclosure is delivered by mail or email, it must be sent at least three business days prior to the required delivery date. The net effect is that if the form is hand-delivered, it must be delivered three business days prior to the consummation date. If it is mailed or emailed, it must be sent 6 business days before the consummation date. The seller must receive the Closing Disclosure no later than at the settlement date. Occasionally there may be changes in circumstances after the Closing Disclosure has been provided that will require a revised Closing Disclosure. This can occur if the interest rate changes in the period of time between the provision of the Closing Disclosure and the loan consummation, for instance. Any change c Closing Costs - ✔ ️Constitute all of the numerous costs and adjustments involved in a real estate transaction. They are expressed as "debits" and "credits" on the closing statement. The decision as to which party pays what costs is made by agreement or custom. An agreement always takes precedence over custom, but in the absence of any agreement to the contrary custom dictates. Many of these costs must be prorated. Following is a list of some typical expenses, together with the party to whom they are customarily charged. It serves as a general example only.