By Dugan P. Kelley

Dugan Kelley

The list below is not exhaustive.  Instead, it is a listing of common terms that are used in the real estate industry.  If you are a seasoned real estate investor, looking for your first deal, or simply want to learn more about how Kelley Clarke PC may serve you in your real estate needs, please don’t hesitate to contact our office and one of our team members will be happy to speak with you.

Abstract of Judgment – The summary of a court judgment that demonstrates that there is a lien against the property.

Abstract of Title – A historical summary of the history of the property, which also shows any title problems (clouds) in connection with the property.

Acceleration Clause – A clause in the operative loan documents that allows the Lender to demand early (accelerate) the amount owed on the loan for specific violations by the Buyer/Borrower under the loan documents.

Addendum – An attachment to the Contract or loan documents.

Adjustable Rate Mortgage (ARM) – A type of mortgage rate loan whose interest rate changes periodically up or down, usually the change occurs only after a set period of time (usually years) and then the rate can change yearly or monthly.

Adjusted Cost Basis – The cost of improvements the seller makes to the property and reducing those cost(s) from the purchase price.

Adjusted Tax Basis – the original cost or other basis of the property, which is reduced by depreciation deductions and increased by capital expenditures.

After Repair Value (ARV) – Estimated value of the property after repairs or remodeling has occurred based on comparable properties.

Alligator Property – A scenario when mortgage payments, property taxes, insurance and maintenance on a rental property is greater than the income it brings in.

Annual Cap – The maximum amount the interest rate on an ARM can be raised or lowered over a 12 month period.

Annual Percentage Rate (APR) – Everything financed into your mortgage (interest, loan fees, points etc…) expressed as a percentage of the actual loan amount.

Appreciation – Connotes that the property increases in value, which typically happens over time.

As-Is – Property is purchased without guarantees or warranties as to condition.

Asking Price – The initial price the Seller is offering the property for sale.

Assumable Loan – A loan in which the Buyer may “assume” the position that the Seller currently has in the loan.

Attornment – A tenant’s formal agreement to be a tenant of a new Buyer/landlord.

Balloon Loan – A Type of loan that requires a large lump sum payment at some point during the loan.  Prior to the balloon payment, the monthly payments are typically smaller and amortized over the loan period.

Balloon Payment – A payment during the loan period that is required to be larger than the other amortized payments.

Bird Dog – This is someone who is a finder and/or identifies a potential good real estate investment opportunity and passes that deal on to another investor for a referral fee.  Depending on the state, this is often an illegal practice.

Blanket Mortgage – Typically this means a single mortgage, which is on more than one property.

Bridge Loan – A type of financing between the termination of one loan and the beginning of another loan (typically for a short period of time).

Broker – A licensed (typically through a real estate license) individual who acts as an intermediary between the Seller(s) and Buyer(s) on a real estate transaction.  Depending on the transaction and appropriate disclosures, the Broker can represent only the Seller, only the Buyer, or both Parties.

Broker Price Opinion (BPO) – This is where a Broker estimates the value of a property

Call Option – A loan agreement that has a clause allowing the Lender to demand the balance of the loan at any time.

Capital Expenditure – the cost(s) of improvement(s) made on the property. Capital expenditures are appreciated, while repairs are subtracted from income for the current year.

Capital Improvement – any structure or component erected as a permanent improvement to real property that adds to its value.

Capitalization (Cap) Rate – This is the rate of return that helps in evaluating a real estate investment.  You divide the property’s net operating income by the current market value or acquisition cost of the property in order to calculate the Cap Rate.

Carrying Charges – These are expenses necessary/required for holding property during construction or when the property is unable to be sold.

Cash Flow – The net operating income minus the total of all debt service required.

Cash Out – Cash given to the Buyer/Borrower from the proceeds of a loan.

Cash-Out Refinance – A type of refinance transaction where the new loan exceeds any prior loan and/or liens, where the balance of the new loan is given to the Buyer/Borrower (typically loaned against the equity/appreciation in the property).

Caveat Emptor – Latin for “Buyer Beware.”

Closing Costs – Costs that must be paid at closing in order to transfer ownership in the property from the Seller to the Buyer.  Closing costs will be calculated by the Title Company usually.

Clear Title – Ownership of the property is clear and marketable, which mean there are no liens or disputes tied to the property.

Closing – This is the formal process/meeting where final loan documents are signed by both the Buyer and Seller, typically funds are transferred, and formal ownership changes.

Collateral – This means/defines the property or other items that are pledged as security for the loan.

Consideration – This can be anything of value to induce/consummate the contract between the parties (usually money/promise to pay money).

Contingency – A condition that must be completed prior to the obligation by the Buyer to close.  Typical contingencies can be (financial/lending contingencies, inspection period, or the sale of another home/property in residential transactions).

Conventional Mortgage – A type of mortgage not insured by either the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), and thus usually requiring a 10 percent – 20 percent down payment.

Conditions, Covenants, and Restrictions (CCR’s) – These are written promises where the property owner agrees to use their property or not use their property in a certain way.

Conforming Loan – A loan that complies/conforms with the loan guidelines (FHA, VA, etc…)

Deed – A written document that transfers title to real property.

Deed in Lieu of Foreclosure – This is where the Borrower will formally relinquish title/possession of the property back to the Lender to avoid foreclosure.

Deed of Trust (DOT) – This is a written document that serves as security for a loan by encumbering the property. A deed of trust involves three parties (borrower, lender and trustee). The trustee has the responsibility to hold the property in trust as security for the payment of the debt and can sell the property if there is a default.

Default – This means there has been a failure to follow the loan agreements or other requirements in place on the property.

Defeasance – This means there is a written clause in in the final loan documents and/or Agreement with the Lender that gives the Borrower the right to redeem the property after default by paying the full debt and any fees.

Deferred Maintenance – This means the property needs repairs that are not being done and the property is depreciating as a result.

Due Diligence – The process of inspecting the property prior to Closing or reviewing and verifying all the documents and facts before Closing.

Earnest Money – These are funds submitted with the offer by the Buyer in order to show good-faith to the Seller.  These funds demonstrate that the Buyer is serious.

Eminent Domain – Where the government or a public utility acquires property or access (easement) for necessary public use by condemnation, but the owner typically must receive money as compensation for the access or condemnation.

Equity – Calculating the value of the property by subtracting from the fair market value any debts/lien amounts gives you what the equity is in the property.

Escheat – the process of the property returning to ownership by the State when the owner dies without leaving a will and has no heirs.

Escrow – This is the procedure of using a neutral third party (typically a title company) to accept documents (from third party lenders or other sources) and money (earnest money or other funds) who will keep those documents and money and facilitate the closing of the transaction.

Fee Agreement – A written agreement between a Borrower/Buyer and a Broker setting forth the nature of their relationship and what fees will be owed to the Broker.

Fee Simple – This means the total ownership in the property.

Fixed Rate Mortgage – A mortgage where the interest rate does not change during the loan.

Forbearance – Where the Lender agrees to delay foreclosure or a lawsuit against a Borrower that is in default.

Foreclosure – The process where the Lender terminates the Borrower/Buyer’s rights to ownership either through formal lawsuit (judicial foreclosure) or by the terms of the written agreement(s) (non-judicial foreclosure).

Fractional Ownership – Means that there is a fractional ownership/percentage owned in a property by a group of persons or businesses.

FRBO – “For Rent By Owner.”

Freddie Mac (FHMLC) – This means the Federal Home Loan Mortgage Corporation, a federally chartered corporation that purchases mortgages and sells them to qualified individuals as securities.

FSBO – “For Sale By Owner.”

FHA Financing – A type of financing for a loan, which be insured against loss by the Federal Housing Administration—a part of the U.S. Department of Housing and Urban Development (HUD).

General Warranty Deed – A written document, which indicates the Seller is agreeing to protect the Buyer against any challenge to title in the property.  Essentially, a guarantee that Seller can sell the property and no one else has any right in the property.

Gentrification – This is the turnover in neighborhoods of lower income residents by higher income residents.

Gross Debt Service – Total amount of money needed to pay principal, interest and taxes.

Gross Monthly Income – Income before any deductions.

Gross Rent Multiplier – the sales price is divided by the gross annual rental rate.

Ground Lease – A written document that indicates that rents the land only.

Hard Money Loan – A loan that is underwritten with the condition and value of the property as the primary criteria for approval. Typical for non-traditional third-party individual(s) or entit(ies) that are not formal Banks to make these loans.

Holdover Tenant – Where a tenant who remains in possession of leased property after the expiration of the lease.

Hypothecate – Where a Borrower promises and/or pledges something as collateral without giving up possession of the collateral/security.

Implied Warranty of Habitability – This is part of the law that requires landlords to provide livable units for their tenants. If the landlord fails, tenants can often have options, like legally withholding rent, moving out, or take other measures.

Inspection Report – There are a variety of reports that can (and should) be generated during due diligence by potential Buyers after an offer has been accepted by the Seller.  These written reports detail the property’s, including: the foundation; interior; roof; kitchen & baths; foundation; and/or heating & A/C.

Joint and Several Liability – This means a Lender can demand full repayment from any borrower (if there are multiple borrowers), and each borrower is responsible to pay 100% of the debt, not just their share.

Joint Tenancy – This means the property is owned by two or more individuals with each of the individuals having an undivided interest.

Joint Venture – an agreement between two or more persons who invest in a single business or property.

Kicker – This is a type of payment that is required and in to the agreed upon principal and interest.

Liquidated Damages – A negotiated amount that is agreed upon by both the Seller and Buyer as being the only amount that will be paid in the event of a breach of the Loan Agreement.

Loan Origination Fee – A fee that is charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan to underwriting.

Management Agreement – a written contract between the Buyer/Owner of the property and someone (usually an entity) who agrees to manage the property for the Owner.

Mortgage Insurance Premium (MIP) – A charge paid by the Buyer/Borrower (usually as part of the closing costs) to obtain financing, and may be required by the Lender depending on whether the Buyer’s down payment was less than 20% of the final purchase price.

Mortgagee – The Lender who is giving money to the Borrower/Buyer.

Mortgagor – The Borrower.

Negative Amortization – A particular loan that allows Borrowers to pay less than the debt service, which means that the Borrower is essentially deferring paying all of the interest.  This eats into the equity of the property.

Net Cash Flow – This means a property that generates income after expenses are subtracted.

Net Operating Income (NOI) – Calculated where gross income subtracts the total of all expenses, not including the actual debt service.

No Cash-Out Refinance – A type of new mortgage/loan that covers the remaining balance of the first loan, closing costs, any liens and cash.  Typically the new loan is not for more than 1% of the principal on the new mortgage/loan.

No Income Verification Loan (NIV) – A type of loan that is given based on the Borrower’s representation of their annual income as stated on the loan application.

Non-Assumption Clause – A written loan agreement clause that prohibits transfer of a mortgage to another Borrower approval by the Lender.

Notice of Default – A written notice sent by the Lender to the Borrower that details claimed violations of the loan Agreement by the Borrower.

Owner Financing (Seller Financing) – A method where the Seller acts as the Lender to the Borrower.  Upon successful completion of the terms by the Borrower/Buyer, the property will be owned by the Borrower/Buyer without ever having to get traditional financing from a Bank.

PITI – Means Principal, Interest, Taxes (property), and Insurance.

Point – It can reference an amount equal to 1% of the principal loan amount.

Property Taxes – Taxes (based on the assessed value of the home) paid by the homeowner for government services.

Pro Forma – A hypothetical presentation, such as forms for how much profit a property will generate for investors in the future.  Pro Formas make certain assumptions.

Quiet Enjoyment – The right of the Owner or Tenant to enjoy the property without interference.

Quiet Title Action – A lawsuit to remove a defect or cloud on the title.

Quitclaim Deed – A written deed that conveys only the amount of interest owned by the Seller without any warranties of ownership.

Real Estate Owned (REO) – A property that the Lender acquires through foreclosure and holds in its inventory, typically to sell at a later date or for negotiated price.

Recission Period – a federally mandated period of three business days (beginning on the day after a loan closes) during which the Borrower may cancel the new loan, or a specific period negotiated in the loan agreements where the Borrower can back-out of the transaction.

Recourse – A loan where the Lender can pursue the Borrower personally in addition to the collateral in the event of a default by the Borrower.

Redemption Period – A period during which a former owner can reclaim foreclosed property.

Section 1031 – A section of the Internal Revenue Code that details the ability of Buyers to make tax-free exchanges of like-kind property.

Section 8 – This means the units are participating in the low-income rental assistance program created by 1974 amendments to Section 8 of the 1937 Housing Act.

Security Deposit – A cash payment held during the term of the lease to offset damages incurred due to actions of the tenant.

Short Sale – The sale a property where the Lender agrees to accept less than the debt to transfer title. Depending on the state where this transaction occurs, the Lender may have recourse for the “deficiency” amount.

Survey – The process by where the property is measured definitively.

Title Insurance – Insurance that protects lenders and buyers against loss of the property due to defects in the title.

Triple Net Lease – A written lease where the tenant must pay a proportionate share of all operating expenses of the property so that the landlord receives net rent.

Trust – A written agreement whereby property is transferred to a trusted third party trustee for the benefit of the beneficiary

U.S. Department of Housing and Urban Development (HUD) – A federal agency that oversees the Federal Housing Administration.

Usufruct – the right to use property (or income from property) that is owned by someone else.

Usury – The charging of excessive interest that is greater than what is permitted by state law.

Utility Easement – The ability to use someone’s property for the purpose of laying gas, water, electric and sewer lines.

VA Loan – Type of loan guaranteed by the Department of Veterans Affairs for qualified Buyers.

Warranty – A written or oral promise guaranteeing a service or aspect of the property.

Wild Deed – An illegally recorded deed.

Without Recourse – The Lender cannot pursue the Borrower personally in the event of a default.

Wraparound Mortgage – A written loan agreement where the existing loan is retained and an additional loan is made that equals or exceeds the existing loan.

Zero Lot Line – A number of units or a housing development where the units are typically attached to each other.  Often the lots is smaller than average.

Zoning – legal mechanism for local governments to regulate the use of privately owned real estate to prevent conflicting land uses and promote orderly development.

Dugan Kelley is a Shareholder in Kelley Clarke PC and he is available to represent you with respect to your real estate needs.