Glossary

A provision in a contract that gives the right to terminate obligations upon the occurrence of certain specified conditions or events. A cancellation clause in a lease may allow the landlord to break the lease upon sale of the building. A lessor may need a cancellation clause if he or she plans to sell the building because the buyer may have another use.

The limit by which the interest rate on an adjustable rate mortgage may be changed; usually there are annual caps and lifetime caps. Without caps, interest rates of adjustable rate mortgages can increase without limit.

Certain assets are defined in the tax code as not being capital assets. Anything not so defined is a capital asset. Depending on current tax law, gains from capital assets often are taxed more favorably than ordinary income, whereas losses from the sale of capital assets often do not receive as favorable treatment.

A process whereby anticipated future income is converted to one lump sum capital value. Rental property evaluation is enhanced by the capitalization process. Income is divided by a capitalization rate to estimate value, using this formula: Property value = (rental income less operating expenses) / capitalization rate

A rate of return used to convert anticipated future income into a capital value. The capitalization rate includes interest and principal recovery. See capitalization.

Expenses necessary for holding property, such as taxes and interest on idle property or property under construction. Investors in nonrental real estate should consider carrying charges.

The amount a property owner has remaining after all out-of-pocket expenses are subtracted. Depreciation expense generally does not affect cash flow though it is deductible to arrive at net income. Mortgage amortization payments reduce cash flow but do not affect taxable income.

A bank check that guarantees the availability of funds in the payer’s account sufficient to cover the amount of the check. A cashier’s check or a certified check usually is required to pay expenses at closing.

Latin for "let the buyer beware." The buyer must examine the goods or property and buy at his or her own risk. This was once an accepted rule. Homebuyers in Texas have much more protection than they once did, as sellers and brokers are required to disclose problems or face possible penalties.

Generally, the heart of a city where most of its financial and business matters are conducted.

See estoppel certificate.

A designation awarded by the Realtors National Marketing Institute, which is affiliated with the National Association of Realtors.

A member of the Institute of Real Property Management, an organization affiliated with the National Association of Realtors.

A designation awarded by the Realtors National Marketing Institute, which is affiliated with the National Association of Realtors.

A unit of land measurement that is 66 feet long. In surveying, land descriptions sometimes use the chain.

A history of conveyances and encumbrances affecting a title from the time the original patent was granted, or as far back as records are available. See abstract of title.

Personal property, including autos and households goods and fixtures. Many laws have different applications, depending on whether the property is real estate or chattel. These laws vary from state to state.

A pledge of personal property as security for a debt.

A bank account that allows the owner to pay obligations and withdraw funds by writing checks. A checking account is a convenient way of holding cash that is used for routine expenses. When applying for a loan, the lender will want to know the amount in any checking accounts the borrower owns.

Property ownership that can be transferred readily. A seller must obtain clear title before a sale can be closed. This means that any known claim to an interest in the property, such as an unpaid mortgage loan, a tax liability or unpaid contractor, must be cleared up. A title search may be required to uncover any such problems. If found, the seller must obtain releases and quit claim deeds to clear up title defects before the sale can be closed.

One who employs a broker, lawyer, accountant, appraiser and so on. See agency. The law describes certain relationships that a professional has with a client. In a real estate transaction it is important to know the scope of the relationship.

Formal transfer of ownership from seller to buyer. The sales contract will set a date for the closing. At that time, if the date is not changed, a meeting of buyer and seller, plus agents, attorneys, lenders and other interested persons, is held. At the meeting, all fees and commissions are paid, the loan is advanced, legal documents are signed and all transaction expenses, including the buyer’s down payment, are paid out of funds supplied by the buyer and seller. After closing and funding, the buyer is the owner of the property.

One who administers a closing. In most cases, a representative of the title company serves as closing agent. This agent schedules the closing meeting, sends notices to the persons, prepares settlement statements and conducts the meeting.

In a real estate transaction, amounts charged to transfer ownership. Generally includes brokerage commissions, discount points and other loan fees, appraisal and credit check fees, attorney fees, title expenses and recording fees. In a residential real estate transaction these easily can exceed 10 percent of the selling price.

The date on which the seller delivers the deed, and the buyer pays for the property. Also called settlement date. The Texas earnest money contract or agreement of sale will state when closing is to take place. A buyer or seller may be considered to have defaulted on a contract if unable to close by the agreed upon date.

An accounting of funds from a real estate sale, made to both the seller and the buyer separately. Most states require the broker to furnish accurate closing statements to all parties to the transaction in which he or she is an agent. Shows the accounting, which should be considered with the Texas earnest money contract. The transaction should not be closed if an error is suspected in the closing statement.

An outstanding claim or encumbrance that, if valid, would affect or impair the owner’s title. A cloud on title can restrict use and affect ownership. These should be cleared prior to closing. An attorney or title company can give assurance of title.

In a residential subdivision, detached housing with each unit in close proximity to the others to allow for a large tract of open land to be shared by the units.

One who signs with an applicant or borrower on a mortgage loan, thereby assuming an obligation to repay the loan. A co-applicant or co-borrower may be related or unrelated to the applicant or borrower. The person is obligated to the terms of the mortgage contract. The co-borrower may supply cash, agree to pay part of the debt service or merely guarantee repayment by the borrower. The lender then may consider the income, wealth and creditworthiness of the co-borrower in underwriting the loan.

A related or unrelated person who joins with another to buy a property. A sales contract may list more than one person as the buyer. The co-purchaser may be someone who will share the home with the purchaser or someone who will help the purchaser finance and pay for the home.

Item of value pledged to secure a loan. A loan backed by collateral is of lower risk to the lender than an unsecured loan. In case of default, the lender can sell the collateral to satisfy the debt. For mortgage loans, the collateral usually is the property being purchased.

That which appears to be good title but is not. A title that appears good actually can be clouded. An attorney or title company’s input is essential in determining if a title is clear.

Property designed for use by retail, wholesale, office, hotel and service users. Nearly all cities and towns have zoning, which restricts the location of commercial property.

To mingle or mix, such as the deposit of another’s money in a broker’s personal account. Brokers generally must maintain amounts of earnest money in an account that is separate from their personal funds.

1. Amount earned by a real estate broker for services rendered. 2. The official body that enforces real estate license laws. 1. Commissions are the way real estate brokers earn money. 2. The Texas Real Estate Commission licenses brokers and salespersons and may suspend a license for certain behavior.

A pledge or promise; a firm agreement. When financing is needed to buy property, a commitment that specifies the loan terms must be obtained from a lender. The loan terms are noted in the commitment, which may include interest rate lock-in.

A charge by a lender for making money available. A lender may agree to lock in an interest rate for 60 to 90 days while the necessary title work is performed, upon the receipt of 1 percent of the proposed loan.

An agreement by a lender to fund a loan with specified terms including a specified period. When a buyer applies for a mortgage loan, the lender analyzes the risk based on the applicant’s credit rating, income and wealth and on an appraisal of the property. If everything is satisfactory, the lender issues a commitment letter for a loan amount at a stated rate of interest. The buyer may then proceed with the closing within the time covered by the commitment.

Generally, in a condominium development, land or a tract of land considered to be the property of the development that all owners can use and enjoy. Owners of a condominium share in the use of and payment for the common area, such as walkways, recreational facilities and ponds. A homeowner’s association typically manages the common area.

The body of law that has grown out of legal customs and practices that developed in England. Common law prevails unless superseded by other law.

An organization of property owners in a certain subdivision, condominium or cooperative development.

Property accumulated through joint efforts of husband and wife and owned by them in equal shares. The doctrine now exists in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. See separate property. Husband and wife must agree to all real estate transactions involving community property.

An informal estimate of market value performed by a real estate agent. As a service to the seller or buyer, an agent will give an analysis of market data on price. The analysis is not as rigorous as an appraisal but allows the property to be priced in line with similar properties on the market. The analysis usually is provided free of charge.

Interest paid on the original principal and also on the unpaid interest that has accumulated. For example, $100 deposited in a 5 percent savings account earns $5 interest the first year. Its second-year earnings are 5 percent of $105, or $5.25. Compound interest is the cornerstone of all financial computations, including monthly mortgage payments and remaining balances.

Taking private property for public use, with just compensation to the owner, under eminent domain. Used by governments to acquire land for streets, parks, schools and so on, and by utilities to acquire necessary property. Also, declaring a structure unfit for use. All property is subject to condemnation, though the government must show need. The amount of compensation can be disputed.

Provision(s) in a contract that some or all terms of the contract must be met or the contract need not be consummated. Examples include that the buyer must obtain certain financing or the house must appraise for a certain amount; the city must give occupancy permit; the seller must pay for certain repairs.

A contract for the sale of property stating that the seller retains title until the conditions of the contract have been fulfilled. See contract for deed. Generally, buyers have less of an interest under this type of contract as contrasted with receipt of a deed.

A system of ownership of individual units in a multi-unit structure, combined with joint ownership of commonly used property such as sidewalks, hallways and stairs. See common elements. The condominium can be mortgaged by its individual owner, who must pay assessments for common-area expenses.

Periodic, usually monthly, charge levied by a condominium homeowners’ association on members. One difference in owning a condominium unit, as opposed to a fee simple property, is the requirement to support and follow the bylaws established by the homeowners’ association. Buyers need information about the fee and the rules before buying a condominium unit.

An appraisal principle that holds that property values tend to be maximized when the neighborhood is reasonably homogeneous in social and economic activity.

Anything of value given to induce entering into a contract, including money, personal services, love and affection. A contract must have some consideration to be legally binding.

A loan on which equal payments are made periodically to pay off the debt when the last payment is made. Although each periodic payment is the same, the portion that is interest declines over time, while the principal portion increases.

A loan used to build on real estate. Many construction lenders require, among other things, that the builder obtain a commitment for a permanent loan before they will issue a construction loan. Commercial banks are the most common source of construction loans. The rate is often the prime rate plus 2 percent plus one or more discount points. The loan is advanced in stages as the project is completed.

Exists when physical conditions render property unfit for the purpose for which it was leased, through the fault of the landlord.

The law presumes that everyone has knowledge of a fact when that fact is a matter of public record. For example, A buys land from B, believing that B is the owner. However, C owned the property. Because C’s deed had been properly recorded, A had constructive notice of C’s ownership and cannot claim ownership against C.

A business that maintains historical records on individual debt repayment. Information is volunteered by creditors, and the reports are reviewed when an individual applies for a loan or line of credit. When someone applies for a mortgage loan, part of the loan underwriting process involves checking the borrower’s credit report. A history of slow payment or nonpayment may cause the loan to be denied.

Actually touching; having a common boundary. See adjacent and adjoining.

A provision written into a sales contract that allows a person, usually the buyer, to void the contract if a specified condition is not met. Contingencies protect a buyer from being forced to complete a transaction even though something occurs that makes the purchase impractical. Common contingencies include a requirement for approval of financing and sale of an existing residence. The provision lets the buyer recover deposited earnest money if the contingency arises.

See condition(s).

An agreement between competent parties to do or not to do certain things for a consideration. A valid contract is enforceable in a court of law. All contracts for real estate must be in writing to be enforceable, except leases for less than one year.

A type of installment sale whereby the buyer makes monthly payments on property and receives the deed upon the final payment. See land contract.

See agreement of sale and earnest money contract.

Someone who performs services under contract. This term is involved in real estate in two ways. First, construction contractors supervise the building, remodeling or repair of buildings under contract with a developer or owner. Second, real estate salespeople may be considered independent contractors, rather than employees, depending on their relationship with the firm.

A mortgage loan other than one guaranteed by the Veterans Administration or insured by the Federal Housing Administration. Conventional loans generally require a larger down payment than others, although the required down payment for conventional loans can be decreased with private mortgage insurance.

To deed or transfer title to another. Means a sale or transfer of ownership.

The transfer of the title of real estate from one to another; the means or medium by which title of real estate is transferred. Usually refers to use of a deed, but can also be used for a lease, mortgage, assignment or encumbrance.

An agent who helps complete the transaction and who is eligible to receive a sales commission. In a Multiple Listing Service, the broker supplying the buyer often is a cooperating broker who earns a share of the commission paid by the seller. An agent does not have to directly enter a listing contract to earn a sales commission. Sales commonly involve a cooperating broker in addition to the listing broker.

A type of corporate ownership of real property whereby stockholders of the corporation are entitled to use a certain dwelling unit or other units of space. Special income tax laws allow the tenant stockholders to deduct from their tax return housing interest and property taxes paid by the corporation.

Visible or tangible. Corporeal rights in real estate include such things as the right of occupancy under a lease.

To become liable on a contract, such as a mortgage loan. Often, the lender will not extend the loan to the party seeking it without a substantial partner who accepts liability.

One of the three appraisal methods of estimating value. The estimated current cost of reproducing or replacing the existing improvements, less the estimated depreciation, added to the value of the land, gives the appraised value. Same as appraisal by summation. Most properties sell for market value. The cost approach is useful for proposed construction or for estimating the amount of insurance. Two other common appraisal methods are the market approach and the income approach.

Ownership of property by two or more persons, as in tenancy in common or joint tenancy.

In real estate negotiations, the rejection of an offer and substitution of a new offer to the other party. A counteroffer may bring the transaction closer to agreement but legally is a rejection of the offer.

A promise written into deeds and other instruments agreeing to do or not to do certain acts, or requiring or preventing certain uses of the property. When buying real estate, it is prudent to determine whether any of the covenants would inhibit or prevent a proposed use of the property.

A person’s past record in repaying debt. A person’s credit history is reviewed by a lender prior to approving a loan.

An evaluation of the credit worthiness of an individual based on their credit history. Mortgage loan approval may be difficult to obtain without a favorable credit rating or with no credit rating. Someone who has never borrowed money may have as much difficulty obtaining credit as a person who has a poor credit history.

A document maintained by a credit reporting agency that describes an individual’s credit history. Loan underwriters commonly order credit reports on loan applicants. Individuals have the right to inspect their credit report and make corrections as needed.

A rating that estimates the loan applicant’s risk of defaulting on the loan. Scores depend heavily on the individual’s prior use of credit and other indicators of trustworthiness. The score is based on objective information from the applicant’s credit records. A person’s credit score helps determine whether they get a mortgage loan and the loan terms that will be offered. The worse (lower) the score, the higher the interest rate on the loan will be.

Someone who is owed a debt. Mortgage loan applications require the borrower to identify current creditors. The lender wants to know how much debt the borrower already has and whether income is sufficient to carry the additional debt load of the proposed loan.

A turn space at the end of a street that allows vehicles to turn around on the street without backing up but provides no outlet to other streets. Cul-de-sacs are popular with homeowners because they have no through traffic, making them quieter and safer than through streets.

Depreciation or deterioration that can be corrected at a cost less than the value that will be added. It is economically profitable to correct curable depreciation.

The right of a husband to all or part of his deceased wife’s realty regardless of the provisions of her will. Exists in only a few states. Where it exists, this is the husband’s counterpart to dower.