Nature
and Description of Real Estate
Fixture:
an object that has been attached to land so as to become real estate
Improvement: any form of land development, such as buildings,
roads, fences, and pipelines
Meridians: imaginary lines running north and south, used
as references in mapping land
Metes and bounds: a detailed method of land description that
identifies a parcel by specifying its shape and boundaries
Monument: an iron pipe, stone, tree, or other fixed point
used in making a survey
Personal property: a right or interest in things of a temporary
or movable nature; anything not classed as real property
Real estate: land and improvements in a physical sense as
well as the rights to own or use them
Recorded plat: a subdivision map filed in the county recorder's
office that shows the location and boundaries of individual parcels
of land
Riparian right: the right of a landowner whose land borders
a river or stream to use and enjoy that water
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Rights
and Interests in Land
Chattel: an article of personal property
Essence: the right or privilege one party has to use land
belonging to another for a special purpose not inconsistent with
the owner's use of the land
Eminent domain: the right of government to take privately
held land for public use, provided fair compensation is paid
Encroachment: the unauthorized intrusion of a building or
other improvement onto another person's land
Encumbrance: any impediment to a clear title, such as a lien,
lease, or easement
Estate: one's legal interest or rights in land
Fee simple: the largest, most complete bundle or rights one
can hold in land; land ownership
Lien: a hold or claim one person has on the property of another
to secure payment of a debt or other obligation
Title: the right to or ownership of something; also the evidence
of ownership, such as a deed ore bill of sale
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Forms
of Ownership
Community property: spouses are treated as equal partners
with each owning one-half interest.
Concurrent ownership: ownership by two or more persons at
the same time
Estate in severalty: owned by one person; sole ownership
Joint Tenancy: a form of property co-ownership that features
the right of survivorship
Right of survivorship: a feature of joint tenancy whereby
the surviving joint tenants automatically acquire all the rights,
title, and interest of the deceased joint tenant
Tenancy by the entirety: a form of joint ownership reserved
for married persons; right of survivorship exists and neither spouse
has a disposable interest during the lifetime of the other
Tenants in common: shared ownership of a single property
among two or more persons; interests need not be equal and no right
of survivorship exists
Undivided interest: ownership by two or more persons that
gives each the right to use the entire property
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Transferring
Title
Adverse possession: acquisition of land through prolonged
and unauthorized occupation
Bargain and sale deed: a deed that contains no covenants
but does imply that the grantor owns the property being conveyed
Cloud on the title: any claim, lien, or encumbrance that
impairs title to property
Color of title: some plausible but not completely clear-cut
indication of ownership rights
Consideration: anything of value given to induce another
to enter into a contract
Covenant: a written agreement or promise
Deed: a written document that, when properly executed and
delivered, conveys title to land
Grantee: the person named in a deed who acquires ownership
Grantor: the person named in a deed who conveys ownership
Quitclaim deed: a legal instrument used to convey whatever
title the grantor has; it contains no covenants, warranties, or
implication of the grantor's ownership
Special warranty deed: grantor warrants title only against
defects occurring during the grantor's ownership
Warranty: an assurance or guarantee that something is true
as stated
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Recordation,
Abstracts, and Title Insurance
Abstract of title: a summary of all recorded documents affecting
title to a given parcel of land
Acknowledgment: a formal declaration by a person signing
a document that he or she, in fact, did sign the document
Actual notice: knowledge gained from what one has actually
seen, heard, read, or observed
Chain of title: the linkage of property ownership that connects
the present owner to the original source of title
Constructive notice: notice given by the public records and
by visible possession, coupled with the legal presumption that all
persons are thereby notified
Marketable title: title that is free from reasonable doubt
as to who the owner is
Public recorder's office: a government-operated facility wherein
documents are entered in the public records
Quiet title suit: court-ordered hearings held to determine
land ownership
Title insurance: an insurance policy against defects in title not
listed in the title report or abstract
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Contract
Law
Breach of contract: failure, without legal excuse, to perform
as required by a contract
Competent party: person considered legally capable of entering
into a binding contract
Consideration: an act or promise given in exchange for something
Contract: legally enforceable agreement to do (or not to
do) a particular thing
Counteroffer: an offer made in response to an offer
Duress: the application of force to obtain an agreement
Fraud: an act intended to deceive for the purpose of inducing
another to give up something of value
Liquidated damages: an amount of money specified in a contract
as compensation to be paid if the contract is not satisfactorily
completed
Power of attorney: a document by which one person authorizes
another to act on his or her behalf
Specific performance: contract performance according to the
precise terms agreed upon
Voidable contract: a contract that is able to be voided by
one of its parties
Void Contract: a contract that has no binding effect on the
parties who made it
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Real
Estate Sales Contracts
Binder: a short purchase contract used to secure a real estate
transaction until a more formal contract can be signed
Counteroffer: an offer made in response to an offer
Default: failure to perform a legal duty, such as failure
to carry out the terms of a contract
Earnest money deposit: money that accompanies an offer to
purchase as evidence of good faith
Equitable title: the right to demand that title be conveyed
upon payment of the purchase price
Installment contract: a method of selling and financing property
whereby the seller retains title but the buyer takes possession
while making the payments
Lease-option: allows the tenant to buy the property at preset
price and terms for a given period of time
Right of first refusal: the right to match or better an offer
before the property is sold to someone else
"Time is of the essence": a phrase that means that
the time limits of a contract must be faithfully observed or the
contract is voidable
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Mortgage
and Note
Acceleration clause: allows the lender to demand immediate
payments of entire loan if the borrower defaults
Deficiency judgment: a judgment against a borrower if the
foreclosure sale does not bring enough to pay the balance owed
First mortgage: the mortgage loan with highest priority for
repayment in the event of foreclosure
Foreclosure: the procedure by which a person's property can
be taken and sold to satisfy an unpaid debt
Junior mortgage: any mortgage on a property that is subordinate
to the first mortgage in priority
Mortgage: a document that makes property security for the
repayment of a debt
Mortgagee: the party receiving a mortgage: the lender
Mortgagor: the party giving a mortgage; the borrower
Power of sale: allows a mortgagee to conduct a foreclosure
sale without first going to court
Promissory note: a written promise to repay a debt
Subordination: voluntary acceptance of a lower mortgage priority
than one would otherwise be entitled to
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Deed
of Trust
Assignment of rents: establishes the lender's right to take
possession and collect rents in the event of loan default
Beneficiary: one for whose benefit a trust is created; the
lender in a deed of trust arrangement
Deed of trust: a document that conveys legal title to a neutral
third party (a trustee) as security for a debt
Naked title: title that lacks the rights and privileges usually
associated with ownership
Reconveyance or release deed: a document used to reconvey
title from the trustee back to the property owner once the debt
has been paid
Trustee: one who holds property in trust for another
Trustor: one who creates a trust; the borrower in a deed
of trust arrangement
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Lending
Practices
Amortized loan: a loan requiring periodic payments that include
both interest and partial repayment of principal
Balloon loan: any loan in which the final payment is larger
than the preceding payments
Conventional loans: real estate loans that are not insured
by the FHA or guaranteed by the VA
Equity: the market value of a property less the debt against
it
FHA: Federal Housing Administration
Impound or reserve account: an account into which the lender places
monthly tax and insurance payments
Loan origination fee: the expenses a lender incurs in processing
a mortgage loan
Loan-to-value ratio: a percentage reflecting what a lender
will lend divided by the sale price or market value of the property,
whichever is less
Maturity: the end of the life of a loan
PITI payment: a loan payment that combines principal, interest,
taxes, and insurance
PMI: private mortgage insurance-a private mortgage insurance
source to insure lenders against foreclosure loss
Point: one percent of the loan amount
Principal: the balance owing on a loan
UFMIP: up-front mortgage insurance premium-a one-time charge
by the FHA for insuring a loan
VA: Department of Veterans Affairs
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The
Loan and the Consumer
APR: the annual percentage rate as calculated under the federal
Truth-in-Lendin g Act by combining the interest rate with other
costs of the loan
Credit report: a report reflecting the creditworthiness of
a borrower by showing past credit history
Fair Credit Reporting Act: federal law giving an individual
the right to inspect his or her file with the credit bureau and
correct any errors
Finance charge: the total amount the credit will cost over
the life of the loan
Liquid asset: asset that is in cash or is readily convertible
to cash
Redlining: a lender's refusal to make loans in certain neighborhoods
Regulation Z: federal regulations that implement the enforcement
of the Truth-in-Lending Act
Truth-in-Lending Act: a federal law that requires certain
disclosures when extending or advertising credit
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Sources
of Financing
Alienation clause: requires immediate repayment of the loan
if ownership transfers; also called a due-on-sale clause
Automated underwriting systems: computerized systems for
loan approval communication between a loan originator and the investor
Computerized loan origination: originating loans through
the use of a networked computer system
Disintermediation: the result created when lenders are required
to pay high rates of interest for deposits while receiving long-term
income from low-interest-rate mortgage loans
Fannie Mae: a real estate industry nickname for the Federal
National Mortgage Association
Freddie Mac: a real estate industry nickname for the Federal
Home Loan Mortgage Corporation
Mortgage broker: one who brings together borrowers and lenders
Mortgage company: a firm that makes mortgage loans and then
sells them to investors
Participation certificates: a certificate representing an
undivided interest in a Freddie Mac Pool
Primary market: the market in which lenders originate loans
and make funds available to borrowers
Secondary mortgage market: a market in which mortgage loans
can be sold to investors
Usury: charging an interest rate that is in excess of the
legal rate
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Types
of Financing
Adjustable rate mortgage (ARM): a mortgage on which the interest
rate rises and falls with changes in prevailing interest rates
Affordable housing loan: an umbrella term that covers many
slightly different loans that target first-time home buyers and
low- to moderate-income borrowers
Asset integrated mortgage: a mortgage designed to create
a savings from the down payment
Blanket mortgage: a mortgage secured by two or more properties
Construction loan: short-term loan for new construction or
remodeling of an existing structure
Equity sharing: an arrangement whereby a party providing
financing gets a portion of the ownership
Graduated payment mortgage: a mortgage with an interest rate
and maturity that are fixed, but the monthly payment gradually rises,
because the initial monthly payments are insufficient to fully amortize
the loan
Negative amortization: accrual of interest on a loan balance
so that, as loan payments are made, the loan balance rises
Option: a right, for a given period of time, to buy, sell,
or lease property at specified price and terms
Package mortgage: a mortgage that secures personal property
in addition to real property
RAM: reverse annuity mortgage. The lender makes monthly payments
to a homeowner who later repays in a lump sum
Seller financing: a note accepted by a seller instead of
cash
Wraparound mortgage: a mortgage that encompasses any existing
mortgages and is subordinate to them
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Taxes
and Assessments
Adjusted sales price: the sales price of a property less
commissions, and closing costs
Ad valorem taxes: taxes charged according to the value of
a property
Assessed value: a value placed on a property for the purpose
of taxation
Assessment appeal board: local governmental body that hears
and rules on property owner complaints of overassessment
Basis: the price paid for property; used in calculating income
taxes
Documentary tax: a fee or tax on deeds and other documents
payable at the time of recordation
Installment sale: sale of real estate in which the proceeds
of the sale are deferred beyond the year of sale
Mill rate: property tax rate that is expressed in tenths
of a cent per dollar of assessed valuation
Tax certificate: a document issued at a tax sale that entitles
the purchaser to a deed at a later date if the property is not redeemed
Tax lien: a charge or hold by the government against property
to insure the payment of taxes
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Title
and Escrow
Closing meeting: a meeting at which the buyer pays for the
property and receives a deed to it and all other matters pertaining
to the sale are concluded
Escrow agent: the person placed in charge of an escrow
Escrow closing: the deposit of documents and funds with a
neutral third party, along with instructions as to how to conduct
the closing
Prorating: the division of ongoing expenses and income items
between the buyer and the seller
Real Estate Settlement Procedures Act (RESPA): a federal
law that deals with procedures to be followed in certain types of
real estate closings
Settlement statement: an accounting of funds to the buyer
and the seller at the completion of a real estate transaction
Title closing: the process of completing a real estate transaction
Walk-through: a final inspection of the property just prior
to settlement
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Real
Estate Leases
Assignment: the total transfer of the lessee's rights to
another party
CPM, RPA: professional designations for property managers
Gross lease: tenant pays a fixed rent and the landlord pays
all property expenses
Lessee: the tenant
Lessor: the landlord
Net lease: tenant pays a base rent plus maintenance, property
taxes, and insurance
Option clause: gives the right at some future time to purchase
or lease a property at a predetermined price
Quiet enjoyment: the right of possession and use of property
without undue disturbance by others
Reversion: the right to retake possession at a future date
Sublessee: a lessee who rents from another lessee
Sublessor: a lessee who rents to another lessee
Sublet: to transfer only a portion of one's lease rights
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Real
Estate Appraisal
Appraisal: the estimate of the value of something
Capitalize: to convert future income to current value
Comparables: properties similar to the subject property that
have sold recently
Cost approach: land value plus current construction costs
minus depreciation
Depreciation: loss in value due to deterioration and obsolescence
FIRREA: the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989
Gross rent multiplier (GRM): a number that is multiplied
by a property's gross rents to produce an estimate of the property's
worth
Highest and best use: that use of a parcel of land that will
produce the greatest current value
Income approach: a method of valuing a property based on
the monetary returns it can be expected to produce
Market (comparison) approach: a method of valuing property
based on recent sales of similar properties
Market value: the cash price that a willing buyer and a willing
seller would agree upon, given reasonable exposure of the property
to the marketplace, full information as to the potential uses of
the property, and no undue compulsion to act
Operating expenses: expenditures necessary to maintain the
production of income
Scheduled gross (projected gross): the estimated rent a fully
occupied property can be expected to produce on an annual basis
USAP: the Uniform Standards of Professional Appraisal Practice
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Licensing
Laws and Professional Affiliation
Broker: one who acts as an agent for others in negotiating
contracts or sales
Independent contractor: one who contracts to do work according
to own methods and is responsible to employer only for the results
of that work
License revocation: to recall and make void a license
License suspension: to temporarily make a license ineffective
Licensee: one who holds a license
Principal broker: the broker in charge of a real estate office
Real estate commission: a state board that advises and sets
policies regarding real estate licensees and transaction procedures
REALTOR®: a registered trademark owned by the National
Association of Realtors for use by its members
Recovery fund: a state-operated fund that can be tapped to
pay for uncollectible judgments against real estate licensees
Sales associate: a salesperson or broker employed by a broker
Salesperson: a person employed by a broker to list, negotiate,
sell, or lease real property for others
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The
Principal-Broker Relationship: Employment
Advance fee listing: listing in which a broker
gets paid in advance and charges an hourly rate
Broker: one who acts as an agent for others in negotiating
contracts or sales
Exclusive authority to purchase: listing utilized by buyer's
brokers
Exclusive right to sell: a listing that gives the broker
the right to collect a commission no matter who sells the property
during the listing period
Multiple listing service (MLS): organization of member brokers
agreeing to share listing information and share commissions
Net listing: a listing agreement that pays the broker an
uncertain amount of commission, generating the principal net proceeds
from the sale (not in legal in Montana)
Ready, willing, and able buyer: a buyer who is ready to buy
at the seller's price and terms and who has the financial capability
to do so
Real estate listing: a contract wherein a broker is employed
to find a buyer or tenant
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Principal-Broker
Relationship: Agency
Agent: the person empowered to act by and on behalf of the
principal
Boycotting: two or more people conspiring to restrain competition
Commingling: the mixing of clients' or customers' funds with
an agent's personal funds
Dual agency: representation of two or more principals in
a transaction by the same agent
Middleman: a person who brings two or more parties together
but does not represent either party
Ostensible authority: an agency relationship created by the
conduct of the principal
Price fixing: two or more people conspiring to charge a fixed
fee, having an anticompetitive effect
Principal: a person who authorizes an other to act
Puffing: statements a reasonable person would recognize as
nonfactual or extravagant
Third parties: persons who are not parties to a contract
but who may be affected by it
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Fair
Housing, ADA, Equal Credit, and Community Reinvestment
Americans with Disabilities Act (ADA): a federal law giving
disabled individuals the right to access for commercial facilities
open to the public
Block busting: the illegal practice of inducing panic selling
in a neighborhood for financial gain
Community Reinvestment Act: federal statute encouraging federally
regulated lenders to increase their participation in low-income
areas
Equal Credit Opportunity Act: federal law that provides for
equal credit to borrowers
Familial status: one or more individuals under the age of
18 who are domiciled with a parent or other person having custody
Handicapped: having a physical or mental impairment that
substantially limits one or more life activities, or having a record
of such impairment
Protected class: a class of people that by law are protected
from discrimination
Steering: practice of directing home seekers to particular
neighborhoods based on race, color, religion, sex, national origin,
or handicapped or adults-only status
Tester: an individual or organization that responds to advertising
and visits real estate offices to test for compliance with fair
housing laws
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Condominiums,
Cooperatives, PUDs, and Timeshares
Bylaws: rules that govern how an owners' association will
be run
CC&Rs: covenants, conditions, and restrictions by which
a property owner agrees to abide
Common elements: those parts of a condominium that are owned
by all the unit owners
Condominium: individual ownership of a space of air plus
undivided ownership of the common elements
Cooperative: land and building owned or leased by a corporation
that, in turn, leases space to its shareholders
Limited common elements: common elements whose use is limited
to certain owners
Planned unit development (PUD): individually owned lots and
houses with community ownership of common areas
Proprietary lease: a lease issued by a cooperative corporation
to its shareholders
Reserves: money set aside for expenses that do not occur
every month
Resort timesharing: the exclusive use of a property for a
specified number of days each year
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Land-Use
Control
Building codes: local and state laws that set minimum construction
standards
Certificate of occupancy: a government-issued document that
states a structure meets local zoning and building code requirements
and is ready for use
Downzoning: rezoning of land from a higher-density use to
a lower-density use
Land-use control: a broad term that describes any legal restriction
that controls how a parcel of land may be used
Master plan: a comprehensive guide for the physical growth
of a community
Nonconforming use: an improvement that is inconsistent with
current zoning regulations
Restrictive covenants: clauses placed in deeds and leases
to control how future owners and lessees may or may not use the
property
Variance: allows an individual landowner to vary from zoning
requirements
Zoning laws: public regulations that control the specific
use of land
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Investing
in Real Estate
Cash flow: the number of dollars remaining each year after
collecting rents and paying operating expenses and mortgage payments
Cash-on-cash: the cash flow produced by a property divided
by the amount of cash necessary to purchase it
Equity buildup: the increase of one's equity in a property
due to mortgage balance reduction and price appreciation
Leverage: the impact that borrowed funds have on investment
return
Negative cash flow: a condition wherein the cash paid out
exceeds the cash received
Prospectus: a disclosure statement that describes an investment
opportunity
Straight-line depreciation: depreciation in equal amounts
each year over the life of the asset
Tax shelter: the income tax savings that an investment can
produce for its owner
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