Terms

REAL ESTATE

TERMS

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Glossary of Real Estate Terms

© 2010 Rich Dad Education. All Rights Reserved. The Rich Dad word mark and logos are owned by Rich Dad Operating Co., LLC and any use of such marks by Rich Dad Education is under license.

 Notice This publication and the accompanying materials are designed to provide accurate and authoritative information in regard to the subject matter covered in it. It is provided with the understanding that the  publisher is not engaged in rendering legal, accounting, or other professional opini ons. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Reproduction or translation of any part of the information contained herein, in any form or by any means, without the written permission of the owner is unlawful.

Glossary of Real Estate Terms

© 2010 Rich Dad Education. All Rights Reserved. The Rich Dad word mark and logos are owned by Rich Dad Operating Co., LLC and any use of such marks by Rich Dad Education is under license.

 Notice This publication and the accompanying materials are designed to provide accurate and authoritative information in regard to the subject matter covered in it. It is provided with the understanding that the  publisher is not engaged in rendering legal, accounting, or other professional opini ons. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Reproduction or translation of any part of the information contained herein, in any form or by any means, without the written permission of the owner is unlawful.

 Real Estate Terms Terms

This publication and the accompanying materials are designed to provide accurate and authoritative information in regard to the subject matter covered in it. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional opinions. If legal advice or other ex pert assistance is required, the services of a competent professional should be sought. Reproduction or translation of any  part of the information contained herein, in any form or by any means, without the written permission of the owner is unlawful. The educational training program provided hereunder is not designed or intended to qualify students for employment. It is intended solely for the avocation, personal enrichment, and enjoyment of students. All forms contained herein are provided for edu cational purposes only. The provider does not assert any warranty, express or implied, as to the legal effect and/or completeness of the forms. The provider hereby disclaims any a nd all liability with respect to these forms. The provider suggests that you contact an attorney to ensure that the forms are modified to meet the laws of your state. Disclosure and Foreclosure and Equity Sharing Techniques The Foreclosure Training course or foreclosure content presented in other Company trainings, products, and services are intended to p rovide broad-based experiential real estate foreclosure and pre-foreclosure training techniques that are applicable in the majority of geographic regions where we conduct our classes. This information is in no way intended to provide legal advice or detailed guidance on how to properly conduct foreclosure and/or pre-foreclosure activity in your state. As with any regulated activity, we strongly recommend that you consult with an attorney. 1

There is currently a growing group of states  which have enacted legislation that could impact how you participate in foreclosure and/or pre-foreclosure activities in those states. Generally speaking, such legislation may regulate both consulting/marketing activities and activities where you in fact purchase the property and/or re-convey it back to the owner. The laws tend to impose detailed contractual requirements and disclaimers along with a right of cancellation for a mandated time period. It is not uncommon for for these laws to curtail certain conduct and limit the compensation/profit you may receive in connection with foreclosure and/or pre-foreclosure pre-foreclosure activities. Finally, many of these laws could be interpreted to prohibit you from taking an interest in a property under unde r certain circumstances, and as such, could hinder techniques we teach to protect the investor. Violations of these laws typically result in both civil and criminal penalties, including multiple damages, fines and terms of imprisonment.

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 As of August 11, 2008 we are aware aware of 23 states which have enacted legislation: CA, CO, District of Columbia, FL, GA, HI, IA, ID, IL, IN, MA, MD, ME, MO, MN, NE, NH, NV, NY, OR, RI, VA and WA.

A Accelerated Depreciation – A method of cost write-off in accounting practice in which allowances for depreciation of a wasting asset are greater in early years and decline according to a formula. Accelerated Capital Cost and Recovery System (ACRS) – The methods for determining depreciation allowances required by the Economic Recovery Tax Act of 1981. Acceleration Clause – A condition in a loan contract or a mortgage note that permits the lender to require immediate repayment of the entire balance of the loan if the contract is  breached or conditions for repayment occur. Accrual Accounting – An accounting system where income is realized when earned, not when received, and expenses are recorded when incurred, not when paid. Adjustable Mortgage Loan (AML) – A flexible mortgage instrument approved by the Federal Home Loan Bank Board for use by federal savings and loan associations which allows adjustment of the interest rate as often as monthly ba sed upon changes on an interest rate index. Adjusted Basis – The difference between the cost of the property and total depreciation claimed in prior years. Adjusted Net Operating Income – Net operating income plus reserve for replacements. Adverse Action – The refusal to grant credit more or less on terms requested by the applicant; or the refusal to increase the amoun t of credit available to an existing  borrower, when the borrower has requested an increase in accordance with standard  procedures. Affidavit – A statement or declaration reduced to writing and sworn or affirmed to be  before an officer who has authority to administer an oath or affirmation. Agency – The business of one entrusted to another. Alias – An assumed name; also known as (a.k.a.). From the Latin “alias dictus,” otherwise called. Alienation Clause – A clause in a mortgage or charge of land that demands payment in full upon sale of property. Similar to an acceleration clause. Allotment – An amount of money set aside by investors or institutions for future investment in mortgages.

 Real Estate Terms

Amortization – The gradual reduction of a debt by means of periodic payments sufficient to pay principal and thereby liquidate a debt. Annual Loan Constant – The total annual payments of principal and interest, annual debt service, on a mortgage with level-payment amortization schedule, expressed as a  percentage of the initial principal amount of the loan. Annuity Capitalization – A process of capitalization in which the income from a property is converted to a present value under the assumption that the income stream will consist of a finite number of equal payments. Appraisal – A supported, defended, estimate of the value of property rights as of a given date. ASA – The designation awarded by the American Society of Appraisers (ASA), to its senior members who appraise various types of personal property as well as real property. Assessed Valuation – The valuation placed on real or personal property for the purposes of taxation. Assessment – A charge made against a property by the state, county, city or other authorized district. Assignee – The one to whom a mortgage and mortgagee note is transferred and assigned (the purchaser). Assignment – A transfer of any current or future interest in property, real or personal. Assignor – The one who is transferring and assigning a mortgage and mortgage note (the mortgagee). Assumption – A method of selling real estate wherein the property purchaser agrees to take over the primary liability for payment of a n existing mortgage. Assumption and Release Agreement – A written agreemen t releasing the mortgagor from  personal liability under the mortgage because a second party (the property purchaser) has agreed to meet the mortgagor’s obligations. Attachment – A seizure of a defendant’s property as security for any judgment a plaintiff may recover in the pending action. Automated Clearinghouse (ACH) – An electronic drafting system that de bits a lender’s authorized bank account and electronically transfers funds to a designated payee account.

B Balloon Mortgage – A mortgage that has level monthly payments that willfully amortize it over a stated term, but which provides for a balloon payment to be due at the end of an earlier specified term. Balloon Payment – The remaining balance of a mortgage that must be paid in a lump sum at the end of a mortgage term. The amount may represent slightly more than a monthly  payment or may be substantial. It occurs because the fixed installment did not fully amortize the mortgage, either accidentally or intentionally. Band of Investment Analysis – A method of deriving an overall rate based on the relative  proportion of debt and equity represented in similar transactions. Bankruptcy – A proceeding in federal court in which a debtor, who owes more than his or her assets, can relieve the debts by transferring his or her assets to a trustee. This affects the borrower’s personal liability for a mortgage debt, but not the lien of the mortgage. Basic (Export) Activity – Exchange of goods produced locally for money earned outside the community or metropolitan area. Basis Point – 1/100 of 1%. For example, 7-1/2 basis points equals 0.075% or 0.0075. Basket Clause – A regulatory provision allowing financial institutions to make a certain  proportion of loans or investments that would otherwise be illegal. Beneficiary – The person designated to receive the income from a trust estate or trust deed. Biweekly Mortgage Payment – A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are drafted from the borrower’s bank account. Blanket Insurance Policy – A single policy that covers more than one piece or property (or more than one person). Blanket Mortgage – A development in which several properties are secured by one mortgage. Boot – An asset or liability transferred as part of an exchange of realty. Broker – One for whom a commission or fee brings parties together and assists in negotiating contracts between them. In real estate transactions, the broker usually brings together the buyer, the seller, and the mortgage lender.

 Real Estate Terms

Bundle of Rights – The concept of property ownership which recognizes ownership of  property as consisting of a number of rights or benefits. Included are the rights of use, exclusion, and disposition. Also, the rights can be divided among a number of different legal estates, such as reversions, life estates and leaseholds.

C Call Option – A provision in the mortgage that gives the lender the right to call the mortgage due and payable at the end of a specified period for whatever reason. Capital Gain – The amount by which the net proceeds from resale of a capital item to exceed the adjusted cost, or “book value” of the item. Capitalization – The process of converting into present value a series of anticipated future installment of net income. Cash Basis Accounting – An accounting system where income is realized when collected, not when earned, and expenses are recorded when paid, not when incurred. Cash Break-even Ratio – Operating expenses plus debt service minus replacement reserves, divided by effective gross income. This ratio provides a n investor with a measure of all cash charges against effective gross income. Cash Throw-off – Net operating income less annua l debt service; also known as before tax cash flow and gross spendable income. Certificate of Estoppel – A statement of material facts or conditions upon which another  person can rely. Closing – The time or situation when title or real estate is conveyed from seller to the  buyer; full payment is made by the buyer to the seller; appropriate documents are transferred, and prorationing of expenses occurs. Cloud On Title – A proceeding or instrument such as a deed, deed of trust, or mortgage, or a tax or assessment, judgment, or decree, which, if valid, would impair the title to the land. Cognovit Clause – Words in a mortgage note which authorize the lender’s attorney to obtain adjustment lien against the debtor’s real property.

Coinsurance Clause – A clause in an insurance policy contemplating that the policyholder will carry insurance to some named percentage of the value of the property covered. In return for this, the policyholder benefits through a reduction in rate. Collateral – Stocks, bonds, evidence of deposit, and other marketable properties that a  borrower pledges as security for a loan. In mortgage lending, the collateral is the specific real property that the borrower pledges as security. Commercial Banks – Lending institutions that primarily make short-term loans to  businesses and individuals. Banks “create money” through their affiliation with the Federal Reserve System. In addition to short-term commercial loans, they make many other types of loans, such as mortgage loans, and provide many financial services. Commitment – A pledge or engagement; a contract involving financial responsibility or a contingent financial obligation to be performed in the future; a promise by a lender to make a specific loan to a prospective borrower. Comparable Sales Approach – Method of appraising real estate by comparing sale prices of properties that have sold recently to account for value differences in a property. Conditional Sale Contract – A contract for the sale of property, the property to be delivered to the buyer; the seller to retain, however, the title thereof until the conditions of the contract have been fulfilled. Condominium – A real estate project in which each unit owner has title to a unit in a  building, an undivided interest in the common areas of the project, and sometimes the exclusive use of limited common areas. Construction Loan – A short-term loan made to a builder to finance the construction of a  building. Contract of Deed or Land Contract – An instrument by which a prospective buyer pays for a property in installments. Legal title is conveyed in the future after payment of the full price or an otherwise specified amount. Contract Rent – The periodic payment for the use of a property specified in the lease. It may differ from the market rent and the rate that would be charged currently if the lease were to be negotiated in the open market. Contracts – An agreement between two or more parties to do or not to do a particular thing. Conventional Mortgage – A mortgage that is not insured or guaranteed by the federal government.

 Real Estate Terms

Convertible ARM – A type of adjustable-rate mortgage that includes an option for the mortgagor to change to a fixed-rate mortgage on one of its early interest rate a djustment dates. Corporation – A legal entity featuring ownership by means of transferable shares, the shares can be sold, of stock and limited liability. Cost – The expenditure of resources necessary to bring a good or product into existence. Cost Depreciation Approach – A method of appraising real estate by subtracting all elements of accrued depreciation from the cost of reproducing the improvements and adding to that result the value of the land as estimated separately. Cost of Funds Index – An index that is used to determine interest rate ch anges for certain ARM plans. It represents the weighted-average cost of savings, borrowings and advances of the 11th District members of the Federal Home Loan Bank of San Francisco. Covenant – An agreement between two or more persons, entered into by deed, whereby one of the parties promises the performance or non-performance of certain acts, or that a given state of things does or shall, or does not or shall not exist. Credit Life Insurance – A type of insurance often bought by mortgagors because it will  pay off the mortgage debt if the mortgagor dies while the policy is in force. Curable Defect (physical or functional) – A deficiency in a building, the correction of which adds at least as much value as the cost to cure the defect.

D Debt Service Coverage Ration – The amount by which net operating income can decline and still be adequate to cover a mortgage payment. Declining Balance Depreciation – A method of depreciating an asset by use of a fixed  percentage applied to the successive balances remaining after previously computed amounts of depreciation have been deducted. Deed – An instrument in writing under seal, duly executed and delivered, containing a transfer, a bargain, or contract, used in conveying the title to real property from one party to another. There are two general types of deed: the quitclaim and the warranty. Under the quitclaim deed, the seller conveys property to the purchaser, the title being only as good as the title held by the seller, who conveys all claim, interest or right to the property as far as his own title is concerned. Under a warranty deed, the seller also conveys all

claim, right, and title to the property, but also warrants the title to be clear, subject only to such matters as may be shown in the deed. The warranty is recognized by law as the subject for future restitution of loss to the purchaser if the seller conveys any defects in the title. A seal is not required in some states; the term “grant deed” is used in place of warranty deed in some states. Deed Restrictions – Limitations placed in a deed limiting or restricting the use of the land. Deed of Trust – A sealed instrument in writing, duly executed and delivered, conveying or transferring property to a trustee. Default – The failure to fulfill a contractual agreement. Deficiency Judgment – Judgment granted after a suit to recover a difference between a legally imposed indebtedness and the dollars received from a foreclosure sale of the debtor’s assets. Depreciation – A loss of utility and, hence, value from any cause. Direct Capitalization – The conversion of anticipated net income into present value by dividing the income by an appropriate rate that reflects the prevailing relationship of net income to selling price for comparable properties being sold in the open market. Disclosure – This is provided to clients; it is a summary of y our loans and the costs associated with them. Discounting (Charging Points) – Withholding a portion of a loan in order to adjust a contract interest rate, nominal rate, to competitive market interest rates. Disintermediation – Withdrawal of funds from savings accounts in thrift institutions for the purpose of investing them in higher yielding, short-term securities – U.S. Treasury certificates and notes. The process occurs during periods of high interest rates. Due-On-Sale Provision – A covenant in a mortgage that allows the lender to call the mortgage due and payable if ownership of the mortgage property is transferred.

E Easement – A right or interest in the land of another that entitles the holder thereof to some use, privilege or benefit such as to place pole lines, pipeline, road thereon or travel over.

 Real Estate Terms

Economic Base – The economic activity of a community which results in the exporting of goods and services to other areas and thus attracts income into the community from outside its borders. Economic Life – The total period over which improvements to real estate contribute to the value of the property. Effective Age – The years of age indicated by the condition and utility of a structure. Effective Gross Income – The estimated potential gross income less allowance for vacancy and collection loss plus other income. Eminent Domain – Governmental power and authority to acquire private property within its borders for public use upon payment of just compensation. Encroachment – An unlawful extension of one’s right upon the land of another. Equity – Value in excess of a mortgage or deed of trust or value of an interest in a contract of sale. Equity Dividend Rate – The ratio of annual cash throw-off to the original equity investment. Equity of Redemption – A right which the mortgagor (borrower) of an estate has of redeeming it, after it has been forfeited by law by the non-payment, at the time appointed, of the money secured by the mortgage to be paid by paying the amount of the debt, interest and costs. Escalator Clause – A phrase in an agreement providing for an adjustment of a price, rent or interest rate. Escrow – Securities, instruments, or other property deposited by two or more persons or  parties with a third person or party, to be delivered on a certain contingency, or the happening of a certain event; when used in the expression “in escrow,” “in trust” or “trust,” the state of being so held. The subject matter of the transaction is the escrow; the terms with which it is deposited with the third person or p arty constitute the escrow agreement; and the third person or party is the escrow agent. Execution – A writ issued in the name of the people, under the seal of the court, and subscribed by the clerk, or issued by a justice of the peace directed to a sheriff, constable, marshal, or commissioner appointed by the court, to enforce a judgment against the  property or person of a judgment debtor.

Externalities – Influences emanating from outside a property which affect it and other  properties, whether vacant land or improved property. Equity Dividend Rate – The ratio of annual cash throw-off to the original equity investment.

F Federal Deposit Insurance Corporation (FDIC) – Governmental agency whose primary functions are supervision and insurance of accou nts. Federal Home Loan Mortgage Corporation (FHLMC) – A government related agency that provides a market for those wishing to sell previously originated mortgage loans. It  primarily buys conventional loans from savings and loan associations. Federal Housing Administration (FHA) – An agency of the U.S. Department of Housing and Urban Development (HUD) which insures private lending institutions against loss on loans under various housing programs established by programs. Federal National Mortgage Association (FNMA) – A government-related agenc y that  provides a market for those wishing to sell previously originated mortgage loans. It deals  primarily in government-underwritten loans. Federal Reserve System (FRS) – An independent government agency consisting of a Board of Governors and 12 regional banks that serve as a reservoir of funds for most of the nation’s commercial banks. The system allows for the “creation” of money through the system of reserves according to policy established by the Board of Governors. Through various tools. The Fed can speed up or slow down increases in the supply of money. These changes, in turn, are usually felt in increasing or decreasing interest rates. Fiduciary – One who holds a thing in trust for another, such as a trustee. First Mortgage – A mortgage that is first lien on the property pledged as security. Fiscal Policy – The taxation and spending plans and patterns of the U.S. Government. Fiscal Year – A corporation’s accounting year; it does not always start on January 1. Fixed-rate Mortgage – A mortgage that provides for only one interest rate for the entire term of the mortgage. If the interest rate change s because of enforcement of the due-onsale provision, the mortgage is still considered a fixed-rate mortgage. Forbearance – The waiving of a term of a mortgage.

 Real Estate Terms

Foreclosure – The legal process by which a mortgagor of real or personal property or other owner of a property subject to a lien is deprived of his interest therein. The usual modern method is sale of the property by court proceedings or outside of court. Form Report – A special type of appraisal report that can be completed relatively quickly and easily. Fractions – When dealing with mortgage notes, this term refers to a portion of the note. Fully Amortized ARM – An adjustable-rate mortgage that h as a monthly payment sufficient to amortize the unpaid principal balance (at the interest accrual rate) over the mortgage term.

G Gap Financing – A loan obtained by a builder to cover the potential difference between a  permanent loan commitment and a construction loan, the amount of which is based upon a specified occupancy rate. Generative Function – A product or service line of establishments that a customer intends to patronize when a shopping journey begins. Going Concern Value – The value of a business considered as operating enterprise as opposed to a collection of individual groups of assets and liabilities. Government National Mortgage Association (GNMA) – A governmental age ncy under HUD that provides a secondary market for mortgages granted under special purpose government programs. Graduated Payment Adjustable Rate Mortgage (GPARM) – A mortgage that combines the features of a graduated payment mortgage and an adjustable rate mortgage. Payments are increased yearly during the graduated payment period and do not necessarily reflect changes in the interest rate during that period. At the end of any graduated payment  period, if there is no option for an additional graduated payment period, the mortgage characteristics are those of a regular adjustable rate mortgage. Graduated Payment Mortgage (GPM) – A type of mortgage loan that allows lower  payments during the loan’s early years than would be the case with a standard fixed  payment mortgage. The payments rise by a specified percentage usually during the loan’s first five to ten years. Grantee – He to whom a grant is made.

Grantor – He by whom a grant is made. The seller of real property, i.e., the grantor in a deed, gives up title. Gross Income (Rent) Multiplier (GIM) – The relationship between sale price (value) and either Potential Gross Income or Effective Gross Income.

H Hazard insurance – A contract whereby, for an agreed premium, one party undertakes to compensate the other for loss on a specific subject by specified hazards, such as acts of God or war. Highest and Best Use, Improved Property – Existing improvements which remain the highest and best use until a new use of the site generates sufficient value to justify demolition of the existing improvements and construction of new improvements. Highest and Best Use, Vacant Site – That use of a site which results in maximum  productivity and return on investment. High-ratio Loan – A loan for more than 75% of the appraised value of a property; according to federal law, it must be insured. Home Bank Loan Act (1932) – Created the Federal Home Loan Bank System. Home Mortgage – A residential mortgage on one-to-four family property. Home Owners Loan Act (1933) – Gave all savings and loan associations the opportunity to apply for a federal charter. Homestead Estate – The rights of record of a head of a family or household in real estate, owned and occupied as a home, which are exempt from seizure by creditors.

I Income Capitalization Approach – A method of appraising real estate by which a  property’s annual net operating income is divided by a rate reflecting a return on and of the investment. The rate is obtained from market transactions of similar properties, and the resulting number is an estimate of market value.

 Real Estate Terms

Incurable Defect, Physical Deterioration – An item which is worn out and costs more to replace than the value added by the cure. Incurable Functional Obsolescence – Defects in a building’s basic design or layout; an insufficient number of bathrooms and an inefficient traffic pattern are good examples. The cost to cure such defects is greater than the value added by the cure. Index – A number derived from a formula used to characterize a set of data, which serves as an indicator for determining interest rate changes on ARMs/GPARMs. Most standard  plans have used indexes based on Treasury bills. Individual Investors – Private investors, unaffiliated with any organizations or institutions, who are purchasing a mortgage for their own profit. Sellers of real estate, who hold the paper on the property they sold, are included in this category. The regulations for licenses in any state are generally there to protect the private investor. Installment Sale – A transaction in which a portion of the selling price for property is received in future periods. Insurable Value – The portion of the total value of an asset(s) that is acknowledged under the provisions of an insurance policy. Interest Accrual Rate – The percentage rate at which interest accrues on the mortgage. In most cases, it is also the rate used to calculate the monthly payment, although it is not used for graduated payment mortgages and adjustable rate mortgages with payment change limitations. Interest-In-Advance Mortgage – A mortgage for which the interest portion of each month’s principal and interest payment covers the period between the first and last day of that month (rather than of the preceding month). Interest Rate Buy Down Plan – An arrangement wherein the property seller (or any other  party) deposits money into an account so that it can be released each month to reduce the mortgagor’s monthly payments during the early years of a mortgage. During the specified  period, the mortgagor’s effective interest rate is brought down below the actual mortgage interest rate. Interest Rate Change Date – The date on which the mortgage interest rate changes for an ARM/GPARM; the effective date that a new interest rate b egins to accrue on an ARM MBS pool. Interim Financing – A subordinated loan from a land seller to a developer during the  period the developer has a first-lien construction or development loan from an institution lender.

Intermediation – The process of depositing funds in financial institutions, which serve as “intermediaries” in the flow of funds for investment. Internal Rate of Return – The interest rate tha t discounts future cash flows and cash reversion from a project equal to the initial investment. Investment Entry Point (Urban Real Estate) – Refers to the relative age of a property at the time of purchase by an investor with respect to the property’s time line.

J Junior Mortgage – Any mortgage that provides a lien that is subsequent in priority to another mortgage.

L Leasehold Financing – A loan for which a long-term leasehold serves as security. Typically, there is a loan on the underlying fee simple interest, which must be subordinated to the leasehold lender. Lessee – One who possesses the right to use or occupy a property under lease agreement; the renter. Lessor – One who holds title to and conveys the right to use and occupy a property under lease agreement; the landlord. Letter Report – An appraisal form used only for simple, straightforward appraisals. Leverage – The use of borrowed funds to finance the purchase of an asset, especially real estate. The effect of leverage can be positive or negative depending upon whether the interest rate on the debt is lower or higher than the rate of return remaining to the equity. Positive leverage enhances the equity return, while negative leverage decreases. Lien – A hold or claim which one person has on the property of another as a security for some debt or charge. Lien Theory – A modern approach to creating loan security in which the lender is considered to hold an interest in, rather than a title to, the property for security of the debt.

 Real Estate Terms

Liquidation Value – The estimated proceeds, net of liabilities, which would result from either a normal or forced sale of an asset(s) if sold without being part of the business of which it was originally a part. Liquidity – Relationship between a speedy sale price and the total number of dollars invested in the property. Loan – The letting out, or renting, of a certain sum of money by a lender to a borrower to  be repaid with or without interest. Loan Fee – A separate charge added to the closing costs of the buyer. Loan-to-Value Ratio – The relationship of the loan amount to the price or value of a  property. Locational (Economic) Obsolescence – Decline in the value of a building caused by the deterioration in the quality of its neighborhood. Long-Lived Incurable Defect – A defect that will last as long as the building.

M MAl (Member Appraisal Institute) – Designation awarded by the American Institute of Real Estate Appraisers (AIREA) which signifies that an appraiser is qualified to appraise all types of real property and meets high knowledge and ethical standards. Margin – The amount that is added to the index value to create a mortgage interest rate for an ARM/GPARM. Market Value – The highest price that a buyer agreeing, but not forced to buy, would pay, and the lowest a seller, agreeing, but not forced to sell, would accept. Marketability – Relationship between a speedy sale price and the current market value of the property. Market Rent – Rental level ascertained by seeking out the rental rates for similar  properties in the relevant market area. Market Risk – The uncertainty associated with the decrease in the market price of an investment in response to a rise in market rates of interest. Market Segmentation – The dividing of a large, more general market into smaller, more specific submarkets.

Maturity Date – The final day of a given period concerning a mortgage or a lien (e.g., a mechanic’s lien or a builder’s lien). Mechanic’s Lien – A lien affixed to land records for a specified period of time, usually on behalf of a tradesman for recapture of the unpaid costs of labor and materials. Mechanics liens must be satisfied when property changes hands. They are also enforced  by court order. MI – Any one of the private or state mortgage insurance companies that insure against loss in the event of a mortgagor’s default under a conventional mortgage. Modification and Assumption Agreement – A written agreement to change the interest rate when the due-on-sale (or transfer) provision of the mortgage is enforced because of a change of ownership. It also releases the previous mortgagor from personal liability under the mortgage. Monthly Fixed Installment – The portion of the total monthly payment that is applied to reduce the debt once a month. Monthly Loan Constant – The total monthly payments of principal and interest on a mortgage having a level payment schedule, expressed as a percentage of the initial  principal amount of the loan. Moratorium – A period during which an obligor has a legal right to delay meeting an obligation, especially such a period granted in an emergency as to debt or generally by a moratorium law. Mortgage – A document providing written evidence of the right of a creditor to have  property of a debtor sold upon default and foreclosure. Mortgage Assignment – Occurs when a mortgagee sells a mortgage; the assignment is a  brief form stating that the mortgagee, the assignor, transfers and assigns the mortgage and mortgage note to the purchaser, the assignee. Mortgage-Backed Security (MBS) – An investment security that represents an undivided interest in a pool of mortgages. Mortgage Banker – Any person, firm or corporation engaged in the business of lending money on the security of improved real estate and who publicly offers such security for sale as a dealer. Usually takes title to loans.

 Real Estate Terms

Mortgage Broker – An agent whose chief function is to originate real estate loans for insurance companies, commercial banks and other investors. Usually does not take title to loans. Mortgagee – The lender; the one to whom the property is pledged. Mortgage Equity Analysis – A procedure for d eriving overall capitalization rates and or valuing the debt and equity components. Mortgage Insurance – Insurance covering complete or partial losses of principal and interest of a mortgage loan. Mortgage Interest Rate – The rate of interest in effect for the monthly installment due. For fixed-rate mortgages or for adjustable rate mortgages that have an initial fixed-rate  period, it is the rate in effect during that period. For adjustable rate mortgages after any initial fixed-rate period, it is the sum of the applicable inde x and the mortgage margin (rounded as appropriate and subject to any per adjustment caps or lifetime interest rate ceilings). Mortgage Margin – The amount that is added to the index value to establish the mortgage interest rate for each interest rate change date (subject to any limitations on the interest rate change) for an ARM. Mortgage Note – A negotiable promissory note secured by a mortgage on certain specific real estate. Mortgage Portfolio – The aggregate of mortgage loans held by the lender. Mortgagor – The borrower; the one pledging the property as security for a debt. Mutual Savings Banks – Mutually owned thrift institutions operated for the benefit of their depositors. They are located primarily in the Northeast and have wider investment  powers than the savings and loan associations.

N  Narrative Report – An appraisal form that is a complete written explanation of the entire valuation process for a specific property.  National Housing Act (1934) – Established the Federal Savings and Loan Insurance Corporation.

 Negative Amortization – A gradual increase in the mortgage debt occurs when the monthly fixed installment is not sufficient for full application to both principal and interest. Actually, there will be an insufficient interest application. This interest shortage is added to the unpaid principal balance to create negative amortization.  Net Income – The part of the gross income that remains after the deduction of all charges, taxes or costs.  Net Operating Income (NOI) – Effective gross income less all relevant expenses; NOI includes only the income to the real estate.  Net Worth – The equity of the owners in the business, i.e., the net assets determined by subtracting all liabilities from the value of the assets.  Net Yield – The yield of certain property, real or otherwise, clear of all charges and deductions; that part of the gross yield which remains after the deduction of all charges, taxes or costs.

O Open-End Mortgage – Mortgage, or deed of trust, written so as to secure and permit additional advances on the original loan. Open Market Operations – One of the “economic tools” used by the Board of Governors of the Federal Reserve System whereby the Fed purchases or sells government securities. Open Mortgage – A privilege given to the mortgagor, which allows pre-payment of the  principal at any time and in any amount. Operating Business Risk – The type of uncertainty primarily concerned with the variance  between budgeted and actual operating income and expenses. Operating Expense Ratio – Relationship between operating expenses and projected gross income. Operating Financial Risk – The type of uncertainty primarily concerned with the ability to pay operating expenses from funds provided from operations, borrowings, and equity sources. Overall Capitalization Rate – The direct ratio between annual net operating income (NOI) and value or sale price of a property.

 Real Estate Terms

Over-Improvement – An improvement that is not the most profitable use for the site on which it is placed because of its excessive size or cost. It does not produce the maximum  possible land value. Owner of Record – The entity that appears in the public records as the owner of a mortgage; usually the mortgage originator, unless the mortgage is subsequently assigned to someone else and that assignment is recorded.

P Package Mortgage – A debt secured by pledge of both real property and personal  property such as range, refrigerator and furniture. Participation Clause – The clause in a lease that requires tenants to pay additional rent on sales in excess of a certain amount. Participation Mortgage – (a) A mortgage held by more than one lender; (b) a mortgage that calls for the lender to share in the operating income produced by the property. Partnership – An association of two or more p ersons for the conduct of an enterprise other than in corporate form. Payback Period – The time required for the complete recovery from cash throw-off equity funds invested in a project. Payment Change Date – The date on which the monthly payment changes for an ARM/GPARM. It must fall within the month immediately following an interest rate change date, unless an ARM or GPARM provides for the monthly payment to change more frequently than the interest rate. Payment Change Interval – The period that elapses between the payment change dates for an ARM/GPARM. Payment Change Limitations – A restriction on the amount that the monthly payment for an ARM or GPARM can change on any payment change date. Pension Funds – The accumulated savings of individuals set aside during their working lives for later use when retired. Personal Property – A chattel; an item of property that is neither the land nor is  permanently attached to the land.

POC – Refers to the three most basic functions of management - planning, organizing, controlling. Portability – Occurs when an owner takes a mortgage to another property when selling their home. In this way they avoid payout penalties, and can enjoy the same terms and interest rates for the life of the mortgage. Potential Gross Income – The income that a property will produce with one hundred  percent occupancy. Power of Attorney – Authorization given to someone to act on behalf of an owner, by the owner and stated in written form. Preoperational – Those steps taken to insure the ability to control. Prepayment Clause (Privilege) – Mortgage contract clause p ermitting borrower to pay loan amounts in advance of their due dates. Prepayment Penalty – Penalty for the payment of a debt before it actually comes due. Price – The quantity of one thing that is exchanged for another; the amount of money  paid; asked; or offered where sale is contemplated. Principal – The amount of the loan minus the interest. It begins as the amount the loan was taken out for and gradually decreases as payments are made and interest is paid off. Principal of Substitution – A valuation principal that states that a prudent purchaser would pay no more for real property than the cost of acquiring an equally desirable substitute on the open market. Promissory Note – A signed document acknowledging the existence of a debt and  promising repayment. Proprietorship – Single ownership. The business and the owner are considered the same. Pro-rating – Allocation of costs or revenues between buyer and seller according to the relative time each occupies the property. Purchase Money Mortgage – A mortgage given by a purchaser of real property to the seller in part payment of the purchase price.

 Real Estate Terms

Q Quantity Survey – A method of estimating building cost in which all elements of labor, materials, and overhead are priced and totaled to obtain building costs. Quitclaim Deed – A deed of release. An instrument by which the grantor relinquishes all right, title, or interest he may have in the property.

R Real Estate – Land, including its natural components such as minerals, water, and  buildings or improvements. Real Estate Investment Trust (REIT) – A passive investment vehicle whose distributed earnings are taxed only to investors who receive them. Realized Gain – The difference between the net sale price and the adjusted basis of the  property. Real Property – The legal rights to possession, use and disposition of real estate. Recapture Rate (capital recovery rate) - Represents the percentage annual return of the capital invested in a depreciating asset. Reconciliation – The process by which an appraiser evaluates, chooses, and selects from among two or more alternative conclusions or indica tions to reach a single answer (final value estimate). Reconstructed Operating Statement – A statement of income and expenses prepared by an appraiser to indicate the probable future net operating income of a property. The forecast reflects the quantity and quality of services anticipated in the stabilized income,  based upon the historic experience of the property and the experience of other competitive properties. Redemption Period – The specified period in which a mortgagor can reclaim foreclosed  property by making full payment of the mortgage debt, under a legally enforceable right of redemption in some states. Rehabilitation Mortgage – A mortgage created to cover the costs of repairing, improving, and sometimes acquiring an existing property.

Renegotiable Rate Mortgage (RRM) – A series of automatically renewable short-term loans secured by a long-term mortgage. The renewable rate may be adjusted at intervals of three to five years. Rental Value – The estimated amount of rent that could be obtained for the use and occupancy of a property. Replacement Cost – The cost of construction, at current prices, of a building having a utility equivalent to the building being appraised, but built with modern materials and according to current standards, design and layout. Reproduction Cost – The cost of construction, at current prices, of an exact duplicate or replica using the same materials, construction or standards, design, layout, and quality of workmanship, embodying all the deficiencies and obsolescence of the subject building. Residential Home Mortgage – A mortgage that covers a residential property, i.e. a  property that is designed as a dwelling used to provide living accommodations for one to four families. Residential Member (RM) – Designation awarded by the American Institute of Real Estate Appraisers (AIREA) that certifies that the individual is qualified to perform appraisals on one-to-four family residences. Residual Techniques – Assignment of a portion of income to part of an asset, with the remainder (or residual) flowing automatically to the rest of the asset. Reverse Annuity Mortgage (RAM) – A loan arrangement in which a lender makes  periodic payments to the borrower, with the borrower’s equity interest in real estate serving as equity for the loan. The borrower may occupy the property until a specified loan-to-value ratio is reached. Right of Redemption – The right of the owner to reclaim title to his property if h e pays the debt to the mortgagee within a stipulated period of time after the foreclosure. Risk – The chance of loss on an investment or from a particular hazard, such as fire, earthquake or wind. Risk of Default – The risk that promised paymen ts of interest and repayment of principal will not be met fully and on schedule.

 Real Estate Terms

S Sale and Contract-Back – A financial arrangement in which an investor purchases real estate owned and used by a business firm and agrees to buy back the property in a land contract. Sale and LeaseBack – A financial arrangement in which an investor purchases real estate owned and used by a business firm and the property is leased back to the firm by the  purchaser-investor. Sales Agreement – An agreement by which one of two contracting parties, called seller, gives a thing and passes title to it in exchange for a certain price in current money to the other party, called the buyer or purchaser, who on his part agrees to pay such a price. Satisfaction – A written instrument that evidences the payment in full of a mortgage debt, and extinguishes the mortgage lien. Scarcity – Limitations on the available supply of an economic good relative to the desire for it. Seasoning (of the mortgage) – The on-going value of the note by payments made on it. The more seasoned the note, the more was paid on it. Investors tend to focus mainly on seasoned notes, which are more secure because they’ve had payments made on them and thus have some money backing them. Secondary Market – A market composed of purchasers of mortgages from institutions that originate mortgage loans to the individual u sers. Second Mortgage – A mortgage that has a lien position that is subordinate to the first mortgage (see also Junior Mortgage). Security/Security Instrument – Something given, deposited, or pledged to make secure the fulfillment of an obligation or the payment of a debt. Senior Residential Appraiser (SRA) – A designation given by the Society of Real Estate Appraisers (SREA) to individuals having extensive technical training combined with long and varied experience. The designation certifies that they are capable of appraising complex properties and providing analytical services regarding real estate purchase and ownership. Senior Real Estate Analyst (SREA) – A designation a warded by the Society of Real Estate Appraisers (SREA) to general practice, professional appraisers who have completed a program of professional training and e xperience in the appraisal of both income and residential properties.

Senior Real Property Appraiser (SRPA) – A designation awarded by the Society of Real Estate Appraisers (SREA) to general practice, professional appraisers who have completed a program of professional training and e xperience in the appraisal of both income and residential properties. Sensitivity Analysis – The process of measuring the effects of different loan provisions on mortgage payments and cash throw-offs. Service Corporations – Subsidiary companies to savings an d loan associations that have much wider lending and investment powers than the parent association. Servicing – Taking all steps necessary to make certain that loan provisions are carried out. Setback – The distance from a lot line which by law, regulation, or restriction in the deed must be left open; the linear distance between the lot line and the buildings or building line. Shared Appreciation Mortgage (SAM) – A type of mortgage loan in which the lender shares with the borrower-owner in the differential between sale price and purchase price (appreciation) at the time the property is sold. In return the lender charges a lower interest rate. Short-Lived Incurable Defects – Those defects that do not last as long as the major  portion of the building. Sinking Fund Factor – A multiplier used to compute periodic contributions to a sinking fund that will grow with compound interest at a selected rate for a specified period of time. Special Assessment – A special charge against real estate such as street assessment or sewer assessment for installation of public improvements from which the property  benefits. Special Assistance Function – One of the functions of the Government National Mortgage Association that involves a number of programs. Th ese programs involve making purchase commitments on certain types and categories of home mortgages which otherwise would not be readily salable. Special Forbearance – A relief provision that provides for a period of reduced or suspended payments, followed by another period of larger than normal payments, to enable the mortgagor to cure the entire delinquency.

 Real Estate Terms

Spread – The difference between the cost of and yield on an investment. Standard Payment Calculation – The method used to determine the monthly payment required to repay the unpaid principal balance of a mortgage in substantially equal installments over the remaining term of the mortgage at the current mortgage interest rate. Static Risk – Risk associated with unusual occurrences such as storms, fire or theft that affect one property, but not all properties of the same class. Straight-Line Depreciation – The process of calculating a theoretical, uniform annual loss of value of a wasting asset based upon the estimated useful life of the property when acquired. Strict Foreclosure – In Florida, the courts give the mortgagor a period of time to cure the default and during this grace period, the mortgagor has the right to remain in possession of the property, unless otherwise agreed to in the mortgage agreement. Subordination – The act of a creditor acknowledging in writing that the debt due him by a debtor shall be inferior to a debt due another creditor by the same debtor (see also Junior Mortgage). Sum-of-the-Year’s Digits – A process by which a theoretical loss of value is calculated for a wasting asset as a deduction for computation of federal income tax. The rate of depreciation is very rapid in early years and more gradual in later years. Surety – One legally liable on default of another. Suscipient Function – A product or service line of establishments which attract passersby who are attracted to the vicinity primarily by other establishments that merchandise more  basic goods or services.

T Tandem Plan – A two-part process in which the Government National Mortgage Association (GNMA) makes a commitment to purchase a package of mortgages, usually to the Federal National Mortgage Association (FNMA), at the current discount rate. GNMA then resells the package to FNMA at current discount rates for less than the original purchase price. Tax Deferred Exchange – When income producing real estate is exchanged for other income producing real estate, termed “like property,” the realized gain on the exchange need not be recognized.

Term Mortgage – One having a specific term, usually not over a five-year maturity, during which interest is paid but the principal is n ot reduced. Title – The means whereby the owner of the land has the just possession of his property. Title Insurance – A type of insurance that insures against defects in the title that were not listed in the title report or abstract. Title Search – An effort to determine the state of a title through an examination of public records. Title Theory – A concept of mortgages in which a mortgage is assumed to represent an actual conveyance of title to mortgage. Transfer of Ownership – Any means by which the ownership of a property changes hands. Treasury Index – An index that is used to determine interest rate changes for c ertain ARM plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities. Trust Deed – An agreement in writing conveying property from the owner to a trustee for the accomplishment of the objectives set forth in the agreement. Trust deeds are generally used in many states rather than mortgages to secure loans on real property. Trustee – A person, real or juristic, holding property in trust. Two-Step Mortgage – An adjustable rate mortgage that provides for one interest rate for the first five or seven years of the mortgage term and a different interest rate for the remainder of the mortgage term.

U Under-Improvement – An improvement which is not adequate to develop the highest and  best use of a site; usually a structure which is of lesser cost, quality, and size than typical neighborhood properties. Unencumbered Property – Property that is free and clear of any assessments, liens, easements, or encumbrances of any kind. Also known as “clear title.” Unit Comparison Method – The reduction of properties to appropriate units in terms of which comparisons of otherwise not directly comparable properties, can be made.

 Real Estate Terms

Unit in Place Method – A method of estimating construction costs which involve estimating the unit cost of component sections of the structure installed “in place.” The unit includes both materials and labor. Utility – The capacity of an economic good to satisfy human desires or needs.

V Valuation – The act of establishing the value of real property. Value – The quantity of one economic good which can be obtained in exchange for another; value in a general sense is conceptual and means different things to different  people. Variable Rate Clause (mortgage) – A mortgage instrument carrying an interest rate that varies with changes in market rates in general, such as the prime rate or the bond market rate. Vendee – The person to whom a thing is sold. Vendor – Seller. Vendor Take-Back Mortgage – Also known as seller financing, it is when the buyer of a  property borrows the money from the seller as opposed to the bank. The seller then takes small payments based on the payment period of the mortgage. Veterans Administration (VA) – Created as part of the Servicemen’s Readjustment Act of 1944 and authorized to guarantee a stated percentage of loans made to qualified veterans  by qualified lenders.

W Waiver – The relinquishment of a right or refusal to accept a right. Warehousing – An arrangement whereby an originator-mortgagee obtains short-term interim credit secured by mortgages for the purpose of bridging the gap between the completion of construction and eventual sale of the mortgage on the property to an investor-mortgagee.