Category : Language of Real Estate

Language of Real Estate

More Choices For Holding Title

Tenancy by the entirety (entireties)

A special joint tenancy between a lawfully married husband and wife, which places all title to property (real or personal) into the marital unit, with both spouses having an equal, undivided interest in the whole property. In essence, each spouse owns the entire estate; each spouse does not own a fractional share, rather the property ownership is an indivisible entirety. Upon the death of one spouse, the survivor succeeds to the entire property to the exclusion of heirs and creditors of the deceased spouse and without the need for probate. This type of tenancy is frequently used in the ownership of a residence, for it guarantees that the surviving spouse will continue to have a home regardless of whether a will is drawn or the property is fraudulently sold. Besides being limited to two specific persons, a tenancy by the entirety differs from a joint tenancy in that neither spouse can convey his or her interest or force a partition during the lifetime of the other, without the consent of the other spouse.

The tenancy by the entirety method of property ownership exists in less than one-third of the United States. It was originally based on the common-law theory that the husband and wife were one person, but this theory has been abandoned under modern law, which recognizes women’s rights in property separate from their husbands.

The creditor of one spouse cannot force a sale of one-half of the property held as tenants by the entirety to satisfy a judgment, as could a creditor of one spouse if title were held in joint tenancy. A creditor of both spouses, however, could take legal action in an appropriate case to force a sale of the property to satisfy a joint obligation, a reason many lenders seek both spouses’ signatures on the mortgage document even though only one spouse signs the note. If there is a judgment outstanding against one of the spouses, it would be difficult for both spouses to obtain a mortgage loan against the property. This is because the lender would fear that the judgment debtor might be the surviving spouse, in which case the judgment creditor would take precedence over the mortgage.

Both spouses can also voluntarily convert the tenancy into a tenancy in common or a joint tenancy.

The tenancy by the entirety may be severed only by mutual agreement, divorce or joint conveyance; it may not be severed by any attempt of one spouse to transfer his or her interest. Although an attempted unilateral transfer is ineffective, the transferor may still be liable to the transferee for money damages for breach of contract. Where divorce severs the tenancy by entirety, the parties become tenants in common (even where the entire purchase price was paid by one party). Upon the death of a spouse, the survivor should record an “affidavit of surviving tenant by the entirety” reflecting the fact of death. This is good title practice and will facilitate any future transfer of title to the property.

In some states, one spouse who owns property can reconvey that property to himself or herself and the spouse as tenants by the entirety, without violating the common-law rule that the joint interests must be created at one and the same time and by the same instrument. Under the Economic Recovery Tax Act of 1981, where property is jointly held by husband and wife with rights of survivorship (this includes tenancy by the entirety), the property will be treated as 50 percent belonging to each spouse for estate tax purposes. The language creating the tenancy by the entirety should provide, in effect, that the property is conveyed “to John Smith and Mary Smith as tenants by the entirety and with the right of survivorship.” However, in some states, a conveyance to husband and wife, without anything else stated further, will automatically create a tenancy by the entirety, while in other states it may create a tenancy in common.

Tenancy in common

A form of concurrent ownership of property between two or more persons, in which each has an undivided interest in the whole property. This form is frequently found when the parties acquire title by descent or by will. Each cotenant is entitled to the undivided possession of the property, according to his or her proportionate share and subject to the rights of possession of the other tenants. No cotenant can exclude another cotenant, or claim ownership of a specific portion of the property. Each cotenant holds an estate in land by separate and distinct titles, but with unity of possession. Their interests may be equal—as in a joint tenancy—or unequal. Where the conveyance document does not specify the extent of interest of each cotenant, there is a rebuttable presumption that the shares are equal. Unlike a joint tenancy, there is no right of survivorship in a tenancy in common. Therefore when one of the cotenants dies, the interest passes to his or her heirs or beneficiaries and not to the surviving tenants in common. The property interest of a tenant in common is thus subject to probate. Also, unlike joint tenancy, dower rights may exist in property held in common.

Any tenant in common can sell his or her interest in the property without the consent of the cotenants, but no cotenant can attempt to transfer the entire property without the consent of all cotenants. If one of the common owners wishes to sell the entire property and the other cotenants do not, the co-owner can bring an action for partition and seek to have the property divided up in kind or sold at auction with each owner paid his or her share of the proceeds.

There is a legally imposed relationship of trust and confidence among cotenants. Each cotenant has the right to possess all portions of the property and to retain profits from his or her own use of the property, though he or she must share net rents received from third parties. No tenant in common can be charged for use of the land or may charge rent for other cotenants’ use of the land. If one cotenant pays taxes or assessments due above his or her share, then the cotenant generally has a lien on the interest of each cotenant for the pro rata share.

A potential problem in a long-term contract for deed where the buyers take title as tenants in common is the confusion that arises when a cotenant dies before the property has been finally conveyed. If one of the cotenant-buyers has died during the term of the contract for deed, the seller should be cautious and check with the court to determine the rightful heirs of the deceased cotenant to whom the property should be deeded. If one of the cotenant-sellers dies, care should likewise be taken in making the money payments under the contract to the appropriate party.

Unless the intention to create a different form of tenancy is manifestly clear, a conveyance to two or more persons is usually deemed to create a tenancy in common. The tenancy in common is appropriately named, since it is the most common form of co-ownership that will result unless another intent is clearly specified.

As a general rule, a tenant in common’s interest is not considered acceptable security by a lender, because the mortgagee has the additional expense in a foreclosure action of forcing a partition proceeding to recover on its security interest.

As with joint tenancy, if one cotenant in good faith makes improvements to the real property without the permission of the other, he or she should be compensated for the improvement in a partition action. The standard used is either the percentage of improvement cost attributable to the other cotenant, or the proportionate share of the increased value of the property.

One problem with tenancy in common is the element of uncertainty connected with the fact that the interest of a deceased cotenant is subject to probate. For example, suppose Smith, Jones and Wallashinski hold lakefront property as an investment. They are tenants in common. Smith, a single person, dies intestate. He had 12 brothers and sisters and both parents living. One sister dies shortly thereafter, leaving a husband and six children. To sell the property to a developer, the other tenants in common may have to get the signatures of all Smith’s brothers and sisters, parents and guardian for the minors to release every possible interest. This problem could have been avoided by taking title in partnership form or in a trust.

Every tenant in common assumes the risk that his or her interest in the property will be imperiled by the failure of cotenants to pay their share of taxes, debt service and other carrying charges. In addition, there is a risk of bankruptcy or involuntary sale or partition of the property to enforce a judgment lien or income tax lien against the interest of one cotenant in the property.

Sample language in a deed creating a tenancy in common would be “. . . to John Smith, single, an undivided one-quarter interest and to Pat Specht, unmarried, an undivided three-quarters interest as tenants in common in the following described property . . . .”

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Language of Real Estate

Holding Title To Real Property

Holding Title To Real Property

Scenario: The seller and the newlywed buyers have agreed to terms and signed the purchase agreement for the sale of the seller’s home. Inspections, financing, escrow, tons of paperwork, have finally culminated in the preparation of the deed conveying title to the buyers. Now the big question for the buyer: “How best to hold title to the new home? Should we hold title as joint tenants, tenants in common, tenants by the entirety, or some other form of ownership?”

In the following series of articles, let’s begin to explore some of the different choices available to multiple owners with some highlights from The Language of Real Estate by John Reilly, Dearborn Publishing (Amazon).

Joint Tenancy

An estate or unit of interest in real estate that is owned by two or more natural persons with rights of survivorship. Only one title exists, and it is vested in a unit made up of two or more persons, all owning equal shares. The basic idea of a joint tenancy is unity of ownership; title is held as though all owners collectively constituted one person, a fictitious entity. The death of one joint tenant does not destroy the owning unit—it only reduces by one the number of persons who jointly own the unit. The remaining joint tenants receive the deceased tenant’s interest by the right of survivorship. Thus, the decedent’s interest cannot be transferred by will or descent. As each successive joint tenant dies, the remaining tenants acquire the interest of the deceased. The last survivor takes title in severalty, fully inheritable at his or her death by heirs and devisees. Some form of joint tenancy is recognized in most states, although several states have opted to eliminate the right of survivorship as a distinguishing characteristic. The fact that one holds title to property as a joint tenant is no reason for a person not to make a will. Joint tenancy does avoid a formal probate proceeding, however.

Traditionally, four unities are required to create a joint tenancy: unity of title, unity of time, unity of interest and unity of possession. Unless all four unities are present, no joint tenancy is created. Such unities are present when title is acquired by one deed, executed and delivered at one time and conveys equal interests to all the grantees, who hold undivided possession of the property as joint tenants. A joint tenancy can be created only by grant or purchase (by a deed of conveyance) or by devise (will)—it cannot be created by operation of law. The grantees or devisees must be specifically named as joint tenants. In most states, a deed or will that is unspecific about the grantees’ or devisees’ tenancy will pass title to the parties as tenants in common. Typical wording used to create a joint tenancy may be “To Morton Charles and Seymour Berkowitz, and to the survivor of them, and his or her heirs and assigns as joint tenants, with rights of survivorship, and not as tenants in common.”

Note that a combination of interests can exist in one parcel of real estate. For example, if Jack and Betty Redundo hold title to an undivided one-half as joint tenants, and Irving and Bernice Proszek hold title to the other undivided half as tenants by the entirety, the relation between the two sets of joint tenants is that of a tenancy in common.

A joint tenancy can be terminated when any of the essential unities referred to above have been terminated. This can occur either by mutual agreement of the parties or by one of the parties selling his or her interest in the joint tenancy. For example, if Bob Burns, Bob Smith and Bob Roberts hold title to certain farmland as joint tenants, and Roberts conveys his interest to Rebecca Sunnybrook, then Sunnybrook will own an undivided one-third interest, and Smith and Burns will continue to own an undivided two-thirds interest as joint tenants. Rebecca Sunnybrook will own the farm as a tenant in common with the joint tenants Smith and Roberts. The same destruction occurs if one or more of the joint tenants’ interests are defeated by an action of law, such as the appointment of a receiver in bankruptcy or the sale of property to satisfy a judgment. In title-theory states, a mortgage is a conveyance of land to the lender. The land is then subject to being reconveyed upon payment of the debt, and a joint tenant in such states who mortgages his or her interest without the other joint tenants joining the mortgage will therefore destroy the existing joint tenancy by removing his or her interest from the joint tenancy.

Many state laws hold that there is no dower in joint tenancy. Thus, business associates can hold title to a parcel of real estate as joint tenants, and any spouses are not required to join in a conveyance to waive dower and/or homestead rights. A corporation cannot be a joint tenant because it has perpetual existence and—at least in legal theory—never dies.

A common misconception is that a debtor can protect himself or herself from creditors’ claims by taking title to property in joint tenancy. The creditor has every right to attach the debtor’s interest in jointly held property and force a partition. However, if the joint tenant dies before the creditor seizes that tenant’s interest, the creditor loses his or her interest because the surviving tenant takes the property free from the claims of the decedent’s creditors. On the other hand, a creditor of the surviving joint tenant has substantially increased his or her security.

One principal advantage of joint tenancy is the avoidance of the delay and expense of probate proceedings, because the surviving joint tenant immediately becomes the sole owner of the property. Thus, the current value of the property is not included in the total value of the estate on which probate fees are assessed. In addition, the survivor holds the property free from the debts of the deceased joint tenant and from heirs against his or her interest. However, the savings in probate fees are partly offset by the legal costs of terminating the joint tenancy of record and may be totally offset by the added taxes. Typically, the probate delay is not unreasonably long. However, probate proceedings may sometimes be necessary to cover the furnishings and personal property of the deceased because such property is not usually held in joint tenancy. In addition, each joint tenant gives up the right to dispose of his or her interest by will and, as a result, precludes the use by an estate planner of various tax-saving devices to minimize the estate taxes. These estate taxes can be substantial, in that the value of the jointly held property is included in the decedent’s estate for estate tax purposes even though it does not pass through probate proceedings. In fact, the federal estate tax may be applied to the entire value of all jointly held property—not just the original cost per owner—except to the extent that the surviving joint tenant can provide detailed records clearly proving the extent of his or her contribution. That contribution must be demonstrated in money, earnings or inheritance, but not in time spent working on the property. There are exclusions, however, such as the rule that each spouse is considered to own one-half of jointly owned property, regardless of which spouse furnished the original consideration or whether creation of the joint interest constituted a gift.

Joint tenancies are subject to gift taxes, income taxes and inheritance taxes in addition to federal estate taxes. A purchaser should discuss these tax consequences with experienced tax counsel before deciding whether to hold title to the property in joint tenancy. In addition, joint tenancy or tenancy by the entirety may not be appropriate for people with children from a prior marriage.

In many states, a property owner can create a joint tenancy (also a tenancy by the entirety with a spouse) by conveying to himself or herself and another as joint tenants without the necessity of conveying through a third person (called a straw man). This is a statutory exception to the common-law “four unities” rule that requires the creation of a joint tenancy by one and the same instrument when title to the property is acquired. Another approach would be for Able, Baker and Charley to convey to Baker, Charley and Daniel as joint tenants.

If all joint tenants die in a common disaster, the Uniform Simultaneous Death Act in effect will treat them as equal tenants in common. Rather than avoid probate, however, the unfortunate effect would be to multiply the number of probate proceedings.

Upon the death of a joint tenant, the survivor(s) should, as a matter of good title practice, record an affidavit of death and a death certificate with the county recorder. This is often required under state inheritance tax laws to obtain a tax clearance. If the property is registered in Torrens, the certificate of title must be amended to reflect such death.

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Language of Real Estate

What’s an Escrow?

Some real estate agents toss around the word “escrow” not realizing that to many sellers and buyers the concept of a deal being in escrow is a mystery. Just what is this strange place called escrow and what happens there? I recall a broker telling me about a rookie agent who put together a sale in her first week, something almost unheard of.  The broker heartedly congratulated the new agent and told her to put the signed contract into escrow. A few days later the broker asked the agent how it was going. Fine came the response — “it’s in escrow.” A week later the broker called the escrow company who acted surprised. They hadn’t seen any paperwork on that deal. The broker called the agent and asked again where was the contract, to which the agent responded that she put it in escrow. The broker said show me. The agent went over to the filing cabinet and opened the drawer marked “escrow” – In the section marked “In Escrow” lo and behold there was the signed contract between buyer and seller.

So, just to be clear about what is this mysterious place called escrow, here’s a discussion from my book The Language of Real Estate, Dearborn Publishing:

ESCROW

The process by which money and/or documents are held by a disinterested third person (a stakeholder) until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) has been achieved. Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place. Although in some states a real estate broker is authorized to handle escrow functions, the common practice is to employ the services of a licensed escrow company, title company or lending institution. In some states, it is called a settlement service.

Escrow can generally be used to close the following types of real estate transactions: sales, mortgages and exchanges; sales by means of a contract for deed; and leases of real estate. In all cases, the escrow holder acts as a fiduciary and retains documents and entrusted assets until specified conditions are fulfilled. The holder is the special and impartial agent for both parties and acts in accordance with the escrow instructions given by both. The sales contract usually serves as the basis for escrow instructions for both seller and buyer because it contains (or should contain) the agreement of the parties concerning who must pay the various expenses, the proration date and the like. This importance of the sales contract underscores the critical role of the real estate salesperson or broker whose responsibility is to advise the parties and properly complete the sales contract form (and advise the parties to seek legal counsel if appropriate). If the contract has been unprofessionally prepared, the escrow company may be delayed or even prevented from closing the transaction. It is important to remember that an escrow agent does not prepare or review the legal documents—escrow merely takes directions from the parties to the contract and acts on them in a confidential manner. Thus the parties should not rely on the escrow agent to discover defects in the transaction. If an established escrow company is not involved in the transaction, an attorney should be consulted about the preparation of proper escrow instructions.

Because of the escrow’s limited duties of disclosure and the confidentiality of the escrow in general, facts known to the escrow holder are normally not imputed or implied to the other party. Escrow is a limited agent for both parties, but once the conditions to the escrow transaction have been performed, the nature of the dual agency changes—escrow then becomes the agent for the seller for the money and the buyer for the deed. Escrow acts as the “clearinghouse” for the details of the transaction. Escrow cannot be unilaterally revoked, and in the event of disagreement the escrow can only be amended, changed or revoked by mutual agreement.

In closing a real estate transaction, the escrow company may perform such duties as paying liens, computing prorations, ordering title evidence, having new documents prepared, drawing up closing statements, obtaining necessary signatures, recording documents and receiving and disbursing funds. After payment of their respective closing costs, the buyer is thus assured of receiving a clear title and the seller is assured of receiving the appropriate funds. Typically, escrow fees are split equally between buyer and seller.

Some special situations to which an escrow arrangement is most appropriate are closing of sale and immediate resale or purchase; closing when several lenders are involved either in new mortgages or releases of prior encumbrances; closing an entire condominium project when purchasers’ funds must be escrowed under state law; closing a VA or an FHA loan (an FHA and VA requirement).

Once a valid escrow has been set up and a binding and enforceable contract of sale has been deposited with the escrow holder along with a fully executed deed, the death or incapacity of one of the parties to the escrow will not terminate the escrow. Upon performance of the decedent’s part of the contract, the other party is entitled to have escrow concluded according to the terms of the contract.

An escrow is usually not opened until major contingencies in the contract of sale have been met. Such major contingencies might be the arrangement of new financing or the approval of a loan assumption, building permit, zoning change or the like. Among the contingencies that can be taken care of after the start of escrow are the appliance check, the termite inspection and the signing of bylaws or house rules.

A related term – “holding escrow” is an arrangement whereby an escrow agent holds the final title documents to a contract for deed. Holding escrows are often suggested as the solution for the problems that arise under a contract for deed when the buyer is ready to pay off the balance owing on the contract but the seller either cannot be found or is not cooperative about executing the deed. Under a holding escrow, the seller, at the time the contract for deed is signed, deposits with the escrow agent an executed deed or assignment of lease and instructs the escrow agent to deliver the conveyance to the buyer when full payment is made under the contract. Many escrow companies are reluctant to handle holding escrows, even when they are indemnified against loss, because of the following possible complications:

  • It may be difficult for the holding escrow to ascertain whether there has been a full payoff, whether the amount deposited in escrow is the correct amount and whether the buyer is in default under any other terms of the contract for deed.
  • Difficulties may arise if the seller dies, particularly in terms of determining the rights of his or her heirs. Other problems may arise if the seller remarries, and new dower, curtesy or marital rights must be considered.
  • If the buyer has resold the property still under contract and used a different escrow agent, the seller will be requested to draft new documents conveying title directly to the new buyer. Thus, there sometimes are added costs.

While the holding escrow practice is good in theory, these practical problems may prevent its effective use. A good alternative is to establish a collection account with the lending institution where the seller has an existing mortgage. The collecting agent will know how to contact the seller if the buyer wants to quickly pay off the outstanding balance and receive a deed to the property. Also, the buyer can thus be assured that the seller’s mortgage payments are being made as long as the buyer makes his contract for deed payments—and vice versa—the seller can be notified if the buyer is in default in making payments. This situation is sometimes called a true escrow.

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Language of Real Estate

Foreclosure

Foreclosure —

A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of all parties to a conclusion and passes the title in the mortgage property to either the holder of the mortgage or a third party who may purchase the realty at the foreclosure sale, free of all encumbrances affecting the property subsequent to the mortgage. There are three general types of foreclosure proceedings—judicial foreclosure, nonjudicial foreclosure and strict foreclosure.

Judicial foreclosure, normally used in those states in which no “power of sale” is included in the mortgage document, provides that, upon sufficient public notice the property may be sold by court order. If a mortgagor defaults in making payments or in fulfilling any requirements of the mortgage—such as paying taxes—the mortgagee can enforce his or her rights. The mortgagee’s first action may be to accelerate the due date of all remaining monthly payments. The attorney for the mortgagee can then file a suit to foreclose the lien of the mortgage. Upon presentation of the facts in court, the property will be ordered sold by court order. A public sale will be advertised and held, and the real estate will be sold to the highest bidder.

Some states allow nonjudicial foreclosure procedures when a power of sale is contained in a mortgage or trust deed. Under this form, a lender (or the lender’s trustee if a deed of trust is used), has the right to sell the mortgaged property upon default without being required to spend the time and money involved in a court foreclosure suit. In fact, under this form of lender control, a borrower’s redemption time is shortened considerably by the elimination of the statutory redemption period sometimes granted in the judicial process. Notice of default is recorded by the trustee at the county recorder’s office within the jurisdiction’s designated time period to give notice to the public of the intended auction. This official notice is accompanied by advertisements in public newspapers that state the total amount due and the date of the public sale. The purpose of the notice is to give publicity to the sale, not to give notice to the defaulting mortgagor. After selling the property, the mortgagee or trustee may be required to file a copy of a notice of sale or affidavit of foreclosure.

Although the judicial and nonjudicial foreclosure procedures are the prevalent practices today, it is still possible in some states for a lender to acquire the mortgaged property by a strict foreclosure process. After appropriate notice has been given to the delinquent borrower and the proper papers have been prepared and filed, the court will establish a specific time period during which the balance of the defaulted debt must be paid in full. If full payment is not made, the borrower’s equitable and statutory redemption rights are waived, depending on the special circumstances involved in the case, and the court awards full legal title to the lender. There can be no deficiency judgment in strict foreclosure cases.

A few states permit foreclosure by entry and possession. If the mortgagee holds possession for the redemption period, the mortgage debt is deemed paid to the extent of the value of the real property.

In preparing a foreclosure proceeding, a current title report should be obtained because all prior and subsequent mortgage creditors must be joined as parties to the judicial action, and junior federal tax liens are not divested by nonjudicial foreclosure proceedings unless the federal government consents or is given notice of the sale. If the state statute of limitations pertaining to real estate actions has run, the mortgagee is barred from exercising its power of sale.

Most states allow a defaulted mortgagor a period of time during which the property may be redeemed after the foreclosure sale. During this statutory redemption period (which may be as long as one year), the court may appoint a receiver to take charge of the property, collect rents or pay operating expenses. If the mortgagor can raise the necessary funds to redeem the property within the statutory period, the redemption money is paid to the court. Because the mortgage debt was paid from the proceeds of sale, the mortgagor can take possession free and clear of the former defaulted mortgage. Historically, the right of redemption is inherited from the old chancery proceedings in which the court sale ended the “equitable right of redemption.” In many states, a statutory redemption period is provided by state law to begin after the sale to give the mortgagor an opportunity to regain title to the land. (Note, however, that if the mortgagee accepts any payment on the mortgage debt after default and before right of redemption expires, most courts hold that the mortgagee has waived the right to complete the foreclosure.)

If redemption is not made, or if no redemption period is allowed by state law, then the successful bidder at the sale receives a deed to the real estate, sometimes called a commissioner’s deed. This is a statutory form of deed that may be executed by a sheriff or master-in-chancery to convey such title as the mortgagor had to the purchaser at the sale. There are no warranties with such a deed; the title passes “as is,” but free of the former defaulted mortgage. The purchaser obtains no better title than the mortgagor held.

If there are any excess proceeds of the foreclosure sale after deducting expenses, they are paid to the mortgagor. If, on the other hand, the proceeds from the sale are not sufficient to repay the foreclosed debt, further action may be taken against the debtor to recover the deficiency. If such a deficiency occurs in a judicial foreclosure, the court can enter a deficiency judgment, which operates as a general lien on the debtor’s assets. If a deficiency results from a sale under nonjudicial foreclosure, however, the mortgagee must institute new proceedings to obtain a deficiency judgment.

A defaulted mortgagor must consider several tax consequences upon foreclosure. A primary concern is that in terms of tax laws, the defaulting owner is considered to have sold his or her property for a price equal to the unpaid debt at the time of disposition. Assuming that the mortgage balance exceeds its adjusted basis (reduced by depreciation), the defaulting owner may realize a taxable gain as a result of the foreclosure sale even though no money is received from the sale. This could be a problem for investors in a failing syndication who not only lose their investment but are saddled with a tax bill from the government. The courts have held this rule to apply to defaults of contracts for deed as well as terminations of mortgages and trust deeds. There is also a recapture of any accelerated depreciation.

The FHA rules require that a homeowner be at least three months behind in mortgage payments, that the delinquency span a six-month period and that he or she be in breach of the mortgage before a lender can foreclose an FHA loan.

A borrower who files bankruptcy can effectively interfere with the foreclosure proceedings. Once bankruptcy is filed, no creditor can take action against the debtor outside of bankruptcy court. Therefore, any foreclosure action is automatically stayed (or delayed) while the bankruptcy is pending. Also, if the foreclosure sale takes place within one year before the filing of bankruptcy, the sale can be voided if the foreclosure sales price is substantially less than the actual fair market value of the secured property.

An alternative to foreclosure is for the mortgagee to accept a deed in lieu of foreclosure from the mortgagor. This is sometimes known as a friendly foreclosure, because it is settled by agreement rather than by civil action. The major disadvantage to this type of default settlement is that the mortgagee takes the real estate subject to all junior liens, whereas foreclosure eliminates all such liens.

Source: The Language of Real Estate, 7th Edition, by John Reilly, published by Dearborn Real Estate Education

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Language of Real Estate Uncategorized

highest and best use

An appraisal term meaning that reasonable use, at the time of the property appraisal, that is most likely to produce the greatest net return to the land and/or the building over a given period of time. The use must be legal and in compliance with regulations and ordinances within the police power of the county and state, including health regulations, zoning ordinances, building code requirements and other regulations. The highest and best use is determined by evaluating the quantity and quality of income from various alternative land uses. Net return normally is interpreted in terms of money, although consideration may be given to such things as amenities.

For example, vacant land in a central business district currently used as a parking lot may or may not be employed at its highest and best use, depending on whether the surrounding market is ready for further commercial development. A gas station site may be more effective as a fast-food facility or a dry cleaners.

For appraisal purposes, land is always valued as if vacant and available for development to its highest and best use. The estate taxes and the real property taxes paid by an owner of unimproved real estate are usually based on the highest and best use of the land rather than the use to which it is actually devoted.

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Language of Real Estate

Hard Money Mortgage

Hard Money Mortgage

Any mortgage loan given to a borrower in exchange for cash, as opposed to a mortgage given to finance a specific real estate purchase. Often, a hard money mortgage will take the form of a second mortgage given to a private mortgage company in exchange for the cash needed to purchase an item of personal property or solve some personal financial crisis. The borrower in this case would pledge the equity in his or her property as collateral for the hard money mortgage.

As opposed to a soft money mortgage, i.e., the money to be financed under a purchase‑money mortgage as a part of the purchase price.

Source: The Language of Real Estate, 7th Edition, by John Reilly,  Dearborn Real Estate Education

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Language of Real Estate Uncategorized

Abstract of title vs. Title insurance

Abstract of title vs. Title insurance

An abstract of title summarizes the various instuments and documents affecting the title to real property, whereas title insurance is a comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon.

Abstract of title — A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The person preparing the abstract of title, called an abstracter, searches the title as recorded or registered with the county recorder, county registrar, circuit court and/or other official sources. The abstracter then summarizes the various instruments affecting the property and arranges them in the chronological order of recording, starting with the original grant of title.

The abstract includes a list of public records searched and not searched in preparation of the report. In summarizing a deed in the chain of title, the abstracter might note the recorder’s book and page number, the date of the deed, the recording date, the names of the grantor and grantee, a brief description of the property, the type of deed and any conditions or restrictions contained in the deed.

The abstract of title does not guarantee or ensure the validity of the title of the property. Rather, it is a condensed history that merely discloses those items about the property that are of public record; thus, it does not reveal such things as encroachments and forgeries. Therefore, the abstracter is usually liable only for damages caused by his or her negligence in searching the public records.

Title insurance — A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Unlike other types of insurance, which protect a policyholder against loss from some future occurrence (such as a fire or auto accident), title insurance in effect protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title.

Needless to say, a title company will not insure a bad title any more than a fire insurance company would insure a burning building. However, if upon investigation of the public records and all other material facts, the title company feels that it has an insurable title, it will issue a policy. Generally, a title insurance policy will protect the insured against losses arising from such title defects (“hidden risks”) as the following:

  • Forged documents such as deeds, releases of dower, mortgages
  • Undisclosed heirs; lack of capacity (minors)
  • Mistaken legal interpretation of wills
  • Misfiled documents, unauthorized acknowledgments
  • Confusion arising from similarity of names
  • Incorrectly given marital status; mental incompetence

In addition, and most important, the title company will agree to defend the policyholder’s title in court against any lawsuits that may arise from defects covered in the policy. A title insurance policy generally consists of three sections:

  • The agreement to insure the title and indemnify against loss
  • A description of the estate and property being insured
  • A list of conditions of and exclusions to coverage

These uninsured exclusions generally include such title defects as:

  • Rights of parties in possession, not shown in the public records, including unrecorded easements
  • Any facts that an accurate survey would reveal (e.g., encroachments)
  • Taxes and assessments not yet due or payable
  • Zoning and governmental restrictions
  • Unpatented mining claims
  • Certain water rights

Title indemnity is made as of a specific date. Except with certain policies, a one-time premium is paid, and coverage continues until the property is conveyed to a new owner (including a conveyance to an insured’s wholly owned corporation). It does not run with the land. Coverage is thus limited to the tenure of the named insured, and certain of the insured’s successors by operation of law.

Most policies provide, however, that the coverage does not terminate “so long as an insured retains an estate or interest in the land, or owns an indebtedness secured by a purchase-money mortgage given by a purchaser from such insured, or so long as such insured shall have liability by reason of covenants of warranty made by such insured in any transfer of conveyance of such estate or interest.”

There are two major types of title insurance, the owner’s policy and the mortgagee’s or lender’s policy. An owner’s policy is issued for the benefit of the owner, the owner’s heirs and devisees or, in the case of a corporation, its successors by dissolution, merger or consolidation; but the policy is not assignable. For an added premium, title companies will issue an extended coverage owner’s policy for certain properties to cover possible title defects excluded from standard coverage. Such title defects may include the rights of parties in possession, questions of survey and unrecorded liens.

A lender’s policy is issued for the benefit of a mortgage lender and any future holder of the loan. It protects the lender against the same defects as an owner under an owner’s policy (plus additional defects), but the insurer’s liability is limited to the mortgage loan balance as of the date of the claim. In other words, liability under a lender’s policy reduces with each mortgage payment, and is voided when the loan is completely paid off and released. Because of this reduced liability, a lender’s policy usually costs less than an owner’s policy. Under a mortgagee policy, the loss payable is automatically transferred to the holder of the mortgage. Upon foreclosure and purchase by the mortgagee, the policy automatically becomes an owner’s policy, insuring the mortgagee against loss or damage arising out of matters existing before the effective date of the policy. In addition to these policies, title companies also issue policies to cover the leasehold interests of a lessee, a lender under a leasehold mortgage or a vendee under a contract for deed.

In the event of loss under a mortgagee’s policy, the insurer pays the mortgagee the balance due on the loan, and the owner is thereby relieved from making further payments. However, the owner still stands to lose the property and the investment. For this reason, it is generally sound practice to obtain an owner’s policy where the lender is already requiring a mortgagee’s policy; there is usually only a slight additional premium to issue both policies simultaneously. Some areas, by custom, require that both policies be purchased. Local practice and custom usually dictate which party to a transaction buys what type of policy. As an example, a seller may pay for the owner’s policy, guaranteeing the title, whereas the buyer may pay for a lender’s policy, protecting the mortgagee’s interest in the real estate. Title insurance may be required by custom, even where title is registered in the Torrens system, to protect against items not shown on the transfer certificate of title (unrecorded liens, such as federal tax liens). The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation also recognize the importance of title insurance, and they require it on every loan they buy.

Title insurance premiums vary throughout the country, but their costs generally reflect the two basic title insurance considerations—cost of title examination and cost of risk insurance. The average cost is approximately 0.5 percent of the cost of property. It generally takes a week for the policy to be issued, much less than the time it would take to prepare an abstract of title. If the same title company has recently issued a policy on the same property, then it may give a discount called a reissue rate.

Note that, if an insured property appreciates in value (as when an expensive improvement is made), it is good practice to increase the amount of title insurance to cover possible increased losses. Newer policies have an “inflation guard” endorsement to cover appreciation.

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Language of Real Estate

Foreclosure vs. Forfeiture

Foreclosure vs. Forfeiture

A foreclosure action extinguishes any claim the mortgagor may have to the real property securing a defaulted loan, whereas a forfeiture refers generally to the loss of a right to something as a result of nonperformance of an obligation or condition.

Foreclosure — A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of all parties to a conclusion and passes the title in the mortgage property to either the holder of the mortgage or a third party who may purchase the realty at the foreclosure sale, free of all encumbrances affecting the property subsequent to the mortgage. There are three general types of foreclosure proceedings—judicial foreclosure, nonjudicial foreclosure and strict foreclosure.

Judicial foreclosure, normally used in those states in which no “power of sale” is included in the mortgage document, provides that, upon sufficient public notice the property may be sold by court order. If a mortgagor defaults in making payments or in fulfilling any requirements of the mortgage—such as paying taxes—the mortgagee can enforce his or her rights. The mortgagee’s first action may be to accelerate the due date of all remaining monthly payments. The attorney for the mortgagee can then file a suit to foreclose the lien of the mortgage. Upon presentation of the facts in court, the property will be ordered sold by court order. A public sale will be advertised and held, and the real estate will be sold to the highest bidder.

Some states allow nonjudicial foreclosure procedures when a power of sale is contained in a mortgage or trust deed. Under this form, a lender (or the lender’s trustee if a deed of trust is used), has the right to sell the mortgaged property upon default without being required to spend the time and money involved in a court foreclosure suit. In fact, under this form of lender control, a borrower’s redemption time is shortened considerably by the elimination of the statutory redemption period sometimes granted in the judicial process. Notice of default is recorded by the trustee at the county recorder’s office within the jurisdiction’s designated time period to give notice to the public of the intended auction. This official notice is accompanied by advertisements in public newspapers that state the total amount due and the date of the public sale. The purpose of the notice is to give publicity to the sale, not to give notice to the defaulting mortgagor. After selling the property, the mortgagee or trustee may be required to file a copy of a notice of sale or affidavit of foreclosure.

Although the judicial and nonjudicial foreclosure procedures are the prevalent practices today, it is still possible in some states for a lender to acquire the mortgaged property by a strict foreclosure process. After appropriate notice has been given to the delinquent borrower and the proper papers have been prepared and filed, the court will establish a specific time period during which the balance of the defaulted debt must be paid in full. If full payment is not made, the borrower’s equitable and statutory redemption rights are waived, depending on the special circumstances involved in the case, and the court awards full legal title to the lender. There can be no deficiency judgment in strict foreclosure cases.

A few states permit foreclosure by entry and possession. If the mortgagee holds possession for the redemption period, the mortgage debt is deemed paid to the extent of the value of the real property.

In preparing a foreclosure proceeding, a current title report should be obtained because all prior and subsequent mortgage creditors must be joined as parties to the judicial action, and junior federal tax liens are not divested by nonjudicial foreclosure proceedings unless the federal government consents or is given notice of the sale. If the state statute of limitations pertaining to real estate actions has run, the mortgagee is barred from exercising its power of sale.

Most states allow a defaulted mortgagor a period of time during which the property may be redeemed after the foreclosure sale. During this statutory redemption period (which may be as long as one year), the court may appoint a receiver to take charge of the property, collect rents or pay operating expenses. If the mortgagor can raise the necessary funds to redeem the property within the statutory period, the redemption money is paid to the court. Because the mortgage debt was paid from the proceeds of sale, the mortgagor can take possession free and clear of the former defaulted mortgage. Historically, the right of redemption is inherited from the old chancery proceedings in which the court sale ended the “equitable right of redemption.” In many states, a statutory redemption period is provided by state law to begin after the sale to give the mortgagor an opportunity to regain title to the land. (Note, however, that if the mortgagee accepts any payment on the mortgage debt after default and before right of redemption expires, most courts hold that the mortgagee has waived the right to complete the foreclosure.)

If redemption is not made, or if no redemption period is allowed by state law, then the successful bidder at the sale receives a deed to the real estate, sometimes called a commissioner’s deed. This is a statutory form of deed that may be executed by a sheriff or master-in-chancery to convey such title as the mortgagor had to the purchaser at the sale. There are no warranties with such a deed; the title passes “as is,” but free of the former defaulted mortgage. The purchaser obtains no better title than the mortgagor held.

If there are any excess proceeds of the foreclosure sale after deducting expenses, they are paid to the mortgagor. If, on the other hand, the proceeds from the sale are not sufficient to repay the foreclosed debt, further action may be taken against the debtor to recover the deficiency. If such a deficiency occurs in a judicial foreclosure, the court can enter a deficiency judgment, which operates as a general lien on the debtor’s assets. If a deficiency results from a sale under nonjudicial foreclosure, however, the mortgagee must institute new proceedings to obtain a deficiency judgment.

A defaulted mortgagor must consider several tax consequences upon foreclosure. A primary concern is that in terms of tax laws, the defaulting owner is considered to have sold his or her property for a price equal to the unpaid debt at the time of disposition. Assuming that the mortgage balance exceeds its adjusted basis (reduced by depreciation), the defaulting owner may realize a taxable gain as a result of the foreclosure sale even though no money is received from the sale. This could be a problem for investors in a failing syndication who not only lose their investment but are saddled with a tax bill from the government. The courts have held this rule to apply to defaults of contracts for deed as well as terminations of mortgages and trust deeds. There is also a recapture of any accelerated depreciation.

A borrower who files bankruptcy can effectively interfere with the foreclosure proceedings. Once bankruptcy is filed, no creditor can take action against the debtor outside of bankruptcy court. Therefore, any foreclosure action is automatically stayed (or delayed) while the bankruptcy is pending. Also, if the foreclosure sale takes place within one year before the filing of bankruptcy, the sale can be voided if the foreclosure sales price is substantially less than the actual fair market value of the secured property.

An alternative to foreclosure is for the mortgagee to accept a deed in lieu of foreclosure from the mortgagor. This is sometimes known as a friendly foreclosure, because it is settled by agreement rather than by civil action. The major disadvantage to this type of default settlement is that the mortgagee takes the real estate subject to all junior liens, whereas foreclosure eliminates all such liens.

Forfeiture — Loss of the right to something as a result of nonperformance of an obligation or condition. A forfeiture loss usually bears no true relationship to the amount of damages allowed by law, and thus there is strong public policy against enforcing forfeitures. Courts frequently refuse to enforce provisions in contracts that require the defaulting party to forfeit all amounts paid under an installment purchase contract (that is, a contract for deed). Even where forfeitures are recognized by some courts, the right to forfeiture must be specifically provided for in the contract, or else the sole remedy is rescission.

When a buyer defaults on a mortgage or trust deed in which he or she holds substantial equity, forfeiture may be inequitable. In such cases, upon proper application, the court may prohibit the forfeiture and order the property sold, with the proceeds necessary to pay off the note distributed to the mortgagee and the balance paid to the mortgagor.

Real property may be acquired by forfeiture, such as when a grantor has conveyed real estate subject to a condition subsequent. Should the condition be breached, the grantor can reacquire the property by forfeiture by exercising the right of reentry.

 

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Language of Real Estate Uncategorized

Unilateral contract vs. Bilateral contract

Unilateral contract vs. Bilateral contract

A unilateral contract involves one promise to perform (option contract), whereas a bilateral contract involves mutual promises to perform (as in a sales contract).

Unilateral contract —  A contract in which one party makes an obligation to perform without receiving in return any express promise of performance from the other party. One party gives a promise in exchange for an act; that party is not obligated to perform on that promise unless the other party decides to act. An example is an open listing contract, where the seller agrees to pay a commission to the first broker who brings a ready, willing and able buyer. The contract actually is created by the performance of the act requested of the promisee, not by the mere promise to perform. Note that a unilateral contract contains a promise on one side, where as a bilateral contract contains promises on two sides.

Before the act is performed, the promise of the promisor is a mere unilateral offer. When the act is performed, this unilateral offer and the performed act give rise to a unilateral contract. The broker makes no promise to perform or to do any acts such as advertising. He or she can accept the contract and thus bind the seller only by actual performance, that is, by producing such a buyer. Many standard exclusive-right-to-sell listings are now written as bilateral contracts wherein the broker agrees to use reasonable efforts to locate a buyer and the seller agrees to pay a commission if the property is sold by the broker, the seller or anyone else.

The classic example of a unilateral contract is a newspaper notice offering a reward for the return of a lost dog. The offeree is under no obligation to look for the dog, but if he or she does in fact return the dog, then the offeror owes him the reward money. Another example is a brokerage company that promises to pay a $1,000 bonus to the salesperson who sells the most units in a specific condominium project. An option in which the seller agrees to sell for a certain period of time at set terms provided the buyer performs by paying the specified option price is also a unilateral contract.

Bilateral contract — A contract in which each party promises to perform an act in exchange for the other party’s promise to perform.

The usual real estate sales contract is an example of a bilateral contract in which the buyer and seller exchange reciprocal promises respectively to buy and sell the property. If one party refuses to honor his or her promise and the other party is ready to perform, the nonperforming party is said to be in default. Neither party is liable to the other until there is first a performance, or tender of performance, by the nondefaulting party. Thus, when the buyer refuses to pay the purchase price, the seller usually must tender the deed into escrow to show that he or she is ready to perform. In some cases, however, tender is not necessary.

Depending on its wording, a listing form may be considered to be a bilateral contract, with the broker agreeing to use best efforts to locate a ready, willing and able purchaser for the property, and the seller promising to pay the broker a commission if the broker produces such a buyer or if the property is sold. Once signed by the broker and seller, such a listing contract becomes binding on both.

In a unilateral contract, one party must actually perform (and not just promise to perform) for the contract to be binding. For example, in an option, the optionor (seller) promises to keep a specific offer to sell open for a specific time in exchange for the performance of an act by the optionee (buyer); that is, the actual payment (not just the promise to pay) of the option money. When the option is exercised, a bilateral contract to buy and sell is created according to the terms set forth in the option.

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Language of Real Estate Uncategorized

Deposit vs. Down payment

Deposit vs. Down payment

The down payment is the amount of cash offered by a buyer or purchaser at the time of purchase. Even though the down payment usually includes the earnest money deposit, the terms are not synonymous. Earnest money is applied toward the total amount of cash down payment due at the closing.

Deposit — Money offered by a prospective buyer as an indication of good faith in entering into a contract to purchase; earnest money; security for the buyer’s performance of a contract. An earnest money deposit is not necessary to create a valid purchase contract because the mutual promises of the parties to buy and to sell are sufficient consideration to enforce the contract. If the buyer completes the purchase, the deposit money is applied toward the purchase price. If the buyer defaults, the contract may provide that the seller can retain the deposit money as liquidated damages. Contracts also often require the seller to split the deposit money with the broker, up to an amount not exceeding the broker’s commission (per the terms of the listing or the contract of sale). If the seller defaults, the deposit should be returned in full to the buyer.

For protection, the seller should require a deposit large enough to cover the broker’s commission, the cost of the title search and the loss of time and opportunity to sell elsewhere. A deposit of 10 percent of the purchase price should be adequate. If the seller requires too substantial a deposit, however, a defaulting buyer might seek a return of part of it, claiming that the deposit did not accurately serve as liquidated damages, but rather as a forfeiture or penalty. Some states set a standard such as 3 percent; if the deposit exceeds that amount, the seller has the burden of proving that the deposit was, in fact, reasonable and not a penalty.

If the deposit involves a large amount of money, it is good practice to provide that the deposit be placed in an interest-bearing account for the buyer’s benefit.

The buyer should be careful to ensure that funds are sufficient to cover the deposit check. If the deposit check bounces, the seller could try to terminate the contract by arguing that no valid contract exists, as the seller’s acceptance is conditional on receiving a proper deposit.

The question of who owns the deposit sometimes arises. If the seller authorizes the broker to accept deposit money on his or her behalf, the deposit money belongs to the seller when the broker accepts it. In some states, the deposit money must be placed in a neutral escrow and cannot be withdrawn until the transaction is consummated. It never belongs to the broker, although the broker may share in the deposit money if the buyer defaults and the seller retains the deposit as liquidated damages. In a case where the broker absconds with the deposit money, if the seller has not authorized the broker to accept the deposit money the broker is acting as the buyer’s agent in handling the money until such time as the seller accepts the buyer’s offer to purchase. Thus the buyer would suffer the loss if the broker were to steal the money. On the other hand, if the seller had authorized the broker to accept the deposit, the seller would suffer the loss. Such authorization is specifically contained in many exclusive-right-to-sell listing contracts.

Down payment — The amount of cash a purchaser will pay at the time of purchase. Even though down payment usually includes the earnest money deposit, the terms are not synonymous. Earnest money is applied toward the total amount of cash down payment due at the closing.

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