Category : Language of Real Estate

Language of Real Estate

Actual eviction vs. Constructive eviction

Actual eviction vs. Constructive eviction

In an actual eviction, the landlord evicts the defaulting tenant, whereas in a constructive eviction the landlord fails to provide the necessary services so the tenant then is legally entitled to cancel the lease.

Actual eviction — The legal process of removing a tenant from the premises for some breach of the lease. Typical grounds for the eviction of a tenant by a landlord include nonpayment of rent, unlawful use of the premises violating the use provisions of the lease (such as conducting a business in a rental unit leased strictly for residential purposes) and noncompliance with health and safety codes.

In the case of a partial eviction, the tenant is deprived of the use of part of the premises. Upon eviction, the tenant is no longer responsible for paying rent, unless the lease contains a survival clause stating that the tenant’s liability for rent survives eviction.

Constructive eviction — Conduct by the landlord that so materially disturbs or impairs a tenant’s enjoyment of the leased premises that the tenant is effectively forced to move out and terminate the lease without liability for further rent. This concept is a product of modern property law, which now tends to place more emphasis on the quality of possession or habitability under a lease. Constructive eviction might occur when a landlord cuts off the electricity or fails to provide heating, makes extensive alterations to the premises or attempts to lease the property to others. Another example would be if the landlord of a highrise apartment building failed to provide elevator service. There can be no constructive eviction without the tenant’s vacating the premises within a reasonable time of the landlord’s act. The tenant’s duty to pay rent is not terminated if the tenant remains in possession. The tenant can sue to recover possession or bring an action for damages based on breach of the covenant for quiet enjoyment.
https://www.realtown.com/words/constructive-eviction

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Language of Real Estate Uncategorized

Quiet enjoyment vs. Quiet title

Quiet enjoyment vs. Quiet title

Quiet enjoyment is the right to uninterrupted use of the property, whereas quiet title is the name of a legal action to prove valid title to real property.

Quiet enjoyment — The right of an owner or lessee legally in possession of property to uninterrupted use of the property without interference from the former owner, lessor or any third party claiming superior title.

Quiet title — A court action intended to establish or settle the title to a particular property, especially where there is a cloud on the title. All parties with a possible claim or interest in the property must be joined in the action. A quiet title action is frequently used by an adverse possessor to substantiate the title, because having official record title makes it easier to market the property. Once the judgment or decree of the court has been recorded, proper record notice of the claimant’s right and interest in the property is established.

A quiet title action can generally be used to extinguish easements; remove any clouds on title; release a homestead, dower or curtesy interest; transfer title without warranties; clear tax titles; or simply release an interest when the grantor may have some remote claim to the property. The seller who holds a forfeited contract for deed, which the buyer had recorded, sometimes brings a quiet title action to clear the cloud on title produced by the recorded contract for deed, especially where the buyer refuses to release or quitclaim the interest.
https://www.realtown.com/words/quiet-title-action

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Language of Real Estate Uncategorized

Specific performance vs. Liquidated damages

Specific performance vs. Liquidated damages

With respect to remedies upon breach of contract, specific performance is a legal action brought in a court of equity to compel a party to carry out the terms of a contract, whereas liquidated damages is an amount predetermined by the parties to an agreement as the total amount of compensation an injured party should receive if the other party breaches a specified part of the contract.

Specific performance — an action brought in a court of equity in special cases to compel a party to carry out the terms of a contract. The basis for an equity court’s jurisdiction in breach of a real estate contract is the fact that land is unique and mere legal damages would not adequately compensate the buyer for the seller’s breach. The courts cannot, however, specifically enforce a contract to perform personal services, such as a broker’s agreement to find a buyer; nor can they enforce an illegal agreement, an ambiguous contract, or a contract in which there is inadequate consideration.

If a seller refuses to sell to a buyer under a contract of sale, the buyer can request a court specifically to enforce the contract and make the seller deed the property under threat of contempt of court. Similarly, a buyer can have a judge enforce performance of a conveyance by the heirs of a deceased seller under a contract of sale.

In some jurisdictions, a seller can force a defaulting buyer to purchase the property, especially if land values have declined. In most cases, however, a seller would have a difficult time proving that the legal remedy of money damages would not be adequate relief, and he or she must show this inadequacy to obtain specific performance relief.
https://www.realtown.com/words/specific-performance

Liquidated damages — an amount predetermined by the parties to an agreement as the total amount of compensation an injured party should receive if the other party breaches a specified part of the contract. Often in building contracts the parties anticipate the possibility of a breach (for example, a delay in completion by a set date) and specify in the contract the amount of the damages to be paid in the event of the breach. To be enforceable, the liquidated damage clause must set forth an amount that bears a reasonable relationship to the actual damages as estimated by the parties; otherwise, the court will treat the amount as a penalty for failure to perform. If a defaulting buyer deposited earnest money over 20 percent of the purchase price and the buyer failed to complete the contract, the courts would probably permit the buyer to recover some of the deposit money on the theory that the seller would be unjustly enriched by keeping it all.

Courts look with disfavor on penalty clauses and tend to declare them void and unenforceable. The clause should therefore specify for what damage the party is being compensated (loss of rent, attorney fees and the like). As a general rule, a court will not enforce a liquidated damage clause in an installment contract or contract for deed if the clause tends to effect a forfeiture of all installment payments made.

A seller who elects to keep deposited earnest money as liquidated damages may be constrained from successfully pursuing other remedies, including additional money damages. For example, if a buyer deposits $1,000 earnest money on a $175,000 house and later defaults, the seller who keeps the $1,000 as liquidated damages and later sells the house for only $170,000 cannot later recover from the first buyer the difference in the two purchase prices.

Some forms for contracts of sale have a special box for the parties to initial if they desire to treat the earnest money as liquidated damages. Some states have statutory guidelines as to what is a reasonable amount for liquidated damages; for example, in California if the amount is more than a certain percent of the sales price, the seller has the burden of proving that such excess is reasonable; otherwise it would be treated as a penalty and returned to the buyer.

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Language of Real Estate

Covenants vs. Conditions

Covenants vs. Conditions

A covenant is a promise to do something (as in a covenant of quiet enjoyment in a deed), whereas a condition is a contingency that must be met, otherwise a particular property right could be gained or lost.

A covenant is an agreement or promise between two or more parties in which they pledge to perform (or not perform) specified acts on a property; or a written agreement that specifies certain uses or nonuses of the property. Covenants are found in real estate documents such as leases, mortgages, contracts for deed and deeds. Damages may be claimed for breach of a covenant.

Covenants found in warranty deeds (general and special) are promises made by the grantor, binding both the grantor and the grantor’s heirs and assigns, warranting that the title is of a certain character and that if the title should be found to be not of that character, the grantor or heirs will compensate the grantee for any loss suffered. In many areas, covenants are implied by use of certain language in a deed, such as “convey and warrant,” “warrant generally” or “warrant specially.”

Covenants are unconditional promises contained in contracts, the breach of which would entitle a person to damages. Conditions, on the other hand, are contingencies, qualifications or occurrences upon which an estate or property right (like a fee simple) would be gained or lost. Covenants are indicated by words such as promise, undertake, agree; conditions are indicated by words such as if, when, unless and provided. Because conditions are limitations only and do not create obligations, failure of the condition to occur will not entitle either party to damages against the other party.

Conditions may be either precedent or subsequent. A condition precedent must happen or be performed before a right or estate is gained; a condition subsequent causes a right to be lost or an estate to be terminated upon its occurrence.

For example, a lease may contain covenants to repair, pay taxes and assessments or pay rent. If the tenant breaches a covenant, the landlord may sue the tenant for damages. If the lease contains a certain condition and the tenant breaches the condition, then his or her leasehold interest will be terminated. Thus, a commercial lease often contains a condition in a defeasance clause that the tenant will forfeit his or her lease upon the tenant’s being declared bankrupt or upon illegal use of the premises.

Promises may be both conditions and covenants. For example, the concurrent conditions found in contracts for sale are also covenants. The delivery of the deed by the seller and the payment of the purchase price by the buyer are concurrent conditions; also, they are covenants. Thus, the buyer could sue the defaulting seller for damages only after the buyer met the condition of tendering performance (by placing the purchase money into escrow).

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Language of Real Estate

Adverse possession vs. Trespass

Adverse possession vs. Trespass

Adverse possession is the acquiring of title to real property owned by someone else by means of open, notorious, hostile and continuous possession for a statutory period of time; whereas trespass is any wrongful, unauthorized invasion of land ownership by a person having no lawful right or title to enter on the property.

Adverse Possession — The acquiring of title to real property owned by someone else by means of open, notorious, hostile and continuous possession for a statutory period of time. The burden to prove title is on the possessor, who must show that four conditions were met: (1) He or she has been in possession under a claim of right. (2) He or she was in actual, open and notorious possession of the premises so as to constitute reasonable notice to the record owner. (3) Possession was both exclusive and hostile to the title of the owner (that is, without the owner’s permission and evidencing an intention to maintain the claim of ownership against all who may contest it). (4) Possession was uninterrupted and continuous for at least the prescriptive period stipulated by state law. In this regard, successive occupation of the premises by persons who are successors in interest (that is, by privity of contract or descent) can be added together to meet the continuous-use requirement. For example, a father adversely occupies a certain parcel of land for four years. Upon his death, his son succeeds to his interest and “tacks on” to his father’s four-year prior possession.

Two words can serve as memory aids: POACH (possession is open, actual, continuous and hostile); CANOE (possession is continuous, actual, notorious, open and exclusive).

The statutory period does not run against any individual under a legal disability (ex.,insanity) or until the individual has a legal cause of action to oust the possessor. For example, an adverse possessor could acquire title against a life tenant but not against the remainderman, who has no right to possession until the prior life estate is terminated.

The main purpose of adverse possession statutes is to ensure the fullest and most productive use of privately owned land. Land has been, is, and will continue to be in short supply. If a landowner makes no attempt to use his or her real estate for a long period of time, it is deemed better for someone who intends to make good use of the property to take title.

Any person who takes title by inheritance or conveyance from the owner takes title subject to the claim of an adverse possessor, because the new titleholder is charged with knowledge of the rights of parties in possession of the property. This condition also applies to purchasers and donees. However, if the owner’s interest was subject to liens and encumbrances at the time an adverse possessor entered into possession, then the adverse possessor is subject to them as well.

One who claims title to property by adverse possession does not have readily marketable title until he or she obtains and records a judicial decree “quieting” the title or obtains a quitclaim deed from the ousted owner. Once this is done, however, the title has equal standing with that of an owner who acquired title by way of a deed.

When all requirements have been met, the owner’s title is extinguished and a new title is created in favor of the adverse possessor. The effective date of the new title, as far as the original owner is concerned, is the first adverse entry. Thus, suits by the former owner based on trespass, profits or rents during the adverse period are barred.

Some states have added a requirement that the adverse possession must be “in good faith.” This means that at the time the claimant gained possession of the property, the claimant must have honestly believed that he or she had some right to the land. Furthermore, this belief must have been based on some fact, such as a deed that would have created good title for the claimant but for the fact that it was improperly executed.

Most states do not require the claimant to have paid taxes on the property for any certain period of time (although in some states a claimant’s paying taxes may shorten the prescriptive period). However, a court might consider that a claimant’s failure to pay taxes is evidence that he or she really did not claim ownership of the property.

Prudent owners of raw land held for future sale or development make periodic inspections of their property to check against adverse possessors. Merely posting No Trespassing signs may not be sufficient to prevent an adverse possessor from acquiring rights to the property. An owner must defend his or her ownership rights and do so within a certain period of time. An owner could stop the adverse possession by a reentry, an action for ejectment or an action to quiet the title.

The courts do not usually allow a claim of adverse possession if owner and claimant have a close family relationship, such as father and son or husband and wife, because in these cases hostile claims are too difficult to prove. Cotenants normally cannot claim adverse possession against each other without an actual and clear ejectment of one cotenant by another.

Prescriptive rights in general are not usually favored by the law, insofar as they cause others to forfeit their rights. There is often a presumption that, when a person has entered into possession of another’s property, such possession was with the owner’s permission and consistent with the true owner’s title.

Generally, one cannot take title to state or federal lands by adverse possession. However, the federal Color of Title Act provides that a claimant who has met all four tests of adverse possession on public land may receive a patent to such land, provided the land does not exceed 160 acres and provided all taxes are paid. The United States, however, reserves the right to all coal and mineral rights to the property. In addition, title to Torrens-registered property usually cannot be taken by adverse possession.
https://www.realtown.com/words/adverse-possession

Trespass — Any wrongful, unauthorized invasion of land ownership by a person having no lawful right or title to enter on the property. Trespass can occur on the land, below the surface or even in the airspace. Certain trespasses are privileged, such as trespasses to prevent waste, to serve legal process and to use reasonable airspace for flights by aircraft.

The unauthorized possession of real property is a mere trespass and cannot ripen into ownership unless all elements of adverse possession are present. Because a tenant is entitled to the exclusive possession of the leased premises, not only against third parties but the landlord as well, any unauthorized entry by either the landlord or a third party would constitute trespass.

Generally, a landowner is not liable for injuries suffered by a trespasser whose presence is not known. When the landlord knows of the trespass, however, the landlord must not create conditions or do anything that may imperil the trespasser.

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Language of Real Estate

Capitalization rate vs. Recapture rate

Capitalization rate vs. Recapture rate

The capitalization (cap) rate is the rate of return the investor wants on a property; it consists of the return on the investment plus the recapture (through depreciation) of the investment.

Capitalization (CAP) rate — The percentage selected for use in the income approach to valuation of improved property. The CAP rate is designed to reflect the recapture of the original investment over the economic life of the improvement to give the investor an acceptable rate of return (yield) on his or her original investment and to provide for the return of the invested equity. In other words, if the property includes a depreciating building, the CAP rate provides for the return of invested capital in the building by the end of the economic life (the recapture rate that allows for the building’s future depreciation) and the return on the investment in the land and the building (similar to yield).

Example: If a building has a 50-year economic life, then the recapture rate is set at 2 percent per year. If the rate of return on the investment is 8 percent and the recapture rate is 2 percent, then the overall capitalization rate applicable to the building is 10 percent.

The selection of an appropriate CAP rate is influenced by the conditions under which the particular investment is being operated, as well as the availability of funds, prevailing interest rates, risk and so on. Only an experienced appraiser can select the appropriate CAP rate—a mere 1 percent difference in the suggested CAP rate could make a 12 percent difference in the value estimate.

The CAP rate measures the risk involved in an investment. Thus, the higher the risk, the higher the CAP rate; the lower the risk, the lower the CAP rate.
https://www.realtown.com/words/capitalization-rate

Recapture rate — An appraisal term describing that rate at which invested capital will be returned over the period of time a prudent investor would expect to recapture his or her investment in a wasting asset.

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Language of Real Estate Uncategorized

Purchase-money mortgage vs. Contract for deed

Purchase-money mortgage vs. Contract for deed 

Both types of financing involve seller carryback financing; the difference is that legal title remains with the seller in a contract for deed.

Purchase-money mortgage —  A mortgage given as part of the buyer’s consideration for the purchase of real property, and delivered at the same time that the real property is transferred as a simultaneous part of the transaction. It is commonly a mortgage taken back by a seller from a purchaser in lieu of purchase money. A purchase money mortgage is usually used to fill a gap between the buyer’s down payment and a new first mortgage or a mortgage assumed, as when the buyer pays 10 percent in cash, gets an 80 percent first mortgage from a bank, and then the seller takes back a purchase money second mortgage for the remaining 10 percent.

A purchase money mortgage has certain priorities. For example, suppose Fred Wilson buys a small farm for $50,000, pays $10,000 down, and gives the seller or lender a $40,000 mortgage. At the same time, Wilson has a $10,000 judgment lien outstanding against himself. The judgment lien, even though prior in time, is inferior in right to the security lien of the seller/mortgagee. This is because the mortgagee made it possible for Wilson to own the land against which the judgment creditor now claims a lien. Delivery of the deed and the taking back of the purchase money mortgage are deemed one transaction in which there is no time for any other lien to intervene.

A person giving a mortgage on one piece of property to raise money to buy another piece is not giving a purchase money mortgage. Where a developer purchases land and then obtains a construction mortgage loan to build structures, the transaction is not a purchase money mortgage.

When a seller agrees in a contract of sale to take back a purchase money mortgage for part of the purchase price, the terms and conditions of the mortgage (such as interest rate and duration) must be set forth in detail; otherwise, the contract might not be enforceable due to incompleteness or uncertainty.

Depending on state law, a deficiency judgment may or may not be permitted upon default of a purchase money mortgage. In some states (e.g., New York), a purchase money mortgage is exempt from the state’s usury ceiling.

Technically speaking, any mortgage on real property executed to secure the purchase money by a purchaser of the property contemporaneously with the acquisition of the legal title thereto is a purchase money mortgage. Thus, the fact that a mortgage is made to a person other than the seller does not prevent its being a purchase money mortgage.
https://www.realtown.com/words/purchase-money-mortgage

Contract for deed — An agreement between the seller (vendor) and buyer (vendee) for the purchase of real property in which the payment of all or a portion of the selling price is deferred. The purchase price may be paid in installments (of either principal and interest or interest only) over the period of the contract, with the balance due at maturity. When the buyer completes the required payments, the seller must deliver good legal title to the buyer by way of a deed or assignment of lease (if the property is leasehold property). Under the terms of the contract for deed, the buyer is given possession of the property and equitable title to the property, while the seller holds legal title and continues to be primarily liable for payment of any underlying mortgage. The features of the buyer’s equitable title and obligation to purchase are what distinguishes a contract for deed from a lease-option.

The contract for deed document usually contains the names of the buyer and seller, the sales price, the terms of payment, a full legal description and a lengthy statement of the rights and obligations of the parties, similar to those under a mortgage, including use of premises, risk of loss, maintenance of premises, payment of taxes and insurance and remedies in case of default. Specific rights, such as acceleration or the right to prepay without penalty, must be expressly written into the agreement. The contract is usually signed by both parties, acknowledged and recorded.

The contract for deed is used extensively in many areas, where it may be called a land contract, agreement of sale (Hawaii), installment contract, articles of agreement, conditional sales contract, bond for deed or real estate contract. In a dynamic and rapidly appreciating real estate market, the contract for deed enables buyers to purchase property on reasonable financial terms and thereby benefit from the appreciation of the property values. Many buyers then sell the property at a profit before their final payment becomes due. In a tight money market where it is difficult to qualify prospective buyers for conventional financing, the contract for deed is frequently the best method to sell or purchase a property. Especially benefited by the contract for deed are young couples, who would have difficulty qualifying for a bank loan at the time of entering into the contract for deed, but whose incomes will increase before maturity of the agreement, enabling them to refinance and pay off the contract for deed.

Some sellers prefer to sell on a contract for deed because it can create an installment sale, which will enable them to defer payment of a portion of tax. In addition, if the buyer defaults the seller can sue for strict foreclosure, something he or she cannot do with a mortgage. However, a seller who chooses this remedy is rescinding the contract and cannot seek a deficiency judgment for the unpaid balance.

Use of a contract for deed is not without some disadvantages. From the buyer’s viewpoint:

  • Because the seller need not deliver good marketable title until the final payment, the buyer must, at the risk of default, continue to make payments even when there may be a doubt whether the seller will be able to perform when all payments are made. This can be especially serious when the seller is a corporation, because its directors and shareholders have only limited liability. Some attorneys try to minimize this problem by inserting a clause to the effect that “the property is to be conveyed free and clear of all encumbrances except (those specified herein) and to remain free and clear except for the above-stated encumbrances.” The seller is then discouraged from placing further mortgages and encumbrances on the property during the period of the contract for deed.
  • The buyer may have difficulty getting the seller to deed the property upon satisfaction. By withholding a large enough final payment, the buyer often can persuade a seller to pay the costs of drafting the deed. In addition, at the time of final payment, the seller might be suffering a legal disability or be missing, bankrupt or dead, and the property might be tied up in probate.
  • The buyer might be restricted from assigning his or her interest in the contract for deed by covenants against assignment.
  • Liens that arise against the seller could cloud the title.
  • Unless a collection account is used, problems could arise if the seller does not apply the buyer’s payments to the underlying mortgage.

From the seller’s viewpoint:

  • If the buyer defaults, the process of clearing record title may be time consuming and costly, especially if the buyer is under a legal disability or is bankrupt, is a nonresident or has created encumbrances in favor of persons who might have to be joined in any quiet title action.
  • The seller’s interest in the contract for deed is less salable than a mortgagee’s interest would have been had the seller sold under a purchase-money mortgage.
  • The seller’s lender may attempt to call in the loan if it has an enforceable ‘due on sale’ provision in the underlying mortgage.
  • By its very nature, the contract for deed is a contract, and all contracts are subject to differing interpretations with the possibility of disputes and litigation.
    https://www.realtown.com/words/contract-for-deed
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Language of Real Estate Uncategorized

Using the Right Word

Mark Twain once said: The difference between the right word and the almost right word is the  difference between lightning and a lightning bug.

Here’s a few words we commonly see misused in real estate parlance:

Selling agent vs. Seller’s agent — The selling agent works with a buyer making an offer and making the sale, whereas the seller’s agent is the listing agent.

Principal vs. Principle — The client is the principal in an agency relationship; also, principal is the original amount of the loan. Sometimes ‘principal’ is misspelled as principle, which is a rule or doctrine.

Mortgagor vs. Mortgagee — The mortgagor (borrower) gives the mortgage to the mortgagee (lender). The mortgage thus pledges (hypothecates) the property as collateral for the loan, and promises the repayment of money by way of a note.

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Language of Real Estate Uncategorized

Exclusive right to sell vs. Exclusive agency

Exclusive right to sell vs. Exclusive agency

The exclusive right to sell gives the broker a commission no matter who sells the property (the owner or the brokers), whereas under an exclusive agency, no commission is due if the seller finds the buyer.

Exclusive agency — A written listing agreement giving a sole agent the right to sell a property for a specified time, but reserving to the owner the right to sell the property himself without owing a commission. The exclusive agent is entitled to a commission if he or she personally sells the property or if it is sold by anyone other than the seller. It is exclusive in the sense the property is listed with only one broker. The multiple-listing service must accept exclusive-agency listings submitted by participating brokers.

Exclusive right to sell — A written listing agreement appointing a broker the exclusive agent for the sale of property for a specified period of time. The listing broker is entitled to a commission if the property is sold by the owner, by the broker or by anyone else. The phrase “right to sell” really means the right to find a buyer; it does not mean that the agent has a power of attorney from the owner to sell the property. Unless the contract clearly states it is an exclusive right or authorization to sell, most courts will treat it as being a mere exclusive-agency listing.
https://www.realtown.com/words/exclusive-right-to-sell

 

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Language of Real Estate

Assemblage vs. Plottage

Assemblage vs. Plottage

Assemblage is the process of joining several parcels to form a larger parcel; the resulting increase in value is called plottage.

Assemblage — The combining of two or more adjoining lots into one large tract. This is usually done to increase the value of the individual lots because a larger building capable of producing a larger net return may be erected on the larger parcel. The resulting added value is called plottage value. The developer often makes use of option contracts to tie up the right to purchase the desired adjacent parcels. Care must be taken through exact surveys to avoid the creation of gaps or strips between the acquired parcels through faulty legal descriptions.

Plottage value — The increased usability and value resulting from the combining or consolidating of adjacent lots into one larger lot. Plottage is also referred to as assemblage, although the latter is more often used to describe the process of consolidation. The term is often used in eminent domain matters to designate the added value given to lots that are contiguous.

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