accession
it is a mode of acquiring property that involves the addition of value to property through labor or the addition of new materials.
air rights
refer to the empty space above a property, are one type of development right. Before the 20th century, anyone owning property also owned the unlimited air rights above it, as well as the ground beneath it.
annexation
change personal property into real property. For example, if a landowner buys cement, stones, and sand and then mixes them into concrete and constructs a sidewalk, the landowner has converted personal property (cement, stones, and sand) into real property
appurtenance
(runs with the land) is a right or privilege associated with the property, although not necessarily a part of it. Typically include parking spaces in multiunit buildings, easements, water rights, and other improvements. Ownership normally transfers to the
area preference
refers not only to geography but also to people's preference for a specific area. based on several factors, such as convenience, reputation, and history. It is the unique quality of these preferences that results in the different price points for similar
bundle of legal rights
right of possession,
right to control the property within the framework of the law,
right of exclusion (to keep others from entering or using the property), and
right of disposition (to sell, will, transfer, or otherwise dispose of or encumber the propert
chattel
Items of personal property,include such tangibles as chairs, tables, clothing, money, bonds, and bank accounts
emblements
Annual cultivated crops of fruit, vegetables, and grain, or known as fructus industriales, and are generally considered personal property.
factory-built housing
dwellings that are built off-site and trucked to a building lot where they are installed or assembled. includes modular, panelized, precut, and mobile homes. generally considered personal property, even though its mobility may be limited to a single trip
fixture
personal property that has been so affixed to the land or a building that, by law, it becomes part of the real property. Examples are heating plants, elevator equipment in highrise buildings, radiators, kitchen cabinets, light fixtures, and plumbing. Almo
improvement
affect the land's value as well as the use of neighboring tracts and whole communities.
land
defined as the earth's surface extending downward to the center of the earth and upward into space, including permanent natural objects such as trees and water. includes not only the surface of the earth but also the underlying soil. It refers to things t
manufactured housing
built at the factory under the following U.S. Department of Housing and Urban Development (HUD) specifications:
-Nonremoveable steel chassis
-At least 8 feet wide and 40 feet long
-At least 320 square feet of living space
Capable of being lived in with or
mine subsidence
the process of downward land shifts due to the collapse of underground mine shafts and groundwater flows, usually resulting in sinkholes or troughs. Damage to structures may be functional, structural, or cosmetic.
nonhomogeneity
Uniqueness
personal property
sometimes called personalty, is all property that can be owned and does not fit the definition of real property.
real estate
is defined as land at, above, and below the earth's surface, and all things permanently attached to it, whether natural or artificial
-
real property
includes both land and real estate. It is defined as the interests, benefits, and rights that are automatically included in the ownership of the land and real estate. refers to anything that can be owned.
severance
An item of real property can become personal property. For example, a growing tree is real estate until the owner cuts it down, literally severing it from the real estate. Similarly, an apple becomes personal property once it is picked from a tree.
situs
refers not only to geography but also to people's preference for a specific area. based on several factors, such as convenience, reputation, and history. It is the unique quality of these preferences that results in the different price points for similar
subsurface rights
the rights to use the surface of the earth. Subsurface rights are the rights to the natural resources lying below the earth's surface (see the figure that follows). An owner may transfer surface rights without transferring the subsurface rights.
trade fixture
A special category of fixtures includes property used in the course of business. An article owned by a tenant and attached to a rented space or building or used in conducting a business. must be removed on or before the last day the property is rented. Th
water rights
are special common-law rights held by owners of land adjacent to rivers, lakes, or oceans and are restrictions on the rights of land ownership. particularly important rights in drier western states, where water is a scarce and valuable public commodity.
buffer zone
to ease transition from one use to another. typically a strip of land separating land dedicated to one use from land dedicated to another use. For example, landscaped parks, playgrounds, and hiking trails are used to screen residential areas from nonresid
building codes
Most municipalities have enacted ordinances to specify construction standards that must be met when repairing or erecting buildings. In Pennsylvania Building codes are generally local in nature, with each municipality and city exercising its regulatory ri
certificate of occupancy
Once the completed structure has been inspected and found satisfactory, the municipal inspector issues this.
comprehensive plan
Local governments establish development goals, also known as a master plan. is not a regulatory document but is rather a guide to planning for change rather than reacting to proposals. usually is long term, perhaps 20 years or longer, and often includes (
conditional-use permit
(also known as a special-use permit) is usually granted to a property owner to allow for a special use of a property that is defined as an allowable conditional use within that zone, such as a house of worship or daycare center in a residential district.
covenants, conditions, and restrictions (CC&Rs)
declarations of conditions and restrictions that affect the use of all parcels of land within a specified development or subdivision plat. typically found in a separate recorded instrument. The deed to each affected property references the plat or declara
dedication
is a voluntary transfer of private property by its owner to the public for some public use, such as for streets, schools, or parks. Developing is generally a much more extensive activity than subdividing.
deed restriction
limitations to the use of the property imposed by a past owner or current owner and are binding on future grantees. Examples include a restriction specifying the kind of structure that may be erected on the land, a requirement that the property be used fo
density zoning
restrict the average maximum number of houses per acre that may be built within a particular subdivision.
developer
(who may also be a subdivider) improves the land by building streets and constructing homes or other buildings on subdivision lots.
enabling acts
allow the power to enact laws authorized by the state's police power to be passed down to municipalities and other local governing authorities. Such regulations must be exercised in a reasonable manner and be clear and specific, nondiscriminatory, and app
impact fees
are charges made in advance to cover anticipated expenses involving off-site capital improvements such as expanding water and sewer facilities, additional roads, and school expansions.
In Pennsylvania Adequate water supplies and environmentally sound sewa
Interstate Land Sales Full Disclosure Act
prevent fraudulent marketing schemes that may arise when land is sold without being seen by the purchasers. The act is regulated by the secretary of HUD through the Office of Interstate Land Sales Registration.
inverse condemnation
an action brought by a property owner seeking just compensation for land taken for a public use where it appears that the taker of the property does not intend to bring eminent domain proceedings. The property is condemned because its use and value have b
nonconforming use
may be allowed to continue legally as long as it complies with the regulations governing nonconformities in the local ordinance, until the improvements are destroyed or torn down, or until the current use is abandoned.
planned unit development (PUD)
a development where land is set aside for mixed-use purposes, such as residential, commercial, and public areas. Zoning regulations may be modified
plat
is a detailed map that illustrates the geographic boundaries of individual lots. It shows the blocks, sections, streets, public easements, and monuments in the prospective subdivision
police power
the inherent authority to create regulations necessary to protect the public health, safety, and welfare. Through enabling acts, states delegate to counties and local municipalities the authority to enact ordinances in keeping with general laws. The incre
restrictive covenants
often called covenants, conditions, and restrictions (CC&Rs), are referenced in the plat and contained in a separate recorded instrument. Private land-use controls may be enforced by injunction against the property owner in violation of the covenant or re
variance
provides relief if zoning ordinances deprive an owner reasonable use of the property. In Pennsylvania The State Real Estate Commission's regulations require the disclosure of the current zoning classification for certain types of properties in an agreemen
zoning ordinances
the regulatory tool that helps communities regulate and control how land is used for the protection of public health, safety, and welfare. implement the comprehensive plan and regulate and control the use of land and structures within designated land-use
asbestos
a fire-resistant mineral that was once used extensively as insulation and to strengthen other materials. Abandoned in 1978. was used to cover pipes, ducts, and heating and hot water units. Its fire-resistant properties made it a popular material for use i
brownfields
are defunct, derelict, or abandoned commercial or industrial sites, many of which are suspected to contain toxic wastes. According to the U.S. General Accounting Office, several hundred thousand are plague communities as eyesores and potentially dangerous
carbon monoxide
a colorless, odorless gas that occurs as a by-product of burning fuels such as wood, oil, and natural gas, owing to incomplete combustion. quickly absorbed by the body, where it inhibits the blood's ability to transport oxygen, resulting in dizziness and
chlorofluorocarbons (CFCs)
are nontoxic, nonflammable chemicals used as refrigerants in air conditioners, refrigerators, and freezers. CFCs are also used in aerosol sprays, paints, solvents, and foam-blowing applications. Although CFCs are safe in most applications and are inert in
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)
was created in 1980. It established a fund of $9 billion, called the Superfund, to clean up uncontrolled hazardous waste sites and to respond to spills. The act created a process for identifying potential responsible parties and ordering them to take resp
electromagnetic fields (EMFs)
are generated by the movement of electrical currents by any electrical appliance: digital clocks, blow dryers, televisions, and computers. It's produced by high-voltage lines, as well as by secondary distribution lines and transformers, have been suspecte
encapsulation
or the sealing off of disintegrating asbestos, is an alternate method of asbestos control that may be preferable to removal in certain circumstances. However, an owner must periodically monitor the condition of the encapsulated asbestos to make sure it is
environmental impact statement (EIS)
These statements detail the impact that the project will have on the environment. They can include information about air quality, noise, public health and safety, energy consumption, population density, wildlife, vegetation, and the need for sewer and wat
environmental site assessment (ESA)
is often performed on a property to show that due care was exercised in determining whether any environmental impairments exist. The assessment can help prevent parties from becoming involved in contaminated property and work as a defense to liability. It
formaldehyde
a colorless chemical with a strong, pronounced odor, is used widely in the manufacture of building materials and many household products because of its preservative characteristics. Often emitted as a gas, it is one of the most common and problematic vola
groundwater
ater that exists under the earth's surface within the tiny spaces or crevices in geological formations
lead
was used as a pigment and drying agent in alkyd oil-based paint. The federal government estimates that it is present in about 75 percent of all the private housing built before 1978 or in as many as 57 million homes, ranging from low-income apartments to
mold
can be found almost anywhere and can grow on almost any organic substance, so long as moisture, oxygen, and an organic food source are present. Moisture feeds its growth. If a moisture problem is not discovered or addressed, its growth can gradually destr
polychlorinated biphenyls (PCBs)
consist of more than 200 organic chemical compounds that are not found naturally in nature. These flame-resistant, chemicals were often used in electrical equipment (such as transformers), electrical motors in refrigerators, caulking compounds, and hydrau
radon
a naturally occurring, colorless, odorless, tasteless, radioactive gas produced by the decay of other radioactive substances. It is measured in picocuries contained in a liter of air (i.e., pCi/L). It is found in every state and territory with its levels
Small Business Liability Relief and Brownfields Revitalization Act
was signed into law in 2002. The Law provides funds to assess and clean up these, clarifies liability protections, and provides tax incentives toward enhancing state and tribal response programs. The law is also important for property owners and developer
Superfund Amendments and Reauthorization Act (SARA)
reauthorized CERCLA, increased the Superfund to $8.5 billion, provided funds for studying the use of new technologies, and required the EPA to assess the risk to human environmental health at every site of the Superfund's list. It also required more citiz
underground storage tanks (USTs)
are commonly found on sites where petroleum products are used or where gas stations and auto repair shops are or were located. They also may be found in a number of other commercial and industrial establishments, including printing and chemical plants, wo
urea-formaldehyde foam insulation (UFFI)
once popular, then banned, and now legal again, is rarely used. When incorrectly mixed, it never properly cures, resulting in strong emissions shortly after installation. Studies have shown that formaldehyde emissions generally decrease over time, so home
water table
the natural level at which the ground is saturated. It may be several hundred feet underground or near the surface. When the earth's natural filtering systems are inadequate to ensure the availability of pure water, any contamination of underground water
air lot
are composed of airspace within specific boundaries located over a parcel of land.
base line
run east and west.
benchmark
are permanent reference points that have been established throughout the United States. They are usually embossed brass markers set into solid concrete or asphalt bases. While used to some degree for surface measurements, their principal reference use is
datum
is a point, line, or surface from which elevations are measured or indicated. For the purposes of the United States Geological Survey (USGS), this is defined as the mean sea level at New York Harbor. However, virtually all large cities use local official
legal description
is a detailed way of describing a parcel of land for documents such as deeds and mortgages that will be accepted in a court of law. The description is based on information collected through a survey
lot-and-block (recorded plat) description
uses lot and block numbers referred to in a plat map filed in the recorder of deeds office in the county where the land is located. is performed in two steps. First, a large parcel of land is described either by the metes-and-bounds method or by rectangul
metes-and-bounds description
is the oldest type of legal description. Metes means to measure, and bounds means linear directions. The method relies on a property's physical features to determine the boundaries and measurements of the parcel.
monuments
are fixed objects used to locate the point of beginning (POB), all corners of the parcel or ends of boundary segments, and the location of intersecting boundaries. In colonial times, a monument might have been a natural object such as a stone, large tree,
plat map
is a map of a town, a section, or a subdivision, indicating the location and boundaries of individual properties. The lot-and-block system is used mostly in subdivisions and urban areas.
point of beginning (POB)
also the point of ending (POE), but often only the POB is used in describing the property. From there, the surveyor proceeds around the property's boundaries. The boundaries are recorded by referring to linear measurements, natural and artificial landmark
principal meridian
run north and south
rectangular survey system
sometimes called the government survey method, was established in 1785 to standardize the description of land acquired by the newly formed federal government. By dividing the land into rectangles, the survey provided land descriptions by describing the re
section
Land parallel to meridians and base lines is divided into ranges and townships, respectively, forming imaginary squares, known as townships. Townships are further divided into these. each of these is one mile square or 640 acres. These descriptions freque
survey
the process by which boundaries are measured by calculating the dimensions and area to determine the exact location of a piece of land. Courts have stated that a description is legally sufficient if it allows a surveyor to locate the parcel. In this conte
township
Land parallel to meridians and base lines is divided into ranges and these, respectively, forming imaginary squares. Each of these contains 36 sections.Pennsylvania does not describe land using the rectangular survey system.
accretion
increases in the land resulting from the deposit of soil by the water's action.
appurtenant easement
is attached to the ownership of one parcel of land and allows the owner the use of a neighbor's land. For an appurtenant easement to exist, two adjacent parcels of land must be owned by two different parties. The parcel over which the easement runs is kno
condemnation
is the process by which the government exercises this right, by either judicial or administrative proceedings. When property is taken in this manner, just compensation is to be paid to the owner, and the rights of the property owner are to be protected by
conventional life estate
is created by the intentional act of the owner. It may be established either by deed at the time the ownership is transferred during the owner's life or by a provision of the owner's will after death. The estate is conveyed to an individual known as the l
deed restrictions
are private restrictions that affect the use of the land. Once placed in the deed by a previous owner, they "run with the land," limiting the use of the property and binding to all grantees.
defeasible fee estate
(or fee simple defeasible estate) is a qualified estate that is subject to the occurrence or nonoccurrence of a specified event. Two categories of defeasible estates exist: fee simple determinable and fee simple subject to a condition subsequent.
doctrine of prior appropriation
Under this doctrine, the right to use any water, with the exception of limited domestic use, is controlled by the state rather than by the landowner adjacent to the water.
easement
is the right to use the land of another party for a particular purpose. It may exist in any portion of the real estate, including the airspace above or a right-of-way across the land.
easement by condemnation
is created under the government's right of eminent domain. This easement is acquired for a public purpose. As with any other condemnation proceeding, the owner of the affected property must be properly compensated for the easement.
easement by necessity
An easement that is created when an owner sells a parcel of land that has no access to a street or public way except over the seller's remaining land. is created by court order based on the principle that owners must have the right to enter and exit their
easement by prescription
If the claimant has made use of another's land for a certain period as defined by state law, an easement by prescription, or a prescriptive easement, may be acquired. The prescriptive period ranges from 10 to 21 years. The claimant's use must have been co
easement in gross
is an individual or company interest in right to use someone else's land. This easement benefits a person or an entity rather than the land, as is the case with an appurtenant easement (see the figure that follows). A railroad's right-of-way is an easemen
eminent domain
is the right of the government to acquire privately owned real estate for public use.
encroachment
is the illegal extension of a building or a fence that extends beyond the land of the owner. It is usually disclosed by either a physical inspection of the property or a spot survey. As a rule, a spot survey is more accurate and reliable than a simple phy
encumbrance
is a claim, charge, or liability that attaches to real estate. An encumbrance may decrease the value or obstruct the use of the property. In essence, an encumbrance is a right or an interest held by someone other than the property owner that affects title
erosion
is the gradual and imperceptible wearing away of the land by natural forces, such as wind, rain, and flowing water. Fortunately, erosion usually takes hundreds or even thousands of years to have any noticeable effect on a person's property. Flash floods o
escheat
is a process by which the state may acquire privately owned real or personal property. State laws provide for ownership to transfer to the state when an owner dies leaving no heirs (as defined by the law) and no will that directs how the property is to be
estate in land
defines the degree, quantity, nature, and extent of an owner's interest in real property. Many types of estates exist. However, not all interests in real estate are estates. To be an estate in land, an interest must allow possession, meaning the holding a
fee simple
(also called fee simple absolute) is the highest interest in real estate recognized by law. is ownership in which the owner is entitled to all rights to the property by law. This estate is intended to run forever; upon the death of its owner, it passes to
fee simple determinable
is a fee simple defeasible estate that may be inherited. This estate is qualified by a special limitation (which is an occurrence or event). The language used to distinguish a special limitation�words such as so long as or while or during�is the key to cr
fee simple subject to a condition subsequent
the second type of fee simple defeasible estate, is similar to fee simple determinable in that an owner gives real estate, on condition of ownership, but it differs in the way the estate will terminate if there is a violation to the condition. While in fe
freehold estate
are ownership interests that last for an indeterminable length of time, such as for a lifetime or forever. This estate continues for an indefinite period and may be passed along to the owner's heirs. A life estate is based on the lifetime of a person and
future interest
The right of entry and possibility for reverter may never take effect. If they do, it will only be at some time in the future.
leasehold estate
An estate in land refers to the degree, quantity, nature, and extent of interest a person holds. Freehold estates are estates of indeterminate length. Less-than-freehold estates. Freehold estates are further divided into estates of inheritance and life es
license
is a personal privilege to enter the land of another for a specific purpose. A license differs from an easement in that it can be terminated or canceled. If a right to use another's property is given orally or informally, it generally is considered a lice
lien
is a charge against property that provides security for a debt or obligation of the property owner. If the obligation is not repaid, the lienholder is entitled to have the debt satisfied from the proceeds of a court-ordered or forced sale of the debtor's
life estate
is a freehold estate that is limited in duration to the life of the owner or to the life of some other designated person or persons. Unlike other freehold estates, a life estate is not inheritable. It passes to future owners according to the provisions of
littoral rights
land borders commercially navigable lakes, seas, and oceans. Owners with littoral rights enjoy unrestricted use of available waters but own the land adjacent to the water only up to the mean (average) high-water mark (see the figure that follows). All lan
party wall
can be an exterior wall of a building that straddles the boundary line between two lots, or it can be a commonly shared partition wall between two connected properties. The lot owners own the half of the wall on their individual lot, and each has an appur
pur autre vie
A life estate may also be based on the lifetime of a person other than the life tenant. Although a life estate is not considered an estate of inheritance, a life estate (for the life of another) provides for inheritance by the life tenant's heirs only unt
remainder interest
The creator of the life estate may name a remainderman as the person to whom the property will pass when the life estate ends.
reversionary interest
The creator of the life estate may choose not to name a remainderman. In that case, ownership is said to revert to the original owner upon the end of the life estate.
riparian rights
are common-law rights granted to owners of land lying along the course of a river, stream, or similar body of water. Although riparian rights are governed by laws that vary from state to state, they generally include the unrestricted right to use the wate
taxation
is a charge on real estate to raise funds to meet the needs of a government. Taxes on real estate include annual real estate taxes assessed by local and area governmental entities, including school districts, taxes on income realized by individuals and co
actual eviction
When a tenant breaches a lease or improperly retains possession of the premises, the landlord may regain possession through a legal process
When a court issues a judgment for possession to a landlord, the tenant must vacate the property. If the tenant fai
assignment
When a tenant transfers all leasehold interests to another person. The new tenant is legally obligated for all the promises the original tenant made in the lease. In most cases, the sublease or assignment of a lease does not relieve the original lessee of
constructive eviction
If a landlord breaches the terms of a lease, the tenant may sue and recover damages against the landlord. If the leased premises become unusable for the purpose stated in the lease, the tenant may have the right to abandon them. This action, called constr
estate at sufferance
arises when a tenant who lawfully possessed real property continues in possession of the premises without the landlord's consent after the rights expire. This estate can arise when a tenant for years fails to surrender possession at the expiration of the
estate at will
gives the tenant the right to possess property with the landlord's consent for an unspecified or uncertain term. An estate at will is a tenancy of indefinite duration. It continues until it is terminated by either party giving proper notice. No definite i
estate for years
is a leasehold estate that continues for a definite period. That period may be years, months, weeks, or even days. An estate for years always has a specific starting and ending date. When the estate expires, the tenant is required to vacate the premises a
estate from period to period
or periodic tenancy, is created when landlord and tenant enter into an agreement for an indefinite time; that is, the estate does not contain a specific expiration date. Such a tenancy is created initially to run for a definite term�for instance, month to
gross lease
the tenant pays a fixed rental and the landlord pays all taxes, insurance, mortgage payments, repairs, utilities, and the like associated with the property (usually called property charges or operating expenses). Residential and commercial office leases a
ground lease
When a landowner leases unimproved land to a tenant who agrees to erect a building on it, the lease is usually called a ground lease. It is most often used in commercial and industrial property development. Ground leases usually involve separate ownership
holdover tenancy
An estate from period to period can be created when a tenant with an estate for years remains in possession, or holds over, after the lease term expires. If no new lease agreement has been made.
The landlord may evict the tenant or treat the holdover tena
lease
is a contract between an owner of real estate (the lessor) and a tenant (the lessee). it is a contract to transfer the lessor's rights to exclusive possession and use of the property to the tenant for a specified period. The lease establishes the length o
lease purchase
is used when a tenant wants to purchase the property but is unable to do so. Perhaps the tenant cannot obtain favorable financing or clear title, or the tax consequences of a current purchase would be unfavorable. In this arrangement, the purchase agreeme
lessee
tenant
lessor
owner of real estate
month-to-month tenancy
A type of rental agreement. is based upon the idea that the lease is renewed at the end of each month. If the renter decides to leave at the end of the month, then he/she/they may do so without breaking the lease.
net lease
the tenant pays all or most of the operating expenses in addition to the rent. The monthly rental is net income for the landlord after operating costs have been paid. This lease is most often associated with large commercial and industrial leases.
percentage lease
This type of lease is generally used for retail business leases. The rent is based on a minimum fixed rental fee plus a percentage of the gross or net income received by the tenant doing business on the leased property. The percentage charged is negotiabl
Protecting Tenants at Foreclosure Act (PTFA) of 2009
requires that new owners of foreclosed properties follow certain requirements with regards to tenants who are current with their rental payments. Although set to expire earlier, the Dodd-Frank Wall Street Reform and Consumer Protections Act extended the p
purchase option
A lease may contain a clause that grants the lessee the privilege of renewing or extending the lease. The lessee, however, must give notice before a specific date of the intention to exercise the option. Some leases grant the lessee the option to purchase
reversionary right
a contract to pay rent and assume other obligations. The lessor grants the lessee the right to occupy the real estate and use it for purposes stated in the lease. In return, the landlord receives payment for use of the premises and retains a right to poss
right of first refusal
allowing the tenant the opportunity to buy the property before the owner accepts an offer from another party. Although not required, the owner may give the tenant credit toward the purchase price for some percentage of the rent paid. The lease agreement i
sale and leaseback
is an arrangement whereby the owners of property sell the property and then lease it back for an agreed period and rental. A sale and leaseback is often used when extra capital is needed on a construction project. The original owners pull out their equity
security deposit
held by the landlord during the lease term. is used if the tenant defaults on payment of rent or destroys the premises. Licensees should be aware of local state laws that govern security deposits: how they may be held, maximum amounts, whether interest mu
sublease
When a tenant transfers less than all the leasehold interests by leasing them to a new tenant. The original tenant remains responsible for rent being paid by the new tenant and for any damage done to the rental during the lease term. The new tenant is res
suit for possession
When a tenant breaches a lease or improperly retains possession of the premises, the landlord may regain possession through a legal process
When a court issues a judgment for possession to a landlord, the tenant must vacate the property. If the tenant fai
warranty of habitability
The lessor who leases residential premises warrants that the premises are fit for habitation. If the tenant proves that the premises are not fit for habitation, the court can order a reduction or cessation of rental payment.
common elements
...
community property
consists of real and personal property acquired by either spouse during the marriage. Any conveyance or encumbrance of community property requires the signatures of both spouses. Spouses can will their half of the community property to whomever they desir
condominium
form of ownership has become increasingly popular throughout the United States. Condominium laws, often called horizontal property acts, have been enacted in every state. Under these laws, the owner of each unit holds a fee simple title to the unit. The i
cooperative
a corporation holds title to the land and the building. The corporation then offers shares of stock to prospective tenants. The price the corporation sets for each apartment becomes the price of the stock. The purchaser becomes a shareholder in the corpor
co-ownership
When title to one parcel of real estate is held by two or more individuals, those parties concurrent owners. Most states commonly recognize various forms of co-ownership. Individuals may co-own property as tenants in common, joint tenants, or tenants by t
corporation
is a legal entity�an artificial person�created under the laws of the state from which it receives its charter. A corporation is managed and operated by its board of directors. The charter sets forth the powers of the corporation, including its right to bu
general partnership
all partners participate to some extent in the operation and management of the business and share full personal liability for business losses and obligations.
joint tenancy
property owned by two or more people.
The four requirements for unities are the following:
- Title is acquired by one document or deed.
- The deed is executed and delivered at one time.
- The deed conveys equal interests to all of the parties.
- The parti
limited liability company (LLC)
is a relatively recent form of business organization. An LLC combines the most attractive features of limited partnerships and corporations. The members of an LLC enjoy the limited liability offered by a corporate form of ownership and the tax advantages
limited partnership
consists of one or more general partners and limited partners. The business is run by the general partner or partners. The limited partners are not legally permitted to participate in the business, and each can be held liable for business losses only to t
partition
is a legal way to dissolve the relationship when the parties do not voluntarily agree to its termination. If the court determines that the land cannot be divided physically into separate parcels without destroying its value, the court will order the real
partnership
is an association of two or more people who carry on a business for a profit as co-owners.
In Pennsylvania Under common law, a partnership is not a legal entity and technically cannot own real estate. Individual partners must hold title as tenants in comm
Pennsylvania Uniform Condominium Act
a condominium is created and established when the owner of an existing building or the developer of unimproved property executes and records a declaration of condominium. The declaration includes
- a legal description of the condominium units and the comm
PITT
the four unities of possession, interest, time, and title�must be present. To establish a joint tenancy with right of survivorship, the intentions of the parties must be stated clearly.
right of survivorship
Upon the death of a joint tenant, the deceased's interest transfers directly to the surviving joint tenant or tenants. Essentially, there is one less owner.
With each successive joint tenant death, the surviving joint tenants keep acquiring the deceased t
separate property
is real or personal property that was owned solely by either spouse before the marriage, obtained by gift or inheritance during the marriage, or purchased with separate funds after the marriage. Any income earned from a person's separate property remains
severalty
occurs when property is owned by one individual or corporation. The term comes from the fact that a sole owner is severed or cut off from other owners. The severalty owner has sole rights to the ownership and sole discretion to sell, will, lease, or other
tenancy by the entirety
is a special form of co-ownership used in some states that allows the husband or the wife to inherit the other spouse's ownership interest upon death. In this form of ownership, each spouse has an equal, undivided interest in the property. The term entire
tenancy in common
each tenant holds an undivided fractional interest in the property. A tenant in common may hold one-half or one-third interest in a property. The physical property is not divided into a specific half or third. The co-owners have unity of possession, meani
time-share
permits multiple purchasers to buy interests in real estate; time-shares are most common with resort property ownership. Each purchaser receives the right to use the facilities for a certain period. A time-share estate is a real property interest in a con
trust
is a device by which one person transfers ownership of property to someone else to hold or manage for the benefit of a third person (see the figure that follows). Perhaps a grandfather wishes to ensure the college education of his granddaughter, so he tra
ad valorem tax
is Latin for according to value. Ad valorem taxes are based on the value of the property being taxed and are specific, involuntary, statutory liens. They are charged by various government agencies and municipalities.
assessment
Real estate is valued for tax purposes by county or township assessors or appraisers
In Pennsylvania Counties are divided into nine different classes, depending on population. Philadelphia, with a population of 1,500,000, is the only first-class county. T
attachment
To prevent a debtor from conveying title to previously unsecured real estate (realty that is not mortgaged or is similarly unencumbered) while a court suit is being decided, a creditor may seek a writ of attachment. By this writ, the court retains custody
equalization factor
In some jurisdictions, when it is necessary to correct general inequalities in statewide tax assessments. this may be applied to raise or lower assessments in a particular district or county. The assessed value of each property in the area is multiplied b
equitable lien
a lien on property imposed by a court in order to achieve fairness, particularly when someone has possession of property which he/she holds for another. See also: constructive trust equity lien.
equitable right of redemption
Generally, the delinquent taxpayer can redeem the property any time before the tax sale. The taxpayer exercises this equitable right of redemption by paying the delinquent taxes plus interest and charges (any court costs or attorney's fees). An owner who
general lien
affect all property, both real and personal, of a debtor. These include judgments, estate and inheritance taxes, decedent's debts, corporation franchise taxes, and Internal Revenue Service taxes. A lien on real estate differs from a lien on personal prope
involuntary lien
A non-consensual claim to the property of another as collateral to ensure the repayment of a debt. An involuntary lien may be imposed by a court, often for non-payment of taxes. The involuntary lien gives the tax authority (or other body) the right to con
judgment
s a decree issued by a court. When the decree establishes the amount a debtor owes and provides for money to be awarded, it is called a money judgment.
A judgment becomes a general, involuntary lien on both real and personal property owned by the debtor.
lis pendens
There is often a considerable delay between the filing of a lawsuit and final judgment. When any suit affecting title to real estate is filed, a special notice, known as a lis pendens (Latin for litigation pending) is recorded. A lis pendens is not itself
mechanic's lien
is a specific, involuntary lien that gives security to those who perform labor or furnish material to improve real property. A mechanic's lien is available to contractors, subcontractors, architects, equipment lessors, surveyors, laborers, and others who
mill
To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. For example, a property with an assessed value of $50,000 located in a municipality with a mill rate of 20 mills would
mortgage lien
is a specific, voluntary lien on real estate given to a lender by the borrower as security for a mortgage loan. It becomes a lien on real property when the lender records the mortgage in the recorder of deeds office in the county where the property is loc
redemption
The holder of the certificate of sale may be required to wait for a while after the sale to receive the deed to the property. Some states grant a period of redemption after the tax sale. In this case, the defaulted owner (or the defaulted owner's creditor
special assessment
special taxes on real estate to fund public improvements to the property. Property owners in the improvement area are required to pay for them because their properties benefit directly from the improvements. For example, the construction of paved streets,
specific lien
are secured by a specific parcel of real estate and affect only that particular property. Specific liens on real estate include vendors' liens, mechanics' liens, mortgage liens, real estate tax liens, and liens for special assessments and utilities. A ven
statutory lien
The Bankruptcy Code defines a statutory lien as a lien arising solely because of a statute. It is essentially a lien that is created automatically by operation of a statute or law (meaning it doesn't require any subsequent judicial action such as a lawsui
subordination agreement
are written agreements between lienholders to change the priority of mortgage, judgment, and other liens. Under a subordination agreement, the holder of a superior or prior lien agrees to permit a junior lienholder's interest to move ahead of his or her l
tax lien
A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.
tax sale
Real estate taxes must be valid to be enforceable. This means they must be levied properly, used for a legal purpose, and applied equitably to all property. Real estate taxes that have remained delinquent for the statutory period can be collected through
vendor's lien
A vendor's lien is the right of a seller to repossess the property sold until the buyer makes all payments for the full purchase price. The property is the collateral given as security to the seller for the purchase price. It is sometimes used in connecti
voluntary lien
A voluntary lien is a type of lien that exists because of an action taken by a debtor. This is the opposite of an involuntary lien that occurs by law, such as a tax or special assessment lien that is imposed by a regulatory authority.
acknowledgment
is a formal declaration under oath that the person who signs a written document does so voluntarily and that the signature is genuine. The declaration is made before a registered notary public or authorized public officer, such as a judge, district justic
adverse possession
is another means of involuntary transfer. An individual who makes a claim to a property, takes possession of it, and most important, uses it may take title away from an owner who fails to use or inspect the property for a period of years. The law recogniz
bargain and sale deed
contains no express warranties against encumbrances. However, it does imply that the grantor holds title and possession of the property. The granting clause usually states a person's name or the name of an entity and the words grants and releases or grant
deed
is a written instrument by which an owner of real estate intentionally conveys the owner's right, title, or interest in a parcel of real estate to another.
deed in trust
is the means by which a trustor conveys real estate to a trustee for the benefit of a beneficiary. The real estate is held by the trustee to fulfill the purpose of the trust.
devise
The gift of real property by will
general warranty deed
provides the greatest protection to the buyer because the grantor is legally bound by certain covenants (promises) or warranties. In most states, the warranties are implied by the use of certain words specified by statute. In some states, the grantor's wa
grantee
The person who is acquiring title
- To be valid, a deed must name a grantee.
- If more than one grantee is involved, the granting clause should specify their rights in the property.
granting clause
states the grantor's intention to convey the property. Depending on the type of deed and the obligations agreed to by the grantor, the wording would be similar to one of the following:
- "I, John Smith, convey and warrant..."
- "I, John Smith, grant..."
-
grantor
The owner who transfers title
- A grantor must be of lawful age, generally at least 18 years old
- A grantor also must be of sound mind
- The grantor's name must be spelled correctly and consistently throughout the deed
In Pennsylvania The law that govern
habendum clause
begins with the words "to have and to hold." Its provisions must agree with those stated in the granting clause. For example, if the grantor conveys a time-share interest or an interest less than fee simple absolute, the habendum clause would specify the
intestate
owner who dies without a will
involuntary alienation
that is, without the owner's consent (see the figure that follows). Involuntary transfers are usually carried out by operation of law, such as by condemnation or foreclosure sales to satisfy debts. When a person dies intestate (with no will) and no heirs,
power of attorney
Most states, including Pennsylvania, permit an attorney-in-fact to sign for a grantor. A power of attorney is the specific written authority to execute legal instruments or perform other designated acts for another person. An attorney-in-fact is the perso
probate
the legal procedure that confirms the validity of a will and accounts for the decedent's assets. The process can take several months to complete. Probate is the formal judicial process.
is the formal judicial process that
proves or confirms the validity o
quitclaim deed
provides the least protection of any deeds. It carries no covenants or warranties and generally conveys only whatever interest the grantor may have when the deed is delivered. If the grantor has no interest, the grantee will acquire nothing. Nor will the
special warranty deed
contains two basic warranties:
That the grantor received title
That the property was not encumbered during the time the grantor held title, except as noted in the deed
In effect, the grantors defend the title against themselves. The granting clause genera
testate
A person who dies testate has prepared a will indicating how the deceased's property will be disposed of. In contrast, a person who dies intestate (without a will), real and personal property pass to the decedent's heirs according to the state's statute o
testator
the person who makes the will.
In Pennsylvania A testator must have legal capacity to make a will. There are no rigid tests to determine the capacity to make a will. Pennsylvania law states that a person must be of legal age (18) and sound mind. To demons
title
means the right to or ownership of the land; it represents the owner's bundle of legal rights. Title also serves as evidence of that ownership. A person who holds title would, if challenged in court, be able to recover or retain ownership or possession of
transfer tax
Most states' laws require that conveyances of real estate be taxed, commonly called a transfer tax on conveyances of real estate. In these states, the tax is usually payable when the deed is recorded. In some states, the taxpayer purchases stamps from the
trustee's deed
It is used when a trustee conveys real estate held in the trust to anyone other than the trustor. The trustee's deed must state that the trustee is executing the instrument in accordance with the powers and authority granted by the trust instrument.
Deeds
voluntary alienation
is the legal term for the voluntary transfer of title. The owner may voluntarily transfer title by either selling or making a gift of the property. To transfer during one's lifetime, the owner must use some form of deed of conveyance.
will
is made by the owner to convey title to real or personal property after the owner's death. This differs from a deed, which must be delivered during the lifetime of the grantor and which conveys a present interest in property.
Elements of a Deed
- Grantor who has the legal capacity to execute (sign) the deed
- Date
- Grantee named with reasonable certainty to be identified
- Statement of consideration
- Granting clause (words of conveyance)
- Habendum clause (to define ownership taken by the gran
Execution of Corporate Deeds
The laws governing a corporation's right to convey real estate vary from state to state. However, these basic rules must be followed:
- A corporation can convey real estate only by authority granted in its bylaws or on a proper resolution passed by its bo
Type of dead
can take several forms, depending on the extent of the grantor's pledges to the grantee. Regardless of any guarantees the deed offers, however, the grantee will want additional assurance that the grantor has the right to offer what the deed conveys. To ob
dower and curtesy
State law which were enacted to protect the inheritance rights of a surviving spouse. When a will does not provide a spouse with the minimum statutory inheritance, the spouse may demand it from the estate.
abstract of title
is a summary report of what the title search found in the public record. The person who prepares this report is called an abstractor. The abstractor searches all the public records and then summarizes the various events and proceedings that affected the t
actual notice
means that not only is the information available but also that someone has been given the information and actually knows it. An individual who has searched the public records and inspected the property has actual notice. Actual notice is also known as dir
attorney's opinion of title
After examining the abstract, an attorney prepares a written report about the condition of ownership.
certificate of title
a statement of opinion of the title's status as of the date it is issued. A certificate is not a guarantee of ownership. Rather, it certifies the condition of the title based on the title search. The certificate may be prepared by a title company or an at
chain of title
is the record of a property's ownership over a period. Beginning with the earliest or original owner, title may pass to many individuals. Each owner is linked to the next so that a chain is formed. An unbroken chain of title can be traced through linking
constructive notice
is the legal presumption that information is available and can be obtained by an individual through diligent inquiry. Properly recording documents in the public record serves as constructive notice to the world of an individual's rights or interest as doe
marketable title
Under the terms of the typical real estate agreement of sale, the seller is required to deliver marketable title to the buyer at the closing. To be marketable, a title must
disclose no serious defects and not depend on doubtful questions of law or fact to
priority
refers to the order of rights in time. Many complicated situations can affect the priority of rights�who recorded first, which party was in possession first, who had actual or constructive notice. The way the courts will rule in any situation depends, of
recording
is the act of placing documents in public record. The specific rules for recording documents are a matter of state law. Although the details may vary, all recording acts essentially provide that any written document that affects any estate, right, title,
subrogation
The premium for the policy is paid once, at closing. The maximum loss for which the company may be liable cannot exceed the face amount of the policy (unless the amount of coverage has been extended with an inflation rider). When a title company makes a p
suit to quiet title
If ownership cannot be traced through an unbroken chain, a gap or cloud in the chain of title is said to exist. In these cases, the cloud on the title makes it necessary to establish ownership by a court action
title insurance
is a contract under which the policyholder is protected from losses arising from defects in the title. A title insurance company determines whether the title is insurable, based on a review of the public records. If so, a policy is issued. Unlike other in
title search
is an examination of all public records to determine whether any defects exist in the chain of title. The records of conveyances of ownership are examined, beginning with the present owner. Then the title is traced back to its origin (40 years to 60 years
Uniform Commercial Code
he Uniform Commercial Code (UCC) is a commercial law statute that has been adopted to some extent in all 50 states. The UCC applies to personal property transactions; it does not apply to real estate. The UCC governs the documents when personal property i
acceptance
is the promise by the offeree to be bound to the exact terms proposed by the offeror. The acceptance must be communicated to the offeror.
bilateral contract
both parties promise to do something; one promise is given in exchange for another. A real estate sales contract is a bilateral contract because the seller promises to sell a parcel of real estate and deliver title to the buyer, who promises to pay a cert
breach of contract
is a violation of any of the terms or conditions without legal reason. A seller who fails to deliver title to the buyer breaches the contract. The breaching or defaulting party assumes certain burdens, and the nondefaulting party has certain remedies.
consideration
is something of legal value offered by one party and accepted by another as an inducement to act or to refrain from some act. A definite statement of consideration must be included in a contract as evidence that something of value was given in exchange fo
contract
is a voluntary, legally enforceable promise between two competent parties to perform (or not perform) some legal act in exchange for consideration. The definition may be easier to understand if its various parts are examined separately. A contract must be
counteroffer
Proposing any deviation from the terms of the offer constitutes a rejection of the original offer and becomes a new offer.
Any change by the seller to the terms proposed by the buyer creates a counteroffer. The original offer ceases to exist because the s
electronic contracting
a growing field in real estate practice because it quickly and efficiently integrates information in a real estate transaction between clients, lenders, and title and closing agents. The transactions are conducted through e-mail or fax and can save a lot
executed contract
one in which all parties have fulfilled their promises and thus the contract has been performed. This usage is not to be confused with the verb, execute, which means the contract is signed.
executory contract
exists when one or both parties still have some act to perform. An agreement of sale is an executory contract from the time it is signed until closing: Ownership has not yet changed hands, and the seller has not received the full sales price. At closing,
express contract
the parties state the terms and show their intentions in words, either oral or written. Most real estate contracts are express contracts; they have been committed to writing.
implied contract
the agreement of the parties is demonstrated by their acts and conduct.
liquidated damages
clause in a real estate purchase contract specifies the amount of money to which the seller is entitled if the buyer breaches the contract.
novation
is the substitution of a new contract in place of the original one. The new agreement may be between the same parties, or a new party may be substituted for either (this is novation of the parties). The parties' intent must be to discharge the old obligat
offer
a promise made by one party, requesting something in exchange for that promise. The offer is made with the intention that the offeror will be bound to the terms if the offer is accepted. The terms of the offer must be definite and specific, and the offer
rescission
one party may cancel or terminate the contract as though it had never been made. Cancellation terminates a contract without a return to the original position. Rescission, however, returns the parties to their original positions before the contract, so any
statute of frauds
certain types of contracts must be in writing to be enforceable in a court of law.
In Pennsylvania The statute of frauds requires that contracts for the sale of real estate be in writing and signed by the seller to be enforceable in a court of law. This s
suit for specific performance
the buyer asks the court to force the seller to go through with the sale and convey the property as previously agreed. The buyer may choose to sue for damages, in which case the seller is asked to pay for any costs and hardships suffered by the buyer beca
time is of the essence
means that the contract must be performed within a specific time. A party who fails to perform on time is liable for breach of contract.
In Practice When a "time is of the essence" clause is used in a contract, the parties should consult an attorney. The
unenforceable contract
may also appear on the surface to be valid; however, neither party can sue the other to force performance. Because the statute of frauds requires contracts for the conveyance of real estate to be in writing, oral real estate contracts are generally unenfo
unilateral contract
a one-sided agreement. One party makes a promise to induce a second party to do something. The second party is not legally obligated to act. However, if the second party does comply, the first party is obligated to keep the promise. An option to purchase
valid contract
meets all the essential requirements of a contract that make it legally sufficient, or enforceable, and is binding in a court of law.
void contract
has no legal force or effect because it lacks some or all of the essential elements of a contract. A contract that is void was never a legal contract. For example, the use of a forged name in a listing contract would make the contract void.
voidable contract
appears on the surface to be valid but may be rescinded or disaffirmed by one or both parties based on some legal principle. A voidable contract is considered valid by the courts if the party who has the option to disaffirm the agreement does not do so wi
Statute of limitations
State law limits the time within which parties to a contract may bring legal suit to enforce their rights. In Pennsylvania, the statute of limitations is four years from the date the contract is breached. Any rights that are not enforced within the applic
Real Estate Licensee precticeing law
In Pennsylvania In law, real estate licensees are prohibited from providing legal advice unless properly licensed to do so. The consequences of the unauthorized practice of law are far reaching. The unauthorized practice of law is a criminal offense, puni
fill in the blanks contract
Because many real estate transactions are similar in nature, preprinted forms are available for most kinds of contracts. The use of preprinted forms raises three problems:
what to write in the blanks,
what words and phrases should be ruled out by drawing
plain english
In Pennsylvania The Plain Language Consumer Contract Act promotes the use of plain language to protect consumers from making contracts they do not understand. Agreements that must be written in plain language include contracts in which a consumer
borrows
acceleration clause
assist the lender in foreclosure. If a borrower defaults, the lender has the right to accelerate the maturity of the debt. This means that the lender may declare the entire debt due and payable immediately. Without the acceleration clause, the lender woul
alienation clause
The lender may want to prevent a future purchaser of the property from being able to assume that loan, particularly because interest rates fluctuate. For this reason, most lenders include an alienation clause (also known as a resale clause or due-on-sale
amortized loan
artially pays off both principal and interest. Most mortgage and deed in trust loans are amortized loans. The word amortizes literally means to kill off; they are paid off slowly, over time, in equal payments. Regular periodic payments are made over a ter
deed in lieu of foreclosure
This is sometimes known as a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit. The major disadvantage of the deed in lieu of foreclosure is that the mortgagee takes the real estate subject to all junior liens. In a
deed of trust
In parts of the country, but not Pennsylvania, lenders may prefer to use a three-party instrument known as a deed of trust. A trust deed conveys naked title or bare legal title�that is, title without the right of possession. The deed is given as security
defeasance clause
in the document, the mortgagee is required to execute a satisfaction of mortgage (also known as a release of mortgage) when the note has been fully paid.
deficiency judgment
The foreclosure sale may not produce enough cash to pay the loan balance in full after deducting expenses and accrued unpaid interest. In this case, the mortgagee may be entitled to a personal judgment against the borrower for the unpaid balance. Such a j
discount points
are used to increase the lender's yield (rate of return) on its investment. For example, the interest rate that a lender charges for a loan might be less than the yield an investor demands. To make up the difference, the lender charges the borrower discou
Fannie Mae
(Federal National Mortgage Association) became a government-owned enterprise. Until that time, it was organized as a completely privately owned corporation that issued its own stock. Then, as now, it provided a secondary market for mortgage loans. Fannie
Federal Reserve System (the Fed)
is to maintain sound credit conditions, help counteract inflationary and deflationary trends, and create a favorable economic climate. The Federal Reserve System divides the country into 12 federal reserve districts, each served by a federal reserve bank.
foreclosure
When a borrower defaults on the payments or fails to fulfill any of the other obligations set forth in the mortgage or deed of trust, the lender's rights can be enforced through foreclosure. Foreclosure is a legal procedure in which property pledged as se
Freddie Mac
(Federal Home Loan Mortgage Corporation) is also now a government-owned enterprise, similar to Fannie Mae, that provides a secondary market for mortgage loans, primarily conventional loans.
Many lenders use the standardized forms and follow the guidelines
Ginnie Mae
(Government National Mortgage Association) has always been a governmental agency. Ginnie Mae is a division of the U.S. Department of Housing and Urban Development (HUD), organized as a corporation without capital stock. Ginnie Mae administers special-assi
hypothecation
In mortgage lending practice, a borrower is required to pledge specific real property as security (collateral) for the loan. The debtor retains the right of possession and control, while the creditor receives an underlying equitable right in the pledged p
interest
is the charge for the use of the money. Interest may be due either at the end or beginning of each payment period. Payments made at the end of a period are known as payments in arrears. This payment method is the general practice, and mortgages often call
lien theory
states, the mortgagor retains both legal and equitable title. The mortgagee simply has a lien on the property as security for the mortgage debt. The mortgage, or deed of trust, is nothing more than collateral for the loan. If the mortgagor defaults, the m
loan origination fee
(or loan fee) to cover the expenses involved in generating the loan. These expenses include the loan officer's salary, paperwork, and the lender's other costs of doing business. A loan origination fee is not prepaid interest; rather, it is a charge that m
mortgage
is a lien or encumbrance on the real property of a debtor, called a mortgagor.
or security instrument, is the document that creates the lien on the property. The mortgage exposes the real estate to claim by the mortgagee and is the document that gives the
mortgagee
the lender
mortgagor
The borrower
The borrower is required to fulfill certain obligations. These usually include the following:
- Payment of the debt in accordance with the terms of the note
- Payment of all real estate taxes on the property given as security
- Maintenance of
prepayment penalty
Most mortgage loans are paid in installments over a long period. As a result, the total interest paid by the borrower may add up to more than the principal of the loan. That does not come as a surprise to the lender; the total amount of accrued interest i
primary mortgage market
is made up of lenders that originate the loans. These lenders make money available directly to borrowers. From a borrower's point of view, a loan is a means of financing an expenditure; from a lender's point of view, a loan is an investment. All investors
promissory note
(or note) is the borrower's personal promise to repay a debt. The mortgagor executes one or more promissory notes to total the amount of the debt.
called the note or financing instrument, is the borrower's personal promise to repay a debt according to agr
satisfaction of mortgage
(also known as a release of mortgage) when the note has been fully paid.
secondary mortgage market
helps lenders raise capital to continue making mortgage loans. Furthermore, the secondary market is especially useful when money is in short supply; it stimulates both the housing construction market and the mortgage market by expanding the types of loans
short sale
enables the property owner to get out from under an unaffordable loan and the lender to recapture capital (and write off the loss) without the cost associated with foreclosure and then having to market the property if it does not sell to another party at
straight loan
(also known as a term loan or an interest-only loan) essentially divides the loan into two amounts to be paid off separately. The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term. S
title theory
states, the mortgagor actually gives legal title to the mortgagee (or some other designated individual) and retains equitable title. Legal title is returned to the mortgagor only when the debt is paid in full (or some other obligation is performed). In th
usury
Charging interest in excess of the maximum rate allowed by law is called usury. To protect consumers from unscrupulous lenders, many states have enacted laws limiting the interest rate that may be charged on loans. In some states, the legal maximum rate i
financing market
The real estate financing market has the following three basic components:
- Governmental influences, primarily the Federal Reserve System
- The primary mortgage market
- The secondary mortgage market
Under the umbrella of the financial policies set by th
discount points formula
For example, if the loan amount is $350,000 and the charge for points is $9,275, how many points are being charged?
$9,275 � $350,000 = 0.0265 or 2.65% or 2.65 points
Tax and Insurance Reserves
Many lenders require borrowers to provide a reserve fund for future real estate taxes and insurance premiums. This fund is called an impound, trust, or escrow account. When the mortgage loan is made, the borrower starts the reserve by depositing funds to
Federal flood insurance program
The National Flood Insurance Reform Act of 1994 imposes certain mandatory obligations on lenders and loan servicers to set aside (escrow) funds for flood insurance on new loans for property in flood-prone areas. This means that if a lender or servicer dis
Assignment of Rents
If the property involved includes rental units, the borrower may provide for rents to be assigned to the lender in the event of the borrower's default. The assignment may be included in the mortgage or it may be a separate document. In either case, the as
Buying Subject To or Assuming a Seller's Mortgage
When a person purchases real estate that is encumbered by an outstanding mortgage, the buyer may take the property in one of two ways. The property may be purchased subject to the mortgage, or the buyer may assume the mortgage and agree to pay the debt. T
Recording Mortgages
The mortgage document must be recorded in the recorder's office of the county in which the real estate is located. Recording gives constructive notice to the world of the borrower's obligations. Recording also establishes the lien's priority.
The priority
Judicial foreclosure
Judicial foreclosure allows the property to be sold by court order after the mortgagee has given sufficient public notice. When a borrower defaults, the lender may accelerate the due date of all the remaining principal balance, along with all overdue mont
Nonjudicial foreclosure
Some states allow nonjudicial foreclosure procedures to be used when the security instrument contains a power of sale clause. In nonjudicial foreclosure, no court action is required. In states where deed of trust loans are used, the trustee is generally g
Strict foreclosure
Although judicial foreclosure is the prevalent practice, it is still possible in some states for a lender to acquire mortgaged property through a strict foreclosure process. First, appropriate notice must be given to the delinquent borrower. Once the prop
Deed to Purchaser at Sale
If redemption is not made or if state law does not provide for a redemption period, the successful bidder at the sale receives a deed to the real estate. A sheriff or master-in-chancery executes this deed to the purchaser to convey whatever title the borr
associate broker
an individual who has met the broker license requirements but who is employed by a broker of record. Associate brokers may not employ other licensees or engage in the real estate business in their own name or from their own place of business. An associate
broker
Sections 201 of the RELRA and 35.201 of the Regulations define a broker as an individual or entity (corporation, partnership, or association) who, for another and for a fee, commission, or other valuable consideration, performs one or more of the followin
broker of record
the individual broker responsible for the real estate transactions of a partnership, association, or corporation licensed as a broker. Only one individual may be recognized as the broker of record, regardless of the number of offices the firm operates. Th
builder-owner salesperson
Although Pennsylvania does not require builders to be licensed in Pennsylvania, some individuals employed by builders of single and/or multifamily dwellings must be licensed. Sections 201 of the RELRA and 35.201 of the Regulations define a builder-owner s
business name
is the name under which a broker, cemetery broker, or rental listing referral agent license is issued (an individual or a business entity). The business name becomes the name under which business is conducted. The name designated on the license must be di
campground membership
interests (other than in fee simple or by lease) that give the purchaser the right to use a unit of real property for the purpose of locating a recreational vehicle, trailer, tent, tent trailer, pickup camper, or other similar device on a periodic basis.
campground membership salesperson
an individual who, either as an employee or independent contractor, sells campground memberships under the supervision of a broker.
The applicant must be at least 18 years of age, complete 15 hours of instruction in specific topics, and complete no less t
cemetery associate broker
Section 35.201 of the Regulations defines a cemetery associate broker as an individual cemetery broker who is employed by another cemetery broker or broker. This individual has the same relationship with the employing broker as an associate broker.
cemetery broker
Sections 201 of the RELRA and 35.201 of the Regulations define a cemetery broker as an individual or entity who engages in the business in the capacity of a broker, exclusively within the limited field of business that applies to cemetery lots, plots, and
Real Estate Licensing and Registration Act
statutory law, enacted by the state legislature and signed into law by the governor. The State Real Estate Commission does not have the authority to amend or modify the Act; that can be done only by the state legislature.
Section 404 of the RELRA authoriz
Real Estate Recovery Fund
was established to provide a means for aggrieved persons to collect judgments awarded in civil court. These judgments must result from civil suits against real estate licensees for fraud, deceit, or misrepresentations in a real estate transaction. Judgmen
rental listing referral agent
Sections 201 of the RELRA and 35.201 of the Regulations define a rental listing referral agent as an individual or entity who owns or manages a business that collects rental information for the purpose of referring prospective tenants to rental units. Thi
salesperson
an individual who is employed by a licensed broker of record to do one or more of the following:
- Sell or offer to sell real estate, or list real estate for sale
- Buy or offer to buy real estate
- Negotiate the purchase, sale, or exchange of real estate
State Real Estate Commission
administer the Act and supervise the activities of licensees in Pennsylvania.
The Real Estate Commission also requires that applicants include a criminal record check completed by the Pennsylvania State Police with their license application. The criminal
time-share salesperson
an individual who, as either an employee or an independent contractor, sells time-shares under the supervision of a broker. Time-share is the right, however evidenced or documented, to use or occupy one or more units on a periodic basis according to an ar
Supervised property management activities
Per Section 35.287 of the Regulations, any real estate licensee involved in property management activities must be directly supervised and controlled by the employing broker. The licensee (salesperson or associate broker) is not permitted to independently
Qualified association
Act 14 of 2009 allows real estate licensees who work for the same broker to form qualified associations for the purpose of receiving compensation from their broker. The broker of record may pay commissions or compensation to this association. The formatio
Cemetery salesperson
Sections 201 of the RELRA and 35.201 of the Regulations define a cemetery salesperson as an individual who is employed by a broker or a cemetery broker for the exclusive purpose of engaging in the specialized field of cemetery lot sales, as described for
Unlicensed Activity
Section 301 of the RELRA states that it is unlawful for any unlicensed individual or entity to engage in any activity for which licensure is required. It is also unlawful for unlicensed persons to advertise or in other ways represent that they are engaged
excluded from licensure
The Act and the Commission's rules recognize that certain individuals and entities can be appropriately excluded from licensure. Sections 304 of the RELRA and 35.202 of the Regulations establish the following exclusions from requirements for licensure:
-
Prohibited Acts
Section 604 of the RELRA lists specifically prohibited acts. Common violations include misrepresentation, mishandling escrow funds, inappropriately paying commissions, and misleading advertising. Licensees who engage in a prohibited act may be fined or ha
Consumer
A person who is the recipient of any real estate service.
Principal
A consumer of real estate services who has entered into an agency relationship with a broker.
is the individual who hires the agent and delegates to that agent the responsibility of representing the principal's interests. In the real estate business, the
Seller agent
Any licensee who has entered into an agency relationship with a seller of real estate.
Subagent
A broker, not in the employ of the listing broker, who is engaged to act for or cooperate with the listing broker in selling property as an agent of the seller. A subagent is deemed to have an agency relationship with the seller.
Listing broker
A broker engaged as a seller's agent, dual agent, or transaction licensee to market the property of a seller/landlord.
Dual agent
A licensee who acts as an agent for the buyer and seller or lessee and landlord in the same transaction.
Designated agent
One or more licensees designated by the employing broker with the consent of the principal to act exclusively as agent(s) on behalf of the principal to the exclusion of all other licensees within the broker's employ.
Transaction licensee
A licensed broker or salesperson who provides communication or document preparation services or performs acts described under the definitions of the terms broker or salesperson for which a license is required, without being an agent or advocate of the con
General Duties of Licensees
Licensees have certain duties or obligations to the parties with whom they work in a transaction, regardless of whether or not the licensee is acting within the scope of an agency relationship. Section 606.1 of the RELRA and Section 35.292 of the Regulati
Escrow Requirements
Section 604(5) of the RELRA and Sections 35.321 though 35.328 of the Regulations set forth detailed requirements for handling escrow funds. Brokers are responsible for depositing funds they receive that belong to others (for example, earnest money and sec
Internet Advertising and Web Pages
The Commission has developed policy to guide advertising procedures on the Internet. The policy applies to licensed firms and licensees advertising or marketing on an Internet site and using Internet electronic communication, including e-mail, e-mail disc
Advertisement of Lotteries, Contests, Prizes, Certificates, Lots, and Gifts
According to Section 604 of the RELRA and 35.306 of the Regulations, advertisements for the solicitation or sale of real estate that employ lotteries or contests or that offer prizes, certificates, gifts, or free lots must contain
- a description of each
Panic Selling
defined as frequent efforts to sell residential real estate in a particular neighborhood due to fear of declining real estate values when that fear is not based on facts relating to the intrinsic value of the real estate; federal law describes this conduc
capital gain
the difference between the original cost of the property and what it sells for today, minus certain expenses. The exemption may be used repeatedly as long as the homeowners have occupied the property as their primary residence for at least two of the past
Comprehensive Loss Underwriting Exchange (CLUE)
a database of consumer claims history that enables insurance companies to access prior claims information in the underwriting and rating process. The database contains up to five years of claims history. The reports include policy information such as name
coinsurance clause
This provision usually requires that the owner maintain insurance equal to a specified percentage (usually 80 percent) of the replacement cost new of the dwelling (not including the price of the land).
demand
the number of buyers who desire the property and who have the financial ability to acquire the property.
Factors that tend to affect the demand side of the real estate market include population, demographics, and employment and wage levels.
Demographics i
elevation certificate
a notarized form supplied by a licensed surveyor, engineer, or architect that shows compliance with community floodplain regulations and determines appropriate flood insurance rates. The cost of flood insurance affects the buyer's financial ratios, which
equity
represents the paid-off share of the property held free of any mortgage.
flood insurance
The National Flood Insurance Act of 1968 was enacted by Congress to help owners of property in flood-prone areas by subsidizing flood insurance and by taking land-use and land-control measures to improve future management for floodplain areas. Flood insur
homeowners' insurance policy
A home is usually the biggest purchase many people ever make. Most homeowners see the importance of protecting their investment by insuring it. Lenders usually require that a homeowner obtain insurance when the loan is secured by the property. While owner
mine subsidence insurance (MSI)
In Pennsylvania A homeowners' insurance policy does not cover damage or loss of a property because of mine subsidence. Property owners can obtain insurance through the Coal Mines Subsidence Insurance Fund administered by the Pennsylvania Department of Env
PITI
Home ownership involves many expenses, including utilities, such as electricity, natural gas, and water, trash removal, sewer charges, and maintenance and repairs. Owners also must pay real estate taxes, buy property insurance, and repay the mortgage loan
replacement cost new
An owner who has this type of a policy may make a claim for the full cost of the repair or replacement of the damaged property without deduction for depreciation.
is the cost at current prices to construct an improvement similar to the subject property, b
special flood hazard areas (SFHAs)
If the property is located in an SFHA, federally related loans require flood insurance. A policy may be purchased from any licensed insurance broker.
supply
efers to the available number of properties in the market at a certain price.
Appraisal
Appraisal is the process of estimating a property's market value, based on established methods, and the appraiser's professional judgment. Although brokers may have some understanding of the valuation process, lenders generally require a professional appr
Property Management
person hired to maintain and manage property on behalf of its owner. By hiring a property manager, the owner is relieved of such day-to-day management tasks as finding new tenants, collecting rents, altering or constructing new space for tenants, ordering
Subdivision and Development
the splitting of a single property into smaller parcels. Development involves the construction of improvements on the land. These improvements may be either on-site or off-site. Off-site improvements, such as water lines and storm sewers, are made on publ
Home Inspection
a profession that allows practitioners to combine their interest in real estate with their professional skill and training in the construction trades or engineering. Professional home inspectors conduct a thorough visual survey of a property's structure,
Counseling
involves providing clients with competent independent advice based on sound professional judgment. A real estate counselor helps clients choose among the various alternatives involved in purchasing, using, or investing in property. A counselor's role is t
Residential
all property used for single-family or multifamily housing, whether in urban, suburban, or rural areas
Commercial
business property, including office space, shopping centers, stores, theaters, hotels, and parking facilities
Mixed-use
property that allows for two uses, commercial and residential, in the same building
Industrial
warehouses, factories, land in industrial districts, and power plants
Agricultural
farms, timberland, ranches, and orchards
Special-purpose
churches, schools, cemeteries, and government-held lands
The Real Estate Market
A market is a place where goods can be bought and sold. A market may be a specific place, such as the village square. It also may be a vast, complex, worldwide economic system for moving goods and services around the globe. In either case, the function of
uniqueness
means that, no matter how identical they may appear, no two parcels of real estate are ever exactly alike; each occupies its own unique geographic location.
Immobility
refers to the fact that property cannot be relocated to satisfy demand where supply is low. Nor can buyers always relocate to areas with greater supply. For these reasons, real estate markets are local markets. Each geographic area has different types of
Affecting Supply
the labor force, construction and material costs, and government controls and fiscal policies.
Labor force and construction costs
A shortage of skilled labor or building materials or an increase in the cost of materials or labor can decrease the amount of new construction. High transfer costs, such as taxes, and construction permit fees can also discourage development. Increased con
Government controls and fiscal policies
The government's monetary policy can have a substantial impact on the real estate market. The Federal Reserve Board (the Fed) establishes a discount rate of interest for the money it lends to commercial banks. That discount rate has direct impact on the i
Population
Shelter is a basic human need, and the demand for housing grows with the population. Although the nation's population continues to rise, the demand for real estate increases faster in some areas than in others. In some locations, population has declined o
Apartment complexes
groups of apartment buildings with varying number of units in each building. The buildings may be lowrise or highrise, and the complexes may include such facilities as parking, clubhouses, swimming pools, and even golf courses.
Converted
use properties are factories, office buildings, hotels, schools, churches, and other structures that have been converted to other uses. Developers often find renovation of such properties more aesthetically and economically appealing than demolishing a pe
Retirement communities
many of them in temperate climates, are often structured as PUDs. They may provide shopping, recreational opportunities, and health care facilities, in addition to residential units. Security and convenience are major advantages that retirement communitie
Highrise developments
sometimes called mixed-use developments (MUDs), combine office space, stores, theaters, and apartment units into a single vertical community. MUDs are usually self-contained developments and offer laundry facilities, restaurants, food stores, valet shops,
Time-shares
allow multiple purchasers to share ownership of a single property, usually a vacation home or resort property. Each owner is entitled to use the property for a certain period each year, usually a specific week or month. In addition to the purchase price,
automated underwriting and credit scoring
the formula for homebuyers who were able to provide at least 10 percent of the purchase price as a down payment was that the monthly cost of buying and maintaining a home�mortgage payments, both principal and interest, plus taxes and insurance impounds�co
penalty-free withdrawals from their tax-deferred individual retirement funds (IRAs) for down payments on their homes
However, these withdrawals are still subject to income tax. The limit on such withdrawals is $10,000 and must be spent entirely within 120 days on a down payment to avoid any penalty. In short, the changes in tax laws have generally benefited home ownersh
Tax deductions
Homeowners may deduct the following from their gross income:
- Mortgage interest payments on first and second homes (for mortgage balances below $1 million, or $500,000 if married filing separately)
- Real estate taxes (but not interest paid on overdue ta
basic form Homeowners' Insurance
provides property coverage against
- fire or lightning,
- glass breakage,
- windstorm or hail,
- explosion,
- riot or civil commotion,
- damage from aircraft,
- damage from vehicles,
- damage from smoke,
- vandalism and malicious mischief,
theft, and
- lo
Broad-form Homeowners' Insurance
covers
- falling objects;
- damage due to the weight of ice, snow, or sleet;
- collapse of all or part of the building;
- bursting, cracking, burning, or bulging of a steam or hot-water heating system or appliances used to heat water;
- accidental dischar
Special apartment and condominium policies Homeowners' Insurance
provide fire and windstorm, theft, and public liability coverage for injuries or losses sustained within the unit. However, they do not usually cover losses or damages to the structure. The basic structure is insured by either the landlord or the condomin
antitrust laws
In Pennsylvania The antitrust section in the attorney general's office enforces the Pennsylvania Unfair Trade Practices and Consumer Protection Law acting as a watchdog to maintain a free and open marketplace. When anticompetitive practices are detected,
brokerage
is simply the business of bringing parties together. A real estate broker is a person licensed to buy, sell, exchange, or lease real property for others and to charge a fee for these services.
A brokerage business may take many forms. It may be a sole pro
commission
or a broker's fee (computed as a percentage of the total sale price), a flat fee, a fee for service, or an hourly rate. The amount of a broker's compensation is negotiable in every case. Even subtle attempts to impose uniform commission rates are clearly
employee
A real estate broker can exercise certain controls over salespersons who are employees. The real estate broker may require an employee to follow rules such as those governing working hours, office routine, attendance at sales meetings, assignment of sales
group boycotting
occurs when two or more businesses conspire against other businesses or agree to withhold their patronage to reduce competition. Group boycotting is also illegal under the antitrust laws.
independent contractor
A broker is permitted to control what the independent contractor does, but not how it is done. Independent contractors are responsible for paying their own taxes and cannot receive anything from the broker that could be construed as an employee benefit
In
Internet advertising
- All electronic communication by a real estate licensee must include the licensee's name, office address, and broker affiliation.
- Real estate professionals must disclose their status as a real estate broker or real estate salesperson on each page of a
multiple listing service (MLS)
In the 1960s, the way that buyers and sellers were brought together in real estate transactions began to change. Brokers started to share information about properties they listed, resulting in two brokers cooperating to sell a property. The brokers formal
National Do Not Call Registry
In 2003, federal do-not-call legislation was signed into law, and real estate licensees must comply with the provisions.
The registry is managed by the Federal Trade Commission (FTC) and is a list of telephone numbers from consumers who have indicated the
personal assistant
is a combination office manager, marketer, organizer, and facilitator who has a fundamental understanding of the real estate industry. An assistant may or may not have a real estate license, depending on state law. The extent to which the assistant can he
price-fixing
is the practice of setting prices for products or services rather than letting competition in the open market establish those prices. In real estate, price-fixing occurs when competing brokers agree to set uniform sales commissions, fees, or management ra
procuring cause
the broker must have started or caused a chain of events that resulted in the sale. For example, activities such as conducting open houses, placing advertisements in the newspaper, and showing the house to the buyer are considered procuring cause. A broke
ready, willing, and able buyer
is one who is prepared to buy on the seller's terms and ready to take positive steps toward consummation of the transaction. Courts may prevent the real estate broker from receiving a commission if the real estate broker knew the buyer was unable to perfo
Fee for Services
The Internet has revolutionized the real estate profession in many ways. One of its more notable effects is that it allows buyers and sellers to have tremendous access to information about real estate, housing, financing, and law. The Internet has caused
Allocation of Customers or Markets
involves an agreement between brokers to divide their markets and refrain from competing for each other's business. Allocations may be made on a geographic basis, with brokers agreeing to specific territories within which they will operate exclusively. Th
Tie-in Agreements
(also known as tying agreements) are agreements to sell one product only on the condition that the buyer also purchases product as well. The sale of the first (desirable) product is tied to the purchase of a second (less desirable) product.
Penalties for violating Antitrust Laws
The penalties for antitrust violations are severe. If convicted of illegal activities committed before 2004, violators of the Sherman Act may be fined up to $350,000 and/or sentenced to no more than three years imprisonment; corporations may be fined up t
Real Estate Internet Web Sites
Most real estate agencies have Web sites that provide extraordinary databases for property and other searches. Keep in mind that NAR has adopted a new Internet Listing Display Policy that replaces the Virtual Office Web site (VOW) and the Internet Data Ex
Real Estate Social Networking Sites
Social networking sites such as Facebook, LinkedIn, YouTube, and Twitter are becoming increasingly useful in business�and the real estate industry is no different. Brokers of record should set clear guidelines in policy manuals and brokerage agreements to
real estate e-mail
E-mail is yet another powerful tool making communication between real estate agents and consumers more efficient. A quick e-mail message can save both licensees and consumers valuable time. Licensees should be prepared for consumers who primarily want to
Real Estate Internet Advertising
- All electronic communication by a real estate licensee must include the licensee's name, office address, and broker affiliation.
- Real estate professionals must disclose their status as a real estate broker or real estate salesperson on each page of a
CAN-SPAM Act of 2003
establishes requirements for sending commercial e-mail, spells out penalties for those that don't comply (not just "spammers"), and gives consumers the right to have e-mailers stop e-mailing them.
The CAN-SPAM Act targets e-mail used to promote or adverti
False or misleading header information on e-mails
From" field, "To" field, and routing information�including the original domain name and e-mail address�must be accurate and identify the person who initiated the e-mail.
Deceptive subject lines e-mails
The subject line cannot mislead the recipient about the contents or subject matter of the message.
E-mail recipients must have an opt-out method e-mails
Each message must include a return e-mail address or another Internet-based response mechanism that allows a recipient to request no future e-mail messages to that e-mail address and requests must be honored.
Commercial e-mail
must be identified as an advertisement and include the sender's valid physical postal address.
Commercial e-mail harvesting
gathering e-mail addresses from Web sites or Web services that have published a notice prohibiting the transfer of e-mail addresses for the purpose of sending e-mail
Commercial e-mails dictionary attack
combining names, letters, or numbers into multiple permutations.
Commercial e-mails multiple e-mail or user accounts
Use scripts or other automated ways to register for multiple e-mail or user accounts to send commercial e-mail
Commerical e-mails Relay e-mails
through a computer or network without permission�for example, taking advantage of open relays or open proxies without notification
Junk Fax Prevention Act of 2005
The Junk Fax Prevention Act of 2005 does not legalize unsolicited fax advertisements or solicitations but does allow for an established business relationship (EBR) exception. As a rule, a real estate licensee cannot legally send an unsolicited commercial
agency
is the word used to describe that special relationship between a real estate licensee and the person represented. Agency is governed by two kinds of law: common law (the rules of a society established by tradition and court decisions) and statutory law (t
agency coupled with an interest
is a relationship in which the agent is given an interest in the subject of the agency, such as the property being sold. An agency coupled with an interest cannot be revoked by the principal or be terminated upon the principal's death. For example, a brok
agent
is the individual who is authorized and consents to represent the interest of another. In the real estate business, a firm's broker is the agent, and shares this responsibility with the licensees who work for the firm.
In Pennsylvania The Pennsylvania Rea
Consumer Notice
is a disclosure summary required for the purchase or sale of residential or commercial real estate or for the lease of residential or commercial real estate when the licensee is working on behalf of the tenant (� 35.336). A different disclosure is require
designated agency
In Pennsylvania In Pennsylvania, designated agency is a process that accommodates an in-house sale in which two different affiliated licensees are involved. The broker designates one licensee to represent the seller and one licensee to represent the buyer
dual agency
the agent represents two principals in the same transaction. Dual agency requires equal loyalty to two different principals at the same time. Because agency originates with the broker, dual agency arises when the broker is the agent of the buyer and the s
express agency
The principal and the agent may enter into a contract, or an express agreement, in which the parties formally express their intention to establish an agency and state its terms and conditions. The agreement may be either oral or written. An agency relatio
fiduciary duties
care, obedience, loyalty, disclosure, accounting, and confidentiality.
fiduciary relationship
is one in which the agent is placed in the position of special trust and confidence to the principal.
general agent
may represent the principal in a broad range of matters related to a particular business or activity. The general agent may, for example, bind the principal to any contract within the scope of the agent's authority. A property manager is typically a gener
implied agency
An agency may also be created by implied agreement. This occurs when the actions of the parties indicate that they have mutually consented to an agency. A licensee acts on behalf of another party as that party's agent. Even though the licensee may not hav
latent defect
a fault in the property that could not have been discovered by a reasonably thorough inspection before the sale.
is a hidden structural defect that would not be discovered by ordinary inspection. Buyers may cancel the sales contract or receive damages whe
law of agency
defines the rights and duties of the principal and the agent. It applies in a variety of business relationships. In real estate transactions, contract law and real estate licensing law�in addition to the law of agency�interpret the relationship between li
listing agreement
which authorizes the broker to find a buyer or a tenant for the owner's property. Although a written listing agreement is usually preferred, some states consider an oral agreement binding. An express agency relationship between a buyer and a broker is cre
nonagent
(also called a facilitator, intermediary, transactional broker, transactional coordinator, or contract broker) is a middleman between a buyer and a seller (or a landlord and a tenant) who assists one or both parties with the transaction without representi
principal
is simply the person -- or group of people -- who authorizes an agent to act on his behalf. The principal is who gives the agent his authority to act and to make decisions. The principal does not typically make day-to-day decisions himself, but is legally
single agency
the agent represents only one party in any single transaction. The agent must provide fiduciary or statutory duties exclusively to one principal within the transaction (who may be either the buyer or the seller or the landlord or the tenant). The customer
special agent
or limited agent, is authorized to represent the principal in one specific act or business transaction only. A real estate broker is usually a special agent. If hired by a seller, the broker is limited to finding a ready, willing, and able buyer for the p
subagency
is created when one broker appoints other brokers, as subagents, to help perform client-based functions on the principal's behalf. A subagent is a broker, not in the employ of the listing broker, who is engaged to act for or cooperate with the listing bro
subagent
is the agent of an agent. If permitted by the original agency agreement, an agent may delegate some authority or responsibility to another party, the subagent. The subagent, because of this extension of the agent's authority, is also an agent of the princ
transaction licensee
a nonagent who provides only customer-level service for either or both the buyer/tenant and seller/landlord in the transaction.
A nonagent (also called a transactional broker, facilitator, coordinator, or contract broker) is not an agent of either party.
universal agent
is a person empowered to do anything the principal could do personally. The universal agent's authority to act on behalf of the principal is virtually unlimited. A real estate licensee typically does not have this scope of authority in a real estate trans
principal-agent relationship
Even as laws change, the underlying assumptions that govern the agency relationship remain intact. The principal-agent relationship evolved from the master-servant relationship under English common law. In that relationship, the servant owed absolute loya
client
is the principal to whom the agent gives advice and counsel.
Customer
is the third party or nonrepresented consumer for whom some level of service is provided and who is entitled to fairness and honesty.
Even though an agent's primary responsibility is to the principal, the agent also has duties to third parties. Any time a
Client versus customer service
There is a distinction between the level of services that an agent provides to a client and those services that the agent provides to a customer. The client is the principal to whom the agent gives advice and counsel. The agent is entrusted with certain c
Fiduciary Care
Principals expect the agent's skill and expertise in real estate matters to be superior to that of the average person. The most fundamental way in which the agent exercises care is to use that skill and knowledge on the principal's behalf. The agent shoul
Fiduciary Obedience
The fiduciary relationship obligates the agent to act in good faith at all times, obeying the principal's instructions in accordance with the contract.
However, that obedience is not absolute. The agent may not obey instructions that are unlawful or uneth
Fiduciary Accounting
The agent must be able to report the status of all funds received from or on behalf of the principal. Brokers are required to deposit and account for escrow funds in the manner prescribed in Pennsylvania's licensing law. Commingling client monies with per
Fiduciary Loyalty
The duty of loyalty requires that the agent place the principal's interest above those of all others, including the agent's own self-interest. The agent must be particularly sensitive to any possible conflicts of interest. Because the agent may not act ou
Fiduciary Disclosures
The agent has a duty to inform the principal of all facts or information that might affect the principal's position in a transaction. Duty of disclosure includes relevant information or material facts that the agent knows or should have known.
The agent i
Fiduciary Confidentiality
Confidentiality is a key element of fiduciary duties. An agent may not disclose the principal's financial condition. If the principal is the seller, the agent may not reveal such things as willingness to accept less than the listing price or urgency to se
Termination of Agency
An agency may be terminated for any of the following reasons:
- Completion, performance, or fulfillment of the purpose for which the agency was created
- Death or incapacity of either party
- Destruction or condemnation of the property
- Expiration of the
Seller as principal
If a seller enters into a listing agreement with a broker to market the seller's real estate, the broker becomes a seller's agent; the seller is the principal, the broker's client. The broker is obligated to deal fairly with all parties in the transaction
Buyer as principal
A buyer who contracts with a broker to locate property and represent the buyer's interests in a transaction is the principal�the broker's client. The broker, as agent, is strictly accountable to the buyer.
A buyer agency relationship is established in the
Landlord as principal
An owner may employ a broker to market, lease, maintain, or manage the owner's property. Such an arrangement is known as property management. The broker is made the agent of the property owner through a property management agreement. As in any other agenc
Tenant as principal
A tenant may contract with a broker to locate property suitable for the tenant's specific purposes. In this case, the broker becomes the agent of the tenant (similar to the relationship a broker has with a buyer-client) and the tenant is the principal. Th
Undisclosed dual agency
A broker may not intend to create a dual agency. It might occur unintentionally or inadvertently. Sometimes the cause is carelessness. At other times, a salesperson does not fully understand the fiduciary responsibilities. Some salespersons lose sight of
Environmental Hazards
No matter whom licensees represent, they should ensure that their clients are aware of potential issues with environmental health hazards, which can render properties unusable for the buyer's intended purpose. For instance, federal law requires the disclo
Americans with Disabilities Act (ADA)
is not a housing or credit law, it still has a significant effect on the real estate industry. The ADA requires reasonable accommodations in employment and access to goods, services, and public buildings. The ADA is important because real estate brokers a
blockbusting
(sometimes known as panic selling) is the unlawful act of encouraging people to sell or rent their homes by claiming that the entry or prospective entry of a protected class of people into the neighborhood will have some sort of negative impact on propert
Civil Rights Act of 1866
The federal government's effort to guarantee equal housing opportunities to all U.S. citizens began with the passage of the Civil Rights Act of 1866. This law prohibits any type of discrimination based on race, stating that "all citizens of the United Sta
code of ethics
is a written system of standards for that conduct. The code contains statements that are designed to advise, guide, and regulate behavior. To be effective, a code of ethics must be specific by dictating rules that either prohibit or demand certain behavio
conciliation
is the resolution of a complaint by obtaining assurance that the person against whom the complaint was filed (the respondent) will remedy any violation that may have occurred. The respondent further agrees to take steps to eliminate or prevent discriminat
disability
is a physical or mental impairment. It is unlawful to discriminate against prospective buyers or tenants on the basis of disability, which includes those having a history of, or being regarded as having, an impairment that substantially limits one or more
Equal Credit Opportunity Act (ECOA)
prohibits discrimination in the lending process based on race, color, religion, national origin, sex, marital status, or age or the receipt of public assistance in the granting of credit. The ECOA requires that credit applications be considered only on th
ethics
is a written system of standards for ethical behavior containing statements that dictate rules that either prohibit or expect certain behavior. Although not applicable to nonmembers, the National Association of REALTORS� Code of Ethics is viewed as a mode
Fair Housing Act
Title VIII of the Civil Rights Act of 1968 prohibits discrimination in housing because of race, color, religion, and national origin. In 1974, the Housing and Community Development Act added sex to the list of protected classes. In 1988, the Fair Housing
Fair Housing Amendments Act
Passed in 1988, expanded federal civil rights protections to include families with children and people with physical or mental disabilities, in addition to race, color, religion, and national origin. The act also changed the penalties, making them more se
familial status
is defined as one or more individuals younger than age 18 living with a parent or guardian. It also includes a woman who is pregnant and anyone who is in the process of assuming custody of a child younger than 18. Housing that qualifies for older people i
Housing for Older Persons Act (HOPA)
repealed the requirement that 55-and-older housing have "significant facilities and services" designed for seniors. HOPA still requires that at least 80 percent of the occupied units in these facilities have one person age 55 or older living in them. The
Megan's Law
promotes the establishment of state registration systems to maintain residential information on every person who kidnaps children, commits sexual crimes against children, or commits sexually violent crimes. Upon release from prison, offenders must registe
Pennsylvania Human Relations Act (PHRA)
is the state law deemed to be "substantially equivalent" to the federal Fair Housing Act. In some cases, the PHRA is more restrictive. In addition to the federal protected classes and prohibited acts, the PHRA adds religious creed, ancestry. As a protecte
redlining
The practice of refusing to make mortgage loans or issue insurance policies in specific areas for reasons other than the economic qualifications of the applicants
is literally drawing a line around particular areas. This practice is often a major contribu
steering
is the channeling of homeseekers to particular neighborhoods or discouraging potential buyers from considering some areas. In the rental process, steering occurs when the landlord puts members of a protected class on a certain floor or building. Another f
Title VIII of the Civil Rights Act of 1968
prohibits discrimination in housing based on race, color, religion, or national origin. It does not prohibit discrimination based solely on a person's citizenship status. It prohibits illegal activities that include steering, blockbusting (panic selling),
Exemptions to the Fair Housing Act
The federal Fair Housing Act covers most housing. However, in some circumstances, it provides for certain exemptions. Most of the exemptions in the federal law do not apply under Pennsylvania law (which is discussed later in this unit). The federal exempt
Housing for older persons
Exemptions to the Fair Housing Act. Certain properties can be restricted to occupancy by elderly persons. Federal law defines elderly as persons age 62 or older (remember that in Pennsylvania, persons over age 40 are protected). Two types of housing may b
Housing Accommodations and Commercial Property
Unlike federal law, Pennsylvania law applies to not only housing accommodations but also to commercial property. Prospective purchasers or tenants of commercial property in Pennsylvania are afforded the same protections as those seeking housing.
Section 604 of the Real Estate Licensing and Registration Act specifically prohibits
- accepting listings that illegally discriminate against certain persons or groups in the sale or rental of property;
- giving false information for the purpose of discrimination; and
- making distinctions, for discriminatory purposes, in the location of
Official Notice and Poster
The Pennsylvania Human Relations Commission prepares and distributes fair housing and fair lending posters that any individual subject to the Pennsylvania Human Relations Act must prominently display in the place of business. Failure to do so can be consi
Pennsylvania Human Relations Act Advertising
Advertisements of property for sale or rent may not include language indicating a preference or limitation. No exception to this rule exists, regardless of how subtle the choice of words. HUD's regulations cite examples that are considered discriminatory
Pennsylvania Human Relations Act Appraising
Those who prepare appraisals or any statements of valuation�whether formal or informal, oral or written (including a comparative market analysis)�may consider any factors that affect value. However, race, color, religion, national origin, sex, disability,
Concerns of Terrorism
In response to the concern of future terrorist attacks, landlords and property managers have been developing new security procedures. These procedures have focused on protecting buildings and residents. Landlords and property managers are also educating r
buyer agency agreement
is an employment contract. In this case, however, the broker is employed as the buyer's agent. The buyer, rather than the seller, is the principal. The purpose of the agreement is to find a suitable property that meets the buyer's specifications. An agenc
comparative market analysis (CMA)
(sometimes known as a competitive market analysis) compares location, size, age, style, and amenities of properties that are comparable to the seller's property, as follows:
- Recently sold properties�what buyers were willing to pay for a similar property
exclusive agency listing
one broker is authorized to act as the exclusive agent of the principal. However, the seller retains the right to sell the property himself or herself without obligation to the broker. An exclusive agency listing must contain the same provisions as an exc
exclusive-right-to-sell listing
one broker is appointed as the sole (exclusive) agent of the seller. The broker is given the exclusive right, or authorization, to market the seller's property. If the property is sold while the listing is in effect, the seller must compensate the broker
net listing
specifies that the seller will receive a net amount of money from a sale, with the excess going to the listing broker as commission. The broker is free to offer the property at any price greater than that net amount. While a net listing may appear to be a
open listing
(also known in some areas as a nonexclusive listing), the seller retains the right to contract with any number of brokers as agents. The brokers can act simultaneously, and the seller is obligated to compensate only the broker who successfully produces a
Real Estate Seller Disclosure Act
requires sellers of residential real properties (an individual, partnership, corporation, trustee, or combination) who intend to transfer an interest in a one- to four-family residential property to disclose to the buyer all material defects. Although the
Written Agreements
Although an agency relationship may be created orally or by the parties' actions, creating agency relationships with written agreements serves both a legal and practical purpose. The Pennsylvania licensing law requires a written agreement between a broker
Listing Agreements
is an employment contract between a broker and a seller. It is a contract for the real estate professional services of the broker, not for the transfer of real estate. All states, either by their statutes of frauds or by specific rule from their real esta
multiple listing service
is a marketing organization whose broker members make their own exclusive listings available through other brokers and gain access to other brokers' listed properties as well.
The MLS offers advantages to brokers, sellers, and buyers. Brokers develop a si
Termination Of Listings
A listing agreement's success depends on the broker's professional efforts. Because the broker's services are unique, the listing is assigned to another broker without the principal's written consent. The property owner cannot force the broker to perform,
Expiration of Listing Period
In Pennsylvania Section 35.332(c) of the Rules and Regulations states that the listing period cannot exceed 12 months. An automatic renewal provision and the requirement to serve a cancellation notice to terminate an exclusive agreement at the end of the
broker protection clause
This clause provides that the property owner will pay the listing broker if, within a specified number of days after the listing expires, the owner transfers the property to someone with whom the broker negotiated during the original term of the listing.
Information Needed for Listing Agreements
Obtaining as many facts as possible about the property ensures that most contingencies can be anticipated. This is particularly important when the listing will be shared with other brokers through the MLS and when the other licensees must rely on the info
Listing Agreement The broker's authority and responsibilities
The contract should specify whether the broker may place a sign on the property and advertise; it should address when the property can be shown, allowing reasonable notice to the seller. It should also address whether the broker may accept earnest money o
Listing Agreement The names of all parties to the contract
Anyone who has an ownership interest in the property must be identified and should sign the listing to validate it. If the property is owned under some form of co-ownership, that fact should be clearly established. If one or more of the owners is married,
Listing Agreement The brokerage firm
The brokerage company name, the employing broker, and if appropriate, the salesperson taking the listing must all be identified.
Listing Agreement The listing price
This is the proposed sales price. The seller's proceeds will be reduced by unpaid real estate taxes, special assessments, mortgage debts, and any other outstanding obligations.
Listing Agreement The description of the premises
In addition to the street address, the legal description, lot size, and tax parcel number may be required for future purchase offers.
Listing Agreement Description of the real property and personal property
Any personal property that will be sold must be explicitly identified. Items of real property that the seller expects to remove at the time of the sale must be specified as well. Some items that may later become points of negotiation might include major a
Listing Agreement The evidence of ownership
A warranty deed, title insurance policy, or abstract of title with an attorney's opinion can be used for proof of title.
Listing Agreement Encumbrances
Any encumbrance that can affect the use or transfer of the property should be identified. All liens will be paid in full by the seller or be assumed by the buyer at the closing.
Listing Agreement Broker compensation
The circumstances under which a commission will be paid must be specifically stated in the contract. The fee can be either a percentage or a flat rate and is usually paid at closing directly by the seller or the party handling the closing.
Listing Agreement Indemnification (hold harmless) wording
The seller and the broker may agree to hold each other harmless (i.e., not to sue one another) for any incorrect information supplied by one to the other. Indemnification may be offered, regardless of whether the inaccuracies are intentional or unintentio
Listing Agreement Leased equipment
It must be determined whether leased equipment�security systems, cable television boxes, water softeners, special antennas�will be left with the property. If so, the seller is responsible for notifying the equipment's lessor of the change of property owne
Listing Agreement The proposed dates for the closing and the buyer's possession
These dates should be based on an anticipated closing date. The listing agreement should allow adequate time for the paperwork involved (including the buyer's qualification for any financing) and the move-in date to be arranged by the seller and the buyer
Listing Agreement The closing
An attorney, title company, or escrow company should be considered and retained as soon as possible. A designated party will be needed to complete the settlement statements, disburse the funds, and file the proper forms, such as documents to be recorded a
Listing Agreement Home warranty program
It may be advisable for a buyer or a seller to purchase a home warranty with the property. A home warranty program covers such things as plumbing, electrical and heating systems, water heaters, duct work, and major appliances. A home warranty can be an at
Listing Agreement The termination of the contract
A contract should provide a way for the parties to terminate the agreement and should specify under what circumstances the contract can be terminated. Under certain circumstances, an agreement can be canceled if the seller arbitrarily refuses to sell or c
Listing Agreement The broker protection clause
Brokers may be well advised to protect their interests against possible fraud or a reluctant buyer's change of heart. It is important to know the circumstances under which a broker will be entitled to a commission after the agreement terminates.
Listing Agreement Warranties by the owner
The owner is responsible for certain assurances and disclosures. Is the property suitable for its intended purpose? Does it comply with the appropriate zoning and building codes? Will it be transferred to the buyer in essentially the same condition as it
Listing Agreement Nondiscrimination (equal opportunity) wording
The seller must understand that the property will be shown and offered without regard to the race, color, religion, national origin, family status, sex, or disability of the prospective buyer. Refer to other federal nondiscrimination laws and state and lo
Listing Agreement Antitrust wording
The contract should indicate that all commissions have been negotiated between the seller and the broker. It is illegal for commissions to be set by any regulatory agency, trade association, or other industry organization.
Listing Agreement The signatures of the parties
All parties identified in the contract must sign the contract, including all individuals who have a legal interest in the property.
Listing Agreement The date the contract is signed
This date may be different from the date the contract actually becomes effective. For example, a salesperson takes the listing and then must have the broker sign the contract to accept employment under its terms.
Listing Agreement Real Estate Recovery Fund information
This required statement briefly explains the purpose and intent of the Fund.
Listing Agreement Lead-based paint disclosure, if applicable
If the residential property was built before 1978, then the seller is required to give the buyer the U.S. Environmental Protection Agency (EPA) pamphlet Protect Your Family from Lead in Your Home. The seller must also tell the buyer and the broker what, i
Listing Agreement Any other disclosures required by law or rule
he contract should include any other disclosures as required by law or the Rules and Regulations.
Exclusive buyer agency
This is a completely exclusive agency agreement. The buyer is legally bound to compensate the broker if the buyer purchases a property of the type described in the contract within the agreed-upon time frame. The broker is entitled to compensation regardle
Exclusive agency buyer agency
Like an exclusive buyer agency agreement, this is an exclusive contract between the buyer and one broker. However, this agreement limits the broker's right to compensation. Brokers are entitled to payment only if they locate the property the buyer ultimat
Nonexclusive buyer agency
This agreement is an open agency contract between a broker and a buyer. It permits the buyer to enter into similar agreements with an unlimited number of brokers. The buyer is obligated to compensate only the broker who locates the property the buyer ulti
factual information needed to enable the licensee to represent the buyer's interests
- names of all buyers being represented,
- type of property desired,
- geographic areas covered by the agreement,
- price range of property desired,
- length of time the contract will run,
- scope of work to be performed by the agent,
- exclusive or nonex
addenda
is any provision added to an existing contract without altering the content of the original. An addendum is essentially a new contract between parties that includes the original contract's provisions by reference, meaning the addendum mentions the origina
agreement of sale
the contract states the specific rights and obligations to which the parties mutually agree
amendment
is a change or modification to the existing content of a contract. Anytime words or provisions are added to or deleted from the body of the contract, the contract has been amended. For instance, a form contract's provision requiring closing in 90 days mig
contingency
create a voidable contract; if the contingencies are rejected or not satisfied, the contract is void. A contingency includes the following three elements:
- The actions necessary to satisfy the contingency
- The time frame within which the actions must be
earnest money
It is customary, although not essential, for a purchaser to provide a deposit when making an offer to purchase real estate. This deposit, usually in the form of a check.
equitable title
When a buyer signs a contract to purchase real estate, the buyer does not receive title to the land; title transfers only upon delivery and acceptance of a deed. However, after both buyer and seller have executed a sales contract, the buyer acquires an in
fraud
is the intentional misrepresentation of a material fact in such a way as to harm or take advantage of another person. This includes making false statements about a property and intentionally concealing or failing to disclose important facts. If a licensee
installment contract
(sometimes called a contract for deed, land contract of sale, or articles of agreement). Under a typical installment contract, the seller (also known as the vendor) retains legal title. The buyer (called the vendee) takes possession and acquires equitable
material fact
is information that is significant to a person and that person's ability to make an informed decision. Although the required seller's disclosure statement addresses certain property conditions, a variety of other information may be material to individual
misrepresentation
is an unintentional misstatement or omission. The misrepresentation or omission does not have to be intentional to result in licensee liability. A negligent misrepresentation occurs when the licensee should have known that a state about a material fact wa
option
is a unilateral contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or lessee) the right to buy or lease the owner's property at a fixed price within a stated period of time. The optionee pays a fee (the agreed-up
puffing
Puffing is generally an expression or exaggeration made by a salesperson or found in an advertisement that concerns the quality of goods offered for sale. It presents opinions rather than facts and is usually not considered a legally binding promise. Such
stigmatized property
are those that society has found undesirable because of events that occurred there or because a known sex offender lives in the area. Federal law does not mandate active notification, but some state laws do.
A common stigma is a criminal event, such as a
Disclosures Estimated statements of closing costs
Real estate licensees are required to provide the buyer and the seller with written estimated statements of closing costs before the parties sign an agreement of sale. The Real Estate Commission's Rules and Regulations state that the broker's commission,
Disclosures Uniform Condominium Act and Uniform Planned Community Act
Living in a condominium unit or planned community with a homeowners' association presents significant financial issues to prospective buyers. The Uniform Condominium Act and the Uniform Planned Community Act require a seller to furnish copies of the devel
Offer
A broker lists an owner's real estate for sale at the price and conditions set by the owner. When a prospective buyer is found, the licensee helps that consumer prepare an offer to purchase. The offer is signed by the buyer and presented to the seller by
The Amount of Ernest Money should be an amount sufficient to
- discourage the buyer from defaulting,
- compensate the seller for taking the property off the market, and
- cover any expenses the seller might incur if the buyer defaults.
commingling
Mixing Ernest money with the broker's personal funds.
conversion
Using ernest money for personal use
The number of different escrow accounts a broker must keep for each ernest check they receive
One
ernest money is returned to buyer
If the offer is not accepted
When seller recieves ernest money
When the transaction is completed
Binder
In some states, licensees may prepare a shorter document known as a binder instead of a complete sales contract. The binder states the essential terms of the offer and acknowledges that the licensee has received the purchaser's deposit. A more formal and
when An offer or counteroffer may be withdrawn (revoked)
any time before it has been accepted, even if the person making the offer or counteroffer agreed to keep the offer open for a set period. The property remains on the market during negotiations. If another buyer materializes with a better offer, the seller
Acceptance
If the seller agrees to the original offer or a later counteroffer exactly as it is made and signs the document, the offer has been accepted and a contract is formed. The licensee must advise the buyer of the seller's acceptance and obtain the approval of
Destruction of premises
In Pennsylvania, once the parties form the agreement of sale, the buyer bears the risk of any damage to or destruction of the property by fire or other casualty before the deed is delivered unless the contract provides otherwise. The seller may be liable
Parts of an Agreement of Sale
- The purchaser's name and a statement of the purchaser's obligation to purchase the property, including how the purchaser intends to take title
- An adequate description of the property, such as the street address (while a street address is adequate for
PA required disclosures
Regardless of the source of the contract form or who prepares it, licensing law in Pennsylvania requires that anytime a real estate licensee is involved in the transaction, an agreement of sale must contain
- a statement identifying the capacity in which
adjustable-rate mortgage (ARM)
generally originate at one rate of interest, then fluctuate up or down during the loan term, based on an objective economic indicator. Because the interest rate may change, so may a mortgagor's loan repayments. Details of how and when the interest rate wi
blanket loan
covers more than one parcel or lot. It is used to finance subdivision developments. However, it can be used to finance the purchase of improved properties or to consolidate loans as well. A blanket loan usually includes a provision known as a partial rele
buydown
is way to temporarily (or permanently) lower the interest rate on a mortgage loan. Perhaps a homebuilder wishes to stimulate sales by offering a lower-than-market rate. Or a residential buyer is having trouble qualifying for a loan at the prevailing rates
certificate of reasonable value (CRV)
for the property being purchased. The CRV states the property's current market value based on a VA-approved appraisal. The CRV places a ceiling on the amount of a VA loan allowed for the property. If the purchase price is greater than the amount cited in
Community Reinvestment Act (CRA)
inancial institutions are expected to meet the deposit and credit needs of their communities; participate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small business, and small farms.
construction loan
is made to finance the construction of improvements on real estate such as homes, apartments, and office buildings. The lender commits to the full amount of the loan but disburses the funds periodically during construction. These payments are known as dra
conventional loan
are any loans that are not government insured or guaranteed. They are often viewed as the most secure loans because the loan-to-value ratio is lowest. Traditionally, the ratio is 80 percent of the value of the property or less; the borrower makes a down p
credit scores
an analysis of factors characteristic or indicative of repayment and, therefore, credit risk. Five major factors are analyzed:
- Past payment performance
- Credit use
- Credit history
- Types of credit in use
- Credit report inquiries
Lenders must give po
Fair and Accurate Credit Transactions Act (FACTA)
requires that each of the three major credit bureaus provides a free credit report every 12 months upon request. Also, the agencies are required to provide toll-free phone numbers to assist consumers, correct mistakes, and remove disputed information from
Farm Service Agency (FSA)
is a federal agency of the U.S. Department of Agriculture. The FSA offers programs to help families purchase or operate family farms. Through the Rural Housing and Community Development Service, it also provides loans to help families purchase or improve
FHA loan
refers to a loan that is insured by the agency. These loans must be made by FHA-approved lending institutions. The FHA insurance provides security to the lender, in addition to the real estate. As with private mortgage insurance, the FHA insures lenders a
growing equity mortgage (GEM)
also known as a rapid-payoff mortgage, uses a fixed interest rate, but payments of principal increase according to an index or a schedule. Thus, the total payment increases and the loan is paid off more quickly. A GEM is most frequently used when the borr
home equity loan
are a source of funds using the home's equity. The original mortgage loan remains in place; the home equity loan is junior to the original lien. It is an alternative to refinancing and can be used for a variety of financial needs, such as to
finance the p
index
is an undeterminable economic indicator that is used to adjust the interest rate in the loan. Most indexes are tied to U.S. Treasury securities.
loan-to-value (LTV) ratio
is the ratio of the debt to the sale price or appraised value, whichever is less. The greater the borrower's stake in the collateral, the lower the lender's risk. If the down payment is less than 20 percent, lenders frequently require some insurance to co
margin
Usually, the interest rate is the index rate plus a premium, called the margin. The margin represents the lender's cost of doing business.
mortgage insurance premium (MIP)
is an insurance policy used in FHA loans if your down payment is less than 20%. The FHA assesses either an "upfront" MIP (UFMIP) at the time of closing, or an annual MIP that is calculated every year and paid in 12 installments.
open-end loan
secures a note executed by the borrower to the lender. It also secures any future advances of funds made by the lender to the borrower. The interest rate on the initial amount borrowed is fixed, but interest on future advances may be charged at the market
package loan
includes real and personal property. In recent years, these kinds of loans have been very popular with developers and purchasers of unfurnished condominiums. Package loans usually include furniture, drapes, the kitchen range, refrigerator, dishwasher, was
private mortgage insurance (PMI)
the buyer purchases an insurance policy that provides the lender with funds in the event that the borrower defaults on the loan. This allows the lender to assume more risk so that the loan-to-value ratio is higher than for other conventional loans.
PMI pr
purchase-money mortgage (PMM)
is created when the seller agrees to finance all or part of the purchase price and consists of a first or junior lien depending on whether prior mortgage liens exist. Often called seller financing or owner financing, a PMM is often used when the buyer doe
Real Estate Settlement Procedures Act (RESPA)
applies to any residential real estate transaction involving a new first mortgage loan. RESPA is designed to ensure that the buyer and the seller are fully informed of all settlement costs.
is a federal consumer law that requires certain disclosures about
Regulation Z
was enacted pursuant to the Truth in Lending Act by the Federal Trade Commission (FTC). It requires that credit institutions inform borrowers of the true cost of obtaining credit. With proper disclosures, borrowers can compare the costs of various lenders
underwriting
is the process of analyzing the extent of risk a lender will assume in connection with a mortgage loan. In addition to assessing the value of the collateral being pledged for the loan, the lender evaluates the capacity and creditworthiness of the borrower
VA loan
The VA assists veterans in financing the purchase of homes with little or no down payments at market interest rates. The VA issues rules and regulations that set forth the qualifications, limitations, and conditions under which a loan may be guaranteed. T
wraparound loan
enables a borrower with an existing loan to obtain additional financing from a second lender without paying off the first loan. The second lender gives the borrower a new, larger loan at a higher interest rate and assumes payment of the existing loan. The
Cost Of Credit Term of the loan
Lenders typically charge a lower interest rate if the money will be repaid in a shorter time (i.e., 15 years instead of 30 years).
Cost Of Credit Type of mortgage loan
Lenders often offer a lower initial interest rate if the borrower agrees to assume some of the risk of future interest rate hikes. Many adjustable-rate mortgages (ARMs) have low interest rates for the first few years, especially when compared to a fixed-r
Cost Of Credit Loan amount
Jumbo loans carry greater risk because so much money is secured by only one property. Because the secondary market sets upper limits for the loans it will buy, investors must retain the loans exceeding this amount. In other words, lenders cannot easily re
Cost Of Credit Lender's cost of money
Lenders must borrow the money that they loan. The interest rates that they pay fluctuate with market conditions. The Federal Reserve indirectly regulates the flow of money and interest rates. By increasing reserve requirements, the Federal Reserve in effe
Loan Application
Loan applicants are required to submit personal information about their employment, income, assets (such as bank account information), and other financial obligations. The lender wants assurance that the collateral for the loan is sufficient, so it will o
Loan Commitment
the lender's pledge to lend a certain amount of money to an explicitly named borrower (or borrowers) under specific terms and for a specified length of time, using a particular property as collateral. The commitment letter is in writing and, once signed b
Creditor
a person who extends consumer credit more than 25 times a year or more than five times a year if the transactions involve dwellings as security. The credit must be subject to a finance charge or payable in more than four installments by written agreement.
Three-day right of rescission
In the case of most consumer credit transactions covered by Regulation Z, the borrower has three days in which to rescind (cancel) the transaction by notifying the lender. This right of rescission does not apply to owner-occupied residential purchase-mone
Regulation Z provides penalties for noncompliance
The penalty for violation of an administrative order enforcing Regulation Z is $10,000 for each day the violation continues. A fine of up to $10,000 may be imposed for engaging in an unfair or deceptive practice. In addition, a creditor may be liable to a
Assumption rules for FHA-Insured Loans
The assumption rules for FHA-insured loans vary, depending on the dates the loans were originated, as follows:
- FHA loans originating before December 1986 generally have no restrictions on their assumptions.
- For an FHA loan originating between December
Discount points for FHA-Insured Loans
The lender of an FHA-insured loan may charge discount points in addition to a loan origination fee. The payment of points is a matter of negotiation between the seller and the buyer. As of November 2009, if the seller pays more than 6 percent of the costs
eligible for a VA loan
- Ninety days of active service for veterans of World War II, the Korean War, the Vietnam conflict, and the Persian Gulf War
- A minimum of 181 days of active service during interconflict periods between July 26, 1947, and September 6, 1980
- Two full yea
VA-Guaranteed Loans Prepayment privileges
As with an FHA loan, the borrower under a VA loan can prepay the debt at any time without penalty.
VA-Guaranteed Loans Assumption rules
VA loans made before March 1, 1988, are freely assumable, although an assumption-processing fee is charged. For loans made on or after March 1, 1988, the VA must approve the buyer and assumption agreement. The original veteran-borrower remains personally
Balloon Payment
When the periodic payments are not large enough to fully amortize the loan by the time the final payment is due, the final payment is larger than the others are. The final payment is called a balloon payment. It is a partially amortized loan because princ
Reverse Annuity Mortgage (RAM)
A reverse annuity mortgage (RAM) allows people 62 or older to borrow money against the equity they have built in their home. Reverse mortgages are the opposite of conventional mortgages in that the homeowner's equity diminishes as the loan amount increase
Sale-and-leaseback
arrangements are used to finance large commercial or industrial properties. The land and building, usually used by the seller for business purposes, are sold to an investor. The real estate is then leased back by the investor to the seller, who continues
accrued depreciation
resulting from physical deterioration, functional obsolescence, and external depreciation.
anticipation
value is created by the expectation that certain benefits will be realized in the future. For example, the value of a house may be affected if there are rumors that an adjacent property may be converted to commercial use in the near future. If the propert
appraisal
a distinct area of specialization within the world of real estate professionals. Appraisal provides a clearer understanding about the market's response to a subject property. Real estate licensees must be aware of the fundamental principles of valuation i
appraiser
is an independent professional trained to provide an unbiased estimate of value in an impartial and objective manner, according to the appraisal process. Appraising is a professional service performed for a fee.
assemblage
The process of merging the two lots under one owner
broker/appraiser
is permitted to appraise only properties valued under $250,000 that are not involved in federally related transactions. This certification was offered to all licensed real estate brokers who applied by September 3, 1998. After this date, any real estate b
broker price opinion (BPO)
is a less-expensive alternative of valuating property often used by lenders working with home equity lines, refinancing, portfolio management, loss mitigation, and collections. Both Fannie Mae and Freddie Mac provide forms that are used by real estate lic
capitalization rate
Estimate the price a typical investor would pay for the income produced by this particular type and class of property. This is done by estimating the rate of return (or yield) that an investor will demand for the investment of capital in this type of buil
certified general real estate appraiser
is permitted to appraise any residential or nonresidential property. For federally related transactions, only a certified general appraiser may appraise commercial property valued over $1 million.
certified residential real estate appraiser
is permitted to appraise only residential property of one to four units, regardless of whether the transaction is federally or nonfederally related. A certified residential appraiser may appraise only these types of properties valued over $250,000.
competition
is the interaction of supply and demand. For example, the success of a retail store may cause investors to open similar stores in the area. This tends to mean less profit for all stores concerned unless the purchasing power in the area substantially incre
conformity
means that maximum value is realized when a property is in harmony with its surroundings and the use of land conforms to existing neighborhood standards. In single-family residential neighborhoods, for example, buildings should be similar in design, const
contribution
the value of any part of a property is measured by its effect on the value of the whole parcel. Installing a swimming pool, greenhouse, or private bowling alley may not add value to the property equal to the cost, but remodeling an outdated kitchen or bat
cost approach
to value is also based on the principle of substitution. It is most useful in the appraisal of newer or special-purpose buildings such as schools, churches, and public buildings. Such properties are difficult to appraise using other methods because there
depreciation
is a loss in value due to any cause. It refers to a condition that adversely affects the value of an improvement to real property. Land does not depreciate�it retains its value indefinitely, except in such rare cases as down-zoned urban parcels, improperl
economic life
The expected period of time during which an asset is useful to the average owner. The economic life of an asset could be different than the actual physical life of the asset.
external depreciation
Depreciation is always incurable if caused by negative factors not on the subject property, such as environmental, social, or economic forces. For example, close proximity to a polluting factory or a deteriorating neighborhood are factors that could not b
functional obsolescence
Obsolescence means a loss in value from the market's response to the item. Outmoded or undesirable physical or design features are curable. Such features could be replaced or redesigned at a cost that would be offset by the anticipated increase in ultimat
gross income multiplier (GIM)
Sales price � Annual gross income
gross rent multiplier (GRM)
Sales price � Monthly gross rent
highest and best use
is its most profitable single use that is legal and feasible and will bring the most money over time. The use must be
- legally permitted,
- economically or financially feasible,
- physically possible, and
- the most profitable or maximally productive.
Th
income approach
to value is based on the present value of the rights to future income. It assumes that the income derived from a property will, to a large extent, control the value of that property. The income approach is used for valuation of income-producing properties
index method
The appraisal method of estimating building costs by multiplying the original cost of the property by a percentage factor to adjust for current construction costs.
market data approach
(also known as the market data approach), an estimate of value is obtained by comparing the subject property (the property being appraised) with recently sold comparable properties (properties similar to the subject). Because no two parcels of real estate
market value
the most probable price that a property should bring in a fair sale. This definition makes three assumptions. First, it presumes a competitive and open market. Second, the buyer and the seller are both assumed to be acting prudently and knowledgeably. Fin
physical deterioration
A curable item is one that can be repaired (such as painting walls), is economically feasible, and would result in an increase in value equal to or exceeding the cost. An item is incurable if its correction is not economically feasible or would not contri
plottage
holds that merging or consolidating adjacent lots into a single larger one produces a greater total land value than the sum of the two sites valued separately. For example, if two adjacent lots are valued at $35,000 each, their total value if consolidated
progression
the value of a modest home would be higher if it were located among larger, fancier properties.
reconciliation
is the art of analyzing and effectively weighing the findings from the three approaches. In reconciliation, an appraiser explains not only the appropriateness of each approach but also the relative reliability of the data within each approach in line with
regression
In general, the worth of a higher-quality property is adversely affected by the presence of the lower-quality property.
reproduction cost
is the construction cost at current prices of an exact duplicate of the subject improvement, including both the benefits and the drawbacks of the property.
sales comparison approach
(also known as the market data approach), an estimate of value is obtained by comparing the subject property (the property being appraised) with recently sold comparable properties (properties similar to the subject). Because no two parcels of real estate
substitution
holds that a property's maximum value tends to be set by how much it would cost to purchase an equally desirable and valuable substitute property. Substitution is the foundation of the sales comparison approach.
supply and demand
the value of a property depends on the number of properties available in the marketplace�the supply of the product. When supply increases, value decreases; when demand increases, value increases. Other factors include the prices of other properties, the n
Uniform Standards of Professional Appraisal Practice (USPAP)
established by the foundation's Appraisal Standards Board. The rules define the education, examination, and experience requirements required to obtain the certification. Continuing education is required.
A federally related transaction is any real estate-
General data
which covers the nation, region, city, and neighborhood. Of particular importance is the neighborhood, where an appraiser finds the physical, economic, social, and political influences that directly affect the value and potential of the subject property.
Specific data
which covers details of the subject property, as well as comparative data relating to costs, sales, income, and expenses of properties similar to and competitive with the subject property.
Appraiser Report
Once the approaches have been reconciled and an opinion of value has been reached, the appraiser prepares a report for the client. The report should
- identify the real estate and real property interest being appraised;
- state the purpose and intended us
Utility
Determines property value by having the capacity to satisfy human needs and desires
Transferability
Determines property value by having a finite supply
Scarcity
Determines property value by having the relative ease with which ownership rights are transferred from one person to another
Market value versus cost
One of the most common misconceptions about valuing property is that cost represents market value. Cost and market value may be the same; in fact, when the improvements on a property are new, cost and value are likely to be equal. More often, however, cos
Principle of Change
no physical or economic condition remains constant. Real estate is subject to natural phenomena, such as tornadoes, fires, and routine wear and tear from the elements. The real estate business is subject to market demands, like any other business. An appr
Increasing and diminishing returns
The addition of improvements to land and structures increases value only to the asset's maximum value. Beyond that point, additional improvements no longer affect a property's value. As long as money spent on improvements produces an increase in income or
Property rights
An adjustment must be made when less than the fee simple legal bundle of rights is involved. This includes land leases, ground rents, life estates, easements, deed restrictions, and encroachments.
Financing concessions
The financing terms must be considered, including adjustments for differences such as mortgage loan terms and owner financing or buydowns by a builder-developer.
Market conditions
Interest rates, supply and demand, and other economic indicators must be analyzed.
Conditions of sale
Adjustments must be made for motivational factors that would affect the sale, such as foreclosure, a sale between family members, or some nonmonetary incentive.
Market conditions since the date of sale
An adjustment must be made if economic changes occur between the date of sale of the comparable property and the date of the appraisal.
Location, or area preference
Similar properties might differ in price from neighborhood to neighborhood or even between locations within the same neighborhood.
Physical features and amenities
Physical features such as the building's age, size, and condition may require adjustments.
Determining reproduction or replacement cost new Square-foot method
The cost per square foot of a recently built comparable structure is multiplied by the number of square feet (using exterior dimensions) in the subject building. The square-foot method is the most common and easiest method of cost estimation. The example
Determining reproduction or replacement cost new Unit-in-place method
In the unit-in-place method, the cost of a structure is estimated based on the construction cost per unit of measure of individual building components, including material, labor, overhead, and builder's profit. Most components are measured in square feet,
Determining reproduction or replacement cost new Quantity-survey method
The quantity and quality of all materials (such as lumber, brick, and plaster) and the labor are estimated on a unit-cost basis. These factors are added to indirect costs (building permit, survey, payroll, taxes, builder's profit, etc.) to arrive at the t
Determining reproduction or replacement cost newIndex method.
A factor representing the percentage increase to the present time of construction costs is applied to the original cost of the subject property. Because this method fails to take into account individual property variables, it is useful only as a check of
accrued items
are expenses to be prorated that are owed by the seller (such as water bills and interest on an assumed mortgage) but will be paid later by the buyer.
When the real estate tax is levied for the calendar year and is payable during that year or in the follo
affiliated business arrangement (AfBA)
To streamline the settlement process, a real estate firm, title insurance company, mortgage broker, home inspection company, or even a moving company may agree to offer a package of services to consumers, a system known as an affiliated business arrangeme
closing
involves two major events: the promises made in the sales contract are fulfilled and the mortgage funds are distributed to the buyer. Before the property changes hands, however, important issues must be resolved. Many real estate licensees maintain lists
credit
is an amount entered in a person's favor�an amount that has already been paid, an amount being reimbursed, or an amount the buyer promises to pay in the form of a loan.
debit
is a charge�an amount that the party being debited owes and must pay at closing.
escrow account
or an impound account. A borrower starts the account at closing by depositing funds to cover at least the amount of unpaid real estate taxes from the date of the lien to the end of the current month (the buyer receives a credit from the seller for any unp
Good Faith Estimate (GFE)
must contain the exact language specified by HUD, making it easier for borrowers to compare loan conditions from one lender to another.
impound account
is simply an account maintained by the mortgage company to collect insurance and tax payments that are necessary for you to keep your home, but are not technically part of the mortgage.
Mortgage Disclosure Improvement Act (MDIA)
has changed how buyers and sellers, lenders, mortgage brokers, title agents, and real estate licensees prepare for a closing. The timeliness of certain disclosures now affects the date of closings. Lenders and licensees should keep in mind the numbers 3,
prepaid items
are expenses to be prorated (such as fuel oil in a tank) that have been prepaid by the seller but not fully used. They are, therefore, credits to the seller.
In Pennsylvania, although the parties may agree otherwise, the following are typical:
- The selle
prorations
Most closings involve the division of financial responsibility between the buyer and the seller for such items as loan interest, taxes, rents, fuel, and utility bills. These allowances are called prorations. Prorations are necessary to ensure that expense
Uniform Settlement Statement (HUD-1)
itemize all charges normally paid by a borrower and a seller in connection with settlement, whether required by the lender or another party, or paid by the lender or any other person (click here to view the form). Charges required by the lender that are p
Preclosing Procedure
Both the buyer and the buyer's lenders must be sure that the seller can deliver the title that was promised in the purchase agreement and that the property is now in essentially the same condition it was in when the buyer and the seller agreed to the sale
Final property inspection
In the real estate contract, the buyer usually reserves the right to make a final inspection, often called a walk-through, shortly before the closing takes place. Accompanied by the licensee, the buyer verifies that necessary repairs have been made, the p
title commitment at closing
When an abstract of title is used, the purchaser's attorney examines it and issues an opinion of title. The attorney's opinion of title is a statement of the quality of the seller's title, and it lists all liens, encumbrances, easements, conditions, and r
Closing agent or closing officer
may be the attorney of the buyer or the seller, a real estate broker, or a representative of the lender or the title company. Some title companies and law firms employ paralegal assistants who conduct closings for their firms.
The closing officer orders a
The exchange at closing
is made when the parties are satisfied that everything is in order. The seller delivers the signed deed to the buyer, who accepts it. All pertinent documents are then recorded in the correct order to ensure continuity of title. For instance, if the seller
IRS Reporting Requirements for closing
Certain real estate closings must be reported to the Internal Revenue Service (IRS) on Form 1099-S. The affected properties include sales or exchanges of
- land (improved or unimproved), including air space;
- an inherently permanent structure, including
Broker's Role at Closing
Depending on the local custom, the licensee's role can vary from simply collecting the commission check to conducting the closing. Most licensees continue to be involved all the way through closing because it is also in their best interest that the transa
Lender's Interest in Closing
Whether a buyer obtains new financing or assumes the seller's existing loan, the lender wants to protect its security interest in the property and ensure that its mortgage liens have priority over other liens. Therefore, lenders may require a survey, a pe
days from application to provide the truth-in-lending (TIL) statement and good-faith estimate (GFE)
3 business
days before the signing of loan documents, after the borrower receives the final truth-in-lending statement and GFE
7 business
days to wait for closing if the annual percentage rate (APR) has changed more than 0.125 percent from the original or most recent TIL and GFE
3 business
RESPA does not apply to
- Loans on large properties (i.e., more than 25 acres)
- Loans for business or agricultural purposes
- Construction loans or other temporary financing
- Vacant land loans on large properties (i.e., more than 25 acres)
- Loans for business or agricultural
RESPA Section 8
prohibits kickbacks and fee-splitting for referrals of settlement services, and unearned fees for services not actually performed. Violators are subject to criminal and civil penalties, including fines up to $10,000 and/or imprisonment up to one year. Con
RESPA Section 9
prohibits homesellers from requiring that homebuyers buy title insurance from a particular company. Buyers may sue the seller for such a violation; violators are liable for up to three times the amount of all charges paid for the title insurance.
RESPA Section 10
prohibits lenders from requiring excessive escrow account deposits, money set aside to pay taxes, hazard insurance, and other charges related to the property.
This HUD Special Information booklet
must be given at the time of application or provided within three days of loan application, provides the borrower with general information about settlement (closing) costs. It also explains the various provisions of RESPA, including a line-by-line descrip
The only fee that the lender may collect before the applicant receives the GFE
credit report fee
No-tolerance fees
may not increase before closing, including lender charges for taking, underwriting, and processing the loan application, including points, origination fees, and yield spread premiums.
Ten percent tolerance fees
cannot increase by more than 10 percent in any given category, including settlement services for which the lender selects the provider or for which the borrower selects the provider from the lender's list, title services and title insurance if the lender
Unlimited tolerance fees
are out of the lender's control, including services for which the borrower chooses the provider (such as escrow and title insurance), impounds for taxes, mortgage interest, and the cost of homeowners' insurance.
Mortgage servicing disclosure statement
This statement tells the borrower whether the lender intends to service the loan or to transfer it to another lender. It also provides information about resolving complaints.
Attorney's fees
If either of the parties' attorneys will be paid from the closing proceeds, that party will be charged with the expense on the closing statement. This expense may include fees for the preparation or review of documents or for representing the parties at s
Recording expenses
The seller usually pays for recording charges (filing fees) necessary to clear all defects and furnish the purchaser with clear title according to the terms of the contract. Items customarily charged to the seller include recording the satisfaction of mor
Transfer tax
Most states, counties, and local municipalities require some form of transfer tax, conveyance fee, or tax stamps on real estate conveyances. Responsibility for these charges varies according to local practice and by agreement in the sales contract.
Title expenses
Responsibility for title expenses varies according to local custom. In most areas, the seller is required to furnish evidence of good title and pay for the title search. If the buyer's attorney inspects the evidence or if the buyer purchases title insuran
Deed preparation fee
This fee is charged by the preparer of the new deed; it is customarily paid by the seller.
Loan fees
The discussion of loan fees becomes even more critical with the good-faith estimate form associated with the new HUD-1 form. For a new loan, the lender generally charges an origination fee and possibly discount points, if the borrower wants a below-market
Appraisal fees
Either the seller or the purchaser pays the appraisal fees, depending on who orders the appraisal. When the buyer obtains a mortgage loan, it is customary for the lender to require an appraisal. In this case, the buyer usually bears the cost, although thi
Survey fees
The purchaser who obtains a new mortgage loan customarily pays the survey fees. The agreement of sale may require the seller to furnish a survey.
Accounting for expenses
Expenses paid out of the closing proceeds are debited only to the party making the payment. Occasionally, an expense item (e.g., an escrow fee, a settlement fee, or a transfer tax) may be shared by the buyer and the seller. In this case, each party is deb
Real estate taxes
Proration of real estate taxes varies widely, depending on how the taxes are paid in the area where the real estate is located. In some states, real estate taxes are paid in advance; that is, if the tax year runs from January 1 to December 31, taxes for t
Mortgage loan interest
On almost every mortgage loan, the interest is paid in arrears. The buyer and the seller must understand that a mortgage payment due on June 1, for example, includes interest due for May. Thus, the buyer who assumes a mortgage on May 31 and makes the June
calculating prorations using banking or statutory year
The yearly charge is divided by a 360-day year, or 12 months of 30 days each.
calculating prorations using calendar year
The yearly charge is divided by 365 to determine the daily charge. Then the actual number of days in the proration period is determined, and this number is multiplied by the daily charge.
budget comparison statement
compares the actual results with the original budget, often giving either percentages or a numerical variance of actual versus projected income and expenses. Budget comparisons are especially helpful in identifying trends in order to help with future budg
cash flow report
is a monthly statement that details the financial status of the property. Sources of income and expenses are noted, as well as net operating income, and net cash flow. The cash flow report is the most important financial report because it provides a pictu
corrective maintenance
involves the actual repairs that keep the building's equipment, utilities, and amenities functioning. Repairing a toilet, fixing a leaky faucet, and repairing a broken air-conditioning unit are acts of repair maintenance.
management agreement
a contract creating a general agency relationship between the owner and the property manager; it defines the duties and responsibilities of each party. It is also a guide used in operating the property, as well as a reference in case of any future dispute
management plan
prepared by the property manager. A management plan outlines the details of the owner's objectives with the property, as well as what the property manager expects to accomplish and how, including all financial objectives. In preparing a management plan, a
multiperil policies
Such a policy offers the property manager an insurance package that includes standard types of commercial coverage, such as fire, hazard, public liability, and casualty. Special coverage for terrorism, earthquakes, and floods is also available. Remember t
operating budget
is the projection of income and expense for the operation of a property over a one-year period. This budget, developed before attempting to rent property, is based on anticipated revenues and expenses and provides the owner the amount of anticipated profi
preventive maintenance
includes regularly scheduled activities such as regular painting and seasonal servicing of appliances and systems. Preventive maintenance preserves the long-range value and physical integrity of the building. This is both the most critical and the most ne
profit and loss statement
is a financial picture of the revenues and expenses used to determine whether the business has made money or suffered a loss. It may be prepared monthly, quarterly, semiannually, or annually. The statement is created from the monthly cash flow reports and
property manager
is complex, requiring the manager to wear many hats. It is not unusual for a property manager to be a market analyst, salesperson, accountant, advertising specialist, and maintenance person�all in the same day. In addition, the property manager frequently
risk management
involves answering the question "What will happen if something goes wrong?" The perils of any risk must be evaluated in terms of options. In considering the possibility of a loss, the property manager must decide whether it is better to
- control it by in
routine maintenance
of the building. Routine maintenance includes such day-to-day duties as cleaning common areas, performing minor carpentry and plumbing adjustments, and providing regularly scheduled upkeep of heating and air-conditioning systems and landscaping.
tenant improvements
These are construction alterations to the interior of the building to meet a tenant's particular space needs. Such alterations range from simply repainting or recarpeting to completely gutting the interior and redesigning the space by erecting new walls,
management agreement contract Description
The property should be clearly defined.
management agreement contract time period
The agreement should address the covered time period and specific provisions for termination.
management agreement contract Definition of the management's responsibilities
All the manager's duties should be specifically stated in the contract. Any limitations or restrictions on what the manager may do should be clearly stated.
management agreement contract Statement of the owner's purpose and responsibilities
The owner should clearly state what the manager is to accomplish. One owner may want to maximize net income, while another may want to increase the capital value of the investment. What the manager does depends on the owner's long-term goals for the prope
management agreement contract Extent of the manager's authority
This provision should state what authority the manager is to have in matters such as hiring, firing, and supervising employees; fixing rental rates for space; and making expenditures and authorizing repairs. Repairs that exceed a certain expense limit may
management agreement contract Reporting
The frequency and detail of the manager's periodic reports on operations and financial position should be agreed on. These reports serve as a means for the owner to monitor the manager's work. They also form a basis for both the owner and the manager to s
management agreement contract Compensation
The management fee or other form of compensation may be based on a percentage of gross or net income, a fixed fee, or some combination of these and other factors. The compensation provision of the agreement should state the base fee, as well as any leasin
management agreement contract Allocation of costs
The agreement should state which of the property manager's expenses�such as office rent, office help, telephone, advertising, and association fees�will be paid by the manager. Other costs will be paid by the owner.
management agreement contract Antitrust provisions
Management fees are subject to the same antitrust considerations as sales commissions. They cannot be standardized in the marketplace, because standardization would be considered as price-fixing. The fee must be negotiated between the agent and the princi
management agreement contract Equal opportunity statement
Residential property management agreements should include a statement that the property will be shown, rented, and otherwise made available to all persons, regardless of race, color, religion, sex, disability, national origin, or family status, and to any
Income Report
Income includes gross rentals collected, delinquent rental payments, utilities, vending, contracts, late fees, and storage charges. Any losses from uncollected rental payments or evictions are deducted from the total gross to arrive at the total adjusted
Expenses Report
Fixed and variable expenses include administrative costs (including building personnel), operating expenses, and maintenance costs. Fixed expenses that remain constant and do not change include employee wages, utilities, and other basic operating costs. V
Total Income Formula
Gross rental income + Other income - Losses incurred =
Net operating income before debt service Formula
Total income - Operating expenses =
Cash Flow Formula
Net operating income before debt service - Debt service - Reserves =
Net Profit Formula
Gross receipts - Operating expenses - Total mortgage payment + Mortgage loan principal =
Property Manager Renting the Property
Effective rental of the property is essential to ensure the long-term financial health of the property. Although the property manager may use the services of a leasing agent, the broker acting as leasing agent is concerned solely with renting space but is
Property Manager Setting rental rates
Because rental rates are influenced primarily by supply and demand, the property manager should conduct a detailed survey of the competitive space available in the neighborhood, emphasizing similar properties. In establishing rental rates, the property ma
Property Manager Marketing
To ensure that a property generates income, the property manager must attract the best tenants. The marketing strategy must take into consideration the property itself, the supply and demand in the area where the property is located, and the amount of mon
Property Manager Advertising
All advertising and promotional activities must comply with federal, state, and local nondiscriminatory laws. The content cannot market to one protected class, such as race, color, religion, sex, national origin, family status, or physical disabilities. T
Property Manager Selecting Tenants
Proper selection is the first step in establishing and maintaining sound, long-term relationships with tenants. The manager should be sure that the premises are suitable for the tenant in terms of size, location, and amenities, and that the tenant can aff
Property Manager Collecting rents
A property manager should accept only those tenants who can be expected to meet their financial obligations. The manager should investigate financial references, check with local credit bureaus, and when possible, interview a prospective tenant's former l
Property Manager Maintaining Good Tenant Relations
The ultimate success of a property manager depends greatly on the ability to maintain good relations with tenants. Dissatisfied tenants eventually vacate the property. A high tenant turnover results in greater expense for advertising and redecorating. It
Property Manager Maintaining the Property
One of the most important functions of a property manager is the supervision of property maintenance. A manager must balance the services provided with their costs; that is, to satisfy the tenants' needs while minimizing operating expenses.
To maintain th
Risk Management Security of Tenants
The physical safety of tenants in the leased premises has become an important issue for property managers and owners. Recent court decisions in several parts of the country have held landlords and their agents responsible for physical harm that was inflic
Risk Management Tenant's insurance
The property manager should notify tenants that in order to protect personal belongings, they must obtain a renter's (HO-4) insurance policy in order to protect their personal belongings. The owner can only insure what the owner owns (i.e., the building);
Risk Management Commercial insurance
An insurance audit should be performed by a competent, reliable insurance agent who is familiar with insurance issues for the type of property involved. The audit will indicate areas in which greater or lesser coverage is recommended and will highlight pa
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