Always Wonder What Certain Terms Mean? Real Estate Definitions

Posted @ 10:44 pm - Filed under 1031 Exchanges, Purposeful Planning, Investment Lessons, RE Investment Practice, Definitions

The following are some well known and not so well known real estate words and phrases. I’ve found they’re so many times thrown around with bastardized, and/or implied by incorrect meanings. Misunderstanding basic definitions in real estate investments can lead to some unintended consequences. In this business the old saying, ‘Words mean things’ should be taken literally — ‘cuz they do.

The pictures aren’t connected, but then when it comes to definitions, they almost never are, right? It’s just cool to have ‘em.

Ground Lease — one that rents the land only. You often find this when land is so expensive it’s the only way to make the whole property, including the land, affordable. Lenders and the IRS have much to say about the length of a ground lease. Most lenders have a problem making a loan on property with a ground lease with less than 30 years to go. The IRS goes as far as changing the definition of the property when the period is less than 30 years.

Defeasance — clause in mortgage that gives the borrower the right to redeem the property after default by paying the full indebtedness and fees incurred.

First Mortgage — That mortgage which is recorded at the earliest time. The time of recording is the sole criteria. Size of loan and type of mortgage are immaterial. When the first mortgage is paid off and released, the second mortgage (if any existed) becomes the first mortgage. Many people have asked me what makes one loan a first, another a second, and so on. It’s simply a matter of chronology. Record your loan first and you’ll be the first mortgage.

Estoppel — a doctrine of law that stops one from later denying facts which that person once acknowledged were true and others accepted on good faith. Beware of what you wish the other party to believe, as it can come back to bite you under this legal theory. I’ve seen it happen.

Fannie Mae (FNMA) — Federal National Mortgage Association, a federally chartered corporation that purchases mortgages and packages them to sell as securities. Lenders loan the same money over and over ‘cuz they’re able to sell each loan to the secondary market. Fannie Mae is obviously a huge player. Duh

Hypothecate — to pledge somehing as security without having to give up possession of it. I’ve done crazy-convoluted tax deferred exchanges in which one of the parties involved took back a note secured by a deed of trust on the property he was exchanging out of (relinquished property). Without boring you with mind-numbing details, we got a loan from his bank, using the note as collateral — hypothecating the note. Got my client out of a bunch of capital gains taxes. Cool.

Loan Application (1003) — A loan application that is required for conforming loans. It has become the standard application for most residential loans, even non-conforming loans. Surprise your lender next time by referring to the application as the ‘1003′.

Escrow Analysis — the periodic examination of escrow accounts to determine if current monthly deposits will provide sufficient funds to pay taxes, insurance, and other bills when due. Funny how these almost always result in having too much cash, and rarely too little. This is why I usually advise clients to avoid escrow, or (as they’re called here) impound accounts. However, that option isn’t available on most loans over 80% loan to value.

Installment Sale — when a seller accepts a mortgage for all or part of the sale, tax on the gain is paid as the mortgage principal is collected. For the long term real estate investor, this is a tax reduction strategy, sometimes applied in concert with a tax deferred exchange. Most investors are unaware that tax deferred exchanges don’t have to be ‘all or nothing’. To use the cliché, while horribly mashing together metaphors — it’s possible to be partially pregnant when it comes to tax deferred exchanging. Sorry about that.

Purposeful Planning — The process sandwiched between the decision to proactively produce a magnificently abundant retirement, and said retirement. The process begins by having a conversation with One Without Hair.

This entry was posted on Thursday, April 24th, 2008 at 10:44 pm and is filed under 1031 Exchanges, Purposeful Planning, Investment Lessons, RE Investment Practice, Definitions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.