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Here is a real
estate glossary:
Accretion/Accession
Accession
is the extension of an owner's land through either
annexation or accretion. Annexation occurs when a
tenant annexes a fixture to a building and thus
increases the value of the property.
Accretion
Accretion
occurs when a riparian owner (the owner of a property
next to a moving river or stream) or littoral owner
(next to a body of water. . .such as a lake, pond, or
ocean), acquires title to additional land by the gradual
build up or accumulation of land deposited on the owners
property by the shifting of the river or lake's action .
An
owner may acquire property by accretion. Accretion is
defined as an addition to land
that
results from a gradual build-up by natural causes.
The party who would benefit from this action would be
the landowner.
The
soil deposited to form the new land is called alluvium.
Alluvium is the land that
accumulates
due to the splash-up action of water.
Avulsion
When
a stream suddenly tears land away from its bank, this is
called avulsion.
Water
When a parcel of land is adjacent to a stream or
river, it may have riparian water rights.
Riparian
Water Rights
Riparian
water rights include a river, stream, or watercourse,
and allows the property owner to use the water for any
reasonable use.
Appropriation
When a property owner is not adjacent to a river,
stream, or watercourse, he will obtain his water through
appropriation. This is accomplished by
applying to the State Division of Water Resources.
Percolation
Percolation occurs when surface water is absorbed back
into the soil. Hydraulic engineers perform a
percolation test to determine the ability of the ground
to absorb and drain water. This is especially
important when trying to determine whether a site is
suitable for a septic tank.
Percolating waters are underground water that are not
confined to a channel or bed. Waters that seeps from the
ground from an unknown source are called artesian
waters.
Adjustable
Rate Loan
An
adjustable or variable rate loan is a loan that adjusts
to some predetermined index (Federal Home Loan Bank
Board District Cost of Funds Index, Cost of Savings
Index, Treasury Securities, London Inter-bank Offered
Rate/LIBOR, etc.) that changes over the life of the
loan.
Lenders
look favorably upon this type of loan because it places
the market risk of rising interest rates on the buyer
and not the lender. Lenders usually offer
attractively lower initial interest rates than fixed
rate loans to entice borrowers to accept this type of
loan the the market risk that accompanies it.
Adjustable/variable rate loans generally assure a good
refinance market in the future.
Therefore, a loan with an interest rate that changes
with money market rates is called a variable rate or
adjustable rate loan. In other words, a real
estate loan providing interest rate increases or
decreases depending upon money market conditions, is
called a variable interest rate loan.
Conversely, fixed rate loan interest does NOT change
over the life of the loan.
Adverse Possession
The
courts generally require substantial proof that the
following five conditions are met before allowing
adverse possession:
- Open
and notorious;
- Uninterrupted
use for 5 years or more;
- Claim
of right;
- Hostile
to the owner's intent;
- Taxes
paid by the adverse possessor.
Remember:
OUCH + Taxes = Adverse Possession.
For a title insurance company to issue a policy of title
insurance, they will require the adverse possessor to
perfect his title through a quiet title action (a court
action to remove a cloud on the title
Agency
An
agency relationship is created when one person (the
principal) gives another person (the agent) the right to
act on his behalf. These acts are generally
limited to a special agency of a broker listing a
property for sale. In this instance, the agent is
employed to find a ready, willing, and able buyer to
purchase the property; and can neither sell the property
for the principal or bind him to any contract for the
sale of the property.
An
agency relationship gives rise to a fiduciary duty of
utmost care, honest, integrity, and loyalty of the agent
to the principal. This is a higher standard of
care the agent must exercise when acting for his
principal.
Establish
An Agency Relationship
The best way to establish an agency relationship is by
written contract or agreement. An agency
relationship can be established by written agreement,
oral agreement, or implied statement of law. An
agent "volunteering" is not one of the three
ways to establish an agency relationship.
Competent parties, a fiduciary relationship, and
legality are also required to create an agency
relationship. However, consideration (bargained
for exchange) is NOT needed to create an agency
relationship.
Ostensible Authority
An agency relationship can result from the conduct and
actions of the parties, even though there is no express
agency agreement between the broker and principal(s).
In other words, ostensible authority occurs when Seller
Able lets Buyer Baker assume that broker Charlie is his
agent.
Gratuitous
Agent
An
agent who acts as an agent for a principal and is not
paid for his services is called a gratuitous agent.
For example, an agent who sets up a financing package
and doesn't charge a fee or commission is called a
gratuitous agent.
Terminate
Agency Relationship
A broker representing a buyer may NOT terminate an
agreement if it is not yet completed.
Fiduciary
An
agency relationship gives rise to a fiduciary duty of
utmost care, honest, integrity, and loyalty of the agent
to the principal. Fiduciary obligations include
truth, confidentiality, and competence. Most
importantly, a fiduciary duty involves trust.
The position of trust assumed by the broker as an agent
for a principal is described most accurately as
fiduciary. For example, in a real estate sales
transaction you are the agent of the buyer and not of
the seller. You owe a fiduciary duty to the buyer.
Violate
Fiduciary Duties
If the seller's agent informs a buyer that the seller
will take less than the list price, he has violated her
fiduciary duties to the seller.
Also, if an agent reveals to a buyer that the seller
will take much less money for a property, this is
unethical and a violation of the agent's fiduciary
responsibility to the seller.
A selling agent is the exclusive agent of the buyer
only. He cannot reveal anything negative regarding the
buyer to the seller.
Broker
Owes Buyer
If the broker is the agent of the seller, he owes the
buyer the duty of honest and fair dealing. This is
the disclosure of all material facts regarding the
property. A material fact is a fact that will
affect the value of the property and must be disclosed
to the buyer.
The broker who represented only the seller in a
transaction has a fiduciary responsibility to the
seller. When dealing with a third party the broker
must disclose all material facts regarding the property.
A real estate broker acting as an agent for his
principal could not file an action in a court of law.
Attorney's file law suits, not real estate brokers.
Dual
Agency
Dual agency occurs when a broker represents both the
buyer and seller in a real estate transaction. The
broker has fiduciary duties to both the seller and the
buyer and must act with extreme care. Loyalty and
confidentiality can be easily compromised for each
party.
If an agent does NOT disclose dual agency to both
parties, he may be disciplined (by the Real Estate
Commissioner), he may not receive his commission, and it
may be grounds for either party to rescind the contract.
Mr. Brown hired a broker to find a warehouse for lease
and agreed to pay a commission for the service. Several
days later, Mr. Green tells the broker he has a
warehouse lease and agrees to pay a commission if he
finds a tenant. The broker writes the lease that is
signed by both parties. Mr. Brown knows that the broker
was representing Mr. Green, but Green did not know that
the broker was representing Mr. Brown. In this case
NEITHER is liable to pay a commission.
A
dual agency is legal if buyer and seller consent to it.
The buyer and seller must consent to dual agency.
Accidental Dual Agency
When a real estate agent acts as an agent for both
the buyer and seller in a transaction, but does not
specifically reveal this fact because he is unaware that
both consider him their agent, he is involved in
accidental dual agency.
Material
Facts
A material fact is a fact that affects the desirability
and value of a property and, if the buyer knew about it,
she probably would not purchase the property. An
example of a material fact is a leaky roof or extensive
plumbing repairs.
For
example, the owner of a single-family residence lists
the property for sale with a real estate broker.
The roof to the property leaks. The owner informed
the broker about this problem. The broker did not
tell the buyer, in this case the buyer could recover
damages from both the seller and the broker, and then
the seller could recover damages from the broker.
Earnest
Money Deposits
In a listing agreement, the seller generally
authorizes the broker to accept earnest money deposits
on his behalf. If there is no deposit with the offer,
the broker must inform the seller. The agent is
also required to do as his principal instructs him to
do. However, he must inform the seller of the any
checks held by the broker because this is a material
fact.
Not
Authorized To Accept Deposit
If Able, the owner of Blackacre, lists the property for
sale with Broker Baker and Able fails to authorize the
agent to accept the deposit on his behalf, Buyer
Charlie makes an offer on Blackacre and gives Broker
Baker a check for $5,000 as a deposit. Under these
circumstances, Broker Baker can accept the deposit as
the agent of Buyer Charlie and place the monies in the
broker's trust fund.
For example, a property is not listed for sale.
A person who wants the property executes an offer to
purchase it through a real estate agent. In doing
so, he gives the broker a $5,000 check as a deposit.
The broker can accept the check as the exclusive agent
of the buyer.
Buyer
Withdraws Offer
Buyer Baker made an offer and gave the seller’s
broker Charlie a $500 check as a deposit. Before
the offer was presented to seller David, buyer Baker
withdrew the offer. The broker should return the
check immediately.
Secret
Profit
A broker cannot receive secret profits. It is a
violation of the Real Estate Law, violation of the laws
of agency, subject the broker and salesperson to
disciplinary action by the Real Estate Commissioner, and
subject both to a civil suit by the seller or buyer.
Agent
Acting In Excess Of His Authority
The seller is NOT liable for the broker's actions if the
broker acts in excess of his authority.
Vicarious
Liability
If a salesperson does something unethical, the
salesperson and broker are liable. Anything the
salesperson does that is unethical or illegal in the
course of their job as a real estate agent also
implicates the broker.
Agency
Disclosure
In January 1988 Agency Disclosure became a new
California law.
As soon as practical, an agent must disclose who is
representing whom in a real estate transaction.
This includes who is representing the seller, buyer, and
if dual agency exists. This disclosure must be in
writing.
For example, if Able is the agent of the buyer, he
should disclose this relationship to other persons
involved in a sales transaction as soon as possible.
Alienation Clause/Due-On-Sale
Clause
An alienation or due-on-sale
clause in a trust deed provides that the principal
amount of the loan plus accrued interest is due in the
event of the sale of the property. If the owner
conveys the property, it allows the lender to call the
entire loan balance due and payable immediately.
The term "alienate" means to convey the title.
Assumption
A
formal assumption of a loan by a buyer assigns all
rights, obligations, and responsibilities of the seller
over to the buyer. The buyer steps into the
seller’s shoes regarding loan payments to the lender.
The seller is completely relieved of all
responsibilities for repayment of the loan.
Subject
To
When
a borrower assumes an existing loan “subject to”
that loan, the lender does not approve the assumption
and the seller continues to remain primarily liable for
repayment of the loan for five years after the subject
to assumption date. Therefore, if a buyer
takes a property subject to the existing loan,
"subject to" most nearly means the buyer will
not be personally liable for the loan and the seller
remains liable for five years.
For example, if Able buys Blackacre from Baker, taking
title to the property subject to the existing loan, the
person primarily responsible for the repayment of the
loan would be Baker.
Alquist-Priolo Special Studies
Earthquake Zones Act
The Alquist-Priolo Special Earthquake Studies Zone
Act requires all owners of properties located within ¼
mile of an earthquake fault zone to disclose this fact
to prospective purchasers.
Under the Alquist-Priolo Special Studies Earthquake
Zones Act, a subdivider would be required to disclose
earthquake fault lines to potential purchasers.
The Alquist-Priolo Special Studies Zones Act is designed
to regulate the development of property in the vicinity
of hazardous earthquake faults.
A
broker is listing a home that lies on an earthquake
fault. The owner of the home tells the broker not
to disclose this fact to the buyer. The broker
should refuse to take the listing.
Please
note: A SUBDIVIDER is required, under the Alquist-Priolo
Special Studies Earthquake Zones Act, to submit a report
on earthquake fault lines to the Real Estate
Commissioner's office.
Amortization
Amortization is the liquidation of a financial
obligation on an installment plan or basis. In
other words, a loan that is completely repaid by a
series of regular equal installment payment of principal
and interest is called a fully amortized loan. An
amortized loan will have less interest cost over time
than a straight note.
Amortization
Tables
Amortization tables or charts are used to determine
the amount of each payment that goes toward interest and
the amount toward principal reduction.
With each payment the interest portion of the payment
decreases and the principal portion increases. However,
these changes are non-linear and favor the lender early
in the amortization period and the borrower late in the
period. In other words, when a loan is fully
amortized by equal monthly payments of principal and
interest, the amount applied to principal increases
while the interest payment decreases.
When reading an amortization table or chart, the amount
shown as the payment, based on a given loan amount, rate
of interest, and loan term indicates both principal and
interest.
Many financial calculators, such as the HP12C
calculator, have the amortization tables programmed into
the calculator.
Fully
Amortized Loan
When a loan is completely repaid by a series of regular
equal installment payments of principal and interest,
this is called a fully amortized loan.
Down
Payment vs. Loan Term
If a buyer has a small down payment and a long loan
term, more interest is paid than if he had a large down
payment or a shorter loan term.
Partial
Amortization (with Balloon Payment)
A partially amortized loan is a loan that is paid off in
a very similar fashion to a fully amortized loan, except
the loan becomes due and payable sometime before the end
of the amortization schedule (usually 5-7 years from the
loan origination date). This lump sum payment is
called a balloon payment and is the
entire balance due. Therefore, a partially
amortized loan has a balloon payment.
Residential lenders will many times give a borrower a
lower than market interest rate to induce them to accept
a partially amortized loan with a balloon payment.
The balloon payment allows the lender to obtain his loan
funds back within a reasonable length of time and
re-loan the funds at market interest rates.
Therefore, the borrower is bearing the market risk
associated with a rise in interest rates.
Commercial loans are many times amortized over 20-25
years; however, virtually all of these loans have a
balloon payment in 10 years or less from origination.
Negative
Amortization
A negative amortization loan requires monthly payments
that are not sufficient to cover the monthly interest
that is due. The borrower pays such a small
payment that it does not cover the principal nor part of
the interest due to the lender. The principal
balance of the loan actually increases over the life of
a negative amortization loan. Negative
amortization loans are used when a real estate market is
appreciating and a commercial investor would like to
obtain as much cash flow from a property as
possible--while stabilizing rents, rehabilitating, and
selling the property at a substantial profit.
Anticipation/Principle of
Anticipation
The
capitalization approach is based on the appraisal
principal of anticipation. An investor would be
willing to pay $1,000,000 cash in anticipation of an
income of $80,000 per year over the holding period.
Appraisal Reports
Most
single-family residential appraisers utilize the Uniform
Residential Appraisal Report (URAR) to provide appraisal
reports to lenders and buyers. In commercial
transactions, an appraiser may use a narrative type
report which is the most complete report and may
comprise several pages of pertinent information related
to the subject property's value.
An appraiser measures the outside of a house and garage
when making an appraisal. The appraiser generally uses a
long tape measure and obtains exact measurements of the
outside of the house and garage. He then uses
these actual measurements to determine the square
footage of useable area (house itself) and the garage
area.
An appraisal is good on the date of the property
inspection report. After this date, there may be
changes in the surrounding area (economic obsolescence)
or to the structures on the property (fire, earthquake,
or vandalism) that will cause a different value estimate
than on the date of the property inspection report.
For these reasons, an appraisal report is required to be
dated, must describe the subject property, and can be
oral or written.
Assemblage/Plottage Increment
The act of placing two or more properties under one
ownership with the resulting value of the parcel being
greater than the total purchase price of the parcels is
called assemblage. The primary purpose of
combining lots is to create assemblage in anticipation
of plottage increment.
Plottage increment is the actual increase in value that
occurs when properties are assembled together.
When two properties are combined to make one property
that is more valuable than the sum of the two properties
separately, this is called plottage.
Assignment
An assignment is the transfer of rights, interests,
or title of a person's real property (assignor) to
another person (assignee). Typical assignments
occur with mortgages and leases.
However,
a personal service contract cannot be assigned. In an
assignment the assignee (person receiving the rights,
interest or title) becomes primarily liable for
obligations occurring from the assignment.
If
Able holds a two year written lease with an option to
purchase at a stated price and Able assigns the lease to
Baker, Baker would now hold the option. Options
can be assigned.
Backfill
Backfill
refers to the soil placed next to the foundation as a
replacement for the soil removed during construction.
It is soil used to fill in trenches and around
excavations.
Bearing Wall
A bearing wall is considered real property because it is
part of a house. The walls that hold the house up
are called bearing walls. Bearing walls usually remain
intact during remodeling, can be at any angle to a door
(archway), and usually are made of stronger structural
members (2x6 boards instead of 2x4's).
Broker Delegates Document Review
To Salesperson
It is quite common for large real estate brokerage
operations to delegate to a salesperson (sales manager
within an office) the review of documents completed by
other salespersons in the office. The broker can
delegate these reviews to a salesperson who has at least
two years full-time experience as a real estate
salesperson within the past five years.
Who
can sign for a broker? A licensed salesperson with
at least two years full-time experience who has a
written agreement delegating responsibility.
Broker Dies
When a real estate broker dies, a daughter (who has a
broker’s license) must re-list all of her father’s
listings in her own name.
Broker Relies on
Information Furnished by the Seller
If a broker relies on information furnished by the
seller, and makes a misrepresentation while relying on
this information, the broker is entitled to a full
commission. A broker may include a "hold
harmless" clause in the listing agreement to
protect the agent from liability resulting from
misinformation given by the seller concerning the
property.
If a broker makes a misrepresentation while relying
on information furnished by the seller, the broker is
entitled to a full commission.
For
example, the broker made a material misrepresentation
about the seller's property to a prospective buyer. He
was acting in good faith from representations made by
the seller, therefore, he is entitled to a full
commission and indemnification by the seller.
Broker/Salesperson Agreement
A written broker-salesperson agreement is required
between all real estate brokers and salespersons in
California. The broker must keep a copy of
these agreements for three years after termination.
California brokers must have an employment contract
with each of the licensed employees in their office.
This contract must be in writing.
After termination of employment, a real estate
broker must retain the written agreement he has with
each salesperson in his office for three years.
A written agreement between the broker and
salesperson is required by the Real Estate
Commissioner's Regulations.
A salesperson is regarded as an employee of the broker.
A
salesperson is legally an employee of the broker,
however, he is an independent contractor for tax
purposes.
Broker Retains Records
A broker must retain copies of all of his records for
three years.
Building Permit
A building permit allows a developer to construct a
building or improvement on the property. If a
developer would like to construct a residence, he would
secure a building permit from the local building
department. The local building department is where
an application for a building permit is made by the
developer.
Business Opportunity
A
business opportunity is defined as the sale or lease of
a business, the sale of a business and its goodwill, and
the lease of a business and its goodwill.
Cal-Vet Loan
In
recognition of veterans’ sacrifice and service, the
California legislature enacted the Veterans Farm and
Home Purchase Program (Cal-Vet) in 1921. This act
provided low-cost, low-interest financing for eligible
veterans who purchase a home, farm, or mobilehome as a
primary residence.
Cal-Vet
utilizes general obligation bonds to finance home
purchases made by qualified veterans. Cal-Vet purchases
a designated home for a veteran and then sets up a real
property sales contract (land contract) for repayment of
the loan. Cal-Vet is the vendor and the veteran is
the vendee. Cal-Vet loans have the lowest closing
costs.
Cal-Vet always has an adjustable interest rate and may
use a variable amortization period. Therefore,
Cal-Vet loans may experience interest rates that
increase or decrease during the term of the loan.
Cal-Vet purchases the home that is designated by the
veteran and then uses a real property sales contract as
a security device. The seller of the home executes
a grant deed in favor of the California Department of
Veteran's Affairs (Cal-Vet). Cal-Vet uses funds
collected through issuing bonds to purchase these homes.
A real
property sales contract is a purchase contract and
security device between Cal-Vet and the veteran.
Therefore, title to a Cal-Vet home is in the name of the
Department of Veteran's Affairs (Cal-Vet) until it is
paid off in full, then it will be transferred into the
name of the veteran.
Capital Gains
When
an investor purchases a real estate investment property
and then resells it sometime in the future, he may have
capital gains or capital losses.
A
capital gain occurs when the property increases in price
and the investor makes a profit on the sale of the
property. A capital loss occurs when the investor
loses money on the sale.
For
federal income tax purposes the change in market value
identified in the sale of the property could be
identified as a capital loss or gain in disposing of a
capital asset.
Capital
Gains Example
Investor
Sharp purchased an apartment building in 1990 for
$1,000,000. He held the property until 1999 and
then sold it for $1,500,000. His profit on the
sale is $500,000. Therefore, $500,000 is his
capital gain on the property. (This does not take into
account permanent improvements and/or accrued
depreciation that will be discussed later in the
chapter.)
Capital
Loss Example
Investor
Able purchased an apartment building in 1990 for
$2,000,000 and sold it in 1999 for $1,500,000. His
loss on the sale would be $500,000. Therefore,
$500,000 is his capital loss on the property.
The
Formula
Unadjusted
Cost Basis (what the investor paid for the property) +
permanent improvements (pool, etc) – accrued
depreciation (27.5 years straight line method for all
residential properties accrued over the number of years
the property is held by the owner; 39 years straight
line depreciation for all other commercial properties
such as office buildings, shopping centers, etc.) =
Adjusted Cost Basis (used to calculate capital gains and
losses.
Unadjusted Cost
Basis
For federal income tax
purposes, the unadjusted cost basis of a property would
include the original sale price or original cost.
PLUS (+) Permanent
Improvements
For
federal income tax purposes, capital expenditures for
improvements of an income property are added to the cost
basis of the property. Capital expenditures may
include a new roof, concrete patio, or swimming pool.
When
an owner adds a swimming pool to an apartment property,
it will increase his basis in the property.
Permanent improvements are added to the unadjusted costs
basis and then depreciated.
Acquisition
costs, brokers commissions, and an addition of a
concrete patio would be added to the basis of a property
for income tax purposes. However, mortgage
principal payments may NOT be added to the basis of an
income property for income tax purposes.
Minus
(-) Accrued Depreciation
Depreciation
for income tax purposes is very different than
depreciation for appraisal purposes. Depreciation
for income tax purposes is a paperwork loss allowed by
the Internal Revenue Service.
To
calculate the depreciation on an income property, the
building portion only (land is NOT depreciated) is
divided into a predetermined number of useful years on a
straight-line basis.
For
example: the property value is $200,000. The land
value is $100,000, therefore the building value is
$100,000. The building portion ($100,000) is
divided into 27.5 years to obtain the amount the
property depreciates each year. Therefore,
$100,000
27.5 years
= $3,636.36
The
property depreciates $3,636.36 each year. When the
investor sells the property and capital gains are
calculated, the accrued depreciation is the total amount
of depreciation taken over the holding period (between
purchase and sale). For example:
Unadjusted
cost basis
$250,000
+
improvements
$50,000(swimming pool)
-
accrued depreciation $25,454.55
(7
years x $3,636.36)
=
Adjusted cost basis
$274,545.45
Only
the improved portion of the property can be depreciated.
This is usually the building. Land cannot be
depreciated, only the building portion.
For federal income tax purposes, an estimated life of
27.5 years is used for the capital improvements made to
residential income property after 1986. All
residential properties (single family, duplexes, and up
to huge apartment buildings use a 27.5 year straight
line depreciation schedule. All other commercial
properties use a 39 year straight line depreciation
schedule.
Equals (=) Adjusted
Cost Basis
The
adjusted cost basis is the cost used in calculating
capital gains and losses for a property.
Therefore,
Sale
Price (today)
–
adjusted cost basis (purchase price + permanent
improvements – accrued depreciation)
=
Capital gain/loss
Basis For Depreciation
Basis
for depreciation is defined as the property value minus
land value equals the improved portion of the property
(property value - land value = improved portion).
The improved portion is the only part that can be
depreciated for federal income tax purposes.
For example, if Able purchased an
income property for $200,000, obtained a loan for
$190,000, the land was valued at $40,000, and the
salvage value of the building was $10,000, Able could
use $160,000 as his basis for depreciation.
Answer: Purchase price of income property - land
value = improved portion (can be depreciated).
Therefore, Able's basis for depreciation will be
$200,000 - $40,000 = $160,000. The loan amount and
salvage value are useless information and are not
relevant to the question.
Another example, Mr. Smith paid $100,000 cash for the
purchase of vacant land. Later he paid $500,000 to
construct an income property building on the property.
He secured a $400,000 loan on the property and paid the
rest in cash. The basis upon which he can take an
income tax deduction for depreciation will be $500,000.
Answer: $500,000 is the improved portion of the
property and can be depreciated. Land cannot be
depreciated. Loan and salvage value are not
pertinent to the question.
Capital Gains Calculated
When a capital
asset (such as real estate) increases in value, upon
sale the owner must pay a capital gains tax when the
property is sold.
For example, a developer purchased four lots in 1981.
In 1991 he sold them for $10,000 each. His tax
basis for each lot was $2,000. For federal income
tax purposes, the capital gain recognized in this sale
would be $32,000. Answer: $10,000 x 4
parcels = $40,000 sales price for all four lots. $2,000
(basis for each lot) x 4 lots = $8,000 basis at the time
of sale. $40,000 (sales price) - $8,000 (basis) =
$32,000 capital gain recognized in the sale.
Capital Losses
Under the provisions of the federal income tax rules and
regulations, a taxpayer may deduct a loss on the sale of
residential real property when the property was acquired
as an investment which was rented or leased to others.
The owner of an unimproved parcel of real estate which
is held by the taxpayer for investment purposes, would
be permitted to deduct a loss suffered in the sale of
the property. It should be noted that a person
cannot take a capital loss on the sale of a home that
was used as his personal residence.
Operational Loss
An investor may take an annual loss if her income
property loses money during the year.
For
example, if an apartment building receives $100,000 in
revenue during the year and incurs operational costs of
$120,000, it would show an operational loss of $20,000.
This passive loss is deductible against other passive
income the investor may receive from other sources and a
limited amount of active income derived elsewhere.
If Able owns an apartment building and sustained a
$3,000 operational loss for the tax year, for income tax
purposes he may deduct the full amount from his ordinary
income. Prepayment penalties, mortgage interest,
and property taxes are all deductible for income tax
purposes.
Community Property
Community property is property
held by husband and wife. Property acquired by a
husband or wife during marriage is considered community
property, and is therefore owned by both parties.
A husband's salary is considered community property.
Exceptions to community property include property that
is willed to one spouse or property taken in severalty
by one of the spouses is not considered community
property.
Equal
Interest
The husband and wife must have equal interests if real
property is held as community property. Vesting
will be: Husband and Wife, as Community Property.
Unenforceable
Both husband and wife need to sign for a contract to be
enforceable. An agreement to sell property held as
community property that is signed by only one spouse is
unenforceable until the other spouse takes action (up to
one year) to set aside the sale and rescind the
contract.
To transfer property deeded to Anna Able, a married
woman would require husband and wife's signatures.
If a married couple acquired a deed in only one spouses
name, this would be considered community property.
Property acquired during marriage is considered
community property and owned by both spouses.
Cloud On The Title
How a spouse takes title to real property can create a
cloud on the title. For example, Mrs. Smith
locates a property while her husband Mr. Smith is out of
town. So she doesn't lose the property, she places
an offer on it in Mrs. Smith's name only. She
cannot sign for Mr. Smith.
Another example, Anna Able recorded title to her
existing property as "a single woman."
Later, she married Bob Baker and changed the name on the
deed to read, "Anna Baker, a married woman."
This would create a cloud on the title. When
conveying the property in the future there will be a
question as to who really owns the property--Anna Able
or Anna Baker? Clouds on title are usually cleared
up with a quiet title action.
No
Right of Survivorship/Can Will Property
Real property held in community property does NOT have a
right of survivorship. The husband can will his 1/2 of
the property and the wife can will her 1/2 of the
property to each of their designated heirs (devisees).
For this reason, holding title in community property is
a common way for a husband and wife to provide for
children from a previous marriage. They are able
to will portions of their 1/2 of the property to these
children without being concerned with right of
survivorship issued inherent with joint tenancy.
For example, a husband dies and in his will specifies
that his wife shall receive his half of the community
property. His wife can sell all of the property.
She would hold the property in severalty and would own
all of the property.
Commission
Earned
In community property, either husband or wife can employ
a broker and either party can change their minds;
however, if an offer was produced (by the broker)
meeting the terms of the listing agreement, the broker
has a valid contract and a commission is owed.
Comparison/Market
Data Approach
The sales comparison approach or market data
approach/method of appraising real properties in
California utilizes the principle of substitution to
appraise real property. An appraiser uses sales
comparables to value a subject property. Sales
comparables are similar properties that have recently
sold near the subject property.
The closer the sales comparables are to the subject
property in relation to size, amenities, and other
characteristics, the more suited they are to be used to
value the subject property.
The sales comparison/market data approach is most often
used with single-family homes and unimproved
land.
The market data approach or method of real property
appraisal is most often used to determine office
building rents and apartment rents.
Principle of
Substitution
The comparison or market data approach is based upon the
principle of substitution. An appraiser
substitutes the entire subject property for similar
properties that have sold in the area. An
appraiser looks for sales comparables that are close
geographically to the subject property and as recent as
possible.
Since an appraiser uses the entire property when
utilizing the market data approach, it is most readily
adaptable for use by real estate licensees.
An appraiser uses the market data approach when he
concentrates only upon the cost to the buyer of
acquiring a comparable substitute parcel.
When
The Sales Comparison/Market Data Approach is Used
The sales comparison/market data approach is used for
the sale of single-family homes and
vacant/unimproved land. It is also used to determine
office and apartment building rents.
Sale of Single-Family
Homes
To determine the value of a single-family residence, an
appraiser would primarily use the comparison approach.
Therefore, appraisals of single-family dwellings are
usually based upon the sale prices of comparable
properties.
For example, when an appraiser is appraising a twelve
year old home, the greatest consideration should be
given to the current prices for other homes in the same
neighborhood (sales comparables).
Sale of
Vacant/Unimproved Land
The comparison approach is the most common for valuing
vacant land.
Since the land does not produce income, the
income/capitalization approach cannot be used.
Since it did not cost anything to build the land, the
cost approach cannot be used. For these reasons,
the comparison approach is used to compare other parcels
of vacant property that have sold recently and within
close geographical proximity to the subject property.
Office Rents
Realistic rents for an office space can be determined
through the comparison approach.
An analysis of the rents being obtained by surrounding
properties is a good way to compare rents and determine
market rents for the subject property. In this
manner, a prospective purchaser can determine if there
is any upside to the rents (if can raise the rents).
Apartment Rents
An owner of an apartment building can rely upon the
comparison approach to help determine what rents to
charge for the units in his complex.
An analysis of the rents being charged by surrounding
apartment properties is a good indication of the rental
amount that can be charged for the subject property.
Market Data Approach
Limited By
Effectiveness of the market data approach is limited by
rapidly changing economics. If there is a large
and rapid increase in population that increases demand
for homes, then fairly recent sales comparables, that
sold only a short time ago, will be useless.
Conversely, if a major employer moves out of the area,
resulting in a loss of jobs; demand for homes may
decrease and recent sales comparables could be equally
useless.
Adjustments
An appraiser must make adjustments between the subject
property and the properties used as sales comparables.
For example, a sales comparable has a swimming pool and
the subject property does not have one. The
appraiser must reduce the sales comparable by the amount
of the swimming pool in order to compare it (principle
of substitution) to the subject property.
In using the market data approach to value a property,
an appraiser increases or decreases the sales prices of
comparable properties because any two properties are
rarely similar or alike.
The most important and difficult step is the adjustment
of data to reflect differences between the subject
property and comparable properties.
An appraiser adjusts for features making a comparable
property better than the subject property by subtracting
the value of the better feature or amenity from the sale
price of the comparable property.
Swimming Pool
Adjustment
In using the market data/comparison approach to value a
single-family residence, a sales comparable has a
swimming pool and the property being valued does not
have one. Under these circumstances, an appraiser
would subtract the value of the swimming pool from the
sales price of the comparable property.
Least Reliable
The original cost or original sale price of a property
would be the least useful in establishing the value of a
property using the market data approach. In other
words, what the property sold for when purchased has no
bearing on what the property is worth in today's market.
For example, the seller purchased the property in 1991
for $140,000. Based on sales comparables the
property is valued at only $120,000 in today's market.
Does the original $140,000 sale price have any bearing?
The answer is no.
The sales comparison or market data approach would also
be least reliable in an inactive market. This is
because there would not be enough recent sales
comparables to adequately determine the value of a
subject property.
Commission
After Term of the Listing/Broker Protection
Clause/Safety Clause/Protection Period Clause
To protect a real estate broker from one of his buyers
(who he showed the property to during the listing
period) coming in after the expiration of the listing
agreement and purchasing the property without paying him
a commission, real estate brokers routinely place broker
protection clauses (also called safety clauses and
protection period clauses) in listing agreements.
A broker protection clause states that if a buyer, who
was shown the property by the real estate broker,
purchases the property within (for example) 180 days
after the expiration of the listing agreement, then the
broker will be paid a commission on the sale of the
property.
Therefore, a real estate broker only has a right to earn
a commission when the property sells during the listing
period except when a broker's protection clause is
included in the listing agreement.
Commissions
in Probate
Commissions in probate are set by the courts. The real
estate commission for a property that is in probate is
set by court order.
Company
Dollar/Office Operating Cash
A broker’s company dollar is the amount of money he
has after paying commissions to other brokers
(cooperative arrangements through the MLS) and agents in
his office (agent commission split).
Condominium
A condominium is a form of ownership where the
condominium owner owns the airspace of her unit
separately and the common areas in common with all the
other condominium owners. A condominium has fee
title to airspace. Common areas include
clubhouses, pools, and sidewalks.
For example, an undivided interest in common areas and a
separate interest in a living area or a working area in
an industrial, residential, or commercial building or
office building is best known as a condominium.
The type of common ownership subdivision in which a
person has a deed to his own unit and an undivided
interest in the land and common areas is known as a
condominium.
Disclosures
Required Upon Sale (Resale)
A buyer of a condominium, other than the original
buyer from the subdivider, must be given a copy of the
articles and bylaws of the association, deed
restrictions (CC&R's), and a copy of the most
current financial statement. A condominium’s
CC&R’s are physically located at the county
recorder's office in the declaration of restrictions.
Condo
Conversion is Subdivision
When a developer converts five apartments to a form of
common ownership, this results in the separate ownership
of the individual units and shared ownership of the
common areas. This is a subdivision.
Condo
Conversion--Notice To Tenants
The minimum time required for an owner to give notice to
the tenants in an apartment building (when that building
is being converted by the owner to a condominium form of
ownership) is 180 days.
Construction
Loan/Interim Loan/Obligatory Advances
Construction loan and interim loan are synonymous.
They have the same meaning. An interim loan is an
agreement between a lender and builder where the lender
agrees to advance certain sums to the builder during
construction.
When a lender advances part of the construction funds
immediately and will release more as each home is
completed, this is called a loan for obligatory
advances. The lender is not comfortable giving the
builder all the construction funds ahead of time because
too many things could happen to the money before it is
spent on construction (i.e. a wild weekend in Tahoe).
Period
To File A Lien
If a contractor obtained a construction loan and the
loan funds were to be released in a series of progress
payments, most lenders disburse the last payment when
the period to file a lien has expired.
A sub contractor has 30 days to file a lien; a
general contractor has 60 days to file.
Contracts
A
contract is an agreement to do or not to do something.
It is a legally enforceable agreement between competent
parties who have agreed to perform certain acts for
consideration or refrain from performing certain acts.
Express Contract
An express contract is a contract where the parties put
their intentions and the terms of the agreement in
words.
Implied Contract
An implied contract is a contract where the agreement
between the parties is shown by acts or conduct, rather
than words.
Enforceable Contract
A purchaser may make a contract contingent upon
obtaining satisfactory leases (inspection of an existing
lease and approving it). This would be considered an
enforceable contract. However, if a purchaser attempts
to make an offer subject to obtaining a
satisfactory lease, this is called an illusory contract
and is not a contract.
Bilateral Contract
A bilateral contract is a promise for a promise. The
promise of one party is given in exchange for the
promise of the other party. For example, when a
seller promises to pay the agent a commission when the
home is sold and the agent promises to use diligence in
marketing the property, this is called a bilateral
contract. A listing agreement is usually
considered a bilateral contract.
A bilateral executory contract is one where the seller
agrees to pay the licensee a commission if the licensee
agrees to use diligence in finding a buyer.
Executory is present tense and denotes a contract in the
process of being completed.
Unilateral Contract
A unilateral contract is a promise for an act. A
promise is given by one party to induce an act by the
other party. For example, A promises to pay B $10
if she will walk across Brooklyn Bridge. B walks
across Brooklyn Bridge, therefore, A owes B $10. B
performs her requirements under the contract with an act
rather than a promise. An example of a unilateral
contract is an open listing.
Executory
Contract
An executory contract is a contract that is in the
process of being performed and has not yet been
completed.
Executed
Contract
An executed contract is a contact that has already been
completed. If a contract has been executed, both
parties have performed completely their obligations as
provided by the contract.
Elements
Of A Valid Contract
There are four essential elements of any valid
contract (all contracts):
·
Competent Parties/Capacity To Contract
·
Mutual Consent
·
Lawful Objective
·
Sufficient Consideration
Real
estate contracts have a fifth element:
·
in writing.
Not
all contracts are required to be in writing, however,
real estate contracts are require to be in writing
(except leases of one year or less are not required to
be in writing).
It
should also be noted that all contracts (real estate or
not) that are not to be performed within one year must
also be in writing.
Competent
Parties/Capacity To Contract
If a person is declared mentally incompetent, a contract
between buyer and seller is void (has no effect and
never was a contract). If this occurs, a
conservator is appointed for the person by the court.
If a person is formally committed to a metal
institution, all of their subsequent contracts (entered
into after being committed) will be void by statute.
Minors
A minor can receive title to real property by gift or
inheritance without court approval. However, a minor
cannot convey real property without court approval.
For example, a single young man enters into a contract
to sell real property he owns. After escrow had
closed and the deed was recorded, the title company
determines that the young man was under 18 years of age.
In this circumstance, the transaction was void.
However, a divorced person under 18 years of age has the
capacity to contract and is not considered a minor.
Aliens
Non-resident aliens who are not citizens of the United
States of America have the capacity to contract.
Minors, convicts, children, and incompetents are all
restricted from contracting.
Mutual
Consent
If the buyer and seller agree to the same thing, then
there is mutual consent. A real estate licensee
uses a purchase agreement, which is an offer to purchase
real estate, to start the process of offer and
acceptance.
For example, the buyer (offeror) makes an offer to the
seller (offeree). The buyer/offeror may revoke the
offer anytime up until the seller's acceptance of the
offer has been communicated back to the buyer. The
seller/offer may do one of three things: accept
the offer, reject the offer, or make a counter offer.
If a counter offer is made, then the seller now becomes
the offeror and the buyer becomes the offeree (they
switch positions). When the counter offer is
communicated to the buyer/offeree then it terminates the
original offer and the seller may not go back and accept
the original offer made by the buyer.
A deposit receipt and offer to purchase a property
becomes enforceable when the buyer is notified of the
seller accepting the offer.
Offer
Without Deposit
If an offer comes in without a deposit, the agent can
accept it but must advise the seller that there is no
deposit.
Seller
Changes Terms of Offer
If a
buyer makes an offer to a seller and the seller changes
the terms of the offer, this is a rejection of the
offer.
Offeror
Dies
If an offer is made, acceptance is NOT communicated back
to the offeror, and then the offer dies, a contract is
NOT formed.
If Able sells property to Baker and each party performed
fully, and then Able dies. There is a valid
contract. Since each party had performed their
portions of the contract, a contract was formed and was
valid.
Spouse
Sells Separate Property
When a spouse sells separate property on his own, the
contract is valid. Separate property may be
property he owned before marriage or acquired through
inheritance.
Offer
Terminated
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