Financing Strategies-Private Lenders-Glossary

 

How to Finance Any Real Estate, Any Place, Any Time

by James A Misko

 

A

asking price. The list price that the seller would like to receive for a property.

assessed value. The value established for a property by the county assessor for property tax purposes. This may be higher or lower than market value.

asset-based mortgage. See chattel mortgage.

attach. To take a person's property into legal custody in order to force payment of a debt.

 

B

balloon payment. A loan payment that is greater than the install­ment payments that preceded it and that reduces the loan, some­times paying the loan in full.

binder. A preliminary agreement, accompanied by a deposit, for the purchase of real estate as evidence of the buyer's intention to com­plete the transaction.

blanket mortgage. A single mortgage that covers more than one piece of property.

BOV. See broker's opinion of value.

bridge loan. A short-term loan for borrowers who need time to secure permanent financing. The bridge loan therefore "bridges" the gap between the end of one loan and the beginning of another loan, or between the purchase of a piece of property and the acqui­sition of a conventional mortgage. This is also called a swing loan.

broker's opinion of value (BOV). A real estate broker's determi­nation of the market value of a property. Note that this is not an offi­cial appraisal, but only an opinion.

 

C

corporation. A corporation that is a separate taxable entity, mean­ing that the profits and losses are taxed directly to the corporation at a corporate income tax rate. Distributions made to shareholders are then taxed at the rate of the individual shareholders. See also S corporation.

capital asset. A long-term asset, such as raw or improved property, that is not bought or sold in the normal course of business.

capital gain. The amount by which the sale price of a capital asset exceeds its adjusted basis.

capital improvement. An improvement to a property that will have a life of more than one year, and will generally be depreciated over its useful life.

cash flow. The periodic income available to an investor after all periodic expenses, including the mortgage debt, have been paid. For instance, the cash flow of a rental apartment would be computed by subtracting expenditures such as taxes, utilities, and mortgage pay­ments (the money going out) from the rent (the money coming in).

cash-on-cash return. A measure of the profitability of an income­producing property, expressed as a percentage. To calculate the cash-an-cash return of an investment, divide the amount of cash received from the property in a given year by the amount original­ly invested.

certificate of deposit (CD). A type of savings account in which a specified sum of money is deposited for a set period of time, yield­ing a return that is generally higher than that of a passbook-type savings account.

chattel mortgage. A pledge of personal property-a car, boat, or livestock, for instance-as security for a debt. This is sometimes referred to as an asset-based mortgage.

closing. The event that transfers ownership of a property from the seller to the buyer in accordance with the contract of sale. Generally, the buyer, seller, lender (if any), and their agents are present at the closing.

collateral. Property pledged as security for a debt. If the debt is not repaid in accordance with the terms of the security instrument-the mortgage or deed of trust-the borrower risks losing the property.

collateral security. Additional security supplied by a borrower to obtain a loan. This security may be in the form of personal proper­ty such as a car or boat, or may be paper, such as promissory notes, stocks, or bonds. The property is not given to the seller but, instead, is pledged to the seller so that if the buyer defaults on his payments, the seller can take possession of the property and either keep it or sell it to cover damages.

commercial property. Real estate intended for use by a retail, wholesale, office, hotel, or service business. Properties deemed commercial include hotels and motels, apartment houses, resorts, restaurants, service stations, convenience stores, shopping centers, and office buildings.

compound interest. Interest paid on both the principal and any unpaid accumulated interest of previous periods. See also simple interest.

condominium. An individual unit in a multi-unit attached residen­tial or commercial structure, in which the individual units are owned privately, and any commonly used areas such as sidewalks are owned jointly.

consideration. Anything of value given to induce someone to enter into a contract, such as an option or a land lease. The consideration can be cash or other personal property, or can be personal services.

contract of sale. A written agreement between the buyer and the owner of a piece of property, in which the buyer agrees to buy the property and the owner agrees to sell as long as certain conditions are satisfied. This is also called an agreement of sale and a purchase agreement.

contract rent. The rent of a unit such as an apartment as stated in the contract. See also market rent.

corporation. A state-chartered business or organization formed by a group of people, and having rights and liabilities separate from those of the individuals involved. The corporation is characterized by the limited liability of its owners; the issuance of freely transfer­able shares; centralized management; and the fact that it can exist indefinitely, beyond the lifetimes of any members or founders. See also C corporation; S corporation.

cost basis. The original cost of any property, whether raw or improved. See also adjusted basis.

 

D

decreasing term life insurance. A life insurance policy that reduces the lump sum paid at death over the term of the plan. This policy is often used when the financial needs of the policyholder are expected to decrease over time.

deed of trust. A legal document, used in states west of the Missis­sippi instead of a mortgage, that pledges property to secure the repayment of a loan. A deed of trust vests the title of the property in one or several trustees to secure the loan's payment. This is also called a trust deed.

defect in title. Any recorded legal document, such as a lien, that makes the ownership of a property subject to a competing claim.

delayed exchange. See Starker exchange.

depreciation. The lessening of a property's value over time due to wear or obsolescence.

depreciation allowance. The amount that an owner of improved land can deduct from his taxable income each year based on the struc­ture's perceived loss of value due to age and wear and tear. This allowance partly depends on whether the property is residential or commercial.

developed land. See improved land.

developer. An individual or company that makes a business of transforming raw land into improved land through the use of capital and labor.

discount. The difference between the current balance of a promis­sory note or other obligation and the amount actually paid for the note.

discount points. See points.

discounted note. A promissory note sold for less than its current balance.

discretionary funds. Any money that remains from net income after essential living expenses have been paid.

down payment. The portion of the purchase price of a property that the buyer pays in cash or exchange equity rather than financing with a mortgage.

due diligence. A careful study performed of the physical, financial, legal, and social characteristics of a specific piece of property, and of its projected investment performance.

duplex. 1. A building that contains two living units. 2. An apart­ment that has rooms on two floors.

 

E

earnest money deposit. A deposit made by a buyer of real estate, generally at the signing of the contract, to show serious intent to purchase the property and to make the contract legally binding.

encumbrance. Anything, such as a mortgage or tax, that complicates the title process and affects the value or use of a property.

equity. The interest or value that an owner has in property over and above any existing debt.

equity investor. An individual who has purchased partial owner­ship of a property by supplying cash rather than expertise.

escrow. Money deposited with a third party, called an escrow agent, to be delivered upon the fulfillment of conditions stipulated in a contract of sale.

escrow agent. An individual or company that receives escrow for deposit or delivery. In some states, the title insurance company most often serves as the escrow agent. In other states, an attorney typi­cally holds the escrow.

 

F

face value. 1. The value of a promissory note at its creation. See also note balance. 2. The amount that the issuer of a zero coupon bond agrees to pay when the bond reaches maturity.

fair market value. See market value.

foreclosure. The legal process whereby a borrower who has failed to make mortgage payments is deprived of his ownership interest in the mortgaged property. This usually involves a forced sale of the property, the proceeds of which are used to pay the mortgage debt.

foreclosure sale. The public sale of a mortgaged property following foreclosure. The proceeds of the sale are used to pay the mortgage debt, vvith any excess going to the mortgagor (the property owner).

four-plex. A building that contains four living units.

 

G

 

H

handyman's special. A house that requires extensive remodeling and repairs, and, as a result, sells for a relatively low price.

hard equity. A contribution to the construction of property in the form of cash rather than labor or services. See also soft equity.

 

I

improved land. Land that has been partly or fully developed for use through the addition of utilities, landscaping, roads, or build­ings. This is also known as developed land.

Individual Retirement Account (IRA). A personal retirement account that an individual can establish by making yearly contri­butions which are limited in amount. Various types of IRAs are available, each with its own rules. See also Roth IRA; traditional IRA.

inflation. 1. An increase in price levels. 2. A loss in the purchasing power of money.

infrastructure. Basic public works such as roads, sewers, water sys­tems, drainage systems, and utilities.

interest. The cost of borrowing or otherwise using money, expressed as a rate, such as 6 percent. Depending on the way it is calculated, interest can be either simple or compound. See compound interest; simple interest.

IRA. See Individual Retirement Account.

IRA administrator. In this book, a company that has full responsi­bility for the operation of a self-directed IRA. The administrator reviews the documentation of each investment vehicle; compiles the paperwork necessary for each transaction; files the paperwork with the IRS; and holds cash, title to properties, and all other assets of the account.

 

J

judgment. The verdict of a court in a civil action, stating that one individual is indebted to another, and fixing the amount of the debt. For instance, if a renter fails to pay rent, the landlord can obtain a judgment from the court against the renter.

judgment creditor. The legal entity-an individual or a company­that has received a judgment for money due from a judgment debtor.

judgment debtor. The legal entity-an individual or a company­against which a judgment has been issued.

 

K

 

L

land lease. A rental agreement that allows a nonowner to use land in a manner acceptable to both parties.

land sale contract. A legal document, used in some areas of the Midwest and West instead of a mortgage, which passes the owner­ship (title) of a property to the buyer only after the contract has been paid in full. This is also called a real estate contract.

lease. A contract by which a property owner (a lessor or landlord) permits another party (a lessee or tenant) to occupy part or all of the property in exchange for rent payments. The lease contract specifies the premises to be rented, the amount to be paid, the payment peri­od, and other rights and obligations of the lessor and lessee.

lease with option to purchase. A lease that gives the tenant the right to purchase the rented property at an agreed-upon price after hav­ing paid rent for a specified period of time.

leaseback. An arrangement whereby a piece of property is simulta­neously sold and leased back to the seller, usually for long-term use.

lender. A person, lending institution, or government agency that makes a real property loan, or any assignee or transferee, in whole or in part, of such a person or agency.

lessee. The person to whom property is rented under a lease. A tenant.

lessor. The person who rents property to another under a lease. A landlord.

leverage. The use of borrowed money to increase investment power.

lien. A legal claim that one person has on the property of another person as security for a debt. A mortgage, for example, is considered a lien.

life estate. An agreement whereby the owner of a piece of proper­ty transfers title to another individual or to an organization, while retaining the right to occupy and otherwise enjoy full use of the property for either a term of years or the lifetime of one or more individuals, such as the owner and his spouse.

limited liability company (LLC). A combination of a corporation and a partnership in which each party buys shares in a property according to the funds he has available. Like a corporation, the LLC offers personal liability to each of the parties involved so that mem­bers can't lose more money than they contributed. Like a partner­ship, earnings are taxed only once.

limited partnership. A form of ownership in which there are two types of partners: limited partners and general partners. Limited partners provide financial backing, but have no role in the man­agement of the property and no personal liability for its debts. Gen­eral partners are responsible for managing the property, and have unlimited personal liability. Like limited liability companies, limited partnerships allow each party to buy units in a property according to the funds he has available.

list price. See asking price.

LLC. See limited liability company. loan discounts. See points.

loan origination fees. See points.

loan-to-value ratio (LTV). The relationship between the amount of money borrowed on a property and the value of the property. A loan with a lower loan-to-value ratio-in other words, a loan in which the amount borrowed is smaller relative to the property's value-has more value than a loan with a higher ratio, because the borrower has more equity in the property, and therefore more rea­son to repay the loan.

 

M

manufactured home. See mobile home.

market price. The actual price paid for a piece of property. Note that this is different from market value.

market rent. The rent that a comparable rental unit-a similar house, for instance-would command if offered on the market. See also contract rent.

market value. An estimation of the price that could be obtained for a piece of property on the current market. This is sometimes referred to as fair market value.

maximum loan charges. See points.

mobile home. A residential unit manufactured in a factory and designed for transport to a permanent site, such as a mobile home park or a mobile home subdivision. This is also known as a manu­factured home.

money market account. A type of savings account that invests funds in money market instruments, such as United States Treasury bills, certificates of deposit, and commercial paper.

mortgage. A legal document that pledges property to a lender as security for payment of a debt. For the most part, the mortgage is used only in states east of the Mississippi. In other states, a deed of trust or land sale contract is more prevalent.

mortgage back. See owner financing.

mortgage cancellation insurance. A form of insurance that pays off a mortgage holder in the event of the homeowner's death. This is also known as personal mortgage insurance (PMD.

 

N

net lease. A lease in which the tenants pay such expenses as taxes, insurance, and maintenance. See also triple-net lease.

non-recourse loan. A type of loan structured so that if the loan isn't paid back as promised, the lender may take only the property to satisfy the debt, and may not take any of the borrower's other assets, such as his car.

note. A legal document that obligates the borrower to repay a debt, such as a mortgage loan, at a stated interest rate during a specified period of time. This is also called a promissory note.

note balance. The amount remaining to be paid on a promissory note. See also face value.

obsolescence. Loss of a property's value due to the structure's becoming outmoded in design, style, or construction.

 

O

offer. A verbal or written statement of the buyer's interest in pur­chasing a property at a specified price and terms. A verbal offer is never legally binding. In most states, however, a written offer accompanied by consideration is binding.

one-hundred-percent location. A site that is far superior to other sites in the area due to a commanding view, unusually good access, or other factors. Because it's the "best" site, land values and rents are normally highest in that area.

option. A written, recordable right to purchase a property under specified conditions, within a specified period of time.

option consideration. Cash or other property given to an owner to secure an option to purchase his property.

ordinary income. Income other than capital gains. Examples of ordinary income include '\",'ages, interest, dividends, and net income from a business.

owner financing. Financing provided by the owner (seller) of a property, rather than by a conventional lender such as a bank. The owner, in essence, assumes the role of the banker, and carries back the loan in the form of a note. The buyer then makes regular pay­ments to the seller, typically on a monthly basis, until the loan is paid off. This is also called seller financing, seller carry-back, ven­dor take-back mortgage, and mortgage back.

 

P

paper. A written obligation, such as a note, mortgage, contract of sale, or deed of trust, that is backed by property.

pass-through taxation. A form of taxation-characteristic of S cor­porations, limited partnerships, and limited liability companies-where­by the income or loss generated by the business passes through to the shareholders, partners, or members for use on their respective income tax returns.

path of progress. An area toward which development and industry are moving. For instance, a vacant lot that is said to be "in the path of progress" may be near the exit ramp of a soon-to-be-built high­way, or adjacent to the site of an upcoming shopping center. Prop­erty that's in the path of progress can usually be expected to increase in value.

personal mortgage insurance (PMn. See mortgage cancellation insur­ance.

points. Loan fees charged by mortgage lenders. Each point equals one percent of the loan principal. Points are also called discount points, loan discounts, loan origination fees, and maximum loan charges.

principal. 1. The amount of money to be paid back on a mortgage or other loan, as opposed to the interest paid on it. 2. The capital or main body of a financial holding. 3. The owner of a property or a legal entity.

promissory note. See note.

property tax. A government-imposed tax based on the assessed value of privately owned real estate. This is also called real estate tax.

purchase agreement. See contract of sale.

 

Q

 

R

raw land. Land that has no improvements such as utilities, land­scaping, roads, drainage, and buildings. See also improved land.

real estate contract. See land sale contract.

real estate tax. See property tax.

real property loan. A loan, mortgage, ad vance, or credit sale secured by a lien on real property.

refinance. To replace an old loan with a new loan.

replacement cost. The total cost of constructing a building that would replace or serve the function of the existing structure. The replacement cost is likely to be greater than the market value.

Roth IRA. A type of Individual Retirement Account in which money is taxed the year it is contributed. Any gain, however, is not subject to income tax the year it is withdrawn. See also traditional IRA.

 

S

S corporation. A corporation that has pass-through taxation, meaning that the income or loss generated by the corporation passes through to individual shareholders for use on their respective income tax returns.

secured loan. A loan that is backed by collateral, such as real estate. security instrument. An interest in real estate that allows the involved property to be sold in the event of failure to fulfill an obli­gation or promise. A security instrument is more specifically called a deed of trust or mortgage.

self-directed IRA. An Individual Retirement Account whose admin­istrator permits the account holder to choose the vehicles in which his funds are invested. These vehicles may include real estate, mutual funds, stocks and bonds, and other investments approved by the Internal Revenue Service. Any type of IRA-including tradi­tional IRAs and Roth IRAs-can be self-directed.

seller carry-back. See owner financing.

seller financing. See owner financing.

sickness and accident insurance. A type of insurance that guaran­tees a degree of replacement income in the event that sickness or accident makes the policyholder unable to work, and therefore' causes his regular income to cease.

simple interest. Interest paid only on the principal, and not on any accumulated interest. See also compound interest.

soft equity. A contribution to the construction of property in the form of labor or services rather than cash. This is also called sweat equity. See also hard equity.

soft market. A market in which demand has shrunk or supply has exceeded demand, causing prices to fall.

soft paper. Paper with lower-than-market interest rates and long­term payments.

spec house. A single-family house built in anticipation of finding a buyer. The builder "speculates" that a buyer will be found.

Starker exchange. A transaction in which a property is traded for the promise to provide a replacement property in the near future. Several strict requirements must be met. This is also referred to as a Starker transaction or a delayed exchange.

Starker transaction. See Starker exchange. stripped bond. See zero coupon bond.

subdivision. A large parcel of land that's divided into individual lots, each of which is suitable for the building of a house or com­mercial building.

sweat equity. See soft equity. swing loan. See bridge loan.

syndication. A method of buying property whereby a syndicator­a sponsor, in other words-sells interests to other investors. The syndication can take various forms, including that of a limited partnership, a limited liability company, or a corporation.

 

T

tax lien. A legal claim placed on a property due to failure to pay property taxes.

tax roll. A list of all properties subject to taxation in a county or other jurisdiction. Among other fads, the list includes the assessed value of each property and the name of the property's owner.

tax sale. The sale of a property due to nonpayment of taxes.

tax sale certificate. A certificate sold by a county or other taxing unit when the owner of real estate is delinquent in paying his prop­erty taxes to the point that foreclosure is imminent. A tax sale certificate gives the buyer the right to collect lawful interest; to give proper notices to foreclose; to obtain possession of the property by court eviction; and to reside in, lease, rent, or dispose of the prop­erty at will.

term. 1. The period of time during which something, such as a loan, is in effect.

          2. A condition specified in a legal agreement.

title. 1. The rights of ownership and possession of a particular property.

        2. The legal document that establishes the rights of ownership.

title insurance. A policy that protects the holder from any losses sustained by recorded defects in title-in other words, against com­peting claims to a property's ownership. Items that are unrecorded or the result of faulty surveys are covered only by an American Land Title Association (ALTA) policy.

title insurance company. A corporation that performs title searches and sells policies of insurance that guarantee the title to a property.

title report. A document that indicates the current status of a prop­erty's title, but offers no protection until the premium is paid and a certificate of insurance is issued. See also title search.

title search. The process of examining public records that relate to the ownership of a property to insure that the current owner has clear title, free of any liens or competing claims. The title search may be performed by an attorney, title insurance company, or other qual­ified title searcher, usually on behalf of the proposed purchaser of the property. In some states, found mostly on the East Coast and in the Midwest, the buyer's attorney prepares an abstract of title, which is a historical summary of the property's title that goes back to the first owner. In other states, typically found on the West Coast and in the Rocky Mountain