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.
Related posts:
- Some Definitions For Beginning (or not) Real Estate Investors
- More Definitions For Real Estate Investors Tax Deferred Exchanges
- Reviewing Some Basics — Some Real Estate Investment Terms — What’s He Mean, Gross?
- Some Definitions For Beginning Real Estate Investors
- Loan Terms — Appreciaton — Capital Growth Is What Matters Most
About BawldGuy
I’m off topic today but came a cross something to share. Yesterday, Morgan Brown on his blog Blown Mortgage, displayed an interesting chart from Credit Suisse which adds the Option Adjustable Rate resets to the sub-prime chart we’ve all seen. I was surprised by the percentage of these loans and also that the peak doesn’t occur until late 2011. The reset schedule reminded me of an interesting article which I thought was well done in attempting to answer how long downtrends in RE usually take, and extrapolating from that historical analysis, how long the current cycle will last. There seems to be some correlation, to me anyway, between the two sources. The analysis comes from an unlikely source, The Institute for Theoretical and High Energy Physics in Paris. The author undertakes a statistical based analysis based on past cycles and it’s notable that written in July 05, he makes the uncanny prediction that RE would peak in the early part of 06 (refer to figure 9 in the paper). Anyway I won’t spoil the conclusion and let you read the statistical prediction for the bottom of this trend. The paper can be found at the following web address:
http://arxiv.org/PS_cache/physics/pdf/0605/0605133v1.pdf
or Google the article “Real Estate Price Peaks: A Comparative Overview” Bertrand M. Roehner. It should be the first link.
It presents some interesting statistics for thought without taking a Bullish or Bearish slant. Whether the author can predict the bottom as well remains to be seen but I had a good laugh reflecting that a decent paper on economics was written by a Physicist.
Cheers.
Thanks Sean — So many advances in various disciplines have come form outside the house, so to speak. I remember when Maxwell Maltz, a plastic surgeon, came up with psycho-cybernetics, still highly respected today.
I observe two factors immediately.
First, based upon current events, both lenders and borrowers will not, in my view, allow something so predictable as a peak in adjustments on loans become a huge problem.
That begs the question immediately brought to mind by my second factor — human behavior. I’m trying to concoct circumstances under which fully three years warning isn’t enough time for rational solutions. Both lenders and borrowers will deal with this.
Using the income tax cuts of the ’80′s as an example, Keynesian economics couldn’t fathom how the ‘cut’ in marginal rates could possibly do what Art Laffer insisted it would. Hindsight shows it was exactly as Laffer predicted — income increased such that in the two presidential terms ’81-89, the income via income/corp. taxes increased by 95%!
Human behavior changes based upon changing circumstances and perception of benefit vs harm. Hey, we should write that one down.
Though there may be U.S. markets still suffering by 2011, it’s my firm belief they will be the exceptions and not the rule.
Thanks again Sean. Always a pleasure.
Thank you for sharing the definitions. Yes…I did enjoy the pictures!