Real Estate Law – Common Terminology

Common Terminology

Real estate transactions have a good amount of terminology that you may or may not be familiar with. I put together this alphabetized “cheat-sheet” that I hope assist buyers and sellers to understand the closing documents. I’ll continually update this list of common real estate terminology from time to time.

  • 1031 Exchange is a legal process whereby an owner of an investment property can sell that property and re-invest the proceeds into another investment property and defer capital gains taxes instead of paying them at the sale of the exit property.
  • Air Rights are the legal ability to use or control the space above a property. Air rights can be sold, rented or leased to another party.
  • Amortization Schedule shows the monthly mortgage interest, principal and balance. The amortization schedule also shows the relationship between principal, interest and how that ratio changes over the duration of a loan.
  • Appraisal is the evaluation of a property by a licensed appraiser on its price based on previous sales of similar properties. The appraised value is used by a lender to determine its lending limit on a given property. A seller may also have a property appraised to determine the offering price during a sale.
  • ARM/Adjustable Rate Mortgage is a loan that has a varying interest rate and payment based on an adjustment period. The adjustment is dependent on the variation in a benchmark index, usually the LIBOR or prime rate. This loan is also known as a variable rate mortgage.
  • Assignment of Leases and Rents from the seller to the buyer is necessary when the buyer is purchasing real property from the seller subject to current tenancies/leases at the premises.
  • Assumption Statements and escrow assignments are used if the mortgage is being assumed. The statement sets forth the balance of the mortgage principal and escrow account. The assignment transfers the insurance and tax escrow from the seller to the buyer.
  • Buyer is…. Cmon now, just checking on you….. 😉
  • Capital Gains are the seller’s gain on an asset used in a trade or business or for investment, including real estate. This gain is taxed at varying rates depending on whether the asset was held for more or less than one year.
  • Capital Improvements are item(s) that add(s) value to the property, adapts the property to new uses, or prolongs the life of property. Maintenance is not a capital improvement.
  • Cap Rate/Capitalization Rate is the percentage of the investment the investor will receive back each year from the net income from the property. The Cap Rate is deduced by a formula that results in a % rate of return that is used to compare different investment opportunities. Cap Rate formula: Net Operating Income (NOI) divided by the property’s asset value. Ie. NOI = $10,000. Asset Value = $400,000. $10k/$400k = 4% Cap Rate.
  • CEMA is an acronym for Consolidation, Extension and Modification Agreement. It is a document that modifies the terms of a mortgage recorded against a property and under certain circumstances merges it with another mortgage recorded against the same property to form a single consolidated mortgage to secure a loan. It is primarily used in refinancing to legally bypass repaying the mortgage taxes on the borrowed funds.
  • Certificate of Occupancy (CoO) is a document issued by a local government agency or building department certifying a building’s compliance with applicable building codes and other laws, and indicating it to be in a condition suitable for occupancy.
  • Closing/Settlement Costs are all transaction charges that home buyers and sellers need to pay at the closing of the transaction when the property is transferred. These typically include lender’s fees and points or prepaid interest, a prorated share of the property taxes, transfer taxes, credit check fees, homeowners’ and title insurance premiums, deed filing fees, real estate agent commissions, inspection and appraisal fees, and sometimes attorneys’ fees if they haven’t been paid earlier.
  • Closing Disclosure is a document that contains financial details for such items as: the purchase price, down payment, assumed and seller-held mortgages, taxes, heating oil, rents, deposits and flat water charges.
  • Deed transfers ownership of real estate and contains the names of the buyer and seller and a legal description of the property. There are several types of deeds with varying degrees of quality of assurances. Here in NYS the most common type of deed if the Bargain and Sale Deed w/ Covenants Against Grantors Acts.
  • Federal and State Estate Tax Affidavit is necessary affidavit stating that all estate taxes have been paid in the event a prior owner on deed has passed away.
  • Home Insurance covers owners against property damage. The binder must also name the lender as a loss payee.
  • IRS form W9 is used to verify the sellers’ Social Security number and details of the sale to comply with income tax regulations.
  • Judgment Affidavit is and affidavit that states the buyer or seller has no judgments, warrants, bankruptcies, or incompetency proceedings against him or her.
  • LTV/Loan-To-Value ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. The term is commonly used by lenders to represent the ratio of the first mortgage as a percentage of the total appraised value of real property.
  • Mortgage creates a lien upon real estate as security for the payment of a debt and it is recorded of public record. A separate promissory note is also signed by the borrower that serves as his/her personal guarantee to repay the loan.
  • Mortgage Commitment is a written notice from a bank informing a loan applicant that it will grant the mortgage loan under certain terms and conditions.
  • Mortgage Satisfaction/Discharge removes the lien of the seller’s mortgage. This is also known as Satisfaction of Mortgage or SAT.
  • NOI/Net Operating Income is the difference between the annual gross income of an investment property and the annual operating expenses of that investment property. The annual gross income of an investment property will mainly be in terms of rent rolls.
  • PITI is an abbreviation for the major expenses that make up a mortgage payment: principal (the amount borrowed), interest, (property) taxes, and (homeowners’) insurance.
  • Post-Possession Agreement is drafted if the seller needs to stay in the house after the closing. It usually requires the seller to pay rent, utilities and maintenance costs to the buyer.
  • Pre-Possession Agreement is drafted if the purchaser is moving in before the closing. It usually requires the purchaser to pay rent, utilities and maintenance costs.
  • Seller……. Stop what you’re doing and go back to school, now.
  • Survey is a blueprint drawn by a licensed surveyor showing the measurements, boundaries and area of the property. It also shows fences, driveways, waterways and all buildings located on the property.
  • Tax Receipts for school, county/town and city/village taxes and water, sewer and refuse charges. Tax receipts need to be paid and received prior to or at the closing table to ensure none of these expenses end up being borne by the new owner of the property.
  • Title Insurance is a form of indemnity insurance that provides coverage against defects and encumbrances on title A mortgagee policy protects the bank. A fee policy protects the owner.
  • Title Search, or abstract of title, is a historical digest of every document that has been recorded concerning a particular piece of property, including deeds, easements, mortgages, rights-of-way, oil and gas leases, bankruptcies, estate proceedings, tax liens and judgments. Excerpts of each legal document are arranged chronologically with the names of the parties involved, the type of document and the date the document was signed and recorded.
  • Transfer Documents are filed with all deeds, mortgages and easements, is used to document the state and local transfer taxes. In the five boroughs of NYC these are commonly referred to as the ACRIS docs.

If you are in the market to buy a piece of property or currently have one listed for sale, don’t hesitate to contact us if you have any questions or need experienced representation for your real estate deal.


Disclaimer:
This document/post/article is not to be considered as legal advice. Content and information contained herein is subject to changes, modifications, and may contain inaccuracies or out-of-date information. As with any legal matter or other matters of importance, consultation with an attorney or professional is the best course of action.

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