date of valuation
In appraisal, the date for which the value of the subject property is established, not to be confused with the date at which the appraisal takes place.
A horizontal plane from which heights and depths are measured.
A type of long-term bond or note given as evidence of debt. Unlike a mortgage note, a debenture is not secured by a specific property. Fannie Mae issues debentures to finance the acquisition of mortgages in the secondary mortgage market. If a borrower defaults on an FHA loan, the government gives interest-bearing debentures to the mortgagee after the title is transferred to FHA. (See Fannie Mae, FHA)
A charge on an accounting statement or balance sheet (appearing on the left-hand column); the opposite of a credit. Used in bookkeeping and in preparing the closing statement in a real estate transaction.
debt coverage ratio
The relationship between net operating income (NOI) and annual debt service (ADS). Often used as an underwriting criterion for income property mortgage loans. Example: Annual debt service for a mortgage loan on a certain office building is $10,000. The property generates $25,000 in annual gross rent, and requires $7,000 for expenses of operation, leaving $18,000 net operating income. The debt coverage ratio is 1.8 calculated by the following formula: NOI / ADS.
Incurring an obligation to repay a debt in order to invest or consume more than one currently owns.
The relationship between a person's long term debt payments and their monthly income.
The making of mortgage payments by the borrower, as arranged with the lender.
One who owes money; a borrower, a maker of a note; a mortgagor.
A dead person, especially one who has died recently.
declaration of condominium
The declaration includes
- A legal description of the condominium units and the common elements (including limited common elements-those that serve only one particular unit);
- A copy of the condominium's bylaws, drafted to govern the operation of the owners' association;
- A survey of the property;
- An architect's drawings, illustrating both the vertical and horizontal boundaries of each unit; and
- Any restrictive covenants controlling the rights of ownership.
declaration of restrictions
A statement of all the covenants, conditions and restrictions (CC&Rs) that affect a parcel of land. A subdivider may note the restrictions on the map or plan when recording the subdivision plat. If the restrictions are numerous, the subdivider may also prepare a separate document called a declaration, listing all the restrictions and then record this declaration. (See CC&Rs)
declaratory relief action
An action to have a court determine the rights of parties before a violation of rights has occurred.
declining balance depreciation
A method of depreciation, often used for income tax purposes, whereby a rate is applied to the remaining balance to derive the depreciation deduction. Compare to "accelerated depreciation."
An accounting method of depreciation for income-tax purposes designed to provide larger-than-straight-line deductions in the early years of a property's life and applicable to property placed in service before 1981. The declining-balance method of calculation is applied in the IRS percentage tables for determining ACRS depreciation deductions applicable to personal property. The 3, 5, 7 and 10-year classes use the 200 percent declining-balance method, switching to straight-line at the appropriate time, and the 15 and 20-year classes use the 150 percent declining-balance method, also switching to straight-line. (See depreciation, straight-line method)
The voluntary transfer of private property by its owner to the public for some public use, such as for streets or schools.
A written instrument that, when executed and delivered, conveys title to or an interest in real estate. (See title)
deed executed pursuant to court order
Executors' and administrator' deeds, masters' deeds, sheriffs' deeds and many other types are all deeds executed pursuant to a court order. These deeds are established by state.
deed in lieu of foreclosure
Voluntarily signing over to a lender the property pledged as collateral on a defaulted loan. It is an alternative to a foreclosure action. Its main disadvantage to a lender is that the deed does not wipe out junior liens, as a foreclosure action would. (See junior liens)
deed in trust
An instrument that grants a trustee under a land trust full power to sell, mortgage and subdivide a parcel of real estate. The beneficiary controls the trustee's use of these powers under the provisions of the trust agreement.
deed of reconveyance
A document used to transfer legal title from the trustee back to the borrower (trustor) after a debt secured by a deed of trust has been paid to the lender (beneficiary).
deed of trust and assignment of rents
The first page of a lending instrument; identifies the parties to the agreement, conveys title to the trustee, describes the collateral, states the terms and conditions of the note and refers to previously recorded "fictitious deeds of trust."
The nonperformance of a duty or obligation that is part of a contract. The most common occurrence of default on the part of a buyer or lessee is nonpayment of money when due. A default is normally a breach of contract and the nondefaulting party can seek legal remedies to recover any loss. Defaults in long-term leases or contracts for deed other than nonpayment might be failure to pay real estate taxes, damage to the property and so forth.
A clause used in leases and mortgages that cancels a specified right upon the occurrence of a certain condition, such as cancellation of a mortgage upon repayment of the mortgage loan.
defeasible fee estate
An estate in which the holder has a fee simple title that may be divested upon the occurrence or nonoccurrence of a specified event. There are two categories of defeasible fee estates fee simple on condition precedent (fee simple determinable) and fee simple on condition subsequent.
A condition that materially affects the value or use of property in an adverse manner.
defect of record
Any encumbrance on a title that is made a part of the public record. Recorded defects include judgments, deeds of trust, mortgages, other liens and easements. (See encumbrance)
deferred capital gain
In appraisal, a type of physical depreciation owing to lack of normal upkeep. Example: The appraisal found the following examples of deferred maintenance on the subject property: (a) broken window glass, (b) missing roof shingles, (c) peeling paint, (d) broken guttering.
In mortgage finance, the shortfall of funds recovered through the sale of property securing a foreclosed loan compared to the amount of debt, accrued interest, foreclosure expenses and damages incurred by the lender. See "deficiency judgement." Example: A lender foreclosed a mortgage loan with outstanding principal balance of $100,000 and accrued interest of $2,000. At the foreclosure sale, the property brought $80,000. The lender claimed a deficiency of $22,000 plus expenses when filing for a judgement in the courts.
A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full.
The status of a financial obligation, such as a mortgage loan, when it is past-due.
The amount of goods people are willing and able to buy at a given price; often coupled with supply. (See supply)
Destruction and removal of an existing structure from a site; necessary to prepare a site for new construction. Example: A block of old houses in the city is to be converted into a new shopping mall. This conversion will require demolition of the houses, site preparation and construction of the mall.
The intensity of a land use. See also "land use intensity." Example: a 10-acre subdivision contains 30 single-family houses. The density is 3 dwelling units per acre.
Laws that restrict land use intensity. Example: A zoning ordinance states that all zones designated "R-2" may contain no more than 4 detached housing units per acre. This is an example of density zoning.
Department of Real Estate (California)
The California agency that administers the Real Estate Law, including the licensing of real estate brokers and agents; headed by the Real Estate Commissioner, who is appointed by the Governor and presides over the Real Estate Advisory Commission whose ten members are appointed by and serve at the Commissioner's discretion.
Money offered by a prospective buyer as an indication of good faith in entering into a contract to purchase; earnest money; security for the buyer's performance of a contract. An earnest money deposit is not necessary to create a valid purchase contract because the mutual promises of the parties to buy and to sell are sufficient consideration because the mutual promises of the parties to buy and to sell are sufficient consideration to enforce the contract. If the buyer completes the purchase, the deposit money is applied toward the purchase price.
In investment real estate only structures can be depreciated. The depreciable basis is the original basis less the value of the land. (See basis)
The decrease in the value of an asset allowed when computing property value for tax purposes. In appraising, a loss in the value of a property improvement from any cause. Depreciation is curable when it can be remedied by repair or an addition to the property and incurable when there is no easy or economic remedy. (See appreciation)
Allocating the cost of an asset over its estimated useful life. Example: Collins buys a warehouse for $550,000. Of the price, $50,000 is for land, which is not subject to depreciation. Of the remaining $500,000, she claims accounting depreciation of $10,000 per year over a 50-year depreciable life, despite the fact that the property is expected to increase in value because of the location of the land.
Acquisition of an estate by inheritance in which an heir succeeds to the property by operation of law.
Design build refers to the construction of premises specifically for the occupant. This occupant is also the freehold owner of the land and the party to fund development. The design build is conceptually a freehold version of the build to suit.
A licensee authorized by a broker to act as the agent for a specific principal in a particular transaction. A designated agent is the only agent in the company who has a fiduciary responsibility toward the principal.
destruction of premises
In many states, once the sales contract is signed by both parties, the buyer bears the risk of any damage to the property that may occur before closing. Of course, the contract may provide otherwise.
One who attempts to put land to its most profitable use through the construction of improvements on subdivided land.
A transfer of real property under a will. The donor is the devisor, and the recipient is the devisee.
A contract that consists of separate agreements that are not dependent on each other. The illegality of one part will not void the balance of the contract.
The ability of an FHA-approved lender to secure FHA single and multifamily mortgage insurance by following FHA guidelines. Under a direct endorsement program applications for many of FHA's mortgage insurance programs can be underwritten by approved lenders who certify that the mortgage complies with applicable FHA requirements. (See mortgage insurance)
A physical or mental impairment that substantially limits one or more major life activities, such as walking, seeing, learning and working. Disability includes a record of such impairment or the fact of being regarded as having such impairment. The Americans with Disabilities Act (ADA) protects individuals with disabilities from various forms of discrimination in employment, public services, transportation, public accommodations and telecommunication services. A person abusing illegal drugs or alcohol is not covered, but a person who is rehabilitated in these areas may be protected under ADA. (See handicap)
discharge of contract
A contract is discharged when the agreement is terminated. Obviously, the most desirable case is when a contract terminates because it has been completely performed, with all its terms carried out. However, a contract may be terminated for other reasons, such as a party's breach or default.
Renunciation of ownership of property.
A statement denying legal responsibility, frequently found in the form of the statement, "There are no promises, representations, oral understandings or agreements except as contained herein." Such a statement, however, would not relieve the maker of any liabilities for fraudulent acts or misrepresentations. (See hold-harmless clause)
disclosed dual agency
Real estate licensing laws may permit dual agency only if the buyer and seller are informed and consent to the broker's representation of both in the same transaction. Although the possibility of conflict of interest still exists, disclosure is intended to minimize the risk for the broker by ensuring that both principals are aware of the effect of dual agency on their respective interests. The disclosure alerts the principals that they may have to assume greater responsibility for protecting their interests than they would if they had independent representation. The broker must reconcile how, as agent, he or she will discharge the fiduciary duties on behalf of both principals, particularly providing loyalty and protecting confidential information.
It is the agent's duty to keep the principal informed of all facts or information that could affect a transaction. Duty of disclosure includes relevant information or material facts that the agent knows or should have known.
A statement required by law, in which sellers of particular kinds of property, or under certain circumstances, must reveal specified information to potential buyers. Examples: (a) most states require sellers of real estate to disclose any "dangerous condition" to potential buyers; (b) many sellers of investment interests in real estate are required to disclose their own interest and even profit potential; (c) sellers of time-share interests must disclose which portions of the project will be retained by the developer, and the costs and conditions of use by time-share buyers.
To sell at a reduced value; the difference between face value and cash value.
An added loan fee charged by a lender to make the yield on a lower-than-market-interest VA or FHA loan competitive with higher-interest conventional loans. One discount point is equal to 1 percent of the loan amount.
- An annual competitive rate of return on total invested capital necessary to compensate the investor for the risks inherent in a particular investment.
- The rate at which the Federal Reserve lends money to its eligible banks. These are short-term loans to fulfill immediate cash needs, not supplement the bank's capital. Thus, the discount rate is not a cost of funds indicator but more of a signal to the banking community. (See Federal Reserve System)
discounted cash flow
A method of investment analysis in which anticipated future cash income from the investment is estimated and converted into a rate of return on initial investment based on the time value of money. In addition, when a required rate of return is specified, a net present value of the investment can be estimated. Example: An asset may be purchased for $1,000. It is expected to generate $100 in income per year for 10 years, after which time it is expected to sell for $1,200. Discounted cash flow analysis shows that the internal rate of return on the investment is expected to be 11.2% per year.
The process of estimating the present value of an income stream by reducing expected cash flow to reflect the time value of money. Discounting is the opposite of compounding. Mathematically they are reciprocals. See "discounted cash flow", "net present value." Example: If the sale of land expected to be $1 million in the year 2000 was discounted to a present value in 1994 at a 15% risk rate, it would provide a value today of approximately $432,000.
Income left over for investment after allocations for bills and savings.
The process of individuals investing their funds directly instead of placing their savings with banks, savings and loan associations and similar institutions for investment by such institutions. This bypassing of financial institutions occurs when proportionately higher yields are available on secure investments (such as high-grade corporate bonds, money market funds and government securities) than can be obtained on savings deposits.
The legal right of a landlord to seize a tenant's personal property to satisfy payment of back rent. Example: Abel is 6 months in arrears on rent. Landlord Baker obtains a court order to seize Abel's furniture to satisfy the rent due. Baker is exercising his right of distraint.
Real estate that is under foreclosure or impending foreclosure because of insufficient income production. See "workout." Example: An apartment building is financed with mortgages that require $25,000 in annual debt service. Because of high vacancies and rising expenses, net operating income drops to $20,000. The owners have ceased making loan payments because their resources are insufficient to pay the negative cash flow. The property is considered distressed property.
distributions of net investment income
The amount of investment income derived from customary and ongoing investment management operations that is (1.) actually distributed to investors, or (2.) credited to investors in the case of investment fund dividend or income reinvestment programs that are elective by the investor. (Mandatory reinvestment programs or automatic cash retention programs are not considered elective by the investor.) A distribution of net investment income does not include proceeds related to disposition and refinancing activities.
doctrine of prior appropriation
In states where water is scarce, ownership and use of water are often determined by the doctrine of prior appropriation. Under this doctrine, the right to use any water; with the exception of limited domestic use, is controlled by the state rather than by the landowner adjacent to the water.
From domus, Latin for "house." The state where an individual has his or her true, fixed permanent home and principal business establishment and where that person has the intention of returning whenever he or she is absent from it. Once established a domicile is never lost until there is a concurrence of specific intent to abandon the old domicile, intent to acquire a specific new domicile and actual physical presence in the new domicile. Though a person may have residences in different states and reside there at different times of the year, it is possible to have only one domicile. Because domicile consists of physical presence plus an intention to make the state one's permanent abode, such factors as local registration of autos, driver's license, voting, paying taxes, membership in local organizations, local bank accounts and local business interest are all important in establishing the requisite intent.
The estate that is said to attach to and derive benefit from the servient estate in reference to an easement appurtenant. For example, an easement road passes over an owner's land (the servient tenement) to give access to an adjacent parcel (the dominant tenement). The dominant tenement usually adjoins the servient tenement. (See easement, servient tenement)
One of the main disadvantages of corporate ownership of income property is that the profits are subject to double taxation. As a legal entity, a corporation must file an income tax return and pay tax on its profits. The portion of the remaining profits distributed to shareholders as dividends is taxed again as part of the shareholders' individual incomes.
The legal right or interest, recognized in some states, that a wife acquires in the property her husband held or acquired during their marriage. During the husband's lifetime the right is only a possibility of an interest; upon his death it can become an interest in land.
The amount one pays for property in addition to the debt incurred.
A change in zoning from a higher to a lower or from a more active to less active classification, such as from residential to conservation, or multifamily to single-family use. In these cases, there is no taking under eminent domain and thus no compensation paid to the affected landowner who helplessly sees the property reduce in value. (See zoning)
- An advancement of money against future earning.
- Periodic advances of funds under a construction loan agreement.
A form of acceleration clause found in some mortgages, especially savings and loan mortgages, requiring the mortgagor to pay off the mortgage debt when the property is sold, resulting in automatic maturity of the note as the lender's option. This clause effectively eliminates the possibility of the new buyer's assuming the mortgage unless the mortgagee permits the assumption, in which case the mortgagee might increase the interest rate or charge as assumption fee.
A structure that provides housing accommodations for two families and supplies each with separate entrances, kitchens, bedrooms, living rooms and bathrooms. A two-family dwelling with the units either side by side or one above the other.
Unlawful constraint or action exercised upon a person whereby the person is forced to perform an act against his or her will. A contract entered into under duress is voidable.
Any building, structure or part thereof used and occupied for human habitation or intended to be so used, including any appurtenances. Many municipalities have adopted ordinances relating to the repair, closing and demolition of dwellings unfit for human habitation.