Vocabulary Flashcards
1
Q
Agency Relationship:
A
A fiduciary relationship between an agent and a principal where respective rights and duties are prescribed by laws of agency and by the agency agreement executed by the two parties.
2
Q
Law of Agency:
A
A body of law defining roles, duties and responsibilities of an agent and a principal. Laws also set forth standards of conduct agent and principal owe to a customer.
3
Q
Principal:
A
The employer in an agency relationship, to whom the agent owes fiduciary duties. (Client)
4
Q
Agent:
A
The party in an agency relationship who is hired by the principal to perform certain duties. In so doing, the agent must also uphold fiduciary duties owed the principal.
5
Q
Customer:
A
In agency law, a party outside of the fiduciary relationship of client and agent. If an agent treats a customer as a client, an implied agency may result.
6
Q
Universal Agency:
A
A fiduciary relationship which empowers an agent to perform any and all actions for a principal that may be legally delegated.
7
Q
General Agency:
A
A fiduciary relationship which authorizes the agent to conduct a broad range of activities for the principal in a particular business enterprise. May or may not include authority to enter into contracts.
8
Q
Special Agency:
A
An agency relationship which restricts the agent’s authorizations to a specific set of duties. The relationship usually terminates on performance of these duties, as in a real estate broker’s listing agreement. (Limited Agency)
9
Q
Implied Agency:
A
An agency relationship that arises by implication from the actions and representations of either agent or principal.
10
Q
Fiduciary Duties:
A
Duties of an agent to the principal in an agency relationship, including skill, care, diligence, loyalty, obedience, confidentiality, disclosure, and accounting.
11
Q
Single Agency:
A
The agent represents one party in a transaction. The client may be either seller or buyer.
12
Q
Subagency:
A
An agency relationship between the client of a listing broker and other brokers and salespeople who have agreed to assist the broker in procuring a customer for the client. The assisting brokers are agents of the listing broker and subagents of the listing broker’s client.
13
Q
Dual Agency:
A
Representing both principal parties to a transaction.
14
Q
Facilitator:
A
A transaction broker who assists principal parties in completing a transaction without acting as a fiduciary agent of either party.
15
Q
Disclosure:
A
Client disclosure. An agent who intends to represent a seller or owner must disclose the import of the proposed agency relationship in writing before the listing agreement is executed. The agent must inform the seller or landlord in writing that the agent will be representing the client’s interests as a fiduciary, and will not be representing the interests of any potential buyer.
Customer disclosure. A listing agent must disclose in writing to a buyer or tenant that the agent represents the owner in the transaction. This disclosure must occur before or at the first “substantive contact” with the customer prospect.
16
Q
Contract:
A
A potentially enforceable agreement between two or more parties who agree to perform or not perform some act. If valid, the contract is enforceable, with limited exceptions.
17
Q
Valid:
A
Legal status of a contract that meets requirements of: competence of parties, mutual consent, valuable consideration, legal purpose, and voluntary good faith. A prerequisite for enforceability.
18
Q
Unenforceable:
A
State laws declare that some contracts are enforceable only if they are in writing. Thus, while an oral contract may meet the tests for validity, if it falls under the laws requiring a written contract, the parties will not have legal recourse to enforce performance. An oral long-term lease and an oral real estate sales contract are examples of contracts that may be valid but not enforceable.
19
Q
Void:
A
An agreement that is null and cannot be enforced.
20
Q
Voidable:
A
An agreement that is subject to being nullified because a party to the agreement acted under some legal disability. Only the disadvantaged party can take action to void the contract.
21
Q
Consideration:
A
An item of tangible or intangible value, or one’s promise to do or not do some act which is used as an inducement to another party to enter into a contract.
22
Q
Statute of Frauds:
A
A law requiring certain contracts to be in writing in order to be enforceable. Examples are real property conveyances, listing agreements, and longterm leases.
23
Q
Offer and Acceptance:
A
A process that creates a contract. Acceptance is the offeree’s unequivocal, manifest agreement to the terms of an offer. The offer becomes a contract when the acceptance has been communicated to the offeror.
24
Q
Counteroffer:
A
Any new offer or amended offer made in response to an offer.
25
Express:
An express contract is one in which all the terms and covenants of the agreement have been manifestly stated and agreed to by all parties, whether verbally or in writing.
26
Implied:
An unstated or unintentional agreement that may be deemed to exist by implication because of acts or statements by any of the parties to the agreement.
27
Unilaterial:
An agreement in which only one party promises to perform, contingent on the other party's performance of an optional action.
28
Bilateral:
A contract where both parties promise to perform in exchange for performance by the other party.
29
Executory:
A completed agreement which enjoins one or both principal parties to perform certain actions in order for the contract to become fully executed.
30
Rescission:
Rescission is the act of nullifying a contract.
31
Listing Agreement:
The document that puts an agent or broker in business. A legally enforceable real estate agency agreement between a real estate broker and a client, authorizing the broker to perform a stated service for compensation. The unique characteristic of a listing agreement is that it is governed both by agency law and by contract law.
32
Exclusive Right:
A listing agreement which pays the listing broker a commission if anyone at all procures a customer.
33
Exclusive Agency:
A listing agreement which pays the listing broker a commission if anyone other than the property owner procures a customer.
34
Open Listing:
A non-exclusive listing which pays an agent a commission only if the agent is procuring cause of a ready, willing, and able customer.
35
Net Listing:
A listing which states a minimum sale or lease price the owner will accept, with any excess going to the broker as a commission. Professionally discouraged, if not illegal.
36
Buyer and Tenant Representation:
A broker's listing with a buyer to locate a suitable property for purchase or lease.
37
Multiple Listing:
Multiple listing is a significant feature of brokerage practice. Multiple listing is an authorization to enter a listing in a multiple listing service.
38
Due Diligence:
Due diligence in the listing context refers to verifying the accuracy of the statements in the listing regarding the property, the owner, and the owner's representations. Especially important facts for a broker or agent to verify are:
the property condition
ownership status
the client's authority to act
39
Procuring Cause:
A party who was first to obtain a ready, willing, and able customer, or a party who expended the effort to induce the customer to complete the transaction.
40
Contract for Sale:
A real estate sale contract is a binding and enforceable agreement wherein a buyer agrees to buy an identified parcel of real estate, and a seller agrees to sell it under certain terms and conditions. It is the document that is at the center of the transaction.
Other names for the sale contract are agreement of sale, contract for purchase, contract of purchase and sale, and earnest money contract.
41
Vendor:
A seller in a real estate contract.
42
Vendee:
A buyer in a real estate contract.
43
Escrow:
An impound account used for the safekeeping of a buyer's earnest money deposit; accompanied by specific instructions to the escrow agent for holding and disbursing the funds.
44
Contingencies:
A condition that must be satisfied for a contract to be binding and enforceable.
45
Default:
Failure to perform.
Buyer default: If a buyer fails to perform under the terms of a sale contract, the breach entitles the seller to legal recourse for damages.
Seller default: If a seller defaults, the buyer may sue for specific performance, damages, or cancellation
46
Option-to-Buy Contract:
An option-to-buy is an enforceable contract in which a potential seller, the optionor, grants a potential buyer, the optionee, the right to purchase a property before a stated time for a stated price and terms. In exchange for the right of option, the optionee pays the optionor valuable consideration.
47
Equitable Interest:
The optionee enjoys an equitable interest in the property because the option creates the right to obtain legal title. However, the option does not in itself convey an interest in real property, only a right to do something governed by contract law.
48
Contract for Deed:
A financial contract where a seller retains legal title to a property and gives the buyer equitable title and possession over a period of time. During the contract period, the seller finances all or part of the purchase price. If the buyer makes timely payments and abides by all contract provisions, the seller conveys legal title at the end of the contract period.
49
Fair Housing Laws:
Anti-discrimination legislation designed to ensure equal opportunity in housing to all home buyers.
50
Discrimination:
A failure to provide equal opportunity for persons to acquire or finance housing based on race, color, religion, national origin, sex, handicapped status, marital status, or family status.
51
Misrepresentation:
A statement or act, or failure to make a statement or act, that misleads a party in a transaction. May be intentional or unintentional. May warrant legal recourse or license revocation.
52
Unequal Services:
| .
Services that differ in nature or quality from those normally rendered, with the alteration based on race, color, sex, national origin, or religion
53
Steering:
The prohibited practice of channeling prospective buyers and tenants toward or away from a particular area.
54
Blockbusting:
Inducing property owners to sell or rent their holdings due to an impending downturn in their property values, often owing to a change in the area's ethnic or social composition.
55
Redlining:
The illegal lending practice of restricting loans by geographical area.
56
Jones v. Mayer:
In 1968, the Supreme Court ruled in Jones v. Mayer that all discrimination in selling or renting residential property based on race is prohibited under the provisions of the Civil Rights Act of 1866.
57
Fair Financing Laws:
Anti-discrimination legislation designed to ensure that all parties have equal access to mortgage financing.
58
Disclosure:
In compliance with applicable laws and to promote respect for the real estate profession, licensees should be careful to disclose
that the agent is going to receive compensation from more than one party in a transaction
property defects if they are reasonably apparent; however there is no duty to disclose a defect which it would require technical expertise to discover
any interest the agent has in a listed property if the agent is representing a party concerning the property
any profits made on a client's money
the agent's identity in advertisements
59
Transferability:
How readily or easily title or rights to real estate can be transferred.
60
Anticipation:
The benefits a buyer expects to derive from a property over a holding period.
61
Substitution:
An appraisal principle that holds that a buyer will pay no more for a property than the buyer would pay for an equally desirable and available substitute property. Forms the foundation for the sales comparison approach to value.
62
Contribution:
The increment of market value added to a property through the addition of a component or improvement to the property. Not to be confused with the cost of the component.
63
Highest and Best Use:
A theoretical use of a property that is legally permissible, physically possible, financially feasible, and maximally productive, usually in terms of net income generation.
64
Conformity:
This principle holds that a property's maximal value is attained when its form and use are in tune with surrounding properties and uses.
65
Progression:
If a property is surrounded by properties with higher values, its value will tend to rise.
66
Regression:
If a property is surrounded by properties with lower values, its value will tend to fall.
67
Assemblage:
A combining of contiguous parcels of real estate into a single tract, performed with the expectation that increased value will result.
68
Subdivision:
The division of a single property into smaller properties can also result in a higher total value. For instance, a one-acre suburban site appraised at $50,000 may be subdivided into four quarter-acre lots worth $30,000 each. This principle contributes significantly to the financial feasibility of subdivision development.
69
Reproduction Value:
The value based on the cost of constructing a precise duplicate of the subject property's improvements, assuming current construction costs.
70
Replacement Value:
The value based on the cost of constructing a functional equivalent of the subject property's improvements, assuming current construction costs.
71
Market Value:
An opinion of the price at which a willing seller and buyer would trade a property at a given time, assuming a cash sale, reasonable exposure to the market, informed parties, marketable title, and no abnormal pressure to transact.
72
Appraisal:
An opinion of value of a property developed by a professional and disinterested third party and supported by data and evidence.
73
Broker's Opinion of Value:
An estimate of a property's value rendered by a party who is not necessarily licensed, objective, or qualified. The estimate may not be a complete appraisal.
74
Reconciliation:
An appraiser's weighted blending of the results of different approaches to value into a final value estimate.
75
Sales Comparison Approach:
A method of appraising property that relies on the principle that a property is generally worth what other, similar properties are worth.
76
Comparable:
A property having similar characteristics to a subject property in an appraisal. The value or sale price of the comparable is used to estimate the value of the subject.
77
Comparative Market Analysis:
(CMA) A method used by brokers and salespeople for estimating the current value of a property using sale price data from similar properties. Not to be confused with a bona fide appraisal performed by a licensed appraiser.
78
Cost Approach:
A method for determining value that takes into account the cost of the land and the replacement or reproduction cost of the improvements net of estimated depreciation.
79
Depreciation:
1. A non-cash expense taken against the income of investment property that allows the owner to recover the cost of the investment through tax savings.
2. A loss of value to improved property.
80
Income Capitalization Approach:
A method of appraising the value of a property by applying a rate of return to the property's net income.
81
Net Operating Income:
The amount of pre-tax revenue generated from an income property after accounting for operating expenses and before accounting for any debt service.
82
Capitalization Rate:
The rate of return on capital an investor will demand from the investment property, or the rate of return that the property will actually produce.
83
Gross Rent Multiplier:
A shortcut method for estimating the value of an income property. The procedure involves multiplying the property's gross monthly rent times a multiplier that reflects the ratio between gross monthly rent and sale price that is typical for similar properties in the area.
84
Gross Income Multiplier:
A shortcut method for estimating the value of an income property. The procedure involves multiplying the property's gross annual income times a multiplier that reflects the ratio between gross annual income and sale price that is typical for similar properties in the area.
85
Financial Institutions Reform, Recovery and Enforcement Act:
In 1989, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in response to the savings and loan crisis. This act included provisions to regulate appraisal.
86
Uniform Standards of Professional Appraisal Practice:
The Uniform Standards of Professional Appraisal Practice (USPAP) is a set of standards, guidelines and provisions for the appraisal industry. It resulted from the cooperation of nine national appraisal organizations in 1985.
87
Supply:
The quantity of a product or service available for sale, lease, or trade at any given time.
88
Demand:
A quantity of a product or service that is desired for purchase, lease, or trade at any given time.
89
Price:
An interaction of supply and demand that determines a price a buyer and seller agree is the value of a good or service to be exchanged. A quantification of value in a transaction.
90
Value:
In general, the worth of an item as determined by its utility, desirability, scarcity, affordability, and other components and quantified as price.
91
Cost:
Those expenses necessary to generate and deliver the item to the market. The essential production costs are the costs of capital, materials, and supplies; labor; management; and overhead.
92
Market:
1. Buyers and sellers exchanging goods and services through the price mechanism.
2. The totality of interactions between supply and demand for a specific set of products or services in a particular geographic area.
93
Market Equilibrium:
A theoretical market state in which the forces of supply and demand are in balance.
94
Base Employment:
The number of persons employed in the businesses that represent the economic foundation of the area. For example, the auto industry has traditionally been the primary base employer of the Detroit metropolitan area.
95
Total Employment:
Total employment in a market includes base, secondary, and support industries. Total employment creates a demand for a labor force.
96
Vacancy:
A measure of the unoccupied supply of exiting space in a building or market at any point in time. A vacancy rate is the amount of vacant space divided by the total amount of existing space.
97
Absorption:
The consumption of available vacant property in a building or market.
98
Mortgage Financing:
Financing that uses mortgaged real property as security for borrowed funds.
99
Hypothecation:
Use of real property as collateral for a mortgage loan.
100
Lien Theory:
A state whose laws give a lender on a mortgaged property equitable title rather than legal title.
101
Title Theory:
A state whose laws give legal title of a mortgaged property to the mortgagee until the mortgagor satisfies the terms and obligations of the loan.
102
Note:
An agreement to repay a loan of an indicated amount under certain terms.
103
Mortgage:
A legal document wherein a mortgagor pledges ownership interests in a property to a lender, or mortgagee, as collateral against performance of the mortgage debt obligation.
104
Mortgagor:
The borrower in a mortgage.
105
Mortgagee:
The lender in a mortgage.
106
Deed of Trust:
An instrument used by a borrower to convey title to mortgaged property to a trustee to be held as security for the lender, who is the beneficiary of the trust.
107
Principal:
The loan balance to which interest charges are applied.
108
Loan Balance:
At any point during the life of a mortgage loan, the remaining unpaid principal is called the loan balance, or remaining balance.
109
Interest:
A lender's charge for the use of the principal amount of a loan.
110
Points:
A discount point is one percent of the loan amount. Thus, one point on a $100,000 loan equals $1,000. The lender charges this as pre-paid interest at closing by funding only the face amount of the loan minus the discount points. The borrower, however, must repay the full loan amount, along with interest calculated on the full amount.
111
Term:
The loan term is the period of time over which the loan must be repaid. A "30-year loan" is a loan whose balance must be fully paid off at the end of thirty years.
112
Payment:
The loan term, loan amount, and interest rate combine to determine the periodic payment amount. When these three quantities are known, it is possible to identify the periodic payment from a mortgage table or with a financial calculator. Mortgage payments are usually made on a monthly basis. On an amortizing loan, a portion of the payment goes to repay the loan balance in advance, and a portion goes to payment of interest in arrears.
113
Mortgage Insurance:
An insurance policy, purchased by a borrower, that protects a lender against loss of that portion of a mortgage loan which exceeds the acceptable loan-to-value ratio.
114
Underwriting:
A process of investigating the financial capabilities and creditworthiness of a prospective borrower and granting credit to a qualified borrower.
115
Qualification:
A mortgage underwriting procedure to determine the financial capabilities and credit history of a prospective borrower.
116
Loan-To-Value Ratio:
An underwriting ratio that relates the size of a loan to the market value of the collateral. The closer the loan value is to market value, the riskier the loan is for the lender , since the lender is less likely to recover the debt fully from the proceeds of a foreclosure sale.
117
Equal Credit Opportunity Act:
Requires a lender to evaluate a loan applicant on the basis of that applicant's own income and credit rating, unless the applicant requests the inclusion of another's income and credit rating in the application.
118
Income Ratio:
An underwriting ratio that relates a borrower's gross or net income and the debt service of a loan; used to determine how large a loan a borrower can reasonably afford.
119
Debt Ratio:
An underwriting equation that is used to determine how much debt an individual can reasonably afford in view of the party's or household's income.
120
Loan Commitment:
A lender's written pledge to lend funds under specific terms. May contain deadlines and conditions.
121
Regulation Z:
A fair financing law applying to residential loans; lenders must disclose financing costs and relevant terms of the loan to the borrower.
122
Real Estate Settlement Procedures Act:
A federal law which aims to standardize settlement practices and ensure that buyers understand settlement costs. RESPA applies to purchases of residential real estate (one- to four-family homes) to be financed by "federally related" first mortgage loans.
123
Primary Mortgage Market:
Lenders and mortgage brokers who originate mortgage loans directly to borrowers.
124
Secondary Mortgage Market:
Lenders, investors, and government agencies who buy, sell, insure, or guarantee existing mortgages, mortgage pools, and mortgage-backed securities.
125
Fannie Mae:
A government-sponsored agency in the secondary mortgage market which buys conventional, FHA, and VA loans, sells mortgage-backed securities, and guarantees payment of principal and interest on the securities.
126
Ginnie Mae:
A division of HUD which guarantees FNMA mortgages and securities backed by pools of VA-guaranteed and FHA-insured mortgages.
127
Freddie Mac:
A major secondary mortgage market organization which buys conventional, FHA, and VA loans and sells mortgage-backed securities.
128
FHA:
The Federal Housing Administration (FHA) is an agency of the Department of Housing and Urban Development (HUD). It does not lend money, but insures permanent long-term loans made by others.
129
Assumability:
Rules for assumability vary according to when the FHA-insured loan was originated and whether the original loan was for an investment property or an owner-occupied principal residence. Loans originated before December 1, 1986, are generally assumable without restriction. Loans originated after December 1, 1986, require that the assumer show creditworthiness. Loans originated after December 15, 1989, may not be assumed unless the borrower fully qualifies. No loans for investment or non-owner-occupied properties originated after the latter date are assumable.
130
VA:
The Veterans Administration (Department of Veterans Affairs) offers loan guarantees to qualified veterans. The VA, like the FHA, does not lend money except in certain areas where other financing is not generally available. Instead, the VA partially guarantees permanent long-term loans originated by VA-approved lenders on properties that meet VA standards. The VA's guarantee enables lenders to issue loans with higher loan-to-value ratios than would otherwise be possible. The interest rate on a VA-guaranteed loan is usually lower than one on a conventional loan. The borrower does not pay any premium for the loan guarantee, but does pay a VA funding fee at closing.
131
Amortization:
A partial or complete reduction of a loan's principal balance over the loan term, achieved by periodic payments which include principal as well as interest.
132
Adjustable Rate Loan:
A mortgage loan having an interest rate that can be periodically raised or lowered in accordance with the movement of a financial index.
133
Seller Financing:
Any financing arrangement where a seller takes a note and mortgage from the buyer for all or part of the purchase price of the property.
134
Liquidity:
The degree to which an investment is readily marketable, or convertible to another form of asset. If immediately salable, an investment is liquid; the longer it takes to sell, the more illiquid the investment. Real property is relatively illiquid in comparison with other types of investment.
135
Leverage:
You may pledge the value of your resource to borrow funds in order to make an investment that is larger than your own resource permits you to do directly. The small resource is used as a lever to make a larger investment, and thus increases your opportunity to benefit from income, appreciation, and the other rewards of investment.
136
Non-income property:
A residential property used as the investor's primary residence. The basic reward, beyond the enjoyment of use, comes in the form of appreciation. There may also be tax benefits, depending on how the purchase is financed.
137
Income Property:
A property owned specifically for the investment rewards it offers. Examples are multi-family residential properties, retail stores, industrial properties, and office buildings. Rewards come in any or all of the forms mentioned earlier: income, appreciation, leverage and tax advantages.
138
Opportunity Cost:
The return that an investor could earn on capital invested with minimal risk. If the real estate investment, with all its attendant risk, cannot yield a greater return than an investment elsewhere involving less risk, then the opportunity cost is too high for the real estate investment.
139
Syndicate:
A group of investors who combine resources to buy, develop, and/or operate a property.
140
General and Limited Partnerships:
General: A syndicate in which all members participate equally in managing the investment and in the profits or losses it generates. The group designates a trustee to hold title in the name of the syndicate.
Limited: A syndicate in which a general partner organizes, operates and is generally responsible for the partnership's interests in the property. Limited partners invest money in the partnership but do not participate in operating the property. These limited partners are passive investors.
141
REIT:
(Real Estate Investment Trust). Investors buy certificates in the trust, and the trust in turn invests in mortgages or real estate. Investors receive income according to the number of shares they own. A trust must receive at least 75% of its income from real estate to qualify as a REIT, and if certain other conditions are met, the trust does not have to pay any corporate income tax.
142
REMIC:
(Real Estate Mortgage Investment Conduit). A kind of partnership entity formed to hold a fixed pool of mortgages that are secured by real property. The entity issues two kinds of interest. Holders of residual interests are treated, for tax purposes, as partners. Holders of regular interests are regarded as owning debt instruments. Income (or loss) received by regular or residual interest holders is treated as portfolio income or loss, and is not included in determining losses from passive activities.
143
Cost Recovery:
Allows the owner of income property to deduct a portion of the property's value from gross income each year over the life of the asset. The "life of the asset" and the deductible portion are defined by law.
144
Capital Gain:
When real estate, whether non-income or income, is sold, a taxable event occurs. If the sale proceeds exceed the original cost of the investment, subject to some adjustments, there is a capital gain that is subject to tax.
145
Passive Activity:
Business activities in which the taxpayer does not materially participate. Included are interests in limited partnerships and rental activities.
146
Appreciation:
The increase in value of an asset over time.
An increase in the value of a property generally owing to economic forces beyond the control of the owner.
147
Adjusted Basis:
The beginning basis, or cost, of a property plus the costs of capital improvements, minus all depreciation expense.
```
The basic formula for adjusted basis is:
Beginning basis
+ capital improvements
- exclusions, credits or other amounts received
adjusted basis
```
148
Gain on Sale:
The gain on sale of a primary residence is represented by the basic formula:
amount realized (net sales proceeds)
- adjusted basis
gain on sale
Gain on sale, if it does not qualify for an exclusion under current tax law, is taxable.
149
Cash Flow:
The remaining positive or negative amount of income an investment produces after subtracting all operating expenses and debt service from gross income.
150
Tax Liability:
The owner's tax liability on taxable income from the property is based on taxable income rather than cash flow. Taxable income and tax liability are calculated as follows:
```
net operating income (NOI)
+ reserves
- interest expense
- cost recovery expense
= taxable income
x tax rate
= tax liability
```
