BUSI 422 Notes
Real Estate
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The tern real in real estate comes from the tern realty, which has, for centuries, meant land and
all things permanently attached.
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Personalty: All intangibles and movable things.
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Estate: All that a person owns, including realty personalty and realty.
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All transactions involving real estate must be evidenced by a written, signed contract in order to
be enforceable.
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When purchasing real estate, investors acquire rights to control, occupy, develop, improve,
exploit, pledge, lease, exclude, and sell real estate.
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Real estate: Refers to things that are not movable such as land and improvements permanently
attached to the land.
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Real property: Ownership rights associated with real estate.
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Property rights: The right of a person to the possession, use, enjoyment, and disposal of his or
her property.
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A holder of a mortgage also has some rights as a nonowner in real estate pledged as security for
a loan.
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Fee simple estate: Represents the most complete form of ownership of real estate, whereas a
leasehold estate usually describes rights and interests obtained by tenants when leasing or
renting a property.
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Estate in possession: Entitles its owner to immediate enjoyment of the rights to that estate.
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An estate not in possession does not convey the rights of the estate until sometime in the future
– represents a future possessory interest in property.
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Freehold estate: Lasts for an indefinite period of time.
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Leasehold estate: Expires on definite date.
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Life estate: A freehold estate lasts only as long as the life of the owner or the life of some other
person. Can be leased, mortgaged, or sold, but the estate will still end with the death of the
holder of estate.
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Reversion: Exists when the holder of an estate in land conveys to another person a present
estate in the property that has fewer ownership rights than the grantor’s own estate and retains
for the grantor or grantor’s heirs the right to take back to full estate.
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Remainder: Exists when the grantor of a present estate with fewer ownership rights than the
grantor’s own estate conveys to a third person the revisionary interest the grantor or grantor’s
heirs otherwise would have in the property upon termination of the grantee’s estate.
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Estate for years: Created by a lease that specifies an exact duration for the tenancy.
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Estate from year to year: Continues for successive periods until either party gives proper notice
of its intent to terminate at the end of one or more successive periods until either party gives
proper notice of its intent to terminate at the end of one or more subsequent periods.
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An interest in real estate can be thought of as a right or clain on real property, its revenues, or
production.
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In an encumberment, the lender receives only a secured interest, but not possession, use and so
on, of the property.
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Easement: A nonpossessory interest in the land.
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Title assurance: The means by which buyers of real estate learn in advance whether their sellers
have and can convey the quality of title they claim to possess and receive compensation if the
title, after transfer, turns out not to be as represented.
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Title is a term frequently used to link an individual or entity who owns property to the property
itself.
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Title only exists for freehold estates. A leasehold contract is typically created by a contract (a
lease).
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Deed: The written instrument used to convey title from one person to another.
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A purchaser wants the deed to convey a good and marketable title to the property.
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Encumbrances such as easements, leases, and mortgages do not automatically make it
unmarketable.
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Three general in which buyer has assurance that a title is good and marketable:
1. Seller may provide a warranty as part of the deed.
2. There may be a search of relevant recorded documents to determine whether there is
reason to question the quality of the title.
3. Title insurance may be purchased to cover unexpected problems with the title.
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General warranty deed: Most common and most desirable. Contains:
1. A covenant that the grantor has good title to the property.
2. A covenant that the grantor has the right to convey the property.
3. A covenant to compensate the grantee for loss of property or eviction suffered by the
grantee as a result of someone else having superior claim.
4. A covenant against encumbrances on the property other than those specifically stated in the
deed.
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Special warranty: Makes the same warranties as general warranty deed except it limits their
application to defects and encumbrances that occurred only while the grantor held title to the
property.
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Bargain and sale deed: Conveys property without seller warranties.
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Quitclaim deed: Offers the least protection.
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A lawyer cannot be held liable for any defect in the title not disclosed therein.
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Title insurance is required for any mortgage that is traded in the secondary mortgage market.
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Title insurance adds: definite contract liability to the premium payer, reserves sufficient to meet
insured losses, supervision by an agency of the state in which the title insurance company
operates, and protection to the policyholder against financial losses because of title defect.
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Mechanics’ lien: Give unpaid contractors, workers, and material suppliers the right to attach a
lien on the real estate to which they added their labor or materials. Permitted to be recorded
after the fact.
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Government restricts property rights with zoning ordinances, allowable uses, height restrictions,
parking requirements, and building codes, permits, and inspections.
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Deed restrictions: Limit the use of property by all subsequent owners of that property.
Chapter 2
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Promissory note: A document that serves as evidence that debt exists between a borrower and a
lender.
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Mortgage document: Created in transaction, whereby one party pledges real property to
another as security for an obligation owed to that party.
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The underlying obligation secured by a mortgage is evidenced by a separate promissory note.
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Any interest in real estate that is subject to sale, sale, or assignment can be mortgaged.
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The vast volume of mortgage lending today is institutional lending, and institutional mortgages
are standardized, formal documents.
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Requirements of a valid mortgage document:
1. Wording that appropriately expresses the intent of the parties to create a security interest in
real property for the benefit of the mortgage.
2. Other items required by state law.
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The joint FNMA-FHLMC uniform mortgage form has been so widely adopted by residential
mortgage lenders that it has largely replaced the use of mortgage forms used by individual
institutions.
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Funds for taxes and private mortgage insurance are usually kept in an escrow account.
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Subordination clause: Might be used in situations where the seller provides financing by taking
back a mortgage from the buyer, and the buyer also intends to obtain a mortgage from a bank or
other financial institution, usually to develop or construct an improvement.
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Assumption agreement: Takes the form of a contract of indemnity – shifts the responsibility for
the payment of debt from the grantor to the grantee.
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Seller financing: Occurs if the seller is willing to take back a mortgage as part or full payment of
the purchase price. Used when: third party mortgage financing is too expensive or unavailable,
buyer does not qualify for long-term mortgage credit, seller desire to take advantage of the
installment method of reporting gain, or seller desires to artificially raise the price of the
property.
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Land contract: Seller promises to convey title at such time as the purchase completes the
performance of the obligation called for in the contract.
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Default: A failure to fulfill a contract, agreement, or duty, especially a financial obligation such as
a note.
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Mortgage default: Can result from any breach of the mortgage contract.
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Six alternatives to foreclosure in a workout: mortgage loan restructuring, transfer of the
mortgage to a new owner, voluntary conveyancy of the title to the mortgagee, a friendly
foreclosure, a prepackaged bankruptcy, a short sale with the lender agreeing to a sale price less
than the loan balance.
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Restructuring could involve lower interest, accruals of interest, or extended maturity dates.
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Extension agreement: An agreement for a longer amortization period for the remaining principal
balance if the mortgagor is in financial difficulty.
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Transfer of mortgage: Someone purchases the property and assumes the mortgage liability. The
purchaser will be willing if the value of the property exceeds the balance of the mortgage.
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Voluntary conveyance: May be done is cost of foreclosure exceeds the expected benefit of
pursuing that course of action.
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Deed in lieu of foreclosure: Has the advantage of speed and minimizes the expense of
transferring the property and uncertainty of litigation and avoids negative of foreclosure or
bankruptcy.
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Friendly foreclosure: The borrower submits to the jurisdiction of the court, waives any right to
assert defenses and claims and to appeal or collaterally attack any judgment, and otherwise
agrees to cooperate with the lender in the litigation.
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Short sale: A sale of real estate in which the proceeds from the sale fall short of the balance
owed on a loan secured by the property sold.
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Judicial foreclosure: Sue on the debt, obtain judgment, and execute the judgment against
property of the mortgager.
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Redemption: The process of canceling or annulling a title conveyed by a foreclosure sale by
paying the debt or fulfilling the other conditions in the mortgage.
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Deficiency judgements: Unsecured claims – unless the mortgagor owns other real estate – and
take their place alongside other debts of the mortgagor.
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Payment of property is an obligation of the mortgagor.
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Bankruptcy: A proceeding in which the court takes over the property of a debtor to satisfy the
claims of creditors.
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Chapter 7 Bankruptcy: “straight bankruptcy”. Gives debtors a fresh start by discharging all of
their debts and liquidating their nonexempt assets. Available to any person.
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Chapter 11 bankruptcy: Available to business owners. Looks to the preservation of the debtor’s
assets while a plan of reorganization to rehabilitate the debtor is formulated. Reorganization
plan must be filed with the court within 120 days after filing.
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Chapter 13 bankruptcy: Known as wage earner proceeding. Envisions the formulation of a plan
designed for the rehabilitation of the debtor. Plans provide that funding of the plan will come
from future wages and earnings of the debtor.
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Chapter 13 can be filed immediately after completion of a prior bankruptcy liquidation or
payment plan as long as it is filed in good faith.
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Deed of trust: Commonly used in Alabama, Arkansas, California, Colorado, D.C., Delaware,
Illinois, Mississippi, Missouri, Nevada, New Mexico, Tennessee, Texas, Utah, Virginia, and West
Virginia.
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Anyone using a deed of trust should hire a local real estate lawyer.
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When a junior lien is destroyed in foreclosure, they will be repaid when there is a surplus after
senior mortgage claims have been repaid.
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Deficiency judgment: An amount owed after a foreclosure and sale.
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During a bankruptcy, the court takes over the property.
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Chapter 11 bankruptcy is risky because assets may be tied up for years.
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A fixture is an item of tangible personal property that has become affixed to or is intended to be
used with the real estate, so as to be considered part of the property. Also called a chattel.
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Fixtures and easements are covered by a mortgage security.
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A land contract buyer does not have title to the property.
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The due-on-sale clause will protect the mortgagee and accelerate the debt.
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Mortgage law typically falls within the jurisdiction of state law.
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Land contract is used when there is no down payment or a small down payment, and a very long
period of time during which a buyer must make periodic payments to the seller.
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The charges and liens clause protects the mortgagee.
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With a subordination clause, a first mortgage holder will make their mortgage junior in priority.
Chapter 3: Mortgage Loan Foundations: The Time Value of Money
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The compounding problem has four basic components: An initial deposit (or present value of an
investment of money), an interest rate, time, and value at some specified future period.
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FV = PV + I1
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Effective annual yield = (FV – PV)/PV
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Whenever the nominal annual interest rates offered on two investments are equal, the
investment with the more frequent compounding internal within the year will always result in a
higher effective annual yield.
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Mortgage loans typically involve monthly compounding.
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An interest rate factor is computed by taking the future value of $1.
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Many investments require a series of payments which make understanding the present value of
an annuity important.
Chapter 4: Fixed Interest Rate Mortgage Loans
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Pricing a loan: Refers to the rate of interest, fees, and other terms that lenders offer and that
borrowers are willing to accept when mortgage loans are made.
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The market rate of interest on mortgage loans is established by what borrowers are willing to
pay for the use of funds over a specified period of time and what lenders are willing to accept in
the way of compensation for the use of such funds.
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The demand for mortgage loans is a derived demand – determined by the demand for real
estate.
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Default risk: The risk that borrowers will default on obligations to repay interest and principal.
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