1031 - 1031 is a section of the Internal Revenue Code defining property to be held for a trade of business/investment property.

1031 property can be subject to tax deferred exchanges, deferring any taxes on the gain in connection with the property as a result of the exchange.

ABSTRACT - An abstract is a history of a piece of real property. It contains copies of all the deeds in the chain of title. Florida became a state in 1845. Shortly after Florida became a state, the United States government patented the property to the State of Florida which then conveyed the property out to private individuals or corporations. Abstracts should go all the way back to the time the property was patented by the United States of America to the State of Florida. Abstracts are seldom seen; they have been replaced by title searches.

ACCELERATION - Usually used when demanding the full amount due and payable under promissory note and mortgage, or agreement for deed. To determine whether the holder of a note and mortgage or agreement for deed is entitled to accelerate, the note and mortgage must provide language that says if the borrower is in default of the terms and provisions, the holder of the note and mortgage may accelerate the full amount due under the note and mortgage to be due and payable.

AGREEMENT FOR DEED - An agreement for deed is a form of financing. The Florida courts treat it the same as a mortgage. The seller transfers what is called "equitable ownership" in the property to the buyer. The buyer owns the property except for the legal title, which the seller holds in his or her name until the seller has been paid by the buyer. In Florida an agreement for deed must be foreclosed the same as a note and mortgage. It is recommended that a deed, note and mortgage be used rather than an agreement for deed in order to avoid additional documentary stamps and questions as to title in the event liens become of record against the seller or the buyer after the agreement for deed has been signed and recorded.

AMORTIZATION - The periodic reduction of the balance of a mortgage. An amortization schedule is usually furnished any time the seller provides financing for the property. The amortization schedule will show how much of the payment is principal, how much is interest, and the balance remaining unpaid after each payment.

APPRAISAL - An opinion of a qualified appraiser as to the value of property. Appraisers can use three different approaches to determine the value of the property: 1) The income approach; 2) The cost approach; and 3) The comparable sales approach. The three approaches are customarily used in appraising commercial property.

The cost approach takes the value of the land and computes the cost to construct the improvements on the property.

The income approach determines the amount of income and uses a multiplier of the income from the property and considers the potential for any increased income.

In residential transactions, the comparable value approach is customarily used. This is accomplished by looking at comparable sales and adjusting the equivalent of one particular piece of property given its condition and amenities as well as square footage. Appraisers can have certain credentials such as Marketing Appraisal Institute (MAI), and other associations which test appraisers to determine their competence. The state also licenses appraisers. Realtors, unless they are trained and have passed the requisite educational courses, are not appraisers and do not give appraisals.

ASSUMABLE MORTGAGE - A mortgage on which a purchaser can take over the payments without the necessity of obtaining the approval of the lender. Some people call it a non-qualifying assumable mortgage when it is not necessary to submit any financial statements to supply the lender with a credit report. If someone assumes a mortgage, both the original borrower and the person assuming the mortgage are liable for the mortgage until it is paid in full.

A qualifying assumable means that the lender has discretion as to whether a purchaser will be able to take over the mortgage payments. With a qualifying assumable mortgage, the purchaser is required to submit a financial statement and a credit report on the purchaser will be obtained. The lender then has the right to reject the purchaser's credit, and can refuse to allow the purchaser to assume the mortgage.

BALLOON MORTGAGE - A mortgage in which the last payment is more than twice the amount of the regular periodic payments. There is a Florida Statute defining a balloon mortgage. The word "balloon" stems from the payments being periodic and the final payment being very large (inflated). An example of a balloon mortgage is one providing that the payments will be amortized over 15 years, with the full amount becoming due and payable in five years. The payments are then computed as if the borrower was going to pay the mortgage out over 15 years, and the principal balance due and owing at the end of five years is called the "balloon" payment.

BOARD CERTIFIED REAL ESTATE ATTORNEY - An attorney who has passed an examination on real estate law, and devotes 40% of his time to real estate matters in his law practice.

BOOT - This is a term usually referring to the money or other non-like-kind property received in connection with a tax deferred exchange of 1031 property which equalized the value of the properties.

CAM - Common Area Maintenance. The term is used in connection with commercial leasing and is an expense which is a charge under the lease in addition to the rent for the taxes on the property, insurance, and the maintenance of the common areas. It is usually assessed on a per-square-foot basis for commercial property.

CONVENTIONAL FINANCING - A purchaser makes a loan application and applies for a mortgage. The lender grants the mortgage on various terms. Conventional financing is usually obtained through a commercial bank or lending institution and does not require FHA or VA approval.

CREATIVE FINANCING - Creative financing includes leases with option to purchase and wraparound mortgages. Creative financing is not done through an institutional lender and the owner is called upon to finance a portion of the purchase price by some means other than a purchase money first mortgage.

DEAL KILLER - A provision in a proposed contract which is unacceptable to the other party and cannot be negotiated.

DEPRECIATION - A decline in the value of property. The Internal Revenue gives a percentage that can be used each year to be deducted as an expense for property held for income purposes. This expense can be taken on a tax return even if the value of the property does not decline. Depreciation is based upon the useful life of a particular piece of property.

"DUE ON SALE" - A provision in a mortgage providing that if the property is transferred or conveyed by the borrower to someone else, the note and mortgage become due and payable. If the note and mortgage has a due on sale clause, the mortgage can be considered non-assumable. If a purchaser buys a piece of property and wishes to assume a mortgage containing a due on sale clause, they must obtain the approval of the lender to assume the mortgage. If they assume and agree to pay the mortgage without the lender's consent, the lender may demand the full amount of the loan to be due and payable. Many institutional lenders do not exercise their right to call loans due and payable, even though their mortgages contain due on sale clauses. Each loan should be evaluated if the Purchaser is considering assuming the mortgage. Due on sale clauses cannot be avoided through the use of agreements for deed. One method of avoiding a due on sale clause is the use of a lease with an option to buy.

EVICTION - This is the legal proceeding by which a landlord removes a tenant for non-payment of rent or breach of the rental agreement. The process takes approximately 30 to 45 days. It costs between $350 and $750 to have the tenant removed. An eviction is usually commenced by having a three-day notice served on the tenant stating that the tenant has three days to pay the rent or move. If the tenant fails to vacate within the three days, it is necessary to file a lawsuit in county court to have the tenant removed.

FEE SIMPLE - Fee simple is a legal term originating from English common law. It means the best interest in property that a person can own.

FORECLOSURE - Foreclosure is the legal procedure by which a holder of a mortgage takes back the real estate a purchaser has pledged as collateral under a mortgage. This procedure takes approximately four to six months. The attorney fees are approximately $1,250 plus the costs of $200 to $300.

INSTITUTIONAL LENDER - An institutional lender is a company in the business of giving mortgages and lending money to homebuyers.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP - When more than one person is taking title to property and they wish to have the property pass to the survivor or survivors in the event of death, title should be taken in the names of all parties, as joint tenants with right of survivorship. If husband, wife and child take title to property, the title should be taken as John Doe, Jane Doe, and Jim Doe, joint tenants with right of survivorship. The marital status as husband and wife should not be shown when the parties take title as joint tenants with right of survivorship, since "husband and wife" denotes tenancy by the entireties, which is a joint ownership between husband and wife.

LAND CONTRACT - Florida does not have land contracts. Land contracts are a form of financing used in a number of states. They allow owner financing, and in the event of default, a termination of the financing agreement rather than having to foreclose the financing arrangement. The closest thing to a land contract in the State of Florida is the agreement for deed which must be foreclosed as a mortgage.

LEASE WITH OPTION TO PURCHASE - This is a lease between the owner and the potential purchaser. The owner agrees to rent the property to a person for a specified period of time. The owner also provides the prospective purchaser/tenant an exclusive right to purchase the property during the term of the lease. Lease-options are useful when a purchaser has a very small down payment and does not have the ability to obtain his or her own financing immediately, but anticipates having sufficient money in the future to either purchase the property or obtain financing. A lease-option is also an effective way of avoiding the due on sale clause in underlying mortgages in that the title to the property remains in the name of the seller, and therefore, the insurance and taxes will continue being billed in the seller's name until such time as the purchaser exercises the option to buy and pays the seller.

The biggest advantage for the seller in a lease-option is the seller's ability to have the tenants evicted in the event they fail to make a payment rather than having to go through a foreclosure process. The seller also receives various tax benefits since he or she can depreciate the property while the tenant is in possession and the option money does not have to be recognized on the seller's income tax until the purchaser closes on the option.

Purchasers routinely wish to have some or all of the lease payments applied to the purchase price. A suggested analysis of how to allocate what portion of the rental payment to the purchase price is to determine an interest rate the seller wishes to receive, such as 8% or 9%, multiply the interest rate times the balance due on the option price. Divide that figure by 12 to determine the amount of rent the seller should receive from the lease. Any amount over and above the rent the seller wishes to receive, taking the taxes and insurance into consideration and whether they are being paid by the seller or purchaser, would be the amount that would apply to the purchase price. Many times there is little or no amount left for application to the option amount. Option money is non-refundable since the purchaser is buying an exclusive right to purchase property. If a lease is negotiated with an option to purchase, the purchaser should be advised that the option money is non-refundable, and if the purchaser does not exercise the option, or if they breach the lease, the option money will not be refunded.

There are certain disadvantages to lease-options for purchasers. The purchaser is unable to obtain homestead exemption. The type of insurance available is non-owner occupied type insurance rather than a homeowner's insurance policy. This is usually carried by the seller, and protects the seller's interest. The purchaser/tenant under a lease-option should obtain insurance to protect their equity or option money as well as the personal property they move onto the property so that, in the event of a casualty loss, the option money and their furniture and furnishings are protected by their own insurance.

Care should also be used in making sure the seller/landlord is current with the underlying mortgage so that, during the term of the lease-option, the property is foreclosed, or when the tenant/purchaser exercises the option to purchase, there is more money owed on the property than the option amount. If negotiating a lease with an option to purchase, contact Roland D. Waller to prepare the lease with option to purchase.

LEASE-PURCHASE - Lease-Purchase is a term used to describe a combination of an executory contract and a lease. A lease-purchase is an inferior substitute for a lease with an option to purchase. When a lease and a purchase are combined, the courts routinely consider them agreements for deed, and require that they be foreclosed. A lease with an option to purchase, however, can be enforced by eviction in the event of default. A lease-purchase is a misnomer.

LIFE ESTATE - A life estate is an interest in property measured by someone's lifetime. A person holding a life estate in real property uses the property during his or her lifetime as if he or she owned the property outright. At the time the person who holds the life estate dies, the interest in the property immediately terminates. Life estates are routinely used in estate planning where a parent may convey property to their children, reserving a life estate. This allows the parent to continue to live on the property and obtain homestead exemption. Upon their death, however, the property passes to the children. The interest of the children or other party to whom the person conveyed the property, is referred to as a "remainder interest".

MARKET ANALYSIS - Realtors obtain the sales figures of other property in the neighborhood of similar property. This is usually used as a listing tool to give the owner of a house a guide to the amount for which he or she can expect to sell the house.

MORTGAGE BROKER - A mortgage broker is a person or corporation who arranges a mortgage between a lender and a borrower. Mortgage brokers are usually compensated by the borrower for arranging a loan for a particular piece of property. Mortgage brokers may assist borrowers with conventional financing as well as arranging loans for borrowers with special circumstances such as credit, self-employment, relocation and unverifiable income.

NON-QUALIFYING ASSUMABLE MORTGAGE - A non-qualifying assumable mortgage is one that does not contain a due on sale clause and allows someone to assume a mortgage without the lender reviewing credit or requiring a loan application. Most non-qualifying assumable mortgages are VA or FHA mortgages. With non-qualifying assumable mortgages, the original borrower remains liable under the note and mortgage, although someone assumes the mortgage. Many lenders will continue to report the payment history under the original borrower although a new purchaser has assumed the mortgage. The borrower also remains liable in the event the non-qualifying assumable mortgage is foreclosed at a later date.

OWNER FINANCING - The owner of the property finances the property or a portion of the purchase price for the purchaser.

PITI - An acronym standing for Principal, Interest, Taxes and Insurance. It is a term commonly used in connection with mortgages. It indicates the total amount that would be payable under the mortgage versus an amount simply for principal and interest.

PURCHASE MONEY MORTGAGE - When a seller finances the property and takes back a mortgage as a part of the purchase price, it is called a purchase money mortgage. Lenders who loan the money necessary to purchase the property to the purchaser and receive a mortgage in return for the loan also receive a purchase money mortgage.

A seller can receive a purchase money second mortgage if he or she allows a lender to provide a portion of the purchase price and then takes a second mortgage for the remaining portion of the purchase price.

SECOND MORTGAGE - This is a mortgage in second position as far as priority is concerned to another mortgage. The other mortgage is a first mortgage. If someone holds a second mortgage, and the first mortgage goes in default and the first mortgage holder files a foreclosure action, the second mortgage holder will be sued and their mortgage against the property eliminated in the foreclosure sale. A second mortgage holder must either make the payments under the first mortgage, or pay off the first mortgage to protect their interest in the property.

TAX DEFERRED EXCHANGE - A tax deferred exchange is the exchange of property defined in Section 1031 of the Internal Revenue Code (property held for a trade of business/investment property). It is an alternative to selling investment property, allowing the deferral of capital gains into a new investment property. If two or more persons wish to exchange property, they may do so, and if there is no boot involved, the parties can then defer any tax that is due in connection with the transfer of their property until such time as it is sold. If there is any cash involved, i.e., if one of the properties exchanged is of lesser value, and cash or other non-like-kind property is part of the exchange, that is referred to as boot on which tax must be paid.

TAX FREE EXCHANGE - This is a misnomer for a tax deferred exchange in which two or more persons exchange property which is held for a trade or business, for other property held in a trade or business.

TENANCY BY THE ENTIRETIES - Tenancy by the entireties is created when a husband and wife take title to property and show that they are husband and wife. If either the husband or the wife passes away, the property passes to the survivor. If two persons are not married, however, show themselves as husband and wife when they take title to the property, they will not have the right of survivorship, nor will they have the right of survivorship if they marry after taking title as husband and wife.

Tenancy by the entireties property must by conveyed by both husband and wife. Neither party can convey away any interest in the property without the joinder of the spouse. The creditor of one spouse cannot attach the property held by husband and wife/tenancy by the entireties.

TENANTS IN COMMON - Tenants in common is how more than one person holds title if it is not designated as joint tenants with right of survivorship, or if the parties are not married and do not take title as husband and wife. There is no survivorship provision for a person owning an interest in property as a tenant in common.

TITLE COMPANY - A title company can be either an independent title agent or a title insurance underwriter who maintains an office to deal with the public. In addition to title companies, there are approximately 9,000 lawyers in Florida who are title insurance agents and issue title insurance.

TITLE INSURANCE - Title insurance is usually purchased by the seller in the Tampa Bay area. It is issued by a title insurance underwriter or title insurance agent. The underwriter or agent obtains a title search and reviews it to determine what liens or encumbrances are on the title. Once the title agent has done the search, it will issue a title commitment for the purchaser price to the buyer, insuring that the buyer has marketable title to the property, subject only to those exceptions shown on the title insurance policy under Schedule B. At a real estate closing, the purchaser receives a title commitment which is the title insurance agent's agreement to issue a title insurance policy.

It is imperative that the purchaser understand what exceptions there are in the title policy. An example of an exception to marketable title is deed restrictions. Copies of the deed restrictions should be furnished with the title commitment at or before closing.

The standard exceptions consist of taxes for the current year, rights of parties in possession, facts that an accurate survey would show, unrecorded easements, and unrecorded construction liens.

TITLE SEARCH - A title search is the examination of the documents appearing in the public records. A title search usually goes back to the prior title policy or relies on the marketable record title act. Title searches have been computerized and it is possible to identify all the documents that appear in the public records that affect the title to the property by its legal description.

TRIPLE NET - Triple net is a term used in commercial leasing to indicate the tenant will be responsible for the taxes, insurance, and maintenance.

WRAPAROUND MORTGAGE - A wraparound mortgage is a note and mortgage usually taken back by a seller to finance the property for a buyer for an amount in excess of the existing first mortgage. The first mortgage of the seller is not paid off, hence the use of the term "wraparound". It is a mortgage that "wraps around" the first mortgage. Under a note and wraparound mortgage, the buyer makes the mortgage payments to the seller, and the seller continues to make the first mortgage payments to the first mortgage lender. Wraparound mortgages are usually used when there is a small down payment and the seller is financing a large portion of the purchase price. The advantage to the seller holding a wraparound mortgage is that it allows the seller to keep the first mortgage financing in place, the seller is assured that the first mortgage will be paid, and his or her credit will not be damaged. In the event the buyer defaults in the payments under the wraparound mortgage, the seller would be able to continue making the payments under the first mortgage while foreclosing the buyer's interest under the wraparound mortgage.

There are many complications and potential problems with wraparound mortgages. The parties need to be concerned about the due on sale provision in the first mortgage. The note and wraparound mortgage should provide who would be responsible if the underlying first mortgage is called due and payable as the result of transfer from the seller to the buyer. The buyer and seller should also include in the note and wraparound mortgage how the payments are going to be made on the first mortgage. The seller needs to be assured that the first mortgage payments are being made, and the buyer needs to be assured that the money paid to the seller is being applied to and used to pay the first mortgage. The failure of the seller to pay the first mortgage could cause a foreclosure, even though the buyer has been making payments regularly to the seller.

There are various methods to address this concern. One is to have the buyer make out two checks with each wraparound mortgage payment, one payable to the seller and one payable to the first mortgage holder. The buyer mails both checks to the seller, who in turn, sends the mortgage coupon or monthly mortgage statement to the lender with the buyer's check. The seller is assured that the mortgage payment has been made and the buyer has a cancelled check as evidence that the payment has been made. In the event the buyer's check bounced, it could cause a default. If the seller neglects to send the buyer's check to the lender, it could also cause a default.

Another problem relates to the insurance and taxes being escrowed by the underlying first mortgage lender. The lender will be put on notice that the title to the property has been transferred when the tax bill comes in, since it will show the buyer as the owner. Depending on the lender, and whether it pays by parcel number or notices a different name on the tax bill than the name on the loan, this will be one way the underlying first mortgage holder will become aware of the sale/transfer, and can demand payment in full pursuant to a due on sale clause.

A more difficult matter to handle is the insurance. If the insurance is in the buyer's name, showing the first mortgage holder as a mortgage holder and the seller as an additional mortgage holder, the first mortgage holder's insurance department may insist that the name on the mortgage and the name on the insurance correspond. If this is required, the first mortgage holder may not pay the insurance from the escrow account. If the seller has cancelled his or her insurance, the lender can put forced place insurance on the property at a very high premium and reduce the amount of the escrow. One method used to avoid this scenario is to maintain two insurance policies on the property. This is usually done at a substantial cost to the buyer or the seller. The parties should agree who will be responsible for paying the additional insurance premiums.

The transfer in ownership of the escrow is also a matter that needs to be addressed prior to closing. Routinely, the buyer buys the seller's escrow. This is complicated by the insurance issue and if two policies are purchased.