491: 10 Terms Every Real Estate Investor Must Know

February 8, 2021bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 491: 10 TERMS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW

It’s very important that real estate investing professionals clearly understand the vocabulary of their profession. Too often, well meaning investors say misleading things, not trying to be deceptive but because they don’t know the precise meaning of the words they are using. In today’s podcast, author, attorney, accountant and real estate investor Michael Lantrip shares 10 common real estate terms that tend to be misinterpreted by many real estate professionals.

What You Will Learn

Why it’s important to for real estate investors to clearly understand the language of real estate investing
What are some of the most misunderstood and misinterpreted real estate terms
Why is there no such thing as an “abandoned property”?
What you should do if a Lender asks you to sign a Personal Guaranty
Which terms are not what they appear to be?
If your neighbor builds a fence of your property, what rights do you have?

About Our Guest

Michael Lantrip

Michael Lantrip, Attorney at Law, is licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia. He is also admitted to practice in the U.S. Tax Court, the U.S. Federal District Court, Eastern District of Texas, and the D.C. Court of Appeals. He has a B.B.A. in Finance from the University of Houston School of Business, and he has a Juris Doctor (J.D.) in Law from the University of Texas School of Law. He practices in the fields of Tax Law, Real Estate Law, Corporate and Business Law, and Wills, Trusts and Estates. As a Criminal Defense Attorney, he has taken three cases to the Texas Court of Criminal Appeals, winning two of them. As a County Attorney, he handled almost 2,000 misdemeanor criminal cases. Formerly a Tax Examiner for the IRS, and a Tax Accountant for a Big 8 Accounting Firm, he has also been a Newspaper Reporter, Radio Announcer, Radio News Director, Television Reporter and Anchorman, Television Executive News Producer, and Military Intelligence Analyst. In addition to 35 years of practicing law, he built one of the first computerized Abstracts Plants and operated his own Title Insurance Company, and has been an Approved Title Attorney for seven national Title Insurance Underwriters. He has handled over 2,000 real estate closings. As a Real Estate Investor, his activities have ranged from Travel Trailers to Office Buildings, and from on-campus Condos to hundreds of acres of land.

Prior to his law career, he was a Radio Announcer at WQTE in Detroit during the “Motown” era, and he was a DJ at KIKK in Houston when it was named “Country Music Station of the Year” by Billboard Magazine. He has written over 700 stories as a daily Newspaper Reporter, he has written and produced more than 1,000 half-hour Television Newscasts, has logged over 8,000 hours on the radio, was named a Top Writer 2018 by Quora.com, and is a Lifetime Member of Mensa.

The Book: Real Estate Investing Vocabulary of Terms – The Language of the Deal

There are 85 word definitions in the book
The book started from his own personal notebook that he kept to maintain consistency as he used the terms
He picked 10 for the show today to show how these terms can be helpful and misunderstood at the same time
If you use these terms in the way they should be used, it will improve your reputation as a real estate investor
It will also show that you really understand real estate investing

10 Terms Every Real Estate Professional Needs to Know

#1 Pre-Approved

This term is a bombshell
It’s used by potential lenders in telling loan applicants the status of their loan applications during the loan process
It’s really to keep them involved in the process
“Pre-Approved” actually means you have not been approved
And it also means there is no reason to believe you will be approved
The word “Approved” means you have been approved. Everything else means you have not been approved
If the term means anything, it means you have provided all of the documentation required or has been asked of you up to that point
“Pre-Approved” does not mean that you have been pre-approved ahead of time
If fact the person or committee who approves your loan hasn’t even seen it yet
It doesn’t mean you’ve been approved ahead of time
It doesn’t mean you’ve been approved
However, there is something you should look into called a “Loan Commitment Letter”
- The heading says “Conditional Loan Approval”
- It’s about 4 pages long
- And it will contain all the terms and conditions of the approval
- It has 2 sets of requirements for you to meet as the borrower:
  - Prior to docs – The lender wants this done prior to the time in which they are ready to order the loan documents from the attorney to be sent to the Title Company
  - Prior to funding – These are the things you must do before they will fund the loan (get an insurance policy letter, appraisal, etc.)
- You can get it from some lenders but most will not because it locks them in
- It is a commitment on their part to make the loan, unlike the “pre-approved” email you will get

#2 Clear Title

There really is no such thing as Clear Title.
In the United States, with the early Land Grants, the promoters, the crooked Politicians, the illiterate population, and even honest mistakes, every parcel of land has some cloud on the title over the past 240 years.
What we usually deal with is what is called “insurable title.”
That means that the Title Insurance Company has searched the public records for all of the documents that affect the title to the property. And they have concluded that although they cannot show that title is clear, they believe that the items that might affect the ownership of the property, held by the Seller, are so unlikely to come up, that they are willing to pay the Buyer for any loss he may suffer as the result of such an event.
Title is not clear, but it is insurable. It’s the best we can do.
He has insured a lot of title that wasn’t clear
- In recent history, there were people who roamed the country selling aluminum siding
- They would sell the siding to people with a contract for 5 years at $87 a month
  - The contract would include a clause that was a lien on their real estate that would be filed in the county records
  - At the end of the 5 years, after the loan was paid off, there was no one around to remove the lien because the salesman usually sold the note to a finance company and moved on
  - The finance company couldn’t remove the lien because it wasn’t in their name
  - So the lien just stayed there
  - His title company insured over things like that
If you use the term “Insurable Title” it will show that you are very knowledgeable real estate investor

#3 Quit Claim Deed

To know what a Quit Claim Deed is, you first need to know what a deed is.

The necessary elements of a deed are:

Grantor: the individual or entity who owns the property and is transferring it.
Grantee: the individual or entity to whom the property is being transferred.
Property Description: sufficient to identify the property owned by the Grantor to the exclusion of all other property.
Consideration: no longer required in some States, and not even required to be stated correctly in any States, and usually recited as “Ten dollars and other
good and valuable consideration.”
Habendum clause: exact rights being transferred by the Grantor to the Grantee, such as “To have and to hold… “
Signature: also called “execution,” usually required in front of Notary Public but, surprisingly, not always. Some States even allow you to stop a couple of Gomers passing by and have them sign as “Witnesses.” Don’t do it. Always notarize signatures, while complying with other State law requirements.
Delivery: this completes the transaction. Recording in the public records is not required in some States for the deed to be valid and complete, but is required to give notice to the public of the transfer of ownership.

This completes the transaction even though the document hasn’t been filed in the county where the property is located. That not part of the actual transfer process. The purpose of filing the document in the county real estate records is not to complete the transfer but to give notice to everyone else – to the public – that the transfer has occurred and now John Smith is the owner of this property.

If you do not do this then someone else can buy this property without knowledge that the person that sold it to them had already sold the property to someone else. Then you would have a big problem. That’s why you always immediately record those at the courthouse.
In some states, they even have a statute that says that you must, in order to protect the title that you’ve received, according to the courthouse, and give everyone else notice. And the laws in those states are called “the race to the courthouse” statute because whoever gets there first is the real owner of that property.

A “Quit Claim Deed” is not even a deed.

Look at the elements of a deed listed above. Now think about what a “Quitclaim Deed” says. It doesn’t contain the elements of a deed.
It says, in effect, “I don’t even claim that I own an interest in this property, but if I do, I hereby transfer that interest to you.”
A Quitclaim Deed is not a document of conveyance, it is a document of disclaimer of interest in favor of someone else. It doesn’t claim to own and it doesn’t claim to transfer.
The overriding requirement of a valid deed is the intent to convey title to the property. The Granting clause says, “I hereby grant and convey.”
If anything, the Quitclaim Deed is a disclaimer of interest in a property from one person to another.
But people continue to try to use the document, so some States have amended their Real Property Code to deal with the Quitclaim Deed problem, and while not acknowledging that it is a deed, they allow its acceptance as transferring interest if certain other factors are present, or not present, and they sometimes require the passage of time, with the minimum being one year and the average being four years.
As the owner and operator of a Title Insurance Company, I never insured nor closed on property with a Quitclaim Deed in the chain of title.
Most insurance is to protect you for things that are going to happen in the future. Title Insurance is to protect you from things that happened in the past.

#4 Deed in Lieu of Foreclosure

This is not a misnomer or mistake in title. You actually do deed the property back to the owner of the purchase money lien instead of lien holder foreclosing on the property.
It usually happens when you are in default or delinquent.
When a Borrower has defaulted on the loan that is secured by his real property, the Lender has a legal right to foreclose on the property and take it back.
But if the Borrower accepts the reality that there is nothing he can do to prevent this, he is likely to deed the property directly to the Lender, using a deed called a Deed In Lieu Of Foreclosure.
It saves the Borrower from having a Foreclosure showing on his credit record, as well as causing additional costs for the Lender, for which the Borrower is responsible.
Most people believe if I deed it back I lose the property. However, there are two problems with that:
- First, understand that the IRS looks at the transaction of deeding the property back to the Lender as a sale. And they look at the Sales Price being not what you owe or paid for the property but, instead, whatever the Fair Market Value (FMV) of the property is at the time of the transaction.
  - To the IRS, you just sold that property.
  - The problem is that 4 or 5 years ago, you bought a 10-unit apartment building for $500,000 and you’ve claimed depreciation on it each year.
  - And now, the depreciated basis of the property is down to about $350,000.
  - However, the FMV of the property is now $800,000 and, in the meantime, you’ve refinanced it and put the money in your pocket and new loan on it is $700,000 and you can’t pay it so you deed it back to the Lender.
  - The IRS looks at it as if you just sold the property at a FMV of $800,000
  - If the Borrower has owned the property for quite a few years, and has just been refinancing it periodically, he might even have a low Basis in the property due to all of the depreciation taken.
  - Your depreciated basis in it is $350,000
  - They see it that you just had $450,000 in Capital Gains
  - And now they want the money and you don’t have it
  - The Borrower owed more than that to the lender, say $300,000, the difference is considered a type of income known as Cancellation of Debt (COD) income. The $40,000 would be considered ordinary income, and would be taxed at the Borrower’s marginal tax rate. This is one type of possible income.
That is why you need to l0ok very closely before signing a Deed in Lieu of Foreclosure

#5 Personal Guaranty

This is when you make a loan in the name of an LLC or a Partnership or Corporation and the entity will be on the deed
The lender will have you sign a Personal Guaranty, meaning that you, as an individual, is assuming personal liability for payment of the debt that is not your personal debt.
Usually the money is used for the purpose of buying real estate or another asset, or to make improvements on such an existing asset.
If the Lender feels that there is too much risk involved, the Lender will require the owner of the legal entity to personally guarantee the repayment of the loan.
This is not an unusual event.
But most people just sign the document that they are presented without question, thinking that their decision is to either do it or not do it.
But there are at least three ways to do this.

The one we just talked about, the Personal Guaranty, is a blanket guarantee – it’s complete. This is what the Lender usually wants — a blanket guaranty, meaning that you, the Guarantor, are promising to repay the loan. However, you might be able to negotiate two other options with the Lender.
You could become a Standby or Back-up Guaranty. This means that if the payment is late, the Lender deals with the entity. If the loan goes into default, the Lender pursues collection procedures against the entity leading up to posting the collateral for foreclosure. At this point, you are required to take over and payoff the loan, in return for the Lender transferring to you the First Lien on the property that is securing the loan. You could, at that point, just refinance the loan
Or you could even become a Loss Guaranty. This means that you are out of the process altogether. The Lender deals with the entity all the way through foreclosure, sells the property. applies the Net Sales Proceeds from the Foreclosure Sale to the principal balance of the loan and if there is a deficiency, then you will make up the difference.

There is more than one kind of Guaranty, and it will benefit you to know the difference. You should try to negotiate this if you can before you sign that blanket guarantee.

#6 Assignment of Rents

When you get financing on a real estate income property, the Lender will require another document that they slip in with all the others called Assignment of Rents
When a real estate investor gets a loan on a rental property, he will sign a number of legal documents, whether the transaction is a purchase or a refinance.
Depending on where you live, these documents will be called different things, such as Real Estate Lien Note, Promissory Note, Mortgage, Deed of Trust, or something else.
The lien documents will be filed “of record” in the Real Property Records of the County in which the property is located.
The investor will also sign another document called an “Assignment of Rents” which will probably not be filed of record along with the other documents, but kept in the Lender’s files to be used if required.
With this document, the investor assigns his right to receive the rents from the property to the Lender. The purpose is to protect the Lender in case the investor stops making payments on the obligation, by authorizing the Lender to collect the rent and apply it to the Note.
When the Note goes into default, the Lender files the Assignment of Rents in the Real Property Records, obtains certified copies, and sends the certified copy by certified mail to the tenant, and instructs the tenant to begin making monthly payments to the Lender instead of the Owner.
The problem is, as you are the Landlord, you are still responsible for the expenses, however, you are getting any income to pay those expenses.
Look at the language in that Assignment of Rents document to see whether or not the Lender will then take over payment of the expenses or just take the rents and apply the funds to the note. That could save or cost you time and/or money.

#7 Living Trust

A Living Trust is not a trust. It is a conditional document that creates a trust that will come into existence upon a certain condition.
In other words, this is a “Revocable Trust.”
A “Revocable Trust” is a very difficult concept to explain because there is so much misinformation about Trusts. A Trust, by legal definition, is not revocable. Therefore, there cannot be a thing called a “Revocable Trust.”
But there is, because of the use of something called a “Living Trust.”
The “living” was chosen by the people who promoted and marketed the scheme as a technique for Tax Planning and Estate Planning, with the primary objective of avoiding the requirement to Probate an Estate upon death.
But since “living” is not a legal term, and since it is necessary to accurately describe the planning device in legal terms, it had to be described as a Trust because there was an actual document, a Declaration of Trust.
But it also had to be further identified as “revocable” since that is its main distinguishing characteristic, and since that sets it apart from the standard legal definition of a Trust.
In practice, here is how a Revocable Trust works:
The Trustor sets up the Living Trust and names himself as the initial Trustee, and also names himself as the primary Beneficiary.
Both of these are not allowed in setting up a real Trust, so it does not meet the legal requirements to be a Trust, and it is not a Trust.
The language of the Declaration of Trust says that the Trust can be revoked at any time, which is also prohibited with a real Trust.
But, and this is the key to the whole scheme, the language also says something to the effect of “upon my death this Revocable Trust shall become Irrevocable, and I name Helen Jones as Successor Trustee, and I name the children of Helen Jones as the Successor Beneficiaries.”
And even if it could, real estate that is going into a real, legal, Trust is not deeded to the Trust, it is deeded to the Trustee.
And since the person who set up the Living Trust named himself as Trustee, he would be deeding the property to himself as Trustee of a Revocable Trust that has no legal existence.
There are many other legal problems as well, with brokerage accounts and retirement accounts, but people just seem to ignore them and pretend that everything is fine.
If you decide to use a Living Trust in spite of everything, PLEASE, get one from an Attorney who specializes in Estate Planning, instead of from a Salesman.
At this point, the illegal Revocable Trust immediately becomes a legal Irrevocable Trust.
And if the Trustor puts all of his assets into the Trust, then he has nothing that needs to pass through Probate, and the time and expense of such a proceeding is avoided.
When done properly, it is an effective Tax Planning and Estate Planning tool.
But there are a lot of potential problems.
The first problem involves trying to deed real estate to the Revocable Trust.
Since it is not a valid legal Trust, it does not exist as a legal entity and therefore cannot own real estate.

#8 Abandonment

In the world of Real Estate, “abandonment” is being defined as the act of just walking away from a property and declaring that you are giving up all ownership and other rights, and the ownership reverts to either the prior owner, or someone else, or to the State.
Don’t get caught using this reference. It’s a fantasy. It doesn’t happen.
If the property is in your name, you own it, and you have all of the legal responsibilities of ownership, and you will continue to own it and be responsible for it until you transfer the ownership to another individual or entity n the manner required by law, or until the property is sold at public auction, either to satisfy a judgment, or in compliance with a Court Order.
You cannot create a legal outcome, or accomplish anything, by just “walking away” from a property.
In fact, the law does not distinguish between you being present on the property or not present on the property, so even the idea of “abandonment” has no legal substance.
You either own the property, or you don’t.
And if you do own it, you need to take care of it because you are responsible for it, and you cannot abandon it.

#9 Adverse Possession

A popular misconception of Real Estate Law is that one of the ways people obtain title to property is by Adverse Possession.
This misconception is that, if you find property no one is living on, that you can just move in and take the property by Adverse Possession.
This almost never happens.
While operating a Title Insurance Company, I did title searches on properties over a 16 year period, multiple times each day, each search involving looking at 20-30 documents in the chain of title.
I never saw a piece of Real Estate where anyone in the chain of title obtained that title under the law of Adverse Possession. Not one.
Adverse Possession is a means of acquiring title to real estate by establishing “actual, open, notorious, exclusive, hostile, and continuous” occupancy of the real estate for a certain period of time.
It sounds possible if you say it real fast, but it almost never happens, and looking at each individual element will show why.
- “Actual” means that you must actually be in possession of the property, either living there or using the property on a regular basis.
- “Open and notorious” means that you are possessing the property in a manner that is clear for everyone to see, and that your possession of the property demonstrates to an observer that you believe that you are the owner because you are acting like the owner of property would act.
- “Exclusive” means that you have not permitted anyone else to enter the property, and that you have attempted to prevent them from doing so, such as by fencing the property and putting up a locked gate, which also contributes to the “notorious” requirement.
- “Hostile” means that you have fought any claims by any other person to the property.
- “Continuous” means uninterrupted. And some of the State statutes require possession periods up to 40 years.
But the primary stumbling block to claiming title to property by adverse possession is that you must be making your claim based on some legitimate claim of “right of title,” such as a signed document. So you can’t just go to the Courthouse and look in the records and pick a bunch of properties and claim them. Or drive by a vacant lot, and decide to start paying taxes on it, and then say that it is yours.
The actual process of acquiring Title by Adverse Possession involves filing a lawsuit and asking the Court for a Declaratory Judgment establishing your ownership of the property.
During the more than 37 years of practicing law, Michael has never seen it.
The environment varies among States, but in the ones where Michael is licensed and attends the required number of Continuing Legal Education (CLE) courses each year, the State Bars are not even providing courses on the subject.
But your State might be different, so you should look into it.

#10 Encroachment

Encroachment is when a structure on your property crosses over your property line and onto the adjacent property, or a structure on the adjacent property crosses over the property line onto your property.
In the situation of encroachment onto your property, you do not have any rights in regard to the structure, except to file a lawsuit and compel the removal of the encroaching portion.
A situation often considered Encroachment, but which is not, is when the adjacent property owner builds a fence that is beyond his property line and is actually located on your property.
In this situation, you own the fence.
It was built on your property and became part of your property.
You can do what you want with it, although doing so will probably lead to a dispute that is more trouble than it is worth, but the law in your State is probably on your side.

In Conclusion

It’s very important, as a credible real estate investing professional, that you clearly understand the vocabulary of the profession, whether it’s with other investors, legal professionals or in the public. Too often, well meaning real estate investors say misleading things, not trying to be deceptive but because they lack full understanding of the terminology they are using.

Michael wrote the book because he realizes, in this profession, that your reputation is all you have, especially when you are establishing new relationships with people. Whether you know what you are talking about is by what you say. You have to both know what you are saying and say it in the right context.

If you increase your knowledge of real estate investing just 5% each month, in three years, you’ll know six times what you know right now!

How to Reach Michael

Website: MichaelLantrip.com
Where to buy his book: Real Estate Investing Vocabulary of Terms: The Language of The Deal

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