It s fun to read stories about wins and losses in the real estate game. It s motivational and entertaining, but sometimes it s more important to learn some very practical information every real estate investor (or even a home buyer) should know. Here are ten essential terms to know.
Types of Interest in Land
1. FREEHOLD: Owning a freehold property means you have the right to use the land for an indefinite period of time and, subject to any bylaws or restrictive covenants, may do what you wish with that land.
2. LEASEHOLD INTEREST: Owning a leasehold on a piece of land gives you the right to use the land for a certain period of time. The owner of the leasehold may sell the land, but the new land owner will be subject to the terms and conditions of the original lease.
Owning Property
3. JOINT TENANCY: Typically how you would own the home you live in with your spouse, as it has the right of survivorship which means if one of the owners dies the other immediately is given the other person s share of the home. Interest is undivided but equal in this ownership type.
4. TENANTS IN COMMON: This is how my husband, Dave, and I own most of our properties together as it allows us to specify the percentage amount of ownership, and it does not carry the automatic right of survivorship. For investment properties this makes a lot of sense because you may not want your partners to automatically get your share of the property if you pass away. For example, Dave and a partner M.M. have bought properties together as Tenants in Common. If Dave passed away, he d likely want his share to pass on to me or his family, not necessarily to M.M.
If you are putting in unequal amounts of money into the investment you may want the ownership percentages to reflect this. For example, early on in our relationship, we bought property where Dave did 100 of the work on the deal and put up most of the money. We own this property together as Tenants in Common with him owning 60 of the property and me owning 40 . At tax time, he claims 60 of the income and expenses and I claim 40 .
Terms you will see in a Purchase and Sale Agreement
5 & 6. FIXTURES vs CHATTELS: If an item is built in or attached to the property in a permanent way, then it is considered a fixture and will be transferred with the property unless it s otherwise stated in the purchase and sale agreement. A chattel, on the other hand, is something that is movable like a fridge or a washer and dryer. These are assumed to not be included unless otherwise stated in the agreement.
7. & 8. CONDITIONS and WARRANTIES: A condition is a fundamental part of the contract. We always make our contracts for purchase and sale subject to at least one condition for at least 5 business days. In the tri plex we almost bought, we struck out the subject to inspection condition but had the deal subject to us being able to obtain satisfactory financing. A breach of a condition within the set time period stated in the contract allows you to get out of the contract. We were able to walk away from the contract without losing any money during that 5 day conditional period because of the financing clause. A warranty, on the other hand, is a promise but it is not fundamental to the contract. In a breach of warranty you may sue for damages but it does not allow you to neglect your contractual obligations. A warranty may apply to something like condominium fees. A seller may warrant that his/her fees are $300 a month. You may find out they are actually $400. This is not a fundamental breach of contract, but you could seek damages as it will cost you $100 more per month.
9. CONSIDERATION: In contractual terms consideration refers to something of value. When you buy a property, the price you pay is the consideration. This is not always a dollar amount, as it could be another property or a promise of value.
10. DAMAGES: Damages refer to financial losses that have arisen from failure to complete the deal as stated in the contract. You have to prove you have suffered financially as a result of the other parties actions, and then you can sue for those damages. For example, you could sue for the $100/month difference in condo fees if you could prove you ve suffered financially by the sellers misrepresentation of the condo fees.
There s a fantastic CANADIAN resource for all things real estate by Douglas Grey, which I used to check some of my definitions above. It s called: Making Money in Real Estate: The Canadian Guide to Profitable Investment in Residential Property, Revised Edition. He covers everything including insurance, tax, legal information and provides additional resources. It s a solid book to have in your library as a Canadian real estate investor.
Author Resource:-
In eight years my husband and I have built a multi-million dollar real estate portfolio in our spare time with minimal cash resources. We publish a free monthly newsletter to help other rookie real estate investors achieve their real estate investment goals. Sign up at: http://www.revnyou.com
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