Real Estate Terms

Generally, the term real estate refers to land and includes not only rights in the use of the surface but ownership of permanent structures located on the tract and may include mineral rights below the surface. Because mineral rights may be severed from the ownership of the surface many years ago and separately transferred or assigned, title insurance and attorney title opinions contain exclusions disclaiming any attempt to disclose the mineral ownership. In order to pass title to real estate, a deed with a proper description of the land must be executed and delivered. The form of the deed is quite important and it is unwise to use deeds that are not designed for use in the state where the property is located as this may prevent resale of the property without curative actions or create unexpected results.

Most deeds in common use in Alabama convey title in fee simple, usually indicated by referencing the grantee (the person receiving an interest in the land) and his or her “heirs and assigns”. This means that the rights in the real estate conveyed by the deed are inheritable or may be conveyed to third parties. There is no triggering event terminating ownership.

If two or more people are purchasing real estate, consideration should be given as to whether title should be held as tenants in common (at death the interest of each grantee passes to that party’s heirs as determined by will or, if the deceased has no will, the laws of intestate succession of Alabama) or with rights of survivorship (the instrument provides that the surviving party shall own the real estate). However a deed may provide for a life estate which gives the individual possession for the duration of his or her life only. The deed may go on to designate the owners of the remainder or reversionary interest (the owners of the property following the death of holder of the life estate) or, if there is no such designation, these rights are reserved to the grantor (the person signing the conveyance). Most married couples prefer the survivorship option for simplicity, but selection of this option prevents the will of the first to die or prenuptial agreements from having effect. Other rights that may be created in the land during a real estate closing, include the rights of the lender through a mortgage of the property or may be of limited duration such as a lease for a specific term of years.

The closing attorney is selected by the lender or another party to the closing to prepare documents, receive and disburse funds, and coordinate the closing process.  The attorney should be contacted for specific advice regarding the available options for taking title to the property as early in the process as is possible.

The contract between a seller and the real estate broker is called a listing agreement. Usually the broker earns a commission only if he or she finds a buyer. There are two general types of listings. The most commonly used is an exclusive listing which calls for payment to the broker even if the seller finds the buyer without the broker’s assistance. Most brokers require use of this agreement before they will actively advertise a property for sale. An open listing gives the broker the right to show the property and a right to a commission only if that broker obtains a buyer. As more than one broker may have an open listing and they are not paid if the buyer contacts the owner directly or another broker, the property may be shown to interested purchasers but the broker will not invest in advertising it.

Real estate brokers and their salespersons (real estate agents) are licensed and regulated by the Alabama Real Estate Commission but are also controlled by federal legislation such as The Federal Fair Housing Act which specifically prohibits discrimination by real estate brokers in the sale or leasing of real estate on account of race, color, religion, sex, or national origin at 42 U.S.C.§ 3606.

The real estate contract (the agreement to sell between a buyer and seller of real estate) should specify the exact name(s) of the proposed owner(s) and the manner in which title should be held. This is provided to the lender in the event that a portion of the purchase price is being financed. All of the lender’s documents may be generated from this initial document and confusion and delays are caused by use of shortened names or nicknames (e.g. Suzy Smith rather than Mary Susan Smith). Generally the full legal name as it appears on social security cards and identification is best. Please note also that everyone listed on the deed will be required to sign any mortgage or resale of the property, although they may not be listed on the note as a borrower (the person responsible for repayment of a loan) due to credit problems.

Most real estate contracts provide that the title to the property must be marketable title. This requires that the seller have proof of ownership of all the property he or she is selling and that third parties not have undisclosed interests in the title. A licensed attorney is generally employed by the buyer to investigate the public records to determine if the title is marketable and renders a written report called a title opinion. Common utility easements, mineral reservations and favorable restrictive covenants shown by the opinion generally don’t affect marketability, nor do mortgages and liens that are to be paid at closing. Some matters such as forgeries and rights of parties in possession not reflected by a recorded instrument cannot be disclosed by an attorney’s opinion. Based upon the title examination and for an additional fee, title insurance may be obtained insuring the buyer (owner’s title insurance) or the lender (lender’s title insurance) against losses caused by problems in the title  at the time of purchase or extension of the loan, whether or not it could have been determined from a careful search of the public records. Where the mortgage loan is to be sold in the long term mortgage market (discussed below), title insurance is required by the lender as a condition of making the loan. A Lender’s Policy is not for the benefit of the purchaser and coverage terminates when the insured mortgage is paid. Owner’s title insurance can be bought simultaneously with the lender’s policy at a discount.

A mortgage involves the transfer of an interest in land as security for a loan or other obligation. If the borrower defaults (generally defined by the loan documents as - failing to make payments, keep the property insured and show the lender as a loss payee, or failing to maintain and pay property taxes on the real estate securing the mortgage), the mortgage may be foreclosed. In Alabama, the property is most frequently sold at public auction after newspaper notice through a power of sale granted in the mortgage (non judicial foreclosure) but may be foreclosed through court action (judicial foreclosure).

Additionally on default, the lender generally declares that the entire mortgage debt is due and must be paid immediately through an acceleration clause contained in the document. The Garn-St Germain Depository Institutions Act of 1982 is Federal legislation that makes such provisions enforceable nationwide.

In addition to specific clauses contained in the mortgage, Alabama statutory and common law provide general rights to both borrowers and lenders. An example would be a right of redemption that is granted to a foreclosed party under Alabama law that is not provided for in many other states. An attorney should be consulted for specific advice in the event of a default causing acceleration and foreclosure of a mortgage. Both Alabama and Federal statutes provide specific protections to the consumer too involved for a brief discussion.

Individual and institutional lenders are regulated by the Alabama mini code but many institutional lenders are more strictly regulated by federal or state law or agencies depending upon the law establishing the entity - such as Savings and Loan Associations by The Office of Thrift Supervision, National Banks by The Comptroller of the Currency, and Federal Credit Unions by the National Credit Union Administration

It is common for long term loans (loans with terms of 15 to 30 years) to be traded in a national market. They are designed to be purchased by federal agencies such as the following: Federal National Mortgage Association, or Fannie Mae Federal Home Loan Mortgage Corporation, or Freddie Mac Government National Mortgage Association or Ginnie Mae. Generally these loans limit the borrower to financing 80% or less of the lower of the purchase price or the appraised value. Borrowers without the 20% down payment required can obtain mortgage financing through use of an 80-20 loan package (a long term loan for 80% with a 20% equity-line at a simultaneous closing) or through use of a mortgage insurance program. Private mortgage insurance companies provide a guaranty to the lender (essentially an agreement to buy the loan in the event of a default) in exchange for a monthly premium paid until the loan is reduced to a “safer” level for the lender’s investment. This premium is usually referenced as MIP or PMI and can have a substantial effect upon the net cost of the loan and upon the borrower’s monthly payment.

The federal government also insures mortgages through the Federal Housing Administration and the Department of Veterans Affairs Although designed to help make housing affordable to those without a large down payment, loans by these entities are highly regulated and require additional time to process. Care should be used in executing a real estate contract (the contract between Buyer and Seller) where this type of financing is used as the Buyer cannot pay certain closing costs.

For detailed information about surveys the Land Surveyor Reference Page is an excellent source.