capacity of parties
The legal ability of people or organizations to enter into a valid contract. A person entering into a contract will have full, limited or no capacity to contract.

No capacity to contract - The inability of a person to enter into a valid contract under any circumstances. Such inability can arise when a person has been adjudicated insane or is an officer of a corporation who is not authorized to execute a contract in behalf of a corporation.

capital gain
Profit earned from the sale of an asset, where the sales price was greater than the adjusted basis.

capital improvement
Any structure or component erected as a permanent improvement to real property that adds to its value and useful life.

capital loss
Loss sustained from the sale of an asset, where the sales price is less than the adjusted book basis.

capitalization
A mathematical process for converting net income into an indication of value, commonly used in the income approach to value. The net income of the property is divided by an appropriate (capitalization) rate of return to give the indicated value. (Income ÷ Rate = Value)

capitalization rate
The rate of return a property will produce on the owners investment.

capping
The process at of laying two to four feet of soil over the top of a landfill site and then planting vegetation to prevent erosion and enhance the landfill's aesthetic value.

caps
Yearly and/or life-of-loan limitations on the amount of variation allowed when adjusting interest on variable-rate loans.

carbon monoxide (CO)
A colorless, odorless gas that occurs as a byproduct of burning such fuels as wood, oil and natural gas due to incomplete combustion.
  National Safety Council on Carbon Monoxide

care
The agent must exercise a reasonable degree of care while transacting the business entrusted to him or her by the principal. The principal expects the agent's skill and expertise in real estate matters to be superior to that of the average person. The most fundamental way in which the agent exercises care is to use that skill and knowledge on the principal's behalf. The agent should know all facts pertinent to the principal's affairs, such as the physical characteristics of the property being transferred and the type of financing being used.

carcinogen
A cancer producing substance.

cash flow analysis
A cash flow analysis shows the effect an investment property has on an owner's income in terms of tax benefits. Analyzes the return on investment after taxes on an income producing property. Measures the property manager's performance from period to period by comparing income and expenses for a given property.

cash-out
When a seller of a property wants to receive the entire sales price in cash with no carry-back financing.

caveat emptor
Latin for "let the buyer beware." A buyer should inspect the goods or realty before purchase.

certificate of eligibility
A certificate issued by a Veterans Administration regional office to veterans who qualify for a VA loan. The Veteran Housing Act permits regional administrators to restore a veteran's entitlement to loan-guarantee benefits after his or her property purchased with an existing VA-guaranteed loan has been disposed of and 1. this loan has been paid in full; 2. the administrator is released from liability under the guarantee or 3. any loss suffered by the administrator has been repaid in full. It is no longer required that property ownership was transferred for a compelling reason.

certificate of occupancy
A certificate issued by a governmental authority indicating that a building is ready and fit for occupancy and that there are no building code violations. Some condominium developers insert language into the sales contract to the effect that upon notification that the units are ready for occupancy, the buyer must accept the unit despite any construction defects that may exist, although acceptance will not bar the buyer from obtaining redress for such defects. Once the building has been certified for occupancy the developer can then close the individual sales, transfer title to the buyers and, most important, begin to pay off the construction loan and eliminate the interest payments.

certificate of sale
The document generally given to the purchaser at a tax foreclosure sale. A certificate of sale does not convey title: normally it is an instrument certifying that the holder received title to the property after the redemption period passed and that the holder paid the property taxes for that interim period.

certificate of title
A statement of opinion prepared by a title company, licensed abstracter or an attorney on the status of a title to a parcel of real property, based on an examination of specified public records. This certificate of title should not be confused with the certificate of title that is issued to a titleholder of land registered under the Toreens system, or with a title insurance policy.
A certificate of title does not guarantee title, but it does certify the condition of title as of the date the certificate is issued, on the basis of an examination of the public records maintained by the recorder of deeds, the county clerk, the county treasurer, the city clerk and collector and clerks of various courts of record. The certificate also may include records involving taxes, special assessments, ordinances, zoning and building codes.

Note that a certificate of title does not offer protection against "off -the-record" matters such as undisclosed liens, rights of parties in possession and matters of survey and location. Nor does it protect against "hidden defects" in the records themselves, such as fraud, forgery, lack of competency or lack of delivery. A title insurance policy, not a certificate of title, protects against certain off-the-record and hidden defects risks.

chain of title
The succession of conveyances, from some accepted starting point, whereby the present holder of real property derives title.

change
The appraisal principle that holds that no physical or economic condition remains constant.

closing
A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs.  At this meeting, ownership of the property is transferred from the seller to the buyer.

closing costs
Expenses of the sale (or loan refinancing) that must be paid in addition to the purchase price (in the case of the buyer's expenses) or be deducted from the proceeds of the sale (in the case of the seller's expenses). Some closing costs result from legal requirements; others are a matter of local custom and practice.

closing statement 
A document which details the financial settlement between a buyer and seller and the costs paid by each party.

cloud on title
Any document, claim, unreleased lien or encumbrance that may impair the title to real property or make the title doubtful: usually revealed by a title search and removed by either a quitclaim deed or suit to quiet title.

commitment
1. A pledge to do a certain act, such as a promise by a lender to loan a certain amount of money at a specific rate of interest to a qualified borrower, provided the loan is made by a certain date. 2. Also refers to an agreement by a title insurance company to issue a policy in favor of a proposed insured upon acquisition of a specific property.

common areas
Land or improvements in a condominium development designated for the use and benefit of all residents, property owners and tenants. Common areas frequently include such amenities as corridor or hall areas, elevators, parks, playgrounds and barbecue areas, which are sometimes called green belts. In shopping centers, the common areas are parking lots, malls and traffic lanes.

common elements
Parts of a property that are necessary or convenient to the existence, maintenance and safety of a condominium or are normally in common use by all of the condominium residents. Each condominium owner has an undivided ownership interest in the common elements.

common interest
The percentage of undivided ownership in the common elements belonging to each condominium apartment, as established in the condominium declaration.

community property
A system of property ownership based on the theory that each spouse has an equal interest in the property acquired by the efforts of either spouse during marriage. This system stemmed from germanic tribes and, through Spain, came to the Spanish colonies of North and South America.

comparables
Properties used as comparisons to determine the value of a specific property.

comparative market analysis (CMA)
This is a term often used by real estate brokers in preparing a report for prospective sellers and buyers, indicating market trends in various neighborhoods, based on computer statistics generated from multiple-listing service data. Generally, these analyses are used for clients to determine a listing price for the sale of a home or for buyers to determine if a list price is reasonable for a given location.

compound interest
Interest computed on the principal sum plus accrued interest. At the beginning of the new interest period, all interest is added to the principal, forming a new principal figure on which interest is then calculated. This process repeats itself each interest period—interest may be compounded daily, monthly, semiannually or annually.

concurrent ownership
Ownership by two or more persons at the same time, such as joint tenants, tenants by the entirety, tenants in common or community property owners.

condemnation
A judicial or administrative proceeding to exercise the power of eminent domain, through which a government agency takes private property for public use and compensates the owner.

conditional-use permit
Written governmental permission allowing a use inconsistent with zoning but necessary for the common good, such as locating an emergency medical facility in a predominantly residential area.

condominium (condo)
Type of real estate ownership where the owner has title to specific unit and shared interest in the common areas.   

condominium ownership
An estate in real property consisting of an individual interest in an apartment or commercial unit and an undivided common interest in the common areas in the condo project such as the land, parking areas, elevators, stairways, exterior structure and so on. Each condominium unit is a statutory entity that may be mortgaged, taxed, sold or otherwise transferred in ownership, separately and independently of all other units in the condo project. Units are separately assessed and taxed based on the combined value of the individual living unit and the proportionate ownership of the common areas. The unit also can be separately foreclosed upon, in case of default on the mortgage note or other lienable payments. In effect, the condominium permits ownership of a specific horizontal layer of airspace as opposed to the traditional view of vertical property ownership from the center of the earth to the sky. Typically, the unit, the percentage of common interest and the limited common elements are appurtenant to each other and cannot be sold or transferred separately.

conforming loan
A mortgage loan that meets all Fannie Mae and Freddie Mac underwriting guidelines.

consideration
An act or the promise thereof, which is offered by one party to induce another to enter into a contract; that which is given in exchange for something from another; also the promise to refrain from doing a certain act, like filing a justifiable lawsuit (the forbearance of a right). Consideration, which distinguishes a contractual obligation from a gift, is usually something of value, such as the purchase price in and paid for a promise or it may be a return promise. Thus, the mere promise to pay money is sufficient consideration, so an earnest money deposit is not necessary for purposes of creating a binding contract.

conservator
A guardian, protector, preserver or receiver appointed by a court to administer the person and property of another (usually an incapable adult) and to ensure that the property will be properly managed. A conservator may not need a real estate license to sell the protected real estate, although the sale does require court approval.

contingency
A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector.  

contract
In real estate, the contract is the legal document by which buyer and seller make offers and counteroffers. The real estate contract describes the property, includes or excludes items in the property, states the price, assigns the closing cost to each party, and sets a closing date. When the buyer and seller agree on terms and sign the same document, it is agreed that there is a "meeting of the minds" and thus there is a legally binding contract to buy and sell the property.

constructive fraud
Breach of a legal or equitable duty that the law declares fraudulent because of its tendency to deceive others, despite no showing of dishonesty or intent to deceive. A broker may be charged with constructive fraud for failing to disclose a known material fact when the broker had a duty to speak—for example, if a listing broker failed to disclose a known major foundation problem not readily observable upon an ordinary inspection.

constructive notice
Notice given to the world by recorded documents. All people are charged with knowledge of such documents and their contents, whether or not they have actually examined them. Possession of property is also considered constructive notice that the person in possession has an interest in the property.

contingency
A provision in a contract that requires a certain act to be done or a certain event to occur before the contract becomes binding.

contract
A legally enforceable promise or set of promises that must be performed and for which, if a breach of the promise occurs, the law provides a remedy. A contract may be either unilateral, by which only one party is bound to act, or bilateral, by which all parties to the instrument are legally bound to act as prescribed.

conventional life estate
A conventional life estate is created intentionally by the owner. It may be established either by deed at the time the ownership is transferred during the owner's life or by a provision of the owner's will after his or her death. The estate is conveyed to an individual who is called the life tenant. The life tenant has full enjoyment of the ownership for the duration of his or her life. When the life tenant dies, the estate ends and its ownership passes to another designated individual or returns to the previous owner.

conventional loan
A loan made with real estate as security and not involving government participation in the form of insuring (FHA) or guaranteeing (VA) the loan. The mortgagee can be an institutional lender or a private party. The loan is conventional in the sense that it conforms to accepted standards and the lender looks solely to the credit of the borrower and the security of the property to ensure payment of the debt. Conventional loans include those loans insured by private mortgage insurance companies.

Because the lender is not subject to the more stringent government regulations of the FHA and VA, conventional loans are frequently more flexible with respect to terms and interest rates, although they do reflect a higher interest rate and larger down payment requirements due to the higher risk involved. Non-conventional loan interest rates (VA loans) are fixed by federal regulation. Conventional loans are subject to institutional regulation, which may be statutory (federal, state) or self-created.

conversion
The appropriation of property belonging to another. The conversion may be illegal (as when a broker misappropriates client funds), or it may be legal (as when the government condemns property under the right of eminent domain).

convertible loan
An adjustable-rate loan that the borrower can convert to fixed-rate at any time during the life of the loan.

conveyance
A term used to refer to any document that transfers title to real property. The term is also used in describing the act of transferring.

cooperative
A residential multiunit building whose title is held by a trust or corporation that is owned by and operated for the benefit of persons living within the building, who are the beneficial owners of the trust or stockholders of the corporation, each possessing a proprietary lease.

co-ownership
Title ownership held by two or more persons.

correction lines
Provisions in the rectangular survey (government survey) system made to compensate for the curvature of the earth's surface. Every fourth township line (at 24-mile intervals) is used as a correction line on which the intervals between the north and south range lines are measured and corrected to a full six miles. Range lines are only parallel in theory. Due to the curvature of the earth, range lines gradually approach each other. If they are extended northward, they eventually meet at the North Pole. The fact that the earth is not flat, combined with the crude instruments used in early days, means that few townships are exactly six-mile squares or contain exactly 36 square miles.

cosigners
Additional signers of a financial agreement that add their personal guarantees to that of the borrower.

cost approach
The process of estimating the value of a property by adding to the estimated land value. The appraiser's estimate of the reproduction or replacement cost of the building, less depreciation.

cost basis
A cost basis of real property is usually based on the purchase price of the property plus the buyer's capitalized closing costs.

counteroffer
A new offer made in response to an offer received. It has the effect of rejecting the original offer, which cannot be accepted thereafter, unless revived by the offeror.

covenant
A written agreement between two or more parties in which a party or parties pledge to perform or not perform specified acts with regard to property; usually found in such real estate documents as deeds, mortgages, leases and contracts for deed.

covenant against encumbrances
The grantor warrants that the property is free from liens or encumbrances, except for any specifically stated in the deed. Encumbrances generally include mortgages, mechanics' liens and easements. If this covenant is breached, the grantee may sue for the cost of removing the encumbrances.

covenant of quiet enjoyment
The covenant implied by law by which a landlord guarantees that a tenant may take possession of leased premises and that the landlord will not interfere in the tenant's possession or use of the property. The grantor guarantees that the grantee's title will be good against third parties who might bring court actions to establish superior title to the property. If the grantee's title is found to be inferior, the grantor is liable for damages.

covenant of seisin
The grantor warrants that he or she owns the property and has the right to convey title to it ("seisen" simply means "possession").

covenants that run with the land
Covenants that become part of the property rights and benefit or bind successive owners of the property.

creative financing
Structuring the financing of a real estate transaction based on the cash positions of the buyer and seller. It involves working in conjunction with the existing financing to create a financing package that enables the buyer to purchase the property at better interest rates or terms than a conventional loan.

credit score
A snapshot of a borrower's credit worthiness; a numerical score based on statistics showing the risk of default on a loan; takes into consideration available credit, management of existing credit, and any detrimental credit information.

curb appeal
The first impression of a house as seen from the street.