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Glossary of property termsAfter tax cashflowThe cashflow generated from the property once all expenses are taken into consideration, and after the tax rebate/payment has been made for depreciation.AgreementThe written contract for the Sale and Purchase of the property between the Vendor (seller) and Purchaser (buyer).AppraisalA formal evaluation of property by an expert, used to establish the market value.Arrangement FeeA fee paid to the property investment company for services relating to the purchase of a property.Assignable ContractsA contract with a provision permitting the contract holder to convey his or her rights of assignment to a third party. The property is sold on by exchanging contracts with a new buyer after you have exchanged contracts with the developer. This transaction occurs before legal completion. It will be the new buyer's funds that pay the developer for the purchase price you originally agreed and exchanged contracts on, with any remaining difference in funds as your gross profit. Not all developers allow this so check with them before committing yourself. Even though you may have assigned the contracts to a new buyer, you are still most likely to be liable for the debt if the new buyer does not complete.AuctionA public sale where the property is sold to the highest bidder - on the proviso the reserve price for the property has been met or exceeded.Back-To-BackThis is where you complete on a property and a new buyer that you have found completes with you almost simultaneously. It will be the new buyer's funds that pay the developer and any funds left over will be your profit.Body CorporateA legal entity created under the Unit Titles Act 1972 consisting of all the unit owners within a unit-titled property and controlled, where there are more than three, by an elected committee. The Body Corporate essentially has an overall management and administrative function.Building ConsentA local authority permit issued to an owner or occupier undertaking building work to ensure all work complies with relevant codes.Capital GrowthAn increase (or decrease) in the value of a property due to changes in the property market.Capitalisation RateThe capitalisation rate is applied to convert net annual income from a property investment into value. In effect it is the market derived price:earnings ratio. Also referred to as the 'All Risks Yield', 'Initial Yield' or 'Initial Return'.Cash on Cash returnA percentage calculation that is worked out by dividing the gross/net cashflow from the property by the amount of money invested in the property.CaveatA caveat is a legal document which, when lodged in the Land Registry Office, gives the caveator the opportunity of protecting an existing right or of establishing an existing claim in property. The most common form of caveat is the caveat against dealings with the land concerned. In effect, while the caveat is in place, it forbids any dealings in the land from being registered.Certificate of TitleThe document of title to the land held under the Torrens System of land registration. It consists of duplicate deeds stating the fact and extent of the interest held in the land. One copy is held by the Land Transfer Office and the other by the registered proprietor.ChattelsMovable and removable items, commonly including stove, television aerial, fixed floor coverings, blinds, curtains, drapes and light fittings, as well as furniture and personal effects. Unless chattels are specified in the Agreement they do not go with the property.Code Compliance CertificateA certificate issued when building work is finished, confirming that the building complies with the New Zealand Building Code.CompletionFinal stage in legally transferring ownership of a property when the contract of sale is completed. The vendor hands over the property and the buyer pays the purchase price. It is at this point that the balance of funds is required. Funds go from the purchaser's solicitor's account to the vendor's solicitor's account.Conditional AgreementA Conditional Agreement is a legally binding contract, but the property is not bought or sold until a certain condition or conditions detailed in the Agreement have been satisfied, usually by the purchaser (e.g arranging mortgage finance by a certain date.ConveyanceAn instrument or document which transfers property or a right in property from one person to another.CovenantAn agreement or promise by deed by which one party pledges to another that something will be done or has been done, and relates generally to the relationship between vendor and purchaser or lessor and lessee. It is commonly used to control the quality and type of building within new developments.Cross LeaseA form of multi-unit tenure in which each owner has an undivided share of the underlying freehold as tenants in common, as well as a long term (usually 999 years) registered leasehold estate of the particular unit occupied.DepositAn amount or a percentage of the purchase price paid by the property purchaser when the agreement is signed. Many people get confused about the deposits required when purchasing off-plan property. There are generally two required:
DepreciationA decline in the value of property and chattels (the opposite of appreciation). Depreciation expense can be offset against property income for tax purposes.Discount RateThe rate of interest that reflects the opportunity cost of capital from similar investments of equivalent risk. It is applied to future cash flows to convert them into present values and is normally expressed as a nominal annual rate.Due DiligenceThe process by which careful consideration of every aspect of a proposed asset purchase or lease is reviewed including in-depth financial, legal and physical investigation. Because the purchase or lease of an investment property can be complex, sale and purchase agreements and lease agreements are often conditional upon the completion of due diligence within a specified period to the satisfaction of the purchaser or prospective lessee.EasementA right which a person has to use land belonging to another in a particular manner without the right of possession of the land, or to take any part of the soil or its produce, or to prevent a landowner from using their land in a particular way. A common form of easement is the right of access over another's property.EquityThe difference between the market value of a property and the value of claims held against it.Estimated Total Building ValueThe estimated value of the building alone, excluding the land and location.Exchange of Contracts (UK Terminology)This is the first legal obligation when buying property off-plan. Exchange of Contracts usually occurs 28 days after the property has been reserved. At this stage a deposit of 5% to 10% is paid to the developer. When you and the developer exchange contracts the deal becomes legally binding. If you pull out before completion you will lose your deposit. You should also have a mortgage offer in place at this point. Some solicitors will not go to Exchange of Contracts without one.(Conclusions of Missives in Scotland) (Unconditional Date in New Zealand) FreeholdProperty held as Freehold is often referred to as an estate in Fee Simple. It is the interest in land having the greatest rights of use and enjoyment allowed by law and the widest power of disposal or alienation. All other forms of tenure are created out of a freehold or fee simple.GearingBorrowing to buy property, using the rental income to cover the mortgage payments. If property prices rise, gearing magnifies your capital profits because you get to enjoy growth on a much larger chunk of property than you could normally afford. If property prices fall, gearing magnifies your losses.Gifted depositWhere the developer gifts you up all or part of your deposit. Some lenders will accept a gifted deposit in lieu of a deposit paid by the property purchaser, others will not.InstalmentsThe amount of the principal and/or interest that you pay regularly.InterestThe amount the bank charges for the loan over the term of the loan.Interest RateThe current annual rate the bank charges in interest for the loan.Internal Rate of Return (IRR)The discount rate, which will equate all future cash flows to the original cost of the investment. In effect it is a measure of the expected average annual rate of return on the unrecovered amount of an investment and involves finding the rate that discounts the net present value of all cash flows to a sum of zero. In real estate analysis this is sometimes referred to as the 'equated yield'.InvestmentThe investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.LeaseholdOccupation of the land under a lease whereby the land owner charges a rental on the land and the occupant (or lessee) obtains the right to occupy the land for a specified term at a specified rent. Any improvements on the land, i.e. building of a house or additions, legally belong to the occupant but the ownership is subject to the terms of the lease.LoanFunds the buyer borrows (usually from a bank or other financial institution) to purchase a property, generally secured by a registered mortgage to the bank over the property being purchased.Market valueThe estimated amount that would be paid for property rights being acquired or disposed of if a property were offered on the open market by a willing seller and allowing for a reasonable period of exposure in a manner that would attract interest.Max Loan to Value Ratio (LVR)The maximum percentage of the purchase price the bank is to lend.MortgageA legal document containing the terms and conditions applied to the funds (money) lent to a person (or legal entity) for the purchase of property (real estate).Mortgage brokerAn intermediary between a borrower and a lender. A broker's expertise is used to help borrowers structure and find financing that they might not otherwise find themselves.MortgageeThe lender of funds who takes mortgage security over the assets of the borrower.MortgagorThe party borrowing funds whose property assets are mortgaged as security in favour of the lender.No Money DownBuying a property with 100% finance.OPEX (Operating Expenses)The ongoing, generally periodic, operating expenses or outgoings associated with the occupation of space over and above the base rent. Operating expenses generally consist of the likes of air conditioning, lighting, lifts, cleaning, security and servicing charges etc. In a net lease, such expenses are charged on a proportionate basis to individual tenants according to either a proportionate share of the rent or space occupied.Passive CashflowAnnual rent less all annual expenses plus any tax rebate.Pre-Approved Home Loan CertificateA certificate that confirms a home buyer is eligible to borrow a specified amount of home finance from a bank. These are usually issued by a bank before prospective buyers start looking for a home, and are valid for around 6 months.Pre tax cashflow per yearThe cashflow generated from the property once all expenses are taken into consideration before the tax rebate/payment has been made for any depreciation allowance.PrincipalThe total amount of funds you are borrowing.Registered ValuationAn opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. Often required by the bank when evaluating a property's suitability for a MortgageRent ReviewThe right of the lessor to review rental under a lease. Commonly in occupational leases this is a 2 to 3 year period, while in the case of ground leases 5, 7 or 21 years are normal.Rental YieldThe annual rental income derived from a property expressed as a percentage of the purchase price.Reservation and Reservation FeesThe initial fee required by the developer to hold a property for you. This fee may or may not be fully or partially refundable so make sure you read the reservation papers. If you are not prepared to proceed to go unconditional (Exchange of Contracts), you may very well have to forfeit your reservation fee.Resource ConsentA local authority permit issued to enable a property owner or occupier to carry out an activity on the property that is not permitted as of right under a local District Plan.Sale & Purchase AgreementA written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold.SettlementA date is set for settlement of the sale at which point the balance of the contract price is paid and ownership of the property transfers from the vendor (seller) to the buyer.ShortfallThis is the difference between what you would expect to pay as a deposit for a buy-to-let mortgage (based on the lender's rental coverage criteria) and what you can actually raise as a mortgage based upon the current level of interest rates and the projected rental income for your property.SubdivisionA housing development that is created by dividing a tract of land into individual lots for sale or lease.Sustainable development- the use of resources and the environment today does not damage prospects for their use by future generations; and- the management of our economic system maintains or improves our resource and environmental base. Tax RateThe percentage at which your income is taxed.Tax RebateThe amount you receive from the tax department as a refund due to building and chattel depreciation or a loss on a property.TermA period of time (referring to a lease, a licence tenure, a mortgage repayment or part of a contract)Terminal ValueThe future estimated monetary value of an investment at a future termination date. Sometimes called a 'reversionary value'.Title SearchA search of land transfer office records revealing details of property ownership and any financially interested parties in the property.TrustAn arrangement established by declaration, will, or by order of a court, under which one party holds legal title to property belonging to another party, with a specific benefit in mind.TrusteeOne who manages assets held "in trust" for the benefit of the beneficiaries.Unconditional AgreementThe legal contract that binds both the Purchaser and the Vendor to settle on the agreed date at the agreed price. It is either not subject to any conditions being satisfied or those conditions have already been satisfied.(Conclusions of Missives in Scotland) (Exchange of Contracts in UK) Unit TitleA unit title, under the Unit Titles Act 1972 is a form of ownership of apartments, flats and home units whereby each owner obtains full freehold ownership of his/her particular dwelling and any ancillary units attached to it (such as garage, parking space) as defined by the unit plan, referred to as a stratum estate. Each unit owner usually becomes a member of a body corporate in respect to administration of all units shown on a particular unit plan.VendorThe person legally authorised to sell a property, generally the legal owner or registered proprietor.« Back |
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