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Attorney-in-Fact

In your real estate career, you will hear the term power of attorney, and attorney-in-fact plus it shows up on your exam, so understanding the terms is essential.

What is an Attorney-in-Fact?

Definition: Someone authorized to act on behalf of another person, typically in business or for some sort of business transaction.

So what exactly does that mean? Well, when it comes to business, financial or personal matters, an attorney-in-fact can represent someone else’s interests. This is incredibly helpful for many people and can save massive amounts of time. Business people can authorize an attorney-in-fact to do things like sign checks, do tax returns, enter contracts, and of course, buy or sell real estate.

It’s worth noting. Contrary to how it sounds, an attorney-in-fact is not necessarily a lawyer. An attorney-in-fact can be a family member, friend, business associate, and more.

So how does someone become an attorney-in-fact? Well, that’s where power of attorney comes into play.

What is a Power of Attorney?

Definition: A legal document that authorizes someone to act on behalf of another person, typically in business or for some sort of business transaction.

You heard that right for someone to be an attorney-in-fact, they must obtain a legal document called a power of attorney. See the difference? The two terms typically go hand and hand, which is why we are talking about them today!

A power of attorney can end for numerous reasons, such as if a principal dies, revokes it, or the courts find any reason to invalidate it. Once a power of attorney ends, that person that was an attorney-in-fact is no longer.

Attorney-in-Fact and Power of Attorney Example

Let’s say a man named Jake lives in Boston, but owns property across the U.S. He owns property in cities like Pittsburgh, Philadelphia, and D.C. Jake decides he wants to sell his property in D.C. Instead of traveling all the way to D.C. to complete all the paperwork, he calls up his buddy Matt. Jake authorizes Matt, who lives in D.C., to sell his property for him. Jake gives Matt power of attorney and is now acting as his attorney-in-fact.

What to Know for the Real Estate Exam

Well, understanding the difference between the two terms is essential come exam day. Remember, an attorney-in-fact is someone authorized to act on behalf of another person, the legal document that authorizes that person is called a power of attorney.

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Eminent Domain, Condemnation, and Inverse Condemnation

Eminent domain is the governments right to take over privately owned real estate for public use. Eminent domain is a government power granted by the constitution and protected under the fifth and fourteenth amendments. This article also covers the difference between condemnation and eminent domain. Make sure to read all the way through to understand the difference!

What is Eminent Domain?

Definition: The right of the government to take over privately owned real estate for public use.

It’s worth noting, in some cases, private entities may also have the power of eminent domain for projects considered public use.

Eminent domain is the government’s constitutional right to take over privately-owned real for public use (usually despite the owners’ wishes). Eminent domain for the federal government is protected under the Fifth Amendment of the Constitution, while for state governments, it is protected under the Fourteenth Amendment.

Eminent Domain Example

Here is a quick and easy example.

Let’s say Mr. Johnson lives on a property right next to a bridge. The state wants to widen the bridge due to the higher amounts of traffic reported. The state needs the space on either side of the bridge to widen the road.

The government then seizes Mr. Johnson’s property and gives him $150,000 for it. Mr. Johnson does not have the opportunity to say no, it’s the law. However, he can challenge whether that $150,000 is fair market value.

Public Use and Other Uses of Eminent Domain

When you hear the term, public use think of infrastructure like highways, major pipelines, railroads, etc.

There are some other more unique circumstances where eminent domain can be used, though. For instance, all real estate in Centralia, Pennsylvania, was claimed by the state government under eminent domain in 1992. It was claimed due to the city’s dangerous environment having constant fires from a mining accident.

What is Condemnation?

Definition: The procedure used by a public or private entity with the powers granted from eminent domain to take privately owned real estate.

Try not to confuse condemnation with a property being “condemned.” That is when a building is legally unfit for a human to live in, typically due to safety measures. This comes into play if a building is not up to code or has some zoning violations; however, the definitive difference is the government does not take the title of the property, it just forbids anyone from living there until the homeowner fixes the problem.

What is the Difference Between Eminent Domain and Condemnation?

Condemnation and eminent domain are almost the same things. The only difference is one is the right while the other is the action to do that right. Or in other words, eminent domain is the right which grants the government to take privately owned land from someone while condemnation is the action of taking that land.

What is Inverse Condemnation?

Definition: The event in which the government takes private property but fails to pay compensation or just compensation.

Remember earlier in our example when I told you Mr. Johnson could challenge whether what he received for his home was the fair market value? Well, that’s inverse condemnation. A property owner can sue to obtain the required just compensation through the process of inverse condemnation.

What to Know for the Real Estate Exam

While understanding condemnation and even inverse condemnation are essential for your real estate career, understanding eminent domain is vital for exam day. Most importantly, you have to distinguish what eminent domain is and understand when it is happening. An example of what you might see on exam day is a question describing a situation where the government comes in and takes someone’s land for public use. You have to know that is an instance of eminent domain.

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Escheat

Escheat is the government’s right to take ownership of unclaimed real estate or assets. Escheat is a government power granted by the constitution, and part of the reason it’s critical to have a will, but more on that later.

What is Escheat?

Definition: The governments right to take ownership of unclaimed real estate or assets.

So what does that mean? Well, when a property owner dies and leaves no proper documented inheritance plan, the property ownership reverts to the government. That is escheat. Escheat ensures that property always has ownership.

Escheat is part of the reason it’s critical to have a will, or when you are purchasing property, you establish an explicit right to survivorship.

The good news is that certain property that is escheated may later be reclaimed. Obviously, it depends on the instance, and the state, but recovering property is possible in some circumstances.

Escheat Example

Here is a quick and easy example.

Imagine an elderly man in a nursing home. He has no family and is suffering from Alzheimer’s. Because of his Alzheimers, he doesn’t remember much. Eventually, he passes away in his sleep. There is no will for the man, and again he has no family. So what happens to the money left in his savings account or his old farm that has been left untouched since he entered the nursing home?

Instead of being handed down to his family(since he has none), his assets (farm included) are going to go to the government in the process called escheat.

As sad as this example may be, it’s a process that must be defined and established just in case matters like that happen.

What to Know for the Real Estate Exam

Well, as you know, in the United States, every state is different, and escheat is no expectation. Each state has different rules and regulations governing escheat and how it functions. It’s super important to understand how your state operates when it comes to escheat.

Understanding the basics of escheat is critical for exam day. An example of what you might see on exam day is a question describing a situation where someone passes away, doesn’t have any heirs or family, and it’ll ask you what happens next? Obviously, the correct answer would be escheat.

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Release Clause

The release clause, also known as a buyout clause is a contract provision that allows for the freeing of all, or part of a property, through a proportional or full amount of the mortgage being paid. This clause is usually seen in blanket mortgages.

A clause identifies a particular section of a real estate contract (for those of you who don’t know). There are many types of clauses in real estate, and you are likely to see many of them on your real estate exam.

What is the Release Clause?

Definition: A release clause is a contract provision (typically in a blanket mortgage) that allows for the freeing of all or part of a property from a claim through a proportional or full amount of the mortgage being paid off.

So what does that mean? Well, those of you who don’t know blanket mortgage are mortgages that cover two or more real estate pieces. Blanket mortgages are designed to enable investors, builders, and developers to mortgage more efficiently. Within a blanket mortgage, investors place multiple properties under a single loan, which is much more efficient than having various single property mortgages.

The release clause allows investors to pay off a specific portion of their blanket mortgage to fully release it of the lender’s claim. In other words, investors can pay off their blanket mortgage property-by-property rather than only being able to pay it off in one lump sum.

Release Clause Example

Here is a quick and easy example. Imagine there is a mortgage agreement for a subdivision. This investor has ten properties within his mortgage agreement. Because his blanket mortgage has a release clause, he pays off two of the ten properties and now owns two of them outright.

What to Know for the Real Estate Exam

What’s important to understand for the real estate exam is like other clauses, you need to remember what the release clause is.

Remember, the release clause allows for the freeing of all or part of a property from a claim through a proportional or full amount of the mortgage being paid off.

A question on the exam you might see is a list of different contract clauses, and you may need to distinguish which-is-which.

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Subordination Clause

The subordination clause, also known as the subordinate clause in real estate, finance, and banking refers to the order of priorities in claims for ownership or assets. The subordination clause is the legal agreement that establishes the order of priorities in the form of a clause (within a contract).

A clause identifies a particular section of a real estate contract (for those of you who don’t know). There are many types of clauses in real estate, and you are likely to see many of them on your real estate exam.

What is the Subordination Clause?

Definition: The subordination clause (in real estate) establishes order of priorities of financial claims (liens).

So what does that mean? Well, the subordination clause effectively makes the current claim number 1 to any existing claims that have already been recorded.

Usually, financial claims or liens have some form of order. Think about it. If a house forecloses, there must be a system in place for the appropriate parties to get paid. Or else how would anyone understand who gets paid first? Well, that’s precisely what the subordination clause does, it establishes a ranking system for claims against the property. To adjust the priority of a claim, a lender usually requires a subordination clause.

Who Benefits from a Subordination Clause?

A subordination clause is meant to protect the interests of the primary lender. A primary mortgage usually covers the cost of purchasing the home; however, if there is a secondary mortgage, the clause ensures that the primary lender retains the number one priority. In other words, the primary lender’s claim will supersede any other financial claims.

Subordination clauses are commonly used when a home loan is refinanced. Refinancing results in the original home loan being paid off and a newer loan with a different interest rate being established. Theoretically, that would put the new lender at the end of the priority list, but mortgage lenders require their loans to be first in line. So to refinance a home, other claim holders have to agree before refinancing can begin.

Exceptions to the Subordination Clause

Obviously, some financial claims or liens can’t be reordered, and the appropriate parties won’t always agree to refinance.

For example, if a homeowner doesn’t pay their taxes, the IRS may put an involuntary lien on the property. If, later on, the homeowner tries to refinance, that decision will ultimately be up to the IRS. They could say yes, but again, ultimately, it’s up to them.

What to Know for the Real Estate Exam

What’s important to understand for the real estate exam is like other clauses, you need to remember what the subordination clause is.

Remember, the subordination clause establishes order of priorities of financial claims.

A question on the exam you might see is a list of different contract clauses, and you may need to distinguish which-is-which.

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Prepayment Penalty Clause

A prepayment penalty is a fee some mortgage lenders charge if a borrower pays off their loan too quickly. Sounds a little crazy, right? Well, it kinda is! In this post we are going define prepayment penalties and the prepayment penalty clause.

A clause identifies a particular section of a real estate contract (for those of you who don’t know). There are many types of clauses in real estate, and you are likely to see many of them on your real estate exam.

What is the Prepayment Penalty Clause?

Definition: A prepayment penalty clause states that a lender can penalize a borrower if the borrower pays off the mortgage much sooner than usual.

Yes, you heard that right, if a mortgage has a prepayment penalty clause paying off a loan faster than usual can create a fee for the borrower. The fee occurs if a borrower pays off their loan before a specific period (typically within the first five years).

Why do Lenders Charge Prepayment Penalties?

Prepayment penalties act as protection for banks or lenders against losing interest they typically would earn. Remember, lenders give out loans to make money. If, for some reason, a borrower pays off the loan quickly enough, lenders still want something in return.

It’s worth noting, a prepayment penalty is not that common today, but some traditional mortgages still include prepayment penalty clauses. The good thing is lenders are required to disclose prepayment penalties at closing in the form of a prepayment penalty clause. Just another reason it’s super important to read and understand a contract before you sign it.

How are Prepayment Penalties Calculated?

Well, prepayment penalties clauses vary per contract and depending on the lender. Some penalties can be either a fixed amount or a specific percentage of the remaining mortgage balance.

The first thing you have to do to calculate prepayment penalties is to determine the lender’s method of prepayment penalty by reading through the specific clause. Depending on the technique, you’ll either multiply your remaining principal by your interest rate by the number of months or just pay the fixed amount.

What to Know for the Real Estate Exam

What’s important to understand for the real estate exam is like other clauses, you need to remember what the prepayment penalty clause is.

Remember, the prepayment penalty clause states that a lender can penalize a borrower if the borrower pays off the mortgage much sooner than usual.

A question on the exam you might see is a list of different contract clauses, and you may need to distinguish which-is-which.