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Real Estate Terms / Real Estate Dictionary

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A loss in property value due to reduced desirability or usefulness because a property's design or construction have become old-fashioned or it has not kept up and a less costly alternative exists.

Occupancy permit
A permit issued by the appropriate local government indicating that a property is suitable for people to live in because it meets certain health and safety standards.

Offer to Purchase
A written contract of intent made by a potential buyer to a property owner to purchase his or her property.

Open House
A real estate property that is being presented without the need for an appointment that is available for inspection by potential purchasers.

Open Listing
A listing contract under which the broker's commission is contingent on the broker's producing a ready, willing and able buyer before the property is sold by the seller or another broker.

A right, given for a consideration, to purchase or lease a property, with specified terms and within a specified period of time, and placing no obligation on the party receiving the option to purchase the property.

Option to Purchase
A contract giving one party the right, but not the obligation to buy the property of another party within a certain time, for a stated amount, and subject to certain conditions.

Original Principal Balance
The total amount of principal owed on a mortgage before any payments are made.

Origination Fee
A fee charged for the work involved in the evaluation, preparation and submission of a proposed mortgage loan. The origination fee is stated in the form of points. One point is 1 percent of the mortgage amount.

Other People's Money, OPM
Industry lingo used when individuals or corporations use borrowed funds to increase their investment returns.

Owner Financing (aka "carrying a note" or "seller financing")
A financing arrangement in which the property seller provides all or part of the financing. This is commonly done in situations where the buyer does not qualify for financing from a lender. There can be several advantages to the seller to do owner financing. One is a the tax advantage in spreading out the time over which an owner receives the money from the sale of a property. Many owners like the idea that they can receive a monthly income from a property they have sold.

The owner can charge the buyer interest on the money being lent. The owner will collect interest and a monthly mortgage payment on the property he or she has sold, in effect increasing the owner's overall sales price of the property.

In order to protect themselves, some homeowners may require the buyer to make their monthly payments into an escrow account held by a bank, and require the borrower to place a Quit Claim Deed into the escrow account with instructions that if a payment is late by a certain number of days then the escrow officer will automatically file the Quit Claim Deed, which will restore ownership to the former owner instantly.

If this were to happen, the buyer would not only lose title to the property but would also lose any and all payments made on the property. This is a powerful incentive for the buyer to make all payments in a timely manner.

Some reasons for a Seller not to do "Owner Financing":

  • The seller still owes money on the house to the bank. The seller must pay off the existing mortgage before selling it to the new owner. Most people don't have that kind of cash laying around.
  • The seller may need their cash faster than the contract pays. After the sale is done, something may happen in the sellers life which causes them to need a large chunk of cash. The seller's first thought may be to "sell the note" However, it is very hard to sell a privately held note without it being severely discounted by as much as 25%.
  • There may be unintended tax consequences. As long as the seller continues to carry the note and reports the interest as income the tax situation remains simple. The tax situation is more complex if the note gets sold to a third party at a discount. Taxes are also complicated if seller financing was used in the sale of an income property.
  • Poorly written contracts will put sellers at risk of not being able to enforce the contract. Hire a real estate attorney to look over your contracts before signing any contracts. Serious problems with the contracts will require a trip to court to resolve. Court costs and attorney fees are expensive and time-consuming. Meanwhile, the buyer may live in the property for months without making payments. The seller is stuck without a house or any income.

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