Real Estate Investment Glossary

Absolute Deed - This is a Deed with no encumbrances attached. If you obtain a property at a Tax Deed Sale with an encumbrance clause, you must wait until that clause expires before you are given an Absolute Deed. Some states will issue an absolute deed at the auction, some states will have encumbrances attached.

Capitalization Rate (Cap Rate) - Cap Rate represents the annual return on an investment before mortgage payments and income taxes. To find a Cap Rate use the following formula:

Cap Rate = Net Operating Income / Market Value x 100.

Encumbrance - A claim or lien on a property which complicates the title process.

Market Value - The most probable price which a property should bring in under normal market conditions.

Net Operating Income - The cash remaining after deducting operating expenses from gross income.

Redemption Period - The period of time the property owner has to pay the Tax Lien before the property is foreclosed upon. There is usually a schedule of Interest charges added for the period of time the Tax Lien is not paid. And, if the property owner doesn't pay within the redemption period, the Tax Lien Certificate holder may be issued a deed to the property. With Tax Deed Sales there may or may not be encumbrances on the deed.

Right of Redemption - In some Tax Deed states, the Deed purchased at auction may be encumbered by a Right of Redemption. This encumbrance is basically a period of time where the former owner can buy back the property from the successful auction bidder. The amount of time the former owner has to buy back to property is know as the Redemption Period.

"Rule of 72" - This is a basic investment rule that estimates the amount of time it will take to double your money. Take the percentage of interest on your money and divide it into 72. So, if your savings account is earning 5% interest, it will take over 14 years to double your money (72/5 = 14.4 years). But if you invest your money in Tax Lien Certificates at 18% interest, it will take only 4 years (72/18 = 4 years).

Tax Deed Sale - A Tax Deed Sale is the sale or auction of a property where the owner has failed to pay owed property taxes. The sale or auction is for the deed (ownership) to that property.

Tax Lien Certificate - A Tax Lien Certificate is a first lien on delinquent property that yields the holder of the certificate high interest rates. The property owner must pay back the original sum of taxes and other charges, plus interest accrued from the time the Tax Lien Certificate was issued. If the property owner fails to pay within the redemption period, the owner of the Tax Lien Certificate may be awarded an "absolute deed" for that property.

1031 Tax Deferred Exchange - Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.

Treasurer's Deed - This is usually a Deed with a Right of Redemption encumbrance attached. This is issued after the auction and the investor holds this deed until the redemption period expires. If the Redemption Period passes without the former owner paying all expenses owed, you are given an Absolute Deed to that property.