Common Terms Used in Real Estate

Commonly Used in Real Estate Vocabulary:

• Contingencies:  Conditions that must be met, either by the seller or the buyer, before the purchase of a property can close. Contingencies are intended to protect buyers and sellers, and often include items such as inspections, mortgage approvals and appraisals.

• Proof Of Funds:  A statement from a financial institution verifying that the buyer has enough funds available to proceed with a purchase offer.

• Carrying Costs: When an investor purchases a property to rehab, they must factor carrying costs into their list of expenses. These are the expenses incurred from the time the property is purchased until the time that it is sold, including interest payments, taxes, insurance and utilities.

• MLS:  The multiple listing service (MLS) is a database accessed by licensed real estate agents to view property listings.

• Carrying Costs: When an investor purchases a property to rehab, they must factor carrying costs into their list of expenses. These are the expenses incurred from the time the property is purchased until the time that it is sold, including interest payments, taxes, insurance and utilities.

• Exit Strategy:  An exit strategy is how an investor plans to cash out on an investment property. This can include strategies such as renting out a buy-and-hold property or selling a rehabbed property.

• Appraisal:  The appraisal is an independent survey conducted by a lender to determine a property’s value, based on its condition and comparable listings. This process helps validate the agreed upon purchase price between a buyer and seller.

• Closing:  A meeting at which a buyer and seller finalize a real estate transaction. Both the buyer and seller are required to fill out legal paperwork to officially transfer ownership of the property in question at the time of closing.

• Closing Costs:  At the time of closing, a buyer should expect to pay 2-5% of the property’s purchase price to cover various fees, such as excise tax, processing fees, title insurance and the appraisal.

• Comparable:  Investors, agents and lenders alike find it useful to identify comparables, or similar homes in close proximity, to derive a precise value for the property in question. The act of conducting this research is referred to as a comparative market analysis (CMA).

• Offer: An offer is the initial purchase price point submitted by a buyer to a seller. The seller then has the choice to accept, reject, or make a counter to the offer.

• ROI:  Return on investment (ROI) refers to the measurement of the net profit of an investment property, relative to its total cost. A high ROI indicates favorable yields for the investor.

• LTV:  Loan-to-value (LTV) is a ratio utilized by lenders to measure the amount of the loan relative to the value of a property. Lenders often show preference to properties with lower LTVs ratios by offering lower interest rates. Buyers can lower the ratio by making a larger down payment.

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Rehabbing Real Estate Investor Vocabulary:

• Flipping:  In real estate, flipping houses describes the strategy of purchasing a property, making improvements to it, and then putting it back on the market for a profit.

• Inspection:  A property inspection is an examination through which the condition of a property is determined. Inspections can help interested buyers estimate the costs of making repairs and renovations.

• Short Sale:  When a homeowner’s outstanding mortgage exceeds the home’s current value, they can obtain approval from their lender to list the property at a lower price. This type of sale is referred to as a short sale.

• Foreclosure:  When a bank repossesses a property due to the owner’s inability to make mortgage payments.

• Real Estate Auction: Financial institutions will routinely sell properties, such as those they repossessed through foreclosure, at auctions available to the public.

• After Repair Value:  The after repair value describes an estimate of a property’s value, after repairs and renovations have been made. As a part of deal analysis, real estate investors utilize this calculation to determine the profit potential of a renovation property.

• Distressed Property:  A property becomes distressed when a homeowner defaults on their mortgage payments, is delinquent on paying property taxes, or is condemned due to disrepair.

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 Wholesaling Real Estate Vocabulary:

• Buyers List:  Real estate entrepreneurs can strike investment deals more quickly by relying on a buyers list, or a rolodex of investors who are actively looking for investment opportunities. These lists are built via marketing, networking and repeated business.

• Motivated Seller:  Homeowners might become motivated to sell if they are pressed for time, are nearing foreclosure, or own vacant property or property out of state.  They may also be motivated if they can no longer afford a property due to job change/loss or marital status.

• Contract Assignment: A wholesaler operates by negotiating below-market-value deals with motivated sellers. They then sell the property contract to an end buyer, such as a rehabber, by using a legal document called a contract assignment.

• Double Close:  Also referred to as a back-to-back closing, a double closing will witness a wholesaler purchase a property and immediately resell it to an end buyer. A double close is different from an assignment of contract because the wholesaler takes legal possession of the property for a short amount of time.

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  Buy & Hold Real Estate Vocabulary:

• Equity:  Real estate equity expresses the difference between a property’s current market value, and the outstanding amount on the mortgage. The more a homeowner pays down a mortgage, the lower the outstanding mortgage will be, thus helping to increase their personal equity in a property.

• Property Management:  Property managers are individuals or entities that oversee the operations of a rental property. Activities include screening and selecting tenants, collecting rents and deposits, handling maintenance issues, and even responding to tenant disputes or complaints.

• Cash Flow:  Cash flow refers to the net income generated by a rental property, after subtracting the costs of owning and operating the property.

• Depreciation:  In accounting terms, depreciation describes the decrease of a property’s value over time, attributed in part to wear and tear.

• Vacancy Rate: A vacancy rate expresses the percentage of unoccupied units in a rental property at a given time. Because vacant units are not generating any income, rental property owners are incentivized to lower their vacancy rates as much as possible.

• Tenant Screening: The process of interviewing and vetting candidates for a rental unit in order to find the best possible tenant. Screening activities include running background and credit checks, as well as calling references.

• 1031 Exchange: In order to defer paying taxes on capital gains, investors can reinvest any proceeds from an investment property into a similar investment. In the tax code, this process is referred to as a 1031 exchange. Real estate terms for Home Buyers.

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Home Buyer Real Estate Vocabulary:

• Adjustable-Rate Mortgage:  A homeowner has an adjustable-rate mortgage if their interest rate fluctuates at predetermined intervals throughout the course of their loan.

• Fixed-Rate Mortgage:  Contrary to an adjustable-rate mortgage, the interest rate of a fixed-rate mortgage remains the same throughout a loan term.

• Amortization:  Mortgage payments are amortized when they include both interest and principal payments, allowing the borrower to start building equity from the very first payment.

• Assessed Value:  The value of a property determined by a public assessor for tax purposes.

• Buyers Agent:  A real estate agent who represents the interests of the buyer in the home buying process is called the buyer’s agent. On the other hand, a listing agent represents the seller.

• Cash Reserves:  Required by some lenders, cash reserves are funds leftover after the down payment and closing costs are paid, to be set aside for emergencies.

• Escrow:  A financial account that is funded by a homeowner’s mortgage payments, used to pay for homeowners insurance and property taxes.

• Interest:  Interest is the cost of borrowing money over time, and is ultimately the responsibility of the lender to set. A monthly mortgage is typically composed of interest and principal payments on a loan.

• Mortgage Broker:  This is the individual or entity who acts as an intermediary between borrowers and lenders, such as originating a mortgage or placing the loan with a funding source.

• Pre-Approval Letter:  Homebuyers can get financially vetted and receive a loan approval estimate from their lender in the form of a letter, helping to add credibility to any offers they make.

• Private Mortgage Insurance:  When a buyer makes a down payment of less than twenty percent on a home, they are typically required to pay a private mortgage insurance (PMI) fee. PMI is typically assessed as a percentage of the mortgage loan, and can be satisfied once the homeowner reaches twenty percent equity.

• Refinancing:  Homeowners often restructure their home loan with a new one, typically to obtain a lower interest rate.

• Title Insurance:  Typically required as a part of the closing process, title insurance protects buyers in case there are any outstanding liens on a property.