The real estate industry is notorious for its use of niche-specific lingo and acronyms. If you’re buying a home for the first time or are just beginning your investing career, you’ll likely encounter real estate terminology that you’ve never heard of before. We put together the following as a complete guide to real estate terms that will help get you up to speed in no time.
Real Estate Terminology For New Homeowners
If you’re getting ready to buy a home, this section addresses important homeowner terms you need to know. Although the list is not comprehensive by any means, it will help you build a foundation so you don’t get lost in translation. Be sure to also check out our to-do list: 10 steps if you are ready to become a first-time homebuyer.
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Adjustable-Rate Mortgage: A homeowner has an adjustable-rate mortgage if their interest rate fluctuates at predetermined intervals throughout the course of their loan.
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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.
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Assessed Value: The value of a property determined by a public assessor for tax purposes.
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Fixed-Rate Mortgage: Contrary to an adjustable-rate mortgage, the interest rate of a fixed-rate mortgage remains the same throughout a loan term.
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Buyers Agent: A real estate agent who represents the interests of the buyer in the homebuying process is called the buyer’s agent. On the other hand, a listing agent represents the seller.
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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.
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Due Diligence: The due diligence period is a time frame allowing a buyer to fully examine a property. This is often done by hiring specific experts to inspect and perform tests. Buyers who may want to renegotiate the contract based on the results.
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Earnest Money Deposit: An earnest money deposit is typically made by the homebuyer when they enter into a contract with the seller. The deposit is about 1 to 2 percent of the home’s purchase price. The deposit is meant to demonstrate the buyer’s earnestness in purchasing the home. The amount deposited is deducted from the total cost of purchase.
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Escrow: A financial account that is funded by a homeowner’s mortgage payments, used to pay for homeowners insurance and property taxes.
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Fee Simple: Fee Simple is term that describes the most common type of home ownership. It means that the owner’s property rights can be freely transferred or inherited at the owner’s discretion.
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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.
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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.
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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.
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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.
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Refinancing: Homeowners often restructure their home loan with a new one, typically to obtain a lower interest rate.
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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.
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Common Real Estate Terms For Beginner Investors
Breaking into the investing community can be intimidating, especially when you hear experienced investors throwing complex lingo and acronyms into every conversation. However, having a comprehensive knowledge of real estate terminology is paramount to starting a successful career, as it’s the only way to ensure that others will take you seriously.
Get started with common real estate terminology every investor should know:
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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.
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As-Is: A property that is stated “as-is” indicates the seller is unwilling to perform repairs. It could also mean the property’s price is “as-is.” It is common this price is lower than market prices in the local area.
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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.
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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.
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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.
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Comparables: 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).
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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.
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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.
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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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MLS: The multiple listing service (MLS) is a database accessed by licensed real estate agents to view property listings.
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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.
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Probate Sale: A probate sale is the death of a homeowner occurs before writing a will or giving the property to someone. Consequently, the probate court authorizes an estate attorney or representative to hire a real estate agent to sell the home.
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Proof Of Funds: A statement from a financial institution verifying that the buyer has enough funds available to proceed with a purchase offer.
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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.
Once you’ve gotten a basic understanding of standard real estate terms, your next challenge is to commit to memory the real estate lingo used in each investing niche. Although many terms overlap, the glossaries below have been organized into three areas; wholesaling, rehabbing, and buy & hold.
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Wholesaling Real Estate Terminology
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Bandit Signs: Bandit signs sport marketing messages from small businesses and local politicians, often sighted on yards and busy intersections. In real estate, these signs are often used to advertise to investors and motivated sellers.
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Bird Dog: When a real estate investor wants to enlist someone’s help in finding investment leads, they may hire a bird dog. These are individuals who are paid a fee to identify motivated sellers and distressed properties on behalf of others.
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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.
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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.
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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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Motivated Sellers: Investors are attracted to homeowners who are motivated to sell, as it presents the opportunity for negotiating a favorable purchase price. Homeowners might become motivated to sell if they are pressed for time, are nearing foreclosure, or own property out of state.
Rehabbing Real Estate Terminology
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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.
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BRRRR: An investing acronym that stands for buy, rehab, rent, refinance and repeat, BRRR describes a framework where investors build passive income over time.
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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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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.
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Foreclosure: When a bank repossesses a property due to the owner’s inability to make mortgage payments.
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Hard Money Loan: Hard money loans are a method to borrow money for a property without utilizing traditional lenders. Hard money lenders finance the loan based on the property not your credit score. Hard money loans typically require a large down payment and a short repayment time frame.
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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.
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Private Money Loan: Private money lending means borrowing money from an individual investor. Real estate investors use private lenders to finance deals that either won’t qualify for a traditional loan or can’t wait the usual 30 days or so that a conventional mortgage loan needs for approval.
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Real Estate Auction: Financial institutions will routinely sell properties, such as those they repossessed through foreclosure, at auctions available to the public.
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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.
Buy & Hold Real Estate Terminology
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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.
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Cash Flow: Cash flow refers to the net income generated by a rental property, after subtracting the costs of owning and operating the property.
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Depreciation: In accounting terms, depreciation describes the decrease of a property’s value over time, attributed in part to wear and tear.
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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.
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Land Lease: When you purchase a home, you typically own the home and the land the property is built on as well. However, a land lease is when you would pay rent to the landowner for the land even while owning the home.
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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.
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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.
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Turnkey Investing: A real estate investor who wishes to acquire income-producing property yet does not wish to make any repairs or renovations to a property may turn to turnkey investing. Turnkey describes a property that has already been repaired and updated to current market standards.
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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.
Summary
With practice and time, you can commit these real estate terminology to memory and be on your way to becoming a real estate pro. If you are a new real estate investor, these terms will become imprinted in your memory as you start conducting market research and negotiating deals. Hopefully, if you are a first-time homebuyer, these real estate definitions have helped clarify the process.
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