If you’re an investor, a landlord, or just simply interested in owning real estate, there are some key terms you must understand. This guide will give you a basic introduction to the most important real estate concepts. With this knowledge under your belt, you’ll be able to make more informed decisions when it comes to your investments.
Let’s get started!
Here is a list of real estate terminology every investor should know:
Absorption rate:
This is the rate at which available homes are sold in a specific market. It is calculated by dividing the number of homes sold in a period of time by the total number of homes available.
Amortization:
The process of gradually paying off a debt with periodic payments. This period can range anywhere from five to thirty years.
Appraisal:
This is an estimate of a property’s value, typically conducted by a professional appraiser.
Assessed value:
This is the value of a property as determined by a local municipality for tax purposes. The assessed value should not be confused with the sale price.
Balloon mortgage:
A mortgage that is typically paid off in full after a relatively short period of time, with the remaining balance due in a lump sum at the end.
Bridge loan:
A short-term loan used to finance the purchase of a property before the borrower obtains permanent financing.
Broker:
A professional who helps facilitate the sale of real estate, usually in exchange for a commission.
Buyer’s agent:
A real estate broker who represents the interests of the buyer in a transaction.
Buyer’s market:
A market in which there are less buyers than sellers, and as a result, prices are relatively low.
CAP rate:
The capitalization rate is used to estimate the potential return on an investment property. It is calculated by dividing the net operating income by the purchase price (or current value) of the property.
Cash flow:
The net amount of cash and cash equivalents being transferred into and out of a company.
Contingency:
A condition that must be met in order for a real estate contract to be legally binding.
Closing:
The final step in a real estate transaction, during which all the paperwork is signed, and the property officially changes hands.
Closing costs:
The costs associated with the purchase of a property, including fees for legal services, title insurance, and lender’s title insurance.
Commission:
The fee charged by a broker for their services. Depending on your location and the company you work with, commissions can range anywhere from 0.5% – 8%.
Down payment:
The initial payment made by a buyer to a seller when purchasing a property. The down payment is typically a percentage of the purchase price.
Due diligence:
The process of investigating a property before making an offer, in order to confirm that it meets your investment criteria.
Easement:
The right of one party to use the property of another party for a specific purpose. For example, an easement may give a utility company the right to build power lines on your property.
Earnest money deposit:
A deposit made by a buyer to demonstrate their good faith in a transaction. This deposit is typically held in escrow until closing.
Encroachment:
The unauthorized use of another person’s property. Encroachment can be something as simple as a fence that crosses onto your neighbor’s land, or it could be a building that is constructed on your property without your permission.
Escrow:
An arrangement in which a third party holds and administers money or documents on behalf of two other parties.
Equity:
The difference between the fair market value of a property and the amount still owed on its mortgage.
Fixed-rate mortgage: A mortgage with an interest rate that remains the same for the life of the loan.
Fractional ownership:
When two or more people own a property together. This is typically seen in vacation homes or investment properties. This makes investing in real estate more accessible.
Hard money loan:
A type of financing in which a borrower receives funds from a private lender, rather than a bank. Hard money loans are typically short-term and have high-interest rates.
Homeowners Association (HOA):
An organization that manages and maintains a community of homes. HOAs are common in condominiums and planned developments.
Imperative contract:
A legally binding agreement in which one party agrees to do something (or refrain from doing something) in exchange for another party agreeing to do the same.
Infrastructure:
The basic systems and services that a community needs in order to function, such as roads, sewers, and power lines.
Joint tenancy:
A form of co-ownership in which each tenant has an undivided interest in the property and the right of survivorship. This means that if one tenant dies, their interest in the property passes to the surviving tenant (or tenants).
Land contract:
A contract in which the buyer agrees to pay the seller for a property in periodic installments, rather than in one lump sum.
Listing agent:
A real estate broker who represents the interests of the seller in a transaction.
Liens:
A type of debt that is attached to a property. When a property is sold, the liens must be paid off before the sale can be completed.
Loan-to-value (LTV):
The ratio of a loan amount to the value of the property it is being used to purchase.
Leverage:
The use of debt to finance the purchase of an asset.
Mortgage:
A loan used to finance the purchase of a property. Mortgages are given by banks and other financial institutions and are typically repaid over a period of 15 to 30 years.
Market value:
The highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept for a property.
MLS:
Multiple Listing Service, a database of available properties compiled by real estate brokers.
Net operating income:
This is the income generated by an investment property after operating expenses have been deducted.
Option period:
A specified timeframe during which a buyer has the exclusive right to purchase a property, as outlined in their offer.
Offer:
A prospective buyer’s bid to purchase a property.
Pre-approval:
A commitment from a lender stating that they are willing to provide financing up to a certain amount, based on the borrower’s credit history and income.
Principal:
The amount of money borrowed or remaining on a loan, not including interest. This number is important to know when calculating your return on investment.
Property tax:
A tax imposed by a municipality on real estate based on the property’s assessed value.
Purchase agreement:
A legally binding contract between a buyer and seller for the sale of a property.
Refinancing:
The process of taking out a new loan to pay off an existing one. An investor may use this strategy to take advantage of lower interest rates or to free up cash for other investments.
ROI:
Return on investment, a measure of the profitability of an investment. Investors use ROI to compare the expected profitability of different investments.
Sale price:
The price at which a property is sold. This value may be different from the assessed value or appraised value.
Seller’s market:
A market in which there are more buyers than there are properties available, resulting in higher prices.
Seller take-back mortgage:
A mortgage in which the seller of a property has lent money to the buyer in order to finance the purchase.
Title search:
A review of public records to confirm that the seller is the rightful owner of the property and there are no outstanding claims or liens against it.
Tenants in common:
Two or more people who hold an ownership interest in a property.
Variable rate mortgage:
A mortgage with an interest rate that can change over time. This depends on factors like the prime rate and market conditions.
Zoning:
The regulations set by a municipality dictate how the land can be used. Depending on the property, it can be zoned as residential, commercial, or industrial.
As you can see, there is a lot of real estate lingo to learn! But don’t worry, once you start working with investors and real estate professionals, it will become second nature in no time. Just remember to ask for clarification if you ever come across a term you don’t understand.
So there you have it, a crash course in real estate terminology! These are just some of the most commonly used terms in the industry, but there are many more out there. The best way to become familiar with them is to simply get out there and start working with investors and real estate professionals. In no time, you’ll be speaking the lingo like a pro!
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