If you put a bunch of real-estate agents & investors together and listen to their conversation you will most likely feel lost. It has little to do with understanding your native language and more to do with limited knowledge of the real estate language you didn't know existed. Real Estate has its own set of terminology.
Whether you are looking to buy, sell or flip a home, you are going to have to properly understand this world you have decided to jump into. And to properly understand it, you will have to get the vernacular down.
Learning the lingo will help you become well-versed in all things real-estate so that you can stay confident in your real estate investing. This post also includes financial terminology and equations as it pertains to real estate so that you can stay on top of your game as you close on deals when selling or buying property. Let’s get into the top real estate terms!
Real Estate Terms to know:
- Bird dog – A Bird dog is a person that scouts properties to find the ones with the greatest investment potential. Bird dogs might look for worn down houses that can be remodeled and resold for a decent profit. They then turn the lead over for a finder’s fee.
- 1%/2% rule – This rule is used as a quick rule of thumb when you are determining the amount you should be charging rent on your property. The rule states that the grossly monthly rent of your property should be equal to 1% of your total investment on the property. Remove the 1% in that sentence to 2% and you have the 2% rule.
- After Repair Value (ARV) – The ARV is the value the property will have after it has been remodeled and rehabilitated.
- Cap Rate – The cap rate is the ratio of net operating income to the property asset value. In other words, it is the percentage of the investment the investor will get back each year from the net income of the property if a deal is bought with all cash.
- Wholesaler – In real-estate, a wholesaler is someone who buys the contract of a house from a homeowner and then sells that contract to someone else for more money. The wholesaler makes money off of the margin gained in the different prices of the contracts.
- Flipping – Flipping is when someone buys a house, makes some sort of improvements, and quickly resells it to make a fast profit.
- Buy, Rehab, Rent, Refinance, Repeat (BRRRR) – The BRRRR strategy helps real estate investors make passive income and acquire more assets by buying property, rehabilitating it, renting it out, and then refinancing the money out on the property.
- House Hack – This is the word that describes the hack of getting other people to pay your housing costs. It is done by renting out units or rooms in a house that you live in so that you do not have to pay your expenses, rent, or mortgage.
- Debt service – This is the cash required to cover the repayment of the interest and principal of your debt.
- Principal Reduction – This is when the principal owned on a mortgage is decreased. This is generally down from the monthly mortgage payments.
- Depreciation – This is the reduction in the value of a house with the passage of time due to wear and tear and general aging.
- Net Operating Income (NOI)– The NOI is the company revenue minus necessary operating expenses. This can or cannot include taxes or interest.
- Absentee Owner – This is when the real estate is not managed directly by the actual owner, nor does the owner live at the property. The owner generally lives in another city or state.
- Earnest Money (EM) – Deposit made by a buyer to show good faith in the intention to buy the real estate.
- Due Diligence (DD) – The satisfying of a legal obligation, usually to make sure that some part of a property is as it should be, or is as advertised.
- Loan to Value (LTV) – The LTV is usually interpreted as a percentage that expresses the ratio of a loan to value of an asset purchase. For instance, a bank may only loan 80% of a property’s actual value.
- Real Estate Investment Association (REIA) – A club environment that has various chapters involving members in education and awareness of special property opportunities.
- Property Manager (PM) – This is the employee hired by a property owner to oversee real estate operation and protection.
- Curb Appeal – The word real estate agents use to talk about the general attractiveness of a property.
- Appreciation – The rise in value of a property over time.
- Cash Flow Property – Any property that increases the owner’s cash flow, such as a rental that provides monthly income.
- Cash on Cash Return – A return on a cash investment calculated as profit after taxes, usually expressed as a percentage (also called the equity dividend rate). It is calculated by dividing the cash flow (the net operating income) by the amount of cash initially invested.
- International Rate of Return – Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. In real estate it usually includes the total return of all the cash flow plus any equity captured when the property is sold.
- Lease up fee – A fee charged by a property manager for leasing a property. It is usually in addition to the fee they take as a percentage of the gross income.
- Leveraged return – What the return is when you used borrowed funds. Using borrowed funding sources tend to increase the potential return on an investment because it is leveraged.
- Rehab – The process of making repairs or updating a property. It usually leads to an increase of the value of the property.
- Real estate owned (REO) – Lender owned property once a foreclosure sale is unsuccessful.
- Retail Investors – An investor that purchases properties for a personal account instead of a company or corporation.
- Remote Investing or Investing out of State – Investing in property that is not local to the investor.
- Self Directed IRA – Individual Retirement Account that allows investor to put money in places not allowed by most IRA custodians, such as real estate, liens, and many other property types.
- Single Family Rentals (SFR) – Stand-alone homes designed for one single family, as opposed to duplexes or apartment type homes.
- Turn Key Property – A property that has been renovated, updated, and is ready for occupancy.
- Short Sale – Real estate sale where the liens on the property will not be met. Investors must agree to take a lesser amount than actually owed for the sale to go through.
- Broker Price Opinion (BPO) – Used instead of an official appraisal for an opinion on the sale value of a property, where investors agree that the time and money spent for an appraisal is unnecessary.
- Debt Coverage Ratio (DSCR): – This ratio is used by banks to test a company’s potential ability to pay back a debt. Equation: Debt Coverage Ratio = Net Operating Income / Debt Service..
- Dollar per Square Foot ($/SF) – In real estate, the property selling price by the property’s square footage gives you the dollar per sq. foot. This is often used to compare home selling prices in a particular area.
- Phase 1 study – A study performed, usually by banks, to determine if toxins or other hazards exist at or near real estate sites before lending on the property. If any questionable risks are found, a phase 2 study will be necessary.
- Assessment – An assessment on a property is usually performed to determine the value for taxing purposes. Local tax assessors perform this duty.
- Personal Guarantee – The personal guarantee is a document signed by an individual owner of a property that gives the bank the right to confiscate additional assets or property if the loan requirements are not meet.
- Amortization – This is the gradual repayment of debt over time. The debt can be charted out over any number of years to see the difference each payment makes. The payment must cover both principal and interest.
- Loan Assumption vs Subject to – A loan assumption is when a loan is assumed only with the lender’s approval, making the person that assumes the loan responsible to the lender. With ‘subject to’, the original loan holder is still responsible to the lender for all payments.
- Land Contract – In a Land Contract, the buyer pays the seller in installment payments while the seller maintains property rights.
- Wrap Around Mortgage (WRAP) – This is when the sellers original financing is kept as is, while the seller creates another mortgage for the buyer, usually at a higher rate of interest. The buyer makes payments to the seller, and the seller makes the payments to the original lender.
- Blanket Loan -Funding for multiple pieces of property via one loan. For instance, when someone several properties and has one loan across all of them. Blanket loans traditionally have a lien release feature, so you can sell one of the properties under the blanket loan.
- Foreclosure – When the homeowner can’t pay the mortgage, the lender goes through a legal process to regain the property. The homeowner forfeits the property.
- Lease Purchase/Lease Option – This is a lease contract for a specified period of time. Then the lease holder has the option of first refusal or the option to buy the property through traditional means.
- Seller Finance – This is when the seller finances property for the buyer and the buyer makes payments directly to the owner.
- Gross Rent Multiplier – The ratio of the property price to its yearly rental potential before expenditures like taxes and utilities.
- Adjustable Rate Mortgage (ARMs) – A mortgage payments adjustment due to fluctuations in interest rates.
- Assessed Value – The value of a home for property tax purposes.
- Closing Costs – Costs paid at the close of a real estate transaction. These costs may be paid by the buyer, the seller, or both. Some costs may be for appraisals, loan origination, surveys, and deed/title fees.
- Contingencies – Contractual elements that must be met for the sale contract to be binding.
- Fixed-rate mortgage – A mortgage whose interest rate stays the same. The buyer's payments are the same every month.
- Points – One point = 1% of the mortgage. These points are paid to the lender. The more points paid = lower monthly payments.
- Private Mortgage Insurance (PMI) – Insurance that protects the lender in case of a default on the mortgage.
- Title insurance – Protects both buyers and lenders against liens and title defects.
- Buyers Agent and Listing Agent – If a buyer’s agent is involved in a transaction, the listing agent becomes the seller’s agent.
- Comparative Market Analysis – CMA is the process of comparing homes in the area to the home being bought/sold.
- Escrow – A third party Escrow agent is employed to handle the transfer of money and documents during a real estate transfer.
- Lien – An encumbrance placed on property because of a debt that has a relationship to that property.
- Mortgage Pre-Approval Letter – A document from a lender that states your specific approval amount for a mortgage.
- Inspection – A property inspector surveys and investigates property for problem areas including foundation, wiring, plumbing, and much more. This is at the buyer’s expense. The buyer may opt out, but it’s not recommended. If the inspector finds issues, the buyer can decide not to purchase and escrow money will be returned.
Learning real estate terminology will help you understand the process of buying and selling real estate at all levels. With this new set of vocabulary, you will feel empowered and confident when closing deals so you walk away a winner every time. Whenever you get stuck, need a refresher, or want to learn more about real estate investing, come back to this page to keep learning more real estate terms.
Are there any real estate terms we missed that you think should be added to our list? Let us know in the comments section below!
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