Below is a list of common terms and acronyms used in the real estate industry. Often you will see these used in contracts, lease agreements, mortgage paperwork and many other documents. However, some of these terms will be used in conversation or will just help you to understand the industry better. This is not a complete list of all real estate terms; just the more important ones are defined.
Appreciation
The increase of a property’s value based on changes in various conditions, inflation and other reasons.
Appraisal
A document that certifies the price paid for a property is based on a comparable analysis of similar properties in the area.
Assessed Value
What the tax man thinks the property is worth based on local tax regulations
Bill of Sale
A document that transfers title to personal property. Lenders usually require this to verify sufficient funds for payment.
Capitalization Rate
Or Cap Rate, is the rate of return on a property based on the income the property will produce. Make sure you know this. See Measuring Return: Cap Rates and Cash on Cash
Cash-On-Cash
A measure by which the annual dollar income is divided by the total dollars invested. See Measuring Return: Cap Rates and Cash on Cash
Clear Title
A title that does not have any liens or questions as to who owns the property. Your property needs one of these unless its your strategy to buy a dodgy deal!
Contingency
Section of the purchase contract that says some or all of the terms of the contract will become void by a specific event. For example, the seller may ask that the buyer show proof of funds before signing the contract.
Deed
The legal document that shows ownership of title.
Deed In Lieu
Also called “deed in lieu of foreclosure,” which transfers title to the lender when the borrower is in default and wants to avoid foreclosure. It may prevent foreclosure documents from becoming public record, and may only show up on the borrower’s credit history. Both parties must agree voluntarily and in good faith.
DTI
Debt To Income Ratio. Don’t over leverage or you’ll regret it one day!
Equity
The difference between the fair market value of a property and what is owed on the property.
FNMA
The Federal National Mortgage Association, or Fannie Mae, is the largest supplier of home mortgage funds in the country.
Foreclosure
When the borrower cannot pay the lender the monthly payment for typically three payments in a row, the lender will seize the property, evict the homeowner and sell the property. The property is typically sold at a public auction and the proceeds go toward paying off the debt. In October 2014, 1 out of every 1232 homes in the USA received a foreclosure filing (source realtytrac).
Gross Annual Multiplier
Or GAM, is the number you get by taking the gross annual rent and dividing it by the selling price.
Judicial Foreclosure
A type of foreclosure proceeding where a civil lawsuit is filed and the outcome is handled entirely by the courts. This can be good for buyers because the process is very long, and can give buyers time to get in a swoop up a property that is headed into judicial foreclosure. See Where to Find Foreclosures in 2015 www.howmanydoors.com/members-home/education-center/find/finding-foreclosures/
Lien
A legal judgment against a property that must be paid when the property is sold. A lien on a property usually means something bad has happened to the owner. Research any liens before signing on the dotted line.
LTV
Loan-To-Value ratio is when you compare the amount owed on a property to its fair market value, and usually the sales price or appraised price is considered the fair market value.
Location, Location, Location
Do we really have to define this? Always remember it!
Net Operating Income
Take your gross income and subtract all the operating expenses except income taxes and financing expenses and voila, you have your net operating income. See Measuring Return: Cap Rates and Cash on Cash
MI or PMI
Mortgage Insurance or Private Mortgage Insurance
PITI
Principal, Interest, Taxes and Insurance. All four of these things play a key role in determining how much cash flow you will have each month. If one of these is out of whack it will most likely have an adverse effect on your bottom line. If you have an impound account, or points, on your loan PITI is usually included in the monthly payment to the lender and this makes it easier to calculate returns.
ROI
Return on Investment is the percentage of the amount an investor earned divided by the amount of money received. See Measuring Return: Cap Rates and Cash on Cash
Tax Deferred Exchange
Also called a “1031 Exchange” this refers to the IRS code Section 1031 where the tax laws allow you to “exchange” one property for another to defer capital gains taxes. Most properties qualify; however, before entering into an exchange make sure your reasons are valid and produce positive results for you. The last thing you want is to do it wrong and get hit with a huge tax bill!