Below is a glossary of investment terms you are going to come across at sometime in your real estate ventures. It is by no means a complete list, but with your help it will be one day. If there is a term you are looking for that is not here reach out to us so that it can be added.
Abstract of Judgment
The summary of a court judgment that creates a lien against a property when filed with the county recorder
Abstract of Title
Historical summary of all of the recorded instruments and proceedings that affect title to a property.
Accelerated Cost Recovery System
A tax calculation that provides greater depreciation in the early years of ownership of real estate or personal property. Usually, depreciation is base upon 39 years for non residential commercial property and 27.5 years for residential property (even multifamily). When you accelerated this process you have a study of the property done to accelerated that depreciation and take a higher dollar amount over fewer years.
A loan provision giving the lender the right to declare the entire amount immediately due and payable upon violation of another specific loan provision, commonly referred to as the Due on Sale Clause.
The price and all fees required to obtain a property.
Adjustable Rate Mortgage (ARM)
An adjustable-rate mortgage, is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Normally, the initial interest rate is fixed for a period of time, after which it resets periodically. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.
Adjusted Cost Basis
The cost of any improvements the seller makes to the property. Deducting the cost from the original sales price provides the profit or loss of a home when it is sold.
Adjusted Tax Basis
The original cost or other basis of the property, reduced by depreciation deductions and increased by capital expenditures.
The amount of time between interest rate adjustments in an adjustable-rate mortgage.
The voluntary and absolute transfer of title and possession of real property from one person to another.
When the cost of mortgage payments, property taxes, insurance and maintenance on a rental property is greater than the income it brings in. Leads to negative cash flow. Usually occurs when buyer overpays for a property or purchases near the max value.
Loan that is repaid in a series of installments each of which contains a portion that is applied to reduce the principal amount of the loan and a portion that is applied to pay interest with each successive payment allocates a larger portion to principal reduction and a smaller portion to interest payment until the outstanding balance is ultimately reduced to zero.
Maximum amount the interest rate on an adjustable rate mortgage can be raised or lowered in the course of one twelve month period.
Appreciation refers to the increase in the value of a property over time. Appreciation is usually projected as a percentage of the property’s value over the course of a year. Appreciation can be cause by supply and demand, inflation, or valued that has been added to a property.
Mortgage payment includes interest for prior month, or overdue payments in default.
Without guarantees as to condition.
The value established for property tax purposes. Multiply the assessed value by the millage rate to see the property taxes.
The person to whom an agreement or contract is sold or transferred.
The method by which a right or contract is transferred. One person finds and locks up the property but does not close on the property, instead that person assigns the contract to someone else and that person closes on the property.
The person who assigns or transfers an agreement or contract to another.
An existing mortgage which allows the next purchaser of a property to be liable for the payments and other obligations of the note and mortgage. Depending on the type of loan, the assumption of the obligation by this next purchaser may or may not require a qualification and approval process and may or may not release the original mortgagor (borrower) from further liability. A written release from the mortgagee (lender) is required to relieve the original mortgagor of responsibility.
A tenant’s formal agreement to be a tenant of a new landlord.
A loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years) but that requires a lump sum payment of the entire principal balance at the end of a shorter term (e.g., 10 years).
An installment payment which is larger (most often much larger) than the other scheduled payments. It is usually the last payment. If a note is written for $50,000 at a fixed 9.0% rate of interest with payments based on an amortization schedule of 30 years and a balloon payment due in 5 years, the first 60 payments will each be $402.31 (the normal payment for a 30 year loan at 9.0% interest) and the last payment will be $47,940.15 which will be the outstanding balance remaining after the 60th payment.
One 100th of 1%.
Someone who identifies a potential good real estate investment opportunity and passes that deal on to another investor for a fee.
A single mortgage which attaches to more than one property.
Broker Price Opinion (BPO)
Real estate broker provides an estimated value of a property
Permission granted by a local government or agency to build a specific structure at a specific site.
A payment of discounts points in exchange for a lower rate of interest. It has the effect of providing the lender with a greater yield today in exchange for a lower yield in the future. (See definition of “discount points” below.).
Mortgage financing between the termination of one loan and the beginning of another loan.
A capital expenditure is an improvement that will have a life of one year or more and will increase the value of the property.
Capital gain is the seller’s gain on an asset used in a trade or business or for investment, including real estate. This gain is taxed at varying rates depending on whether the asset was held for more or less than one year.
Capital improvement is an item that adds value to the property, adapts the property to new uses, or prolongs the life of property. Maintenance is not a capital improvement.
Capitalization Rate (Cap Rate)
The percentage of the investment the investor will receive back each year from the net income from the property. If you were to purchase the property all cash this would be your return on that investment.
Cash flow is the income produced by an investment property after deducting operating expenses and debt. Simple put the cash that’s left over after all your expenses including debt servicing is paid.
In a mortgage commitment, some lenders require that the borrower have on deposit in their bank accounts at the time of the closing an amount equal to a predetermined number of months of the cost of principal, interest, taxes, and insurance, which is referred to as a cash reserve.
Certificate of Occupancy (C of O)
The Certificate of Occupancy is a certificate issued by a local governmental entity responsible for the use of land in the community where the property is located stating that the structures on the property or any improvements made to these structures comply with the codes, ordinances and regulations of that governmental entity and that they may be occupied.
Certificate of Title Opinion
Certificate of Title Opinion is a report based on a title examination, which states the examiner’s opinion of the quality of a title to real property.
A cession deed is used to relinquish real property to a municipality for a road or other public work project.
A chain in land measurement is a distance of 66 feet.
Chain of Title
Chain of Title is a successive conveyance of title to a specific parcel of land.
Chattel is personal property.
A letter issued by the lender to the applicant that states funds will be provided subject to written terms and conditions.
Common Area or Common Elements
The common area is the area in the property or in the building that is available for use by all owners and tenants.
Comparables (Comps) or Comparative Market Analysis
Comps are used in assessing or establishing the fair market value of a property, a property which has been sold recently that is similar in size, condition, location and amenities.
Condemnation is the exercise of the power of eminent domain or taking private property for public use.
Consideration is anything of value, as recognized by law, offered as an inducement to contract.
Contingency is a condition in a contract relieving a party of liability if a specified event occurs or fails to occur.
Contract for Deed
Contract for deed is a contract of sale and a financing instrument wherein the seller agrees to convey title when the buyer completes the purchase price installment payments. It is also called installment land contract and installment plan.
Conveyance is the transfer of title to real property.
Cost approach is an appraisal method for estimating the value of properties that have few, if any, comparables and are not income-producing.
A counter-offer is a new offer made by either the buyer or seller when rejecting a previous offer.
A covenant is a promise made in writing.
The debt-to-equity ratio, also referred to as the loan-to-value ratio, is a rule used by banks requiring that a borrower invest a minimum amount of equity cash (usually 10% to 25% of the purchase price) as a condition to obtaining a mortgage. The rule is used in conjunction with the carrying-cost rule to determine how much money a bank will lend. A ratio of 1 means 100% leverage of a property, and higher than 1 means negative equity.
Debt Service is the cost of carrying a loan, usually through monthly payments, including the payment of interest and principal.
Debt-to-Income Ratio or Debt-Service Ratio
The debt-to-income ratio is the relationship of a borrower’s monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage. It is also known as bottom ratio.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is another option to avoid foreclosure. A deed in lieu is a transaction where the homeowner voluntarily transfers title to the property to the lender in exchange for a release from the mortgage obligation.
A deed restriction is a limitation on land use appearing in a deed.
An act performed by the buyer, seller, tenant or landlord that breaches the contract of sale or lease and permits a claim for damages.
A defeasance clause is a statement in a mortgage or deed of trust giving the borrower the right to redeem the title and have the mortgage lien released at any time prior to defaulting by paying the debt in full.
Depreciation is the expensing of the original cost of an asset, plus any qualified improvements, over its scheduled life as defined by the IRS. Depreciation deductions are permitted only for assets held by the production of income or used in a trade or business. The current term for depreciating residential real estate is 27.5 years.
Descent is the distribution of property to qualified heirs of one who has died intestate.
Disclosure and Informed Consent
Disclosure and informed consent is a real estate agent explaining his position in the agency relationship and the verbal and written consent of the relationship by the client.
The disclosure statement is an accounting of all financial aspects of a mortgage loan required of lenders to borrowers in residential mortgage loan as regulated by the Federal Reserve Board.
Discount points are a one-time payment by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would cost $2,000. It is also referred to as points.
Due diligence is the investigation and review of a property to determine any legal liability.
Two units under one roof. Usually side by side, but can be one on top of the other.
A deposit made by the potential home buyer to show that he or she is serious about buying the house.
An improvement that intrudes illegally on another’s property.
Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions.
A homeowner’s financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens.
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition. For example, the earnest money deposit is put into escrow until delivered to the seller when the transaction is closed.
The interest held by one who has agreed to purchase, but has not yet closed the transaction.
The value of the unencumbered interest in real estate as determined by subtracting the total of the unpaid mortgage balances plus the sum of any current liens against the property from the property’s fair market value.
The reversion of property to the state in the event that the owner dies without leaving a will and has no legal heirs.
A doctrine of law that stops one from later denying facts which that person once acknowledged were true and others accepted on good faith.
The lawful expulsion of an occupant from real property.
Examination of Title
The report on the title of a property from the public records or an abstract of the title.
Provision in a mortgage allowing the borrower to surrender the property to the lender without personal liability.
A person named in a will to administer an estate. The court will appoint an administrator if no executor is named.
A written agreement between all parties on a contract allowing an additional specified period of time during which all parties are expected to perform their contractual obligations.
Fair Credit Reporting Act
A federal law that allows individuals to examine and correct information used by credit reporting services.
Fannie Mae (FNMA)
Federal National Mortgage Association, a federally chartered corporation that purchases mortgages and packages them to sell as securities.
Federal Fair Housing Law
A federal law that forbids discrimination on the bais of race, color, sex, religion, or national origin in the selling or renting of property.
Federal Housing Administration (FHA)
An agency within HUD that administers many loan programs designed to make housing more available.
An agreement between a borrower and a broker which normally specifies the relationship between them and the amount of compensation to the broker.
Absolute ownership of real property.
An obligation to act in the best interest of another party. This type of obligation typically exists when one person places special trust and confidence in another person and that responsibility is accepted.
That mortgage which is recorded at the earliest time. The time of recording is the sole criteria. Size of loan and type of mortgage are immaterial. When the first mortgage is paid off and released, the second mortgage (if any existed) becomes the first mortgage.
Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant.
Fixed Payment Mortage
A loan secured by real property which features a periodic payment of interest and principal which is constant over the term of the loan.
Fixed Rate Mortgage
A mortgage with an interest rate that remains the same through the life of the loan.
A level land area subject to periodic flooding from a contiguous body of water.
A course of action a lender may pursue to delay foreclosure or legal action against a delinquent borrower
The process by which the mortgagor’s (borrower’s) rights to a property are terminated. While the general process is similar from state to state, the actual procedures tend to vary greatly.
Freddie Mac (FHMLC)
Federal Home Loan Mortgage Corporation, a federally chartered corporation that purchases mortgages and packages them to sell as securities.
For sale by owner.
The ability of a property or building to be useful and to perform the function for which it is intended according to market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.
A letter to a lender stating that a gift of cash has been made to the buyer(s) and that the person gifting the cash to the buyer is not expecting the gift to be repaid. The exact wording of the gift letter should be requested of the lender.
Good faith estimate:
Under the Real Estate Settlement Procedures Act, within three days of an application submission, lenders are required to provide in writing to potential borrowers a good faith estimate of closing costs.
The person to whom an interest in real property is conveyed.
The person conveying an interest in real property.
An insurance policy selected by the borrower to cover the property against loss due to hazards such as fire, hail, etc. The borrower pays an annual premium for this coverage. In many cases, the lender requires that the borrower pay 1/12 of this annual amount every month, included with the borrower’s monthly payment of principal and interest. These funds are held in reserve on behalf of the borrower in an escrow account.
An inspection made by a third party (not the buyer or seller) for a statement of condition on the property, i.e. structural and mechanical conditions. Many contracts to purchase are contingent on the buyer having a home inspection performed within a certain time period prior to closing.
An association with annual dues collected from residents to insure enforcement of any covenants or restrictions that apply to the properties covered. For example, the Homeowner’s Association could legally cause a homeowner to take care of their yard as required by a legal covenant signed as a part of closing. Homeowner’s Association fees also cover maintaining common areas, and in some cases may be either voluntary or mandatory.
An insurance policy covering specific future repairs, should they become necessary, for a specific time period. These are often provided by the seller or builder as a condition of sale.
A document that provides an itemized listing of the funds that were paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. The HUD1 statement is also known as the “closing statement” or “settlement sheet.”