The real estate investing business can be very intimidating to those who are just getting started. One of the main reasons for this is the vast amount of terminology that accompanies the business; not all of it is common place to the average person. To that end, it can be awkward trying to carry on a conversation about real estate without knowing what everyone else is talking about. Between all of the different areas of the business, there are dozens of different terms used, each of which you should be able to understand. Most of these you will have some idea of what they mean, but others may serve to confuse you. Here are some of the most important real estate terms new investors should familiarize themselves with:
- Equity: Equity is often referred to as the amount of down payment you put on the property. If you are buying a home with a 30% down payment, you have the same amount of built in equity when the purchase closes. It is also used to reference the amount owed on the property in relation to the current value. Owning a property worth $200,000 with a balance of $150,000 gives you $50,000 in equity.
- Contingencies: These are referenced when you are buying a property. A contingency is anything that has to be done before you can move forward with the purchase. The most common contingencies deal with the inspection, mortgage, appraisal and time. Failing to meet these contingency dates may cause you to forfeit your deposit and back out of the deal. These are done for the protection of either the buyer or the seller to keep the deal constantly moving forward.
- Bandit signs: When you hear the term bandit sign used in a conversation, you may think the other person is up to something. Bandit signs are the small yard signs that you often see for small businesses or local politicians. These signs are not confined to front yards. Any small “we buy houses” or “quick, cash closings” signs you see in busy intersections are examples of bandit signs.
- Proof of funds: Any offer you make will have to verify where the money is coming from. With cash offers, sellers will ask for a proof of funds letter. This is simply just a letter or statement from your account holder verifying that you have enough in the account to proceed with the offer. This letter needs to be updated, and it should reflect enough for the purchase in question.
- Carrying costs: There are a handful of costs that go into rehabbing a property. One of the hidden expenses are the carrying costs. These are the expenses you incur from the time you take ownership until you rehab and sell the property. These costs are different from specific rehab expenses. Carrying costs often include interest repayment, taxes, insurance, utilities and other hidden costs with ownership.
- Variable rate: There are not nearly as many variable rate loans as there were in the past. A variable loan is a loan that has the ability to adjust at some predetermined point in the future. If you took a three year ARM (adjustable rate mortgage), your loan is fixed for the first three years and can adjust every six months or year after. The benefit is that for the adjustable period, the interest rate is typically lower than the fixed rate option.
- MLS: Many new investors have heard about the MLS, but don’t know exactly what it means. The MLS is an acronym for multiple listing service. This is the directory where local real estate agents find new listings. Any new property listed by a real estate agent goes to the MLS. This includes any bank owned property, short sales and foreclosures. It also hold current listings and previous sales.
- Exit strategy: Going into a deal without knowing the end goal is a recipe for disaster. Your exit strategy is your plan for what you want to do with the property. In a rehab, this is where and how you will sell the property. For a buy and hold property, it is determining your rental price and how you will market it. The exit strategy is another way of figuring out the end goal before you get started.
- Closing costs: The closing costs is the amount you pay to secure your loan. There is a difference between closing costs and prepaid items. Closing costs are fees to your lender, attorney, title search, title insurance and real estate agent. The prepaid items are paid at closing, but are used to prepay your property taxes and insurance. If these are escrowed in your payment, you won’t have to make a payment again, but you will cover anywhere from six months to a year up front.
- Appraisal: There is a big difference between the appraisal and the inspection. The inspection is done for the buyers benefit to verify the quality of the property. The appraisal is done for the lender to validate the property value. They not only look at the condition of the property, but will look at local comparable sales and past listings. The appraisal is an independent, subjective view of the value of the property.
These are just ten of the many terms used every day. Don’t be intimidated if you aren’t sure of what someone is saying. Fortunately, you can fairly easily find a glossary of terms to quickly figure these out. If you read as much as you can about the business every day, these terms will become second nature in no time.