Real estate investing is a new, exciting, and wonderful adventure when you’re first getting started. For me, the new hasn’t worn off. I love real estate investing as much as I ever have. But, if there’s one thing I would have changed, it would be my knowledge of the terminology thrown around by more seasoned investors. If you’re tired of feeling like a dunce for having to look up the meaning of a real estate term every time you hear one, here’s a primer that should help get you up to speed. Acceleration clause – a provision in a mortgage loan that allows the lender to demand immediate payment of the entire outstanding balance because of the violation of a loan provision, such as defaulting on the mortgage. Addendum – an addition to a contract adding a provision that wasn’t in the original document. Once agreed to by both parties, the addendum then becomes a part of the original contract and is enforceable in court (assuming the provision is legal). Appreciation – the increase in value of an asset. Balloon payment – a required large final payment of a contract, frequently a large percentage of the original amount borrowed. Many times a contract will consist primarily of interest only payments for a period of time followed by a large payment that pays off the entire balance. For instance, someone might make interest only payments on a property for five years and then have to pay the entire balance off at the very end. Cash flow – the amount of money left over on a monthly basis after paying all operating expenses on a property. This amount can be expressed as either a positive or a negative number. For example, if a property has total income of $1500 per month and expenses and debt service of $1000 per month, monthly cash flow on the property would be $500. Closing – a meeting between the buyer and seller of a property where legal ownership is transferred. When this happens, there is typically a large stack of legal documents that needs to be signed by both parties. At this time, the seller receives certified funds as payment for their property, all closing costs are paid, and the buyer signs mortgage and other legal documents and receives a large stack of papers related to the purchase. Closing costs – expenses that must be paid in order to legally transfer ownership of a property from the seller to the buyer. Depreciation – a provision in the Internal Revenue Code that allows the owner of a property to take a tax reduction for the value lost through the year. One unique aspect of this provision is that the federal tax code allows a real estate investor to take a depreciation allowance on their tax return even though their property actually increased in value. Due on Sale Clause – a provision in a mortgage contract requiring that the entire loan balance be paid immediately on demand in the event of the sale of a mortgaged property. Certain things can trigger the due on sale clause in the contract, such as the legal transfer (or equitable transfer) of ownership from the original loan borrower to another party. Earnest money deposit – when someone places a written offer on a property, the seller will normally require that the buyer provide a small deposit (usually $500 or $1000) to prove to the seller that they are serious about making the purchase. These funds are normally placed into an escrow account by the real estate agent and will become the property of the seller in the event that the buyer fails to execute the contract as agreed. Foreclosure – the legal process involved in repossessing a property, usually for nonpayment of a mortgage contract. There are two kinds of foreclosure: judicial and nonjudicial. Specific foreclosure laws vary from state to state, but in general the foreclosure process takes considerably longer in a judicial state because the lender must go to court and prove that the borrower has failed to make their payments as agreed. In a nonjudicial state, the process is much shorter and simpler because the lender is not required to receive court approval prior to forcing the removal of the borrower from the property. GRM – also known as the Gross Rent Multiplier, which is a ratio you can use to estimate the value of an investment property. To figure the GRM, you need two pieces of information about the property: the sales price and the market rent rate. The way you figure the GRM is by taking the sales price and dividing by the monthly rent. For instance, pretend you have a property with a list price of $125,000 that would rent for $1600 per month. 125,000/1600=78. In this case the GRM would be 78. Home Equity Loan – a type of loan where the owner of a property borrows money from a lender based upon the value of the property. Proceeds from a home-equity loan are typically used to make repairs to the property, pay off other debt, or to fund additional real estate investments. HELOC – Home Equity Line of Credit is a type of loan where the borrower pledges the equity in their home as collateral. In exchange for receiving a HELOC loan, the homeowner usually receive a checkbook that they can use to access funds. While the homeowner is typically notified at the time that their loan is approved how much money they are qualified to receive, they don’t normally receive cash at that time. Instead, they use the checkbook to access HELOC funds, so they only pay interest on the portion of the loan that they are utilizing at any given time. HUD-1 settlement statement – this form is also known generically as the closing statement. Put simply, it is nothing more than a detailed accounting sheet that discloses where every dollar of a real estate transaction is going. It lists things such as real estate commissions, mortgage broker fees, escrow amounts, etc. At the very bottom of the sheet it details the total amount of money paid by or on behalf of the buyer to the seller. Lien – a type of encumbrance that can be placed on a property by a creditor that prevents the property’s sale without the payment of a legitimate debt. For instance, if a homeowner loses a lawsuit and is bordered by the court to pay the winning party a certain amount of money, many times the winning party will place an encumbrance upon their real estate to ensure that the judgment is paid. LTV – a numeric value that can be used to determine how heavily leveraged a property is. If a borrower takes out a loan in the amount of $100,000 and the property is worth $125,000, the LTV is 80%. NOI – the Net Operating Income of an investment property is the amount of money left over each month after making all debt payments and paying all operating expenses, such as insurance, maintenance, and repairs. Owner financing – a method of financing where the seller acts as the bank and agrees to take payments for their equity over a period of time. This is a very common and creative real estate financing technique utilized by a lot of real estate investors who for one reason or another have decided to forgo institutional bank financing or the use of hard money lending sources. PITI – an acronym that stands for principle, interest, taxes, and insurance. ROI – an acronym that allows a real estate investor to determine their return on investment, which is expressed as a percentage. For instance, if you invest $100,000 and you receive $10,000 in annual returns, your ROI would be 10%. Title insurance – an insurance policy that the purchaser of a real estate property can purchase to guarantee that there are no outstanding liens or other encumbrances that would affect the transfer of ownership from one party to another. As you can clearly see from this list of real estate investing terminology, there is a huge vocabulary for you to learn as you begin to fully immerse yourself into the world of real estate investing. This is by no stretch of the imagination a full list. It is, however, enough of a starter list that you can feel a little more comfortable with getting up to speed. Your eyes won’t completely glaze over if you happen to overhear more experienced investors talking, and in many cases you can smugly smile – knowing that you’re a member of a select club of special entrepreneurs who have their own secret language. Plus, you won’t have to wear a special uniform or try to explain to people where the Klingon empire is located. To learn even more of the jargon used by real estate investors, navigate over to www.REIconferences.com and look around a site built by investors for investors. It’s packed with all the tips, tools, and information you need to turn the corner and reach all of your investing dreams.
Charrissa Cawley has a long standing reputation for excellence as a gifted speaker, real estate trainer and wealth coach. Her strength lies in training entrepreneurs in the areas of real estate, investing and financial literacy. Her passion is bridging the gap between learning and doing. She has helped thousands of entrepreneurs all over the world seeking financial growth by equipping them with the tools, resources and specialized knowledge to succeed. Charrissa offers accurate and proven strategies to investors of all different levels and is the founder of www.REIconferences.com, one of the fastest growing real estate investment training organizations in the US in addition to www.rewexclub.com , the top rated Real Estate Investor Community on the web today.
