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Currently, the real estate market is on most investors’ minds. I’ve had friends trying to buy a house in the current market, and it seems impossible for them to actually get an offer accepted!
They’ve put multiple offers in, none of which have led to a new home, and it’s getting so frustrating for them to navigate.
Many of them are first-time home buyers, which means they’re learning this whole home-buying thing on the fly. They don’t know what to say at the offer table, and it’s hard enough trying to buy a home right now, let alone all of the terms & jargon that goes along with it.
Today’s real estate market is so competitive, and it takes an expert to properly enter the market and buy successfully. Are you looking to buy or sell right now? Do you find yourself a little out of your depth when trying to enter the conversation of real estate investing?
My friends certainly did. They needed a “real estate 101” class to start them out on the right foot. Since my husband and I bought a home a few years back, we’re in the know with all things real estate.
Since we’ve already navigated the waters, we wanted to pay it forward and offer our friends (and you!)
24 Real Estate Investing Terms to Understand:
1. Seller’s Market
In a Seller’s Market, the prices of properties are rising, meaning it’s a good time to sell yours if you want to. Right now, most would agree that we are in a Seller’s Market.
That’s why my friends are having such trouble buying a home at a reasonable price! Housing prices are rising, and sellers can get the top dollar for their real estate. However, buyers are finding it hard to get a good deal on the house they love.
You might have to put in an offer above the asking price to get the home you really want at this time. In this situation, the demand for houses is greater than the supply, causing prices to skyrocket.
2. Buyer’s Market
A Buyer’s Market is just the opposite. It’s time to buy a low priced house! In this situation, most real estate prices are dropping, meaning you can get a good deal for the real estate you want to buy.
Hopefully, the market will change up in time for my friends to buy during a Buyer’s Market to save the most money possible.
This would make it possible for them to negotiate a great price on a home, possibly below asking price. In this scenario, the supply for houses is greater than the demand, causing prices to lower for a time. Consult with your realtor to see when is a good time to negotiate a lower price with the seller.
So if you hear someone talking about a “Buyer’s Market” or a “Seller’s Market,” now you know!
3. 1031 Exchange
This term is good to know if you’re getting into commercial real estate. It involves using the proceeds from selling your current real estate to buy more real estate! It’s a great tactic if you’re looking to save on taxes, since the gains on this first investment aren’t taxed if you just put them right back into more real estate.
Make sure you work with a financial professional such as an attorney to be sure you’re completing the transaction properly so it is qualified as an exchange in the end, and keep detailed records of your purchase and sale as you work with them.
Be careful to take the right steps so you won’t find yourself paying more taxes than you need to!
This involves your property gaining value! It could involve renovations, changes to properties around yours that increase its value, or even just more demand for houses in the real estate market causing an increase in the value of your property.
Since my husband and I bought our home, it has appreciated in value by approximately 15% due to the current Seller’s Market and some bathroom renovations we’ve done.
Depreciation is the natural way of the world. It’s when the value of something decreases due to wear and tear, natural disasters, or just general damage. Think of a home’s roof.
Over the years, the roof will need repairs and possible replacement. This wear and tear can cause the value of a home to depreciate.
Equity is the assessed value of your property minus how much you have left to pay off on your mortgage. So, as I pay off my mortgage, my equity increases. And, as the assessed value of my home goes up, my equity increases! An easy way to calculate your home’s equity with this formula:
your current home’s appraised value – your mortgage balance = equity
High equity is typically a good thing.
Assessments are done by local assessors frequently to determine how much a property is worth to approximate the local taxes the investor should make each year. Our home hasn’t been assessed in several years, so we’re still paying the same local taxes we paid last year even though our home has increased in value like I mentioned before.
An assessor could determine that your home is worth more or less in any given year, based on prices in the real estate market as a whole, the age of your home, the area it’s in, and any improvements you’ve made.
Local taxes are paid as a percentage of your assessed home value, so your tax total will increase as your home value rises, and vice versa.
8. ROI (Return On Investment)
Your return on investment is exactly what it sounds like – it’s the money you make on the sale of your real estate. It’s typically represented by a percentage that shows what percent of the original cost of your real estate you “got back” in gains.
The higher the ROI, the better! When we sell our home in the next few years, I’m hoping for an ROI of about 15%, since this is how much our home has increased in value since we bought it.
This means we’ll hopefully list our home for 15% more than we bought it for (around 207k) so we can get a return on our initial investment (27k) from when we first purchased the home (180k).
9. Debt-to-Income Ratio
Debt-to-income is your personal monthly debts (think paying off a mortgage or car payment) divided by your personal monthly income. Utilities like gas, water and electric aren’t included in this ratio.
Now that my friends are buying their first home, this was an important factor for them in securing their new loan. As you probably guessed, they worked to make their current debts a minimum and max out their current income to get a great loan.
Lenders are typically looking for a debt-to-income ratio of 36% or lower.
Underwriting is also part of the process for securing a loan. The company you’re looking to get a loan from is assessing the risk you’ll pose to them. Do you typically pay off your debts? Do you have steady income? Will you pay them back?
The underwriting process lets the company decide if they’ll take you on as a customer. The lender we went through took a few weeks to complete their whole underwriting process, and it was thorough!
When you secure a loan, amortization will definitely come up. It’s basically the way your loan payments will be spread out over time. To make a dent in your loan, you’ll typically need to make monthly payments that include paying off the actual loan balance, as well as interest that’s accruing.
Our amortization schedule (the balance of the loan spread out over scheduled payments) goes on and on for the next 28 years… It’s a little daunting!
Speaking of interest, this is the portion of your purchase that goes directly to the lender. The quicker you pay off your mortgage, the less interest you’ll have to pay, since interest accrues over time. Interest rates rise and fall throughout the year, and they are different with different lenders.
If you hear the terms fixed associated with your interest rate, this means that that rate will stay the same for the entirety of your loan. It’s locked in, if you will. If your interest rate is variable, it has the potential to rise and fall with the market. Sometimes variable interest rates start lower, since they are more of a risk to the buyer.
If you’re considering taking on a mortgage for a short time, a lower variable rate might be the way to go.
However, if you plan on financing your home for a while, a fixed rate might be a good choice for you. It all depends on how comfortable you are with risk. We shopped around for a fixed interest rate when we were securing our loan!
Escrow is a term used for the period of time where the buyer and seller are finalizing their agreement with an escrow agent (usually just before the purchase is closed). The phrase in escrow is often used for people in this particular phase of the buying process.
Our escrow lasted about a month – it was hard to wait this long to get into our new home! An escrow account is an “in between” account used for the lender to hold funds to pay off things like taxes and insurance for your home.
It’s established when you get your mortgage if you put down under 20% of the cost of the home, and continues to hold money as you pay it and the lender uses it for costs associated with your mortgage.
14. Down Payment
You’ve probably heard of a down payment. It’s the amount of money you’ll fork over before your loan balance pays off the rest of the purchase you want to make. The down payment basically proves you are financially stable enough to handle paying off your mortgage, and it isn’t always required for all loans.
Depending on the type of loan you secure, you may or may not have to pay a down payment at all. My husband and I only had to pay a down payment of about 5% of the total cost of our home. This 5% went right towards purchasing our home, so our loan then had to cover 95% of the purchase price.
Another thing we had to consider when purchasing our home was if we’d have to pay private mortgage insurance on our loan. For most conventional loans, this insurance is required if you pay a down payment of less than 20%, and it can hike up the cost of your monthly mortgage payment.
Since we only put down 5%, we pay this insurance monthly, tacked on to our mortgage payment.
This insurance basically ensures that the lender can recoup some losses if we fail to continue to pay off your mortgage. As the equity in our home rises, soon we might not have to pay the PMI anymore. Check with your lender to see if this is a possibility for you!
15. Short Sale
A Short Sale is a scenario where a bank offers a foreclosed home for less money than the current loan balance they hold for the home. This helps them recoup some of the money they lost, and can be a great deal for the buyer.
If you’re confident the home is in good shape after the foreclosure, this might be just the investment for you!
16. Building Classifications
If you’re interested in investing in commercial real estate, building classifications are an important factor to note. These classifications are a way to indicate the risk and possibility of return associated with a property.
Decide on how much risk you can handle and check out the building classification before you choose to jump in and buy a commercial building.
17. Class A Property
These properties are known as less risky, and they are typically in great locations, and newer builds. That way, the investor shouldn’t expect too many problems, but this usually comes at a higher cost.
18. Class B Property
A Class B Property sits in the middle of the risk and reward continuum. They might be in a good location, and be a more moderate price. However, they are older buildings than Class A Properties, so this makes them more of a risk.
19. Class C Property
An even older property with the potential for problems and a less desirable location would be a Class C Property. The potential for return grows and the price falls, but the risk is greater due to the location and age of the building.
20. Class D Property
A Class D Property is the riskiest of them all, but with the lowest cost and highest potential for a large return. It might be a very old building with many problems, but with some renovations and a vision, the investor might turn it around.
21. After Repair Value
Speaking of renovations, if you flipped a house or property, it’s worth once all of these changes were complete would be dubbed the After Repair Value.
The ARV can be reasonably predicted before repairs are even made by taking into account the current value, the location, which renovations you’ll do, and a few other factors.
22. Inspection Contingency
An Inspection Contingency is a great tool for buyers. It allows you, as the buyer, to purchase a home while being protected in the meantime if the inspection comes back less than stellar. If you don’t approve of the home after the inspection, you can renegotiate the price or terminate the deal altogether.
My husband and I didn’t know about this option when we were buying, but I’m definitely recommending our friends take advantage of this contingency if they can when they buy their new home.
23. Appraisal Value
When we bought our home, our mortgage company had to send out an appraiser to be sure that the home’s value fit the amount of the mortgage we wanted. In other words, the lender wouldn’t give us more money than they thought the home was worth (unless there were special conditions they were willing to consider)!
The appraiser found our home’s appraisal value by considering things like similar homes, the area, and the curb appeal. The purpose of this value was mostly to determine for the lender if the mortgage amount was appropriate for the home we wanted.
24. Market Value
The market value of our home was different from the appraised value. It was how much we were actually willing to pay for the home, considering the current market, as well as many other factors like how the home was marketed, how much comparable houses were going for, and the neighborhood the house was in.
This price was lower for us, and it was also similar to the price that the home was listed for. The purpose of finding this price is typically to be sure that you as a (seller or buyer) are getting a reasonable price for your home considering the market conditions and the state of the home, as well as other factors.
The Bottom Line
If you’re interested in diving into the real estate world now that it’s all a buzz, you’ll need to be familiar with most of these terms to keep up. My friends are scouring the market and learning these terms to be better equipped when the time comes for them to make their first real estate investment.
I wish I had this list when I bought my first home! It’s been a process, but over time and through going through my own home purchase I’ve learned to make this real estate jargon more understandable for myself and my friends.
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