As a real estate professional, it's crucial to have a solid understanding of the industry's vocabulary. Whether you're studying for your real estate license exam or want to refresh your memory on common terms, this article will provide you with a comprehensive list of 105 real estate terms every realtor should know.
Introduction
Having a good grasp of real estate terminology is essential for success in the industry. This article aims to familiarize you with the definitions of common real estate terms that you're likely to come across in your real estate business. By expanding your knowledge of these terms, you'll be better equipped to communicate with clients and navigate the complexities of the real estate market.
1. Contingent
When a home sale is listed as contingent, it means that the seller has accepted an offer on the property, but there are still other steps, or contingencies, that must be met before the deal can go through. These contingencies could include a positive home inspection report, appraisal, or a pending mortgage pre-approval letter.
2. Pending
A pending status indicates that the seller has accepted an offer from a buyer, but the deal has not been finalized yet. Unlike a contingent status, pending means that all the paperwork is still being processed before the deal is officially closed.
3. Short Sale
A short sale occurs when a financially distressed home is sold for a smaller amount than what is still owed on the mortgage. In this scenario, all the money from the sale goes to the mortgage lender, who is responsible for approving the sale. Selling a house in a short sale is financially better for the seller than going through foreclosure.
4. Wholesaling
Wholesaling in real estate involves finding sellers willing to sell their properties at a discount and connecting them with cash buyers or real estate investors. In exchange, the wholesaler collects a fee for bringing the two parties together. This arrangement benefits the seller by selling their home with minimal hassle, while the buyer or investor finds the perfect property.
5. Cap Rate
Cap rate, short for capitalization rate, is a crucial term for real estate investors. It represents the ratio of a property's net income to its purchasing price. Investors use this number to determine the potential profit they can make from a rental property.
6. ARV
ARV stands for After Repaired Value, which is the value of a property after it has been rehabbed. Appraisers determine the ARV before the repairs are completed based on a list of proposed repairs.
7. Right of First Refusal
The right of first refusal is a provision in a lease or home agreement that grants an interested party the right to buy the property before the seller considers other potential buyers. The seller is unable to negotiate with other buyers unless the party with the right of first refusal declines.
8. LTV
LTV stands for loan-to-value ratio, a metric used in commercial real estate. Lenders or financial institutions calculate the LTV before approving loans for purchasing commercial properties. Higher LTVs indicate higher risks and often come with higher interest rates.
9. Encumbrance
An encumbrance refers to any claim, liability, or limitation on a property. Examples include liens, deed restrictions, easements, and encroachments. These situations can reduce the property's value and restrict the owner's ability to transfer the property's title.
10. NOI
NOI stands for net operating income, a metric used to analyze the profitability of a real estate property. It is calculated by subtracting all operating expenses from the revenue generated by the property. NOI indicates whether owning and maintaining the property is financially worthwhile.
11. Easement
An easement is the right to use a property even if you're not the owner. It typically relates to a specific purpose and is limited to that purpose. For example, utility companies can use easements to access roads on a property.
12. Blockbusting
Blockbusting is an illegal practice where real estate agents convince homeowners to sell their properties at a lower price by falsely suggesting that their neighborhood's socioeconomic status is changing, leading to decreasing property values. This discriminatory practice results in the new home buyer purchasing the property at an inflated price.
13. MLS
MLS stands for Multiple Listing Service, a collection of regional databases that display property listings in specific areas. Real estate agents pay an annual fee to access these databases, gaining access to the most up-to-date information about the market.
14. CAM
CAM stands for common area maintenance, a charge that tenants may have to pay on top of their base rent for shared areas of multi-tenant buildings. Examples of CAM fees include pest control services, security services, and insurance.
15. Proof of Funds
A Proof of Funds letter is a document that a buyer presents to the seller to prove that they have the necessary funds to cover all the costs associated with purchasing a home, including the down payment, escrow, and closing costs.
16. Earnest Money
Earnest money is a small fee paid by the buyer to the seller after the seller accepts the offer on a home. It acts as a deposit and is held in escrow until the closing is completed, at which point it is applied to the down payment and closing costs.
17. ADU
ADU stands for accessory dwelling unit, a legal term for a secondary residential building located on the same lot as the primary home. Examples include guest houses or detached garages. ADUs cannot be bought or sold separately from the primary home and can be either attached or separate from the main building.
18. Comps
Comps, short for comparable sales, are homes in the same area with similar size, condition, and features used to determine an appropriate offer price for a property. Homebuyers use comps to decide how much to offer, while sellers use comps to determine a listing price.
19. HOA
HOA stands for homeowners' association, a group of homeowners in a particular subdivision or condominium complex who form an association to address shared issues and maintenance concerns.
20. Redlining
Redlining is an illegal discriminatory practice that categorizes certain neighborhoods as not worth investing in based on the race or ethnicity of their residents. This practice leads to the denial of financial services such as mortgages, loans, and insurance.
These are just a few of the real estate terms covered in this article. By familiarizing yourself with these terms, you'll be well-equipped to navigate the real estate industry and effectively communicate with clients. If you have any questions about additional real estate terms or want to share your own insights, feel free to leave a comment below!