This Colorado real estate glossary is from The Practical Guide to Colorado Real Estate Investing eBook. If you can’t find the definition you’re looking for, please contact us.
1003 – The standardized loan application form for Residential mortgages. It consists of a list of your sources of income, your Balance Sheet, your Credit Score and other information needed by the Lender to determine which loan products for which you qualify.
1031, or 1031 Exchange – a tax deferred method to sell one property and exchange it for another property of a similar type. If you follow all of the IRS rules carefully, you can postpone your payment of capital gains.
Acceleration – also called the Due on Sale Clause. If a property is sold, the entire amount of the loan is usually due immediately. Some other triggers for loan acceleration might include several late payments in a row. Acceleration can motivate a seller to want to move quickly, to avoid foreclosure.
Addendum – An extra document that is incorporated into a real estate contract. It might also modify the existing terms and conditions.
Adjustable Rate Mortgage – A mortgage that is fixed for a period of time, then the interest rate floats and is periodically adjusted based on the interest rate on which the loan is indexed.
Agency – a relationship where one person is authorized to act on the behalf of another. Your real estate agent will have an agency relationship with you, the investor, in many situations.
Amortize – the reduction of the principal of a mortgage with regular monthly payments. Residential loans are usually amortized over thirty years. Commercial loans are commonly amortized over fifteen to thirty years, but they might become due with a Balloon Payment in a shorter period of time.
Apartment – real estate property designed and built to be used for renting to tenants. Its highest and best use is usually renting to tenants. If the surrounding area has appreciated significantly in value, it occasionally becomes profitable to Convert the building from apartments to condominiums. Apartment buildings with four or less units are considered Residential property; five units or more are considered Commercial property.
Appraiser – Independent party that develops an assessment (the Appraised Value) of the value of a property. For residential real estate, they rely most heavily on recent history of similar properties (sales Comps) that have sold near your property. For Commercial properties, they will often use sales comps, an Income Valuation, and a Cost Valuation.
Appraised Value – The valuation the Appraiser calculates for your property, based on their analysis. This can be different from the Market Value, as it is only an estimate, and investors often influence the appraisal process.
Appreciation – an increase in the value of a parcel of property.
ARM – See Adjustable Rate Mortgage
ASF – Attached Single Family home; such as a duplex or a triplex. Usually less expensive, on $/ square foot basis, than a DSF (detached single family home), but usually a bit more expensive than a condo of a similar size in a given location.
Assets – What you own, such as your primary residence and your car. Part of the Balance Sheet on the 1003, the standard mortgage application.
Assign or Assignment – usually “Assign a Contract.” An investor who is interested in Assignments gets a property under contract for an attractive price then assigns the contract to another buyer, usually another investor. The first investor will be paid a fee for the work.
Assumable Loan – A loan that can be transferred to another party, upon lender’s approval. Common for commercial loans; much less common for residential.
Assumption – process of taking responsibility for a loan. You agree to take over the payments for the balance of the loan and the legal recourse for non-payment is transferred to you. A common feature of commercial loans, particularly the larger ones. Not commonly available on residential loans. More frequently, investors take over a property Subject To the existing mortgage.
At Par – The loan rate that you qualify for with a given type of property, LTV and credit score (among other variables). You can Buy Down the interest rate (get a lower interest rate) by paying more point(s) at the closing. Alternatively, you can get a point credited to you at closing to offset some closing costs by accepting a higher interest rate.
AVM – Automated Valuation Model; e.g., an automated appraisal.
Balance Sheet – A list of your Assets (what you own, such as your house and your car) less your Liabilities (what you owe, such as your mortgage and your car loan). The difference between the two is hopefully a positive number and represents your Net Worth. The Balance sheet is part of the 1003 mortgage application for Full Doc loans. The higher your Net Worth (also expressed in slang as “the stronger your Balance Sheet”), the better the terms the Lender can give you on your mortgage.
Balloon or Balloon Loan – a mortgage that does not fully amortize; in other words it has a shorter life and a lump sum payment is due at the end of its life. Common for commercial loans.
Balloon Payment – The amount of principal that is due at the end of a Balloon Loan.
Bankruptcy – A provision of Federal Law that a debtor can give assets to the court, and have many types of debts eliminated.
Basis – The investor’s purchase price of the property, plus any purchase costs, plus any improvements (e.g., replacement of a boiler or roof) less accumulated depreciation.
Basis Points – 0.01%. Also referred to as Bips. One mortgage broker might whine to another that “rates on the five year fixed are up thirty bips today, and I lost a deal as a result.”
BATNA – See Best Alternative to Negotiated Agreement
Best Alternative to Negotiated Agreement – also known as BATNA. In any negotiation setting, this is what your next best option is if you and the other party cannot come to terms.
Bips – See Basis Points.
Buyers Agent – A real estate agent that is representing a Buyer and has the financial responsibility to get the best possible deal for their client. A Buyer could also be represented by a real estate agent in the capacity of a Transaction Broker. In this case, the agent would be trying to get the transaction completed in a way that is fair and ethical to all parties, without looking out for the interests of any one party to the transaction.
Capital Gain – The sales price of the property, less selling costs, les the purchase price, less purchase costs, less any capital improvements. If the gain has been realized in less than a year, it is often taxed as Ordinary Income, which is usually a higher tax rate. If it has been held for more than a year, it is often taxed as the Capital Gains tax rate, which is usually lower.
Capital Gain Tax Rate – taxation applied to capital gains, usually of assets held for more than a year. Usually a lower rate than Ordinary Income.
Capitalization Rate (Cap Rate) – Used by investors to evaluate income properties, the NOI divided by the Cap Rate gives an estimate of the buildings value. Similar to return on investment for other types of investments, this is the return that you would get from investing in a building if you paid all cash. Cap Rates are roughly tied to interest rates – as rates go up, Cap Rates usually go up as well. As Cap Rates increase, the value of the building (assuming no change in NOI) declines.
Cash – When purchasing a property, most state-regulated real estate contracts allow you to put provisions into the contract that state if you cannot get the loan you want on the terms you want, you can back out of the deal. Investors usually purchase properties using “Cash.” Most of them don’t actually have the purchase price sitting in their checking account; they have made arrangements to get the money from some source, such as a Hard Money Lender. However, from the Seller’s point of view, it looks like cash. Sellers find this to be highly desirable and will occasionally accept less money for the certainty and speed of a cash closing.
Cash on cash return – The ratio of before tax cash flow to the total amount of cash invested.
Certified Public Accountant (CPA) – An accountant who has passed the Uniform Certified Public Accountant Examination and other state regulations. He is licensed to be able to give advice and opinions on financial matters.
Closing – Ceremony where Title is passed from Seller to Buyer. Usually a large number of supporting documents are also signed.
Closing Agent or Closer – the person at the Title Company that conducts the closing and manages the blizzard of paperwork and checks.
Closing Costs – the expenses paid by the buyer and the seller when the deal closes, which include: commissions, mortgage fees, escrow or attorney’s settlement charges, transfer taxes, recording fees, and title insurance.
Cloud or Cloud on Title – a doubt or uncertainty about who is authorized to sell a property, or who has value liens/claims against it. Clouds must be resolved before Title can pass from Seller to Buyer and the deal can close.
CMA – Competitive Market Analysis. See Comps
COFI – See Cost of Funds Index
Collateral – property (real or personal) that is pledged to secure a loan.
Commercial property – the opposite of Residential property. Commercial properties, for the purpose of this book, are apartment buildings with more than four units. Financing for these buildings is more difficult to arrange than for residential properties. Lower LTVs are typically available.
Comps – Slang for “sales comparables.” If you purchasing a three bedroom, two bathroom home with a two car garage and 2,000 square feet, the homes that generally meet those same parameters and sold in the last six to twelve months in a half mile to mile radius would be the “comps” for your property. Generally, all of them should sell for about the same price. There will be a bit of a range, as some homes will have been sold in better condition than others, or will have had more upgrades than others. An investor will often as their real estate agent to “pull comps” for them for a property in which they are interested.
Condominium – A building with multiple units that share some common elements. For example, an apartment building that has been Converted into a condo will often have a common roof, boiler, and hallways. The condo will have a Home Owners Association that pays the common expenses and collects a periodic assessment from the building’s owners.
Conduit Loan – A commercial loan that meets exacting criteria that is re-sold to Wall Street. Usually has a million dollar minimum, and offers lower interest rates and potentially slightly higher LTV than the portfolio alternatives. Often is non-recourse. However, they are harder to qualify for and are very difficult to pre-pay.
Conforming Loan – most residential loans adhere to strict underwriting guidelines. This enables the bank to package up large bundles of loans and sell them on Wall Street. If your property is within the tolerances of a conforming loan, you will get better terms. A loan that is not part of FHA or VA.
Construction Loan – A shorter term loan, often for 24 months or less, used to purchase an Apartment that an investor wishes to Convert to Condominiums. Often the lender will loan 80-85% of LTV or LTC, whichever is lower.
Contingency — a provision of a contract that keeps it from being fully legally binding until a certain condition is met. For example, the Buyer’s usually has a contractual right to get a professional home inspection before purchasing the home.
Contract – a legal document that binds two parties to perform some action. Often in real estate it refers to the Purchase Contract, though it could also refer to the many other documents involved in a purchase or sale of property.
Contractors – the trade people (e.g., plumbers, electricians, carpenters) that assist you with a renovation project.
Conversion – transforming an Apartment building into a Condominium. Involves a number of steps and can generate significant profits.
Conventional Mortgage – see Conforming Loan
Cost of Funds Index (COFI) – an index used for variable rate commercial loans. It adjusts rather slowly to changes in the interest rate. Often contrasted to LIBOR, which is another common choice for a commercial loan index, which tends to adjust to rate changes much more quickly. Often a better choice than LIBOR when rates are low and you expect for them to rise in the near future.
Cost Valuation (or Replacement Cost Valuation) – an analysis by the Appraiser for a Commercial property of how much it would cost to rebuild the property in the event of a major mishap.
Counter – see Counteroffer.
Counteroffer – A rejection of the initial offer proposed by the Buyer. The seller outlines different terms that would be acceptable.
Coverage Ratio – For apartment buildings, the Coverage Ratio = Net Operating Income divided by the Debt Service. Typically the debt service will be amortized over twenty five years. The minimum coverage ratio varies by lender, but will often be at least 120%.
Credit Report – the file that is independently maintained by three reporting agencies of what credit products you have applied for, received, and if you are making payments as agreed. The information in the credit report is used to calculate a credit score.
Credit Score – An independent, third party assessment of how well you have managed your credit in the past. Three national companies track your credit scores; a lender will usually request all three and take the middle value (the Mid Score) for determining the terms of your loan. As slang, you will often hear the Loan Officer say that they need to “pull your credit,” which is to get the three credit reports to discover your mid score.
Debt Service – for commercial loans, the principal and interest payment for the loan. Often, commercial loans are amortized on a basis less than thirty years (25 is common). The under writer will want to make sure that the Coverage Ratio of the NOI divided by the Debt Service achieves a target ratio, often 120%.
Deed of Trust – See Mortgage
Defeasance – When a borrow must pre-pay a Conduit loan, they are often required to purchase a set of securities that will generate the same amount of interest as the loan payments they contractually committed to make. These securities are held by a trust which makes the payments for the life of the loan. This process is expensive to set up.
Depreciation – An accounting concept that lets the investor write-off a portion of the value of the property each year. For many types of real estate investments, you will calculate the value of the land (perhaps using a tax assessment as a guide), and then the value of the improvements can be depreciated over 27.5 years. This doesn’t impact the actual cash flow of the asset, but it does reduce your current-year tax liability. When you sell the asset, the IRS Recaptures the depreciation.
DSF — Detached Single Family Home.
DOM – Days on Market; number of days from the time that the property was listing the MLS to the time it was placed under contract.
Due on Sale Clause – a provision of most lender contracts. If you take over the payments of the mortgage without going through the formal Assumption process (if any), then the lender has the right to Call the Loan and make it payable immediately. This happens extremely rarely in practice.
Earnest Money – A good faith deposit, usually included with a purchase contract.
Equity – The difference between net market value after closing costs and the mortgage amount. The amount of money the Seller clears after the closing.
Escrow – Delivery of deed by the seller, which is contingent on some other event (such as the Buyer’s loan being funded).
Escrow Agent – see Closing Agent
Escrow Payment – funds collected by the lender, usually monthly, in addition to the principal and interest payment. May include property taxes and hazard insurance.
Exit Strategy – The investor’s plan for what they will do with the property when they have finished adding their value to it. Often the exit strategy is to sell to a retail buyer at top dollar, or to rent the property to a tenant. The better your understanding of your exit strategy, the more effective you will be as an investor.
Fannie or Fannie Mae — a government agency that facilitates the mortgage market.
FHA – The Federal Housing Administration. They facilitate loans at high LTV. Often, but not exclusively, used by first time buyers.
Fix and Flip (F&F) – Purchase of a property with the intention to do something to it to add value, and then quickly resell at a profit. Renovation work is the most common value added by investors.
Fix and List – Fix and list is a term used to describe the process of finding the sweet spot for updating a property to maximize the profit for owners when they are ready to sell. During this service, an agent identifies and coordinates repairs and upgrades to your home to increase your profit when selling. It is geared towards two types of clients:
- Investors selling rentals looking to maximize their profit.
- Traditional homeowners looking to sell their primary residence.
The goal is to ensure that the seller is getting the most money out of the home with the return goal being 2-3 dollars for every dollar spent. The process usually involves these steps:
- Tour of Home – The fix and list agent comes out to the property, takes pictures, does a walkthrough, and gathers information on repairs and updates that have already been completed.
- Market Analysis – Using a detailed market analysis, the agent identifies which repairs and upgrades will be most beneficial and presents the owner with a list of options to choose from. The agent performs a market analysis by looking at like comps within a 1-mile radius that have sold within the last 6 months. These comps will have similar bedroom and bathroom counts, square footage, and features, such as a garage. The agent will use these comps to determine the maximum sales price of the home and then work backwards to determine how much it will cost to perform repairs and upgrades to get the home to that level. This is meant to prevent overspending, but doing just enough to make the property comparable to the recently sold homes.
- Present 3 options to homeowner – Using the home tour and market analysis, the agent presents the homeowner with three options for selling the home: As Is, Light Updates, or Full Remodel. The agent provides the homeowner with a net sheet that shows the estimated costs, home value, and net profit for each option. Once an option is chosen, the agent helps coordinate with contractors and professionals to perform the updates.
For Sale By Owner – a property that is being marketing by the owner of the property without the assistance of a real estate agent.
Foreclosure – a legal set of events that eliminates the legal rights of the property owner to use or sell the property.
Freddie or Freddie Mac – a government agency that facilitates the mortgage market.
FSBO – See For Sale By Owner
Full Documentation (“Full Doc”) Loan – a mortgage where you document everything about your income and assets. Usually results in a lower interest rates and the potential for a higher LTV. Compare to Stated Loan. Usually used by investors with steady employment and/ or a strong Balance Sheet.
Good Faith Estimate – (GFE) – an estimate of your mortgage’s closing costs; provided by your Loan Officer.
Grant – A monetary gift, usually from a third party, such as a city or county government, or a non-profit agency. In most cases, the investor will actually pay for the so-called grant by rolling the cost into the mortgage for the property. Neighborhood Gold is a typical example.
Grantee – the person receiving an interest in a property.
Grantor – the person giving up an interest in a property.
Gross Rent – the scheduled rent multiplied by the number of units. The theoretical maximum income that a building could produce if all of the units were occupied all of the time. In reality, some units are vacant some times, so the Net Rents after vacancy are lower.
Gross Square Feet – the measurement approach often used for single family homes and for apartment buildings. The appraiser measures the outside of the building. The square footage includes hallways, boiler rooms and the thickness of the exterior walls.
Hard Money Lender – Lend you money based on the value of the property you are purchasing. If the property is worth $200,000 and you are able to purchase it for $150,000, a Hard Money Lender will probably give you a loan regardless of your down payment or credit score. However, the fees and the interest rate will be much less desirable than more conventional forms of financing. Hard Money Lenders can usually close very quickly, and from the Sellers’ point of view, you are purchasing with Cash.
HOA – see Home Owners Association
Home Owners Association (HOA) – Group that pays the common expenses and collects a periodic assessment from Condominium’s owners
Hold Open Policy – A title policy that costs about 20% more at the time of purchase (the difference is paid by the buyer). If the investor sells in two years or less (the time varies by Title Company), the investor doesn’t have to purchase a new title policy – they only pay the difference in the value of the purchase price and the sales price. Usually this is a nominal amount and it saves the investor about $1000.
House Hacking – House hacking is where a person buys a property to live in, while renting out part of it to reduce their living expenses or live for free. It can be a multifamily where you live in one unit and rent out the other unit(s). Renting out individual rooms in a house is also a property strategy. Many people move out after one year to turn it into a rental. Check out our Ultimate House Hacking Guide to learn more.
HUD – A home owned by HUD, a government agency. Frequently a foreclosure on an FHA loan.
HUD or HUD Statement – see Settlement Statement.
Income Valuation – For commercial real estate, the appraiser will estimate the property’s value using the income approach, as well as the cost approach and sales comps. This consists of estimating the income the building can generate (usually from rents), then deducting the expenses to operate the building (e.g., property taxes, utilities, maintenance) to arrive at Net Operating Income (NOI). The NOI is divided by a Capitalization Rate (“Cap Rate”) to determine the buildings value from the income approach.
Inspector – Independent party that you may hire to inspect a property you are considering purchasing. In many states, inspectors are not regulated, so anyone can call themselves an inspector without any minimum level of training or certification.
Insurance Broker – Independent party that works with multiple insurance companies to find the best insurance product to manage your liabilities.
Interest Rate – the percentage amount of money that is due for the privilege of using money via a loan for a period of time.
Joint and Several Liability – the Lender can collect the full amount of the debt from anyone who signed the note.
Lease – A rental contract for a set period of time with a predetermined payment, usually monthly, for exclusive use of a property.
Lease Option (L/O) – Acquiring control of a property (though not necessarily ownership), then leasing the property to a tenant. The lease is bundled with an option, so the tenant can (but does not have to) purchase the property for a given price within a given time frame.
Lease Option – Investor Carry – A L/O where the investor purchases the property.
Lease Option – Owner Carry – A L/O where the investor does not purchase the property, the seller continues to be accountable for the mortgage.
Lender Letter – A letter from your lender that states you have made an application for a mortgage and gives a general outline of the financial terms and maximum loan amount for which you qualify. The listing agent for the property you purchase will likely call the Loan Officer to confirm the arrangements and that you have the financial capacity to complete the transaction.
Letter of Intent – also known as LOI. A letter that a prospective buyer can send to a prospective seller – whether the property is listed or not. Rather than using the formal state-regulated offer contract, this one page letter briefly outlines the important terms of a purchase contract in a non-binding manner. If the prospective seller has interest, the Buyer can then take the time to draft a complete contract.
Liabilities – what you owe. Examples would be the mortgage for your primary residence, or the loan balance for your car. Combined with your Assets, this forms a Balance Sheet that a lender can use to assess which loans for which you qualify. The liability statement is a part of the 1003, the standard loan application.
LIBOR – The London Inter Bank Offer Rate. An interest rate index for commercial and residential loans. For some commercial loans the borrower can pick between the LIBOR or COFI indexes. COFI adjusts slowly to interest rate changes; LIBOR adjusts quickly. LIBOR tends to be a better choice when rates are high and you expect for them to decline.
Lien – an encumbrance against a property that must be paid or resolved before it can be sold.
Listing — an agreement between a real estate agent and the entity selling the property that allows the agent to market and arrange for the sale of the property. “Listing” also refers to the property for sale.
Listing Agent — A real estate agent that is representing a Seller and has the financial responsibility to get the best possible terms for their client. A Seller could also be represented by a real estate agent in the capacity of a Transaction Broker. In this case, the agent would be trying to get the transaction completed in a way that is fair and ethical to all parties, without looking out for the interests of any one party to the transaction.
Loan Officer (LO) – the person who gathers your financial information in a standardized format (the 1003), gathers rate and term quotes from lenders, helps you select the best loan for your situation, then helps coordinate the closing of the loan.
Loan to Cost – The amount of money a Lender may be willing to provide for a construction loan. The cost might be the purchase price of the building ($100,000) plus the costs renovation costs needed ($50,000), or $150,000. If the lender is willing to loan 80%, the loan amount would be $120,000.
Loan to Value – The amount of money that the Lender is willing to provide for the purchase of a given property. For example, if you are purchasing a home for $100,000 and you want to borrow $80,000, the LTV is 80%. Higher LTVs are available for Residential properties than for Commercial properties.
LOI – See Letter of Intent
LTC – Loan to Cost. A term used for assessment of loans for Commercial property and Construction loans.
LTV – Loan to Value. A term used for the assessment of loans for Commercial and Residential property. Also used for Construction loans.
Market Value – what a property will sell for in a reasonable period of time with normal marketing efforts. Often less than the Appraised Value.
Mechanics Lien – an encumbrance on a property placed by a contractor.
Mid Score – The middle Credit Score from the three national companies that track your credit history. This value is the one most commonly used by your lender.
MLS – Multiple Listing Service. The MLS is a regional organization that collects, compiles and distributes information about properties listed for sale by its members, who are real estate agents.
Mortgage – A debt used to purchase a real estate investment. The property serves as collateral for the debt. Mortgages are usually the least expensive source of funds for a purchase.
Mortgage Broker – Independent party that works with multiple lenders to find the best loan for your specific needs. In most states they are licensed and regulated.
Mortgage Insurance (MI) – insurance for loans whose LTV exceeds 80%. Alternatively, the borrower can get a first mortgage at 80% LTV and a second mortgage for the balance of the required amount to avoid MI.
Multifamily – Multifamily (or multi family) is a type of housing where multiple separate housing units are in the same building of multiple buildings within one complex. Many investors find multifamily attractive for economies of scale. 1-4 unit properties are considered residential. 5+ units are considered commercial.
Multiple Listing Service – see MLS
Net Operating Income (NOI) – The amount of money an income property generates for the owner after all expenses for running the building, but before financing costs are paid.
Net Rent –The theoretical maximum income that a building could produce (the Gross Rent) less an allowance for vacant units.
Net Square Feet – the measurement approach often used for condos. The appraiser measures the inside of the building. This square footage measurement does not include hallways, boiler rooms or the thickness of the exterior walls.
Net Worth – On the Balance Sheet, Net Worth is your Assets less your Liabilities.
Nomad™ – The Nomad strategy is where a person buys and lives in a future rental property. They take advantage of favorable owner-occupant financing to buy a place for low money down and then move out after a year to convert it to a rental. It’s a great way to build a rental portfolio. This strategy is often combined with house hacking so tenants reduce living expenses while the investor is living there.
Non-Conforming Loan – A loan that does not adhere to strict, national underwriting guidelines. Since this loan cannot be packaged up into a large bundles and resold on Wall Street, the lender (often called a Portfolio Lender) often holds on to the loan themselves. The rates and terms will be less favorable than for a Conforming loan.
Offer – A proposal to purchase a property.
Option – A real estate contract that gives a prospective buyer the right to purchase a given property for a set price for a set period of time. Usually the prospective buyer pays an Option Fee for this privilege. The fee is usually non-refundable.
Option Fee – consideration given by a prospective buyer to have the exclusive right but not the obligation (option) to purchase a property for a set period of time at a predetermined price.
Ordinary Income Tax Rate – taxation applied to earned income and capital gains of assets held for less than a year. Usually a higher rate than the Capital Gains Tax Rate.
Origination Fee – A fee charged by a Mortgage Broker to recoup the costs of setting up the loan. Often about 1% of the loan balance.
Owner Occupied (sometimes abbreviated as O/O) – real estate when there owner lives on-site the majority of the time. Lenders perceive an O/O loan to be less risky than a non-O/O loan for a real estate investment. As a result, O/O loans have lower interest rates and can usually offer higher LTV.
Non-Owner Occupied (sometimes abbreviated non-O/O) — real estate where the owner does not live, e.g., an investment. Lenders perceive non-O/O to be riskier than O/O loans, so the interest rates are typically higher and the maximum LTV offered is typically lower.
Non-Recourse – A loan where the borrower is not liable to the lender if the loan goes into default. Typically only an option with larger (at least $1 million) commercial loans, particularly Conduit loans.
P&I – part of the total mortgage payment. Principal payment and interest, but not taxes and insurance.
P&L – abbreviation for Profit and Loss statement.
Partial Recourse – If the borrower defaults on a loan, the borrower is only partially liable for the debt with their other personal assets. For larger commercial loans, the Lender may ask the Borrower to pledge assets to secure 50% of the loan balance, for example.
Partial Release of Lien – A feature of a construction loan to convert an apartment building into condos. As each unit in the project is sold off, the bank takes some of the sales proceeds to pay down the debt of the project in exchange for releasing some of the lien that is help against the property. This is a feature most standard commercial loans do not offer.
Payoff – amount of money to fully satisfy a mortgage; the Title Company will order a Payoff statement from the lender as part of the closing process.
PITI – The “total” mortgage payment: Principal, Interest, Property Taxes and Insurance.
Plat – a map showing how a parcel of land is divided.
Point – 1% of something, typically a loan amount or a purchase price. Often expressed with mortgages as “a point in front.” This would be a 1% fee charged by the lender to originate the loan.
Portfolio Lender – Lender that holds on to the loan over the course of its life. This is in contrast to most residential lenders that re-sell their loans. Portfolio lenders charge more and often have less favorable terms, but offer more flexibility in the properties for which they can lend you money.
Power of Attorney (POA) – a written document that authorizes one person to act on the behalf of another and sign documents. If done for a real estate closing, the Title Company usually has to prepare and notarize the POA.
Prepayment Penalty – Fee imposed by a lender for paying off a loan before a specified time. Very common for commercial loans for borrowers of all credit scores; for residential loans most often seen for credit-challenged applicants or for certain non-owner occupied loans.
Profit and Loss – also called the P&L. For a rental building, the income generated (e.g., rents, laundry income) less the operating expenses (e.g., insurance, property taxes) to get to Net Operating Income. Usually the financing costs (e.g., the mortgage payment) are deducted, which leaves the profit for the owner after financing.
Pro-Forma – An estimate, often of a Profit and Loss Statement.
Property Manager — A third party that takes on some of your responsibilities in the ongoing operations of your rental property. Some of the tasks include cleaning and maintenance, collecting rents, showing units to prospective tenants, answering questions, and managing tenants as they move out of the building. Some Property Managers will also run the operating account for you and pay the building’s bills.
Prorate – to divide into proportional amounts. For example, the property taxes are prorated between the buyer and seller at closing.
Purchase Contract – the agreement between the buyer and seller regarding the sale of a property. Usually is completed on a contract form approved by the state government body that regulates real estate.
Real Estate – the land and anything permanently attached to the land.
Real Estate Agent – A person who has passed your state’s regulatory board requirements and has some minimal level of training to offer real estate services to the general public. In most states it is illegal to buy and sell real estate for third parties unless you are licensed. Note that having a license doesn’t mean that you are experienced in servicing all different types of property. A real estate agent that has joined the National Association of REALTORS® is allowed to use the trade name of REALTOR®. About half of the people with a license are also REALTORS®. In most transactions there will be a real estate agent representing the Buyer (often, but not always, a Buyer’s Agent), and an agent representing the Seller (often, but not always, a Sellers Agent). Those two roles could also be filled by agents in a Transaction Broker capacity.
REALTOR® – A person with a license to practice real estate in your state who has also joined the National Association of REALTORS®. REALTORS® usually have some additional training in ethics and agree to abide by a strict code of ethical behavior when working with clients.
Record – the act of publicly filing a document, usually with the County government. Deeds and mortgages are filed to give constructive notice to the world that the Owner must repay a loan before they can sell the property.
Recourse – If the borrower defaults on a loan, the borrower pledges all of their other assets to repay the loan.
Refinance – replacement of one loan with another, usually at a higher LTV or better terms.
Reissue Rate – If you sell a property within seven years of purchasing it, many title companies can give you a discount (as much as 50%) for your title policy.
REIT – Real Estate Investment Trust. An institutional investor that purchases real estate, such as very large apartment complexes.
Release – a document that terminates a lien or mortgage from a property. See also Partial Release.
REO – Real Estate Owned. The foreclosure properties in a Lender’s portfolio.
Replacement Cost Valuation – see Cost Valuation.
Residential property – single family homes, town homes, condominiums and small apartment building with fewer than five units. Financing for these buildings is typically easier to arrange than for commercial buildings. High LTVs are typically available.
Retail Buyer – the typical owner occupant, who wants to move into a perfect property that needs no work of any kind. Retail buyers are willing to pay more for better condition and style.
Return on Investment – Often abbreviated as ROI. ROI is the profit made from an investment divided by how much money you had to invest to earn that return. For example, if you make a $5,000 profit on a $10,000 investment, your ROI is 50%. The ROI is often expressed in annual terms. If you have a 50% ROI in six months, you annualized ROI is 50% * (12 months / 6 months) = 100%. Conversely, if you have a 50% ROI in two years, your annualized ROI is 50% * (12 months / 24 months) = 25%.
ROI – See Return on Investment
Sales Comps – See Comps
Seller’s Agent – See Listing Agent
Selling Agent – See Buyers Agent. Yes, this is confusing.
Settlement Statement – the document prepared by the closing agent that shows the buyer’s and seller’s charges and costs to accomplish a real estate closing. Also called a HUD Statement.
Short Sale – A property that has not yet been foreclosed on, but the clock is running. Sometimes it is possible to negotiate with bank(s) that hold the mortgage(s) to arrange a payment amount that is less than the amount owed to fully satisfy the debt. This is called a short sale.
Special Assessment – an ad-hoc tax from the government, usually to fund a one-time project (such as a new school). Alternatively, an ad-hoc charge from a HOA to pay for a one time large project (such as a new boiler).
Subject To – Transferring title from the seller to the buyer without paying off the mortgage. The new buyer continues to make the payments but the loan is not formally transferred or Assumed. The loan remains on the seller’s credit report.
Stated Loan – As opposed to a Full Doc loan, you will not be required to fully document your income or your assets – you “state” what you have and the lender takes you at your word. Since there is more risk, the loan will usually have a higher interest rate and won’t offer as high of a LTV as a Full Doc loan. This is the loan that many self-employed investors use. The Stated Loan still will examine your Credit Score.
Title – Evidence of ownership.
Title Company – a firm that sells Title Insurance and manages the Closing Agent.
Title Insurance – An insurance policy, purchased by the Seller in most states, that warrants that the Seller has the authority to sell a given property and that the property is being transferred to the Buyer free of all liens and encumbrances. The Buyer usually pays for the part of the Title insurance that protects the Lender.
Title Search – a review of the public records to determine who owns a parcel of property and what liens, if any, encumber it.
Transaction Broker –A real estate agent attempting to get the transaction completed in a way that is fair and ethical to all parties, without looking out for the interests of any one party to the transaction. If the real estate agent is working for both Buyer and Seller, they will need to be a transaction broker role. If they represent just one party, they can wear the transaction broker hat, but will usually either be a Buyers Agent or a Listing Agent.
Tri-Merge Credit Report – The combination of the information from all three credit reporting agencies and their credit score analyses. Usually the middle score is used for loan qualification analysis.
Underwriters – Group at the Lender that examines all of the Borrower’s documents to be sure they are credit worthy and examine the appraisal to ensure the property is worth what the Buyer claims it is worth. They check all of facets of the loan to make sure they are within the lending guidelines of the program. When they are satisfied that all conditions are met, they approve the release of funds from the Lender so you can complete your purchase.
Vacancy – An empty rental unit that is not currently generating income.
Vacancy Allowance – In a Pro-Forma Profit and Loss, an estimate of how frequently a rental will not be occupied and not generating rental income.
Vacancy Rate – the average level of vacancy for a type of building in a given neighborhood. Most cities have an Apartment Association that collects this information on a periodic basis.
Walk-Away Price – As a Buyer, the most you can pay for a project to still have a viable project. You should determine this value before you start negotiations and stick to it, unless you uncover material facts that change your assumptions.
Wholesale – an investor that finds an assignment property that does not want to fix it and up and clean it so that it can be sold to a Retail buyer will usually Assign the contract to an investor interested in this type of work. This is called Wholesaling a Deal.
Yield Spread Premium – (abbreviated YSP). Points that are not obvious to the borrower (in most cases). Comprises additional compensation for the Loan Officer and / or their office.
YSP – See Yield Spread Premium.