Real estate is a complex and dynamic field, with its own unique set of terminology. Whether you're buying, selling, or investing in a property, it's essential to understand the key terms that are commonly used in the industry so you can really thrive in real estate.
Appraisal: An appraisal is an assessment of the value of a property by a professional appraiser. Whether you are selling or buying, it is important to have a good appraisal so you know how much a property is worth.
Appraisal Contingency: A clause that allows the buyer to dissolve the purchase agreement if the home’s appraised value is less than the sale price. This ensures that you are not paying more for the property than it is worth.
CAP rate: Capitalization rate shows the potential rate of return on the real estate investment. The higher it is, the better for you as an investor.
Closing: The final stage of a real estate transaction where the buyer and seller sign the necessary documents and exchange funds. There are many costs involved with the closing, and it’s really important to learn all about them.
Common area assessment: The part of the fee from your payment to an HOA that goes towards maintaining a common area in the neighborhood.
Days on market (DOM): DOM is defined as the number of days from the date on which the property is listed for sale on the local real estate brokers’ multiple listing service (MLS) to the date when the seller has signed a contract for the sale of the property with the buyer.
Debt-to-Income Ratio (DIT): This helps lenders determine how much you will be able to pay monthly for a mortgage. It uses the total of your debt expenses plus your monthly housing payments divided by your gross monthly income multiplied by 100.
Escrow: A neutral third party that holds funds and documents during a real estate transaction until all conditions of the sale have been met.
Equity: The difference between the current market value of a property and the outstanding mortgage balance.
Home inspection: A thorough evaluation of a property's condition and potential issues by a professional home inspector. If you need to learn more about home inspectors, you can check out our newsletter on the subject here.
Inspection Contingency: Clause sometimes offered that allows the buyer some time to do any necessary inspections during escrow. It is also known as “Due diligence contingency”.
Property tax: A tax levied by the government on the value of a property. Make sure you factor in the cost of property taxes since they can add up to a lot in the long run.
Probate sale: When a property is left without an owner or will the State takes over it to make sure it gets taken cared of and sold appropriately.
Seller’s Concession: Concessions are mostly contributions that the seller’s make towards the buyer’s closing costs to make the deal more appealing.
Option Period: A termination option period that the buyer can pay for. It is a right that has to be separately paid for and allows the buyer a pre negotiated amount of time to do due diligence and terminate the contract if they want to. If they chose to terminate the agreement in the established time, the earnest money is given back to the buyer.
Return on investment (ROI): It is the key measure to know whether the property you are looking at gave you any profit. It takes into account the gain or loss of an investment relative to the cost of it.
Tenancy in Common (TIC): Type of joint ownership of a property. It can be a residential or commercial property, and each buyer owns the property in different ratios.
Zoning: The process of dividing land into different zones or categories for specific uses, such as residential, commercial, or industrial.
These are just some of the key terms you need to know in real estate. By familiarizing yourself with these and other important concepts, you'll be better equipped to navigate the complex world of real estate and make informed decisions.
