By Russell Barneson
By Russell Barneson
Because there are so many terms to know and understand when it comes to real estate investing, it's vital for potential investors to get familiar with them as soon as possible.
Our goal is to ensure you are completely comfortable with each stage of the real estate investing process, therefore we've put together a list of phrases you may encounter on a daily basis in pursuit of your investment goals.
This glossary breaks down some of the most commonly used terms in real estate investing and provides clear definitions to help get you started on your real estate journey. Read carefully, do not skip ahead!
Addendum: An agreement that is attached to a real estate or purchase contract.
After Rehab Value (ARV): The projected value of the property after all planned improvements are finished.
Amortization: A loan in which the principle is paid down over a set amount of time.
Appraisal: An expert evaluation of the present value of a property.
Commercial Use: A commercial property with no residential use.
Conventional mortgage: Ideal for borrowers with strong credit, not insured by Federal Government.
Cross Collateralize: When two debts are secured by the same asset.
Crowdfunding: The investment of a small amount of money from many investors toward the creation of a new business.
Deed: A signed legal document that conveys transfer of ownership of an asset.
Default: Failure to comply with the conditions of a loan for more than 30 days.
Delinquency: A homeowner who has fallen behind on mortgage payments is considered to be delinquent.
Distressed Property: A property in bad condition and possibly in foreclosure; typically an excellent option for fix-and-flip projects.
Draw Schedule: A payment schedule for building or remodeling projects. The value of the work completed is used to determine when funds will be dispersed to the borrower by lenders.
Entity: A business entity is an organization formed under state law, such as an LLC, a corporation, a sole proprietorship, or a partnership. It must not be operated by an individual.
Equity: The difference between the amount owed to a lender and the market value of a house is used to determine this.
Escrow Account: A type of legal holding account for items that can't be delivered until specific criteria are fulfilled.
Exit Strategy: How a borrower intends to payback a lender. Most common exit strategies are to either sell the property or refinance into a traditional bank loan.
Foreclosure: The procedure by which a lender takes legal possession of a property because the borrower fails to fulfill his or her obligations under the loan.
First Trust Deed: A legal document that allows the hard money lender to foreclose on and sell your home if you default on the loan. The first trust deed on the property has precedence over all other mortgages or trust deeds.
Fix-N-Flipping: Purchasing a home and then renovating it in order to raise the value of the property such that it may be sold at a profit
Guarantor: This person promises to accept liability for any outstanding loan amounts that remain owed if a loan is going bad.
Hard Money Loan: A short-term loan that is secured by a tangible asset like residential or commercial property. These loans are typically for one to two years and carry higher interest rates compared to conventional bank loans.
Hard Money Lender: Also known as bridge lenders or private money lenders, a hard-money lender provides short-term loans to individuals buying residential or commercial property. Investors use hard money lenders to purchase investment properties banks will not lend on.
Holding Costs: Costs associated with maintaining an investment property for a period of time. This covers property taxes, home upkeep, insurance, and utilities.
Home Inspection: A home inspection is any evaluation of a property's condition, whether conducted in connection with the sale of the property or not. A home inspector with the training and accreditation to do inspections performs this examination.
Interest Rate: The interest rate is the amount you pay for borrowing money — a percentage of the loan's total value.
Lien: A legal claim on an asset registered by a lender with the county recorder's office until the subject loan is repaid.
Liquidity: The degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.
LLC (Limited Liability Company): A hybrid between a corporation and a partnership. A corporation shields its owners from personal liability whereas a partnership does not. An LLC is an entity that combines the best attributes of these two business forms while also limiting owner's exposure to liability.
Loan Officer: A loan officer is the one who has the authority to grant loans or make other credit arrangements for a financial institution.
Loan Points: Loan points, also known as origination points, are fees used in the financing of real estate loans. A loan point is the value of 1% of interest on the principle loan amount.
Loan Term Summary (LTS): Helps present the details of the loan in an easy-to-understand format, complete with a cost. The LTS explains all of the terms and conditions of the loan, including amounts, penalties, and deadlines.
Loan-to-Value (LTV): The percentage of the total value for a property that you are borrowing from a Financial Institution to finance. For example, if you borrow $90 000 on a land or house and its market value (inclusive of the purchase price) is $100 000, then your Loan-to-Value ratio is 90%
Maturity Date: When the maturity date is reached, all of the principal (and any remaining interest) must be paid.
Mixed Use: When a property is used for a combination of residential, commercial and/or office space.
Multiple Listing Service (MLS): A national database of properties listed for sale throughout the United States that is operated by REALTORS® who are members of local boards or associations.
Pre-approval: A prospective lender or bank will examine an individual's finances, including their income, assets, and credit history, in order to figure out how much money can be borrowed.
Pre-payment Penalty: A fee levied for paying off the loan before its scheduled maturity date.
Private Lending: A person or company that lends money for the purchase of real property in which their security is the deed to that real estate and not a personal guarantee.
Proof of Funds (POF): A loan document issued by a lender to confirm that the borrower has sufficient cash available to complete a deal.
Real Estate Broker: A real estate professional who is paid a commission by sellers or buyers to list, sell, rent, help buy and/or lease real estate. A real estate broker may also be called: agent
Real Estate Investor: Someone who buys commercial and/or residential investment property with the intent of making money or profit from it.
Refinance: Refinancing your mortgage is the process of swapping your current mortgage for a new one, as well as any outstanding balance. When you refinance your mortgage, your bank or lender uses the proceeds from the new loan to pay off your old debt; this is what term refinancing means.
Real Estate Owned (REO): An REO is a property that has been repossessed by a lender, such as a bank, because it did not sell for enough money to cover the debt.
Return on Investment (ROI): A metric that measures the profitability of an investment. ROI is found by dividing an investments net income by its costs.
Second Trust Deed: Second trust deeds allow a property owner to obtain extra cash beyond the first trust deed. The lender who holds the initial trust deed will be paid in full before the lender that comes second in line receives any money from the foreclosure sale. Second trust deeds have greater interest rates than first trust deeds because of the higher degree of risk involved.
Scope of Work: A list of all the improvements planned to be made before the property is sold, as well as their projected costs. The scope of work specifies when the contractor expects each part of the rehabilitation to be completed, as well as a timetable for when it will happen.
Short Sale: A short sale is a sale of real estate in which the net proceeds realized do not fully satisfy the indebtedness. The sale must be authorized by the bank or credit provider for this to happen.
Title: A real estate title is a document showing legal ownership of a property.
Underwriting: Underwriting a loan is the process of verifying all information that the borrower has given to you and checking it for accuracy. This is done to ensure that the borrower will be able to pay back the loan as promised, and that the property in question does not have any liens against it before funding a loan. Hard money lenders have a much faster underwriting process than most traditional lenders, focusing primarily on the value of the collateral rather than a borrowers credit score or employment history.
This list of vocabulary terms should help you better understand the real estate lingo professionals use on a daily basis.
If you find yourself in need of a hard money loan for a real estate project do not hesitate to contact us. Crescent Lenders can be reached at 213-474-3131 or via email at email@example.com.
Crescent Lenders, 2999 Overland Ave, Suite 116, Los Angeles, California, 90064