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Real Estate Glossary
Glossary of Common Real Estate Terms
Adjustable Rate Mortgage (ARM)
Adjustable rate mortgages (ARM's) are based on a monitored index, which allows the interest rates to fluctuate over the maturity of the loan.
Adjusted Basis
The adjusted basis is the original cost of your property, plus any capital expenses and costs of sale minus your property's accumulated depreciation.
APOD (Annual Property Operating Data)
An APOD is the real estate industry's standard format for showing a property's income and operating expenses. It does not account for debt service (mortgage payments). APOD's are used to arrive at a property's net operating income.
Appraised Value
Appraised value is the estimate of the property's current market value. This value is determined by comparable residential sales, insurance replacement costs, or similar commercial income.
Appreciation
Appreciation is any increase to the value of your property due to changes in market conditions, inflation, or any other causes.
Asking Price
Asking price is the listed price an owner wants to receive for a property.
Balloon Payment
Balloon payment is the outstanding balance due at the end of your loan or mortgage. This payment is due before your loan would normally amortize your debt. It is usually your last payment and much larger than you're other scheduled payments.
Bird Dog
A bird dog is someone who works for a fee to identify potential real estate investment opportunities for other investors.
Capital Expenses
Capital expenses are costs associated with making improvements that have a useful life of more than one year. These major expenses permanently upgrade the property rather than simply repair or maintain it and must be capitalized for tax purposes.
Cap Rate
Capitalization rate is the percentage used to express the relationship between a property's net operating income and its current value.
Cash Flow
Cash Flow is the amount of the property's income received less the amount of expenses paid out.
Cash-on-Cash
Cash-on-cash return is also called the equity dividend rate or return-on-investment (ROI). Showing the ratio between a property's cash flow and the cash invested to buy the property, it is generally used only for the first year of ownership.
Closing Costs
Closing costs are any expenses that occur while you are completing your loan process. These may include non-recurring costs that you only pay once such as title searches, closing fees, processing fees and recording fees. Recurring costs, or pre-paid items, include property taxes and homeowners insurance. Within three days of receiving your home loan application your lender will make an estimate for you of your closing costs based on the Good Faith Estimate.
Conventional Loan
A conventional loan is a conforming loan that has not been underwritten by a government agency. Conforming loans generally have smaller interest rates, and must be under a certain amount specified by the government. As of 2006, conventional loans are defined as ones under $417,000.
Cost of Sale
Put simply, the cost of sale is the amount of money that the seller pays out when selling a property. Cost-of-sale expenses include real estate agent and broker fees, transfer taxes, and other fees associated with selling property.
Debt Coverage Ratio (DCR)
Debt coverage ratio (DCR) is the ratio between your property's annual net operating incomeand it's annual debt service. Because 1.00 is the break-even mark, if your property falls below this it does not generate enough money to pay your mortgage. If your DCR is above 1.00 then you will have some money left over after mortgage payments.
Debt Service
Debt service refers to the payments made on your loan; generally this includes your interest and premium.
Depreciation
Depreciation, or cost recovery, is the tax deduction you claim on your property taxes annually until you have written off the entire amount of the property. The length of time you can claim depreciation is specified in the tax code by your property's "useful life". The useful life is not the same as your property's estimated physical life.
Down Payment
Down payment is the portion of the purchase price paid by a buyer to a seller that is not provided by a lender.
Equity
Equity is the portion of the property you own. This is determined by your loan amount less the money you invested into it.
Escrow
Escrow is an agreement between the buyer and seller that places money or property with a third party for safekeeping, pending the fulfillment of the sale.
Financing
Financing is the loan agreement between the borrower and lender. It may consist of one loan or multiple loans. The loan terms determine the buyer's interest rate, loan term (length of loan) and loan type.
Fixed-Rate Loan
A fixed-rate loan means that your interest rate will never change during the contracted life of your loan.
Foreclosure
Foreclosure is the procedure for enforcing a creditors right to terminate the borrowers rights to a property when their debts are in default. While the general process is similar from state to state, the actual procedures tend to vary greatly.
For-sale-by-owner (FSBO)
A property that is being sold directly by its owner without the assistance of a real estate agent, broker, or other intermediary is said to be for-sale-by-owner. Properties being sole this way are also referred to as FSBOs.
Gross Operating Income
Gross operating income, or effective gross income (EGI) is the property's gross scheduled income less any vacancy and credit loss This gives an accurate indication of a expected income from the property.
Gross Rent Multiplier (GRM)
Gross rent multiplier, or GRM, is the ratio of a property's selling price to its gross scheduled income.
Gross Scheduled Income
The gross scheduled income, or potential gross income, is the potential maximum annual income of a property. It does not take into account any vacancy or credit loss.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is a mortgage loan that allows you to borrow money drawn against the equity of your home up to a predetermined limit.
Interest-Only Loan
An interest-only loan does not require amortization and at the end the entire principal balance is due.
Interest Rate
Interest rate is the percentage of your loan amount charged to you by your lender for borrowing the money.
Internal Rate of Return (IRR)
Internal rate of return (IRR) is an analysis of rate of return using multi-year cash flows and net sale proceeds. This information is analyzed using discounted cash flow techniques. Where cash-on-cash provides the rate of return for one year, the IRR provides a method for evaluating the return over the life of the investment.
Jumbo Loan
A jumbo loan, or non-conforming loan, is a loan that exceeds conforming loan limits. These limits are set annually and generally have higher interest rates than conforming loans.
Loan Term
Loan terms are the major requirements of your loan that determine how you will pay back the loan. These terms can include interest rates, monthly payments, your amortization period, etc.
Loan-To-Value (LTV)
Loan-to-value (LTV) is the percentage that tells you the ratio between your property's total mortgage financing and it's appraised value or selling price. Lenders will base the LTV on whichever price is lower, mortgage or selling price.
Monthly Payment
Monthly payment is the total amount you will pay on your loan each month. It includes principal and interest, but excludes any amounts that are applied to taxes and insurance not included in your PITI.
Net Operating Income (NOI)
Net operating income (NOI) shows a property's income after vacancy and credit lossand all operating expenses are deducted. The NOI shows you how profitable a property is before taxes, financing, and capital recovery.
Net Present Value (NPV)
Net present value (NPV) is the difference between the present value of future cash flows and any money you invest to purchase cash flows.
Offer Price
Offer price is the price a buyer offers to purchase a property for.
On-Sale Gain
On-sale gain is what the government taxes you on when you sell a property. This taxable profit is the difference between the property's adjusted basis and its selling price.
Operating Expense Ratio
Operating expense ratio is the ratio between operating expenses and the gross operating income. This ratio is used to determine if your investment's expense ratio is typical compared to other similar properties.
Operating Expenses
Operating expenses are periodic maintenance costs that are necessary to extend the productivity of your property.
PITI
PITI stands for your principle, interest, taxes, and insurance that are usually included in your monthly mortgage payment. For loans with an loan-to-value ratio of less than 80%, your lender will generally escrow your taxes and insurance and pay them on your behalf and then add them into your payments.
Points
One point, or loan fee, is one percent of your loan amount. This is added on to your loan by your lender as a premium for making the loan.
Present Value
Present value is the current lump sum of your expected future cash flow calculated according to a specific discount rate.
Price Discount
Expressed as a precentage, price discount is the difference between what the selling is asking for the property and what the buyer offers to pay
Principle Mortgage Insurance PMI
Principle mortgage insurance (PMI) is insurance provided by a private mortgage insurance company to protect your lender incase you default on your loan. Most lenders generally require this for a loan with a loan-to-value percentage greater than 80 percent.
Property Tax
Property tax is what the government charges you based on the market value of your property. This will be determined by the property tax rate for the area of your property.
Real Estate Owned (REO)
Real estate owned (REO) property is acquired through a lender through a foreclosure and then held in inventory.
Rent Inflation
Rent inflation is the annual increase of rent that is generally determined by the Consumer Price Index.
Resale Value
The resale value is the estimated future price a property will sell for. This will be determined by many factors, including appreciation trends in the area and improvements made.
Return on Equity (ROE)
Return on equity (ROE) is the percentage of return determined by dividing your gross operating income by your net income by equity.
Sale Proceeds
The sales proceeds are the sales price of an investment property less the costs of selling the property (cost of sale -- e.g., real estate agent fees) and any outstanding loan balance.
Title Insurance
Title insurance protects the lender or buyer against any loss sustained by defects in the title.
Vacancy and Credit Loss
Vacancy and credit loss, or vacancy allowance, is any potential rental income lost due to empty space or renter's failure to pay.
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