Real Estate Investment Terms and Jargon
If you’re new to real estate investing, you’ve likely stumbled across some common real estate investment terms (or jargon) that you have no idea what they mean. I absolutely hate it when investors throw out terms and jargon in training classes without providing definitions. To me, it’s a surefire way to make your audience feel disconnected.
Of course, it’s impossible to not fall into this habit when you’ve been in the business for a while, but I know how intimidating it can be when talking to someone who throws around terms with the expectation that everyone knows exactly what they’re talking about.
A great example is when you’re talking to your doctor and they are throwing around clinical terms that are completely lost on you. Do you tell them you have no idea what they’re talking about? Are you comfortable asking questions? Maybe. Or, maybe you’re too intimated to ask for clarification because you don’t want to come across as dumb. I imagine we’ve all been there.
I promise you’ll run into that veteran investor who’s going to hit you with terms and acronyms at some point in your investment career.
Here are some common real estate investment terms and jargon that I feel are thrown around in the investing world:
After Repair Value (ARV)
What does after repair value, or more commonly ARV mean?
The after repair value means what the home will be worth after an investor has either rehabbed the property, or done any needed repairs. This is one of the most common real estate investment terms, and probably one of the most important. If you’re buying investment properties, you should not only know what this term means, but you should also know how to figure this out for any potential investment. If you don’t know what the ARV is for a potential property investment is, then you don’t really know if it’ll be a good investment.
What’s a capital gain, and why should you know what it means?
Capital gain is how much the property will increase in value. This is an important term for investors, because if you’re flipping a home the capital gain must be claimed as income on your taxes. Typically capital gain laws indicate that the property be listed as your “primary residence” for at least 2 years in order to not pay capital gain taxes.
What does contingency clause mean in a real estate deal?
A contingency clause is pretty much what it sounds like. It’s an offer that’s based on certain contingencies. There are a number of contingency clauses that can range from an offer being contingent on repairs being made; to contingencies on selling another listed property. Essentially it’s a provision in the contract that means contingencies must be met before the contract will be closed. Buyers and investors often use contingencies to ensure that they are getting the best deal in an real estate transaction.
What’s a balloon payment loan?
Balloon payments are popular loans in the real estate investment world, but should be approached conservatively. A balloon payment is an end of term payment that will pay off the property. In many rehab cases it’s a short-term option that will set up an investor with lower payments throughout the term of the loan, but with a large and final payment due at the end of the term. Keep in mind that when the loan term ends, you’ll be on the hook for the outstanding balance. It might seem appealing for a rehab, but if the rehab runs long, an investor may find themselves in a situation where they have to come up with a large chunk of cash quickly.
These are great options for investors with liquid capital that will have the money on hand should something go wrong. In some cases, you may be able to refinance before the balloon payment is due, but always check with your lender before you make this assumption. Also, keep in mind that the real estate market will take significant swings, and you never want to be in a position where you won’t be able to meet the terms of your loan.
Hard Money Loan
Is a hard money loan a good option for real estate investors?
Hard money loans can be tricky, and should really only be considered as last resorts for investors. These loans often have higher interest rates, and will include “points” in the terms. Hard money loans are typically not reliant on the credit of the borrow, but are secured by the value of the property. While this may seem similar to a traditional loan in the sense that you are using the property as collateral, keep in mind that a hard money loan will typically be a short-term lending option, and will have a higher interest rate.
Hard money loans are riskier loans and are not offered by most mortgage lenders. You’ll likely have to find a hard money lender who specializes in hard money loans. I always recommend an investor considering a hard money loan to only use it as a last-resort option. A smart investor will try to avoid hard money loans at all costs.
What does it mean for a property to be a short sale?
A short sale is when a property is being offered at less than the pay-off of the original loan. Short sales can be great for investors, but come with a number of contingencies and special terms. I have an entire page dedicated to short sales, so I’d recommend reading up here before you pursue any short sale properties.
Is owner financing a good option for investors?
Absolutely! It’s also an option that’s rarely available. Owner financing is when the seller is willing to carry the note. Traditionally it’s used as an option for those who would be unable to get a loan through traditional lending. Whether it’s bad credit or problems with the property, owner financing is a non-traditional way to buy or sell properties. Sellers may consider offering owner financing if they’ve had trouble selling the property, or need to sell quickly.
Owner finance deals can be closed quicker than a traditional mortgage, and can be set up in number of ways. They are great options for selling a home and give the seller some control over the terms. They can also be a way for a seller to get a quick cash infusion through the down payment. While they can be risky if offered to someone with bad credit, there are times when bad credit isn’t an actual reflection of the borrowers credit history (medical bills, or credit report errors).
Comparative Market Analysis (CMA)
What are “comps”?
Often you’ll hear an agent or appraiser running “comp,” or a comparative market analysis. This is something a real estate investor should be intimately familiar with. Running a comparative market analysis should be done before you consider making an offer, and will also set the price for sellers. It’s a comparision of other recently sold homes in a specific area, and is one of the reasons home values will vary in similar markets. Home values depend on a number of factors, including market trends and location.
Comps can also impact the ability to secure financing. This is one of the reasons you will hear investors say that you never want to own the nicest home in a certain area. The nicest home will often be hindered by comps in the sense that the seller will be unable to list their property at a price they consider fair. It’s important to keep in mind that comps dictate the fair market value of a listing.
While this is certainly not a comprehensive list of real estate investment terms, it’s a good starting point. My recommendation is to always ask what something means if you don’t know. Who cares if the person thinks it’s a stupid question? It’s better to know what’s going on when you’re considering making an investment than not know what you’re getting into.
Did I miss something on this list? Leave a comment or shoot me an email if you have questions (I promise to be judgment free).