Austin Real Estate Investment Advice & Analysis
Here is some information and helpful links on questions you may have about real estate investing. Contact us with any other questions you have.
- Should I buy a Single Family house, a Duplex or a Multi-Family property as an Investment?
- Should I buy real estate as a Short Term Investment or Long Term Investment?
- What are the tax Advantages and Disadvantages in owning real estate for investment? Capital Gains
- What is a 1031 Tax Deferred Exchange? Click Here for the ins-outs of 1031's
- Capitalization Rate or Cap Rate
- Glossary of Terms
1. Should I buy a Single Family house, a Duplex or a Multi-Family property as an Investment?
Real Estate as an Investment
There are no perfect investment avenues and real estate investment is no exception. Your choices are many and for each advantage on tying up your money for investment property, there is at least one disadvantage. It is important that you go into any venture with your eyes wide open and with your vision not clouded by those who would make you believe that it is the easy way to riches. It may be a great way of increasing your net worth, but it is not necessarily quick and rarely is it easy!
Single Family Property
2. Should I buy real estate as a Short Term Investment or Long Term Investment?
Long Term Investment
In most cases, being a Real Estate investor is a bit more than simply buying property, finding a tenant, and letting the cash flow in. Some people are very comfortable with the kinds of activities that investors face almost daily. Others find them challenging, or worse, find ways not to deal with them. If that is the case, your business will almost surely suffer. Spend a few seconds and take a glance inward to see if you have some or all of the traits that you will find in many Real Estate investors.
- Do you deal well with people on a regular basis?
- Are you good at keeping records?
- Does a degree of risk not concern you?
- Do you have a good amount of free time to devote to your investment activity?
- Are you willing to do a portion (or most) of the repairs and maintenance yourself or are you willing and able to pay someone to have them done?
- Are you willing to take an active management role?
- Can you juggle several tasks at the same time?
- Would you have the guts to evict a family of five if they didn't pay the rent?
If you cannot answer at least 5 of the above questions in an affirmative manner, you may not have the personality needed to be an effective manager of your own properties. No matter what the late night infomercials tell you, being a real estate investor can be a very time (and emotion) consuming activity. If you are looking to go from a net worth of $0 to a net worth of $1,000,000 in a short amount of time, it is probably better that you invest your money in lottery tickets. Although there are instances where investors have made the "big hit," and have mountains of money to show for it, the odds are stacked against it. It is far more likely that you will devote a good amount of time and effort, spread over a number of years, before you begin to see the fruits of your labor. Real estate investment, over the long haul, can be a very rewarding activity, but it takes a little work, time and patience.
Long Term or Short Term
One of the first decisions you will need to make when considering any property is whether it will be designated as a short term or long term investment. Are your intentions to purchase a property, repair or improve it, and then make a quick sale? Or do you intend to keep the property, rent it, and go for the long term investment potential?
Obviously, the return on investment in a short term is quicker, and the rate will be higher due to the short time of the exposure. There are, however some risks associated with a short term investment. What if the property requires more work (and money invested) than expected? What if you are not able to sell it quickly? In situations such as these, your potential profit could be severely limited.
Turning for Profit
One of the easiest ways of getting involved in Real Estate investing is to buy a property and sell it within a relatively short amount of time for a profit. It avoids the hassles of dealing with tenants, and since you are buying and selling at basically the same time, it avoids the potential of the bottom falling out of the market and taking your profit potential with it. Due to the short time span, your return on investment, as a percentage, can be higher than almost any other form of investment.
Finding good property to "turn" is one of the most difficult tasks you will face if you intend to do a quick turn investment. You definitely will not be the only prospective purchaser of a property that shows good profit potential. Not only will you have other investors to compete with, more and more first time buyers are competing for the same properties--not to fix up and sell, but to repair and live in. In addition to your own efforts, you may want to enlist the help of a good Real Estate Agent--one who has experience working with investors--to aid in your search.
You will also need to develop a "team" of professionals that is willing to give you top priority. When you "rehab" a house, things must be done in a certain order. For example, any inner wall plumbing repairs must be done prior to any sheetrock work, which must be done prior to any painting or wallpapering. A plumber who makes you wait 3 weeks before getting to the work can not only hold up the entire project, but can also cut heavily into your profit potential. Besides the obvious monetary cost of holding the property while you wait for repairs to be completed, a holdup can push you from a good Real Estate market time (for example, early October) to a lousy one (for example, the time between Thanksgiving and Christmas) and severely limit your pool of potential buyers.
Strategies
There are a couple of different strategies to maximize your profit potential in "quick turn" Real Estate investment. One of the best we have seen is Kevin Myer's Best Home Tips from the Super Handyman! When it comes to household problems, millions of people turn to the #1 authority on home maintenance and repair tips--Al Carrell. In Best Home Hints from the Super Handyman, Al Carrell presents a collection of his best-ever time-and money-saving household hints. Black-and-white illustrations throughout.
3. What are the tax Advantages and Disadvantages in owning real estate for investment? (Capital Gains)
The link below will take you to the IRS Daily Digital website. They have several helpful articles and resources that can answer your questions about capital gains.
4. What is a 1031 Tax Deferred Exchange?
Information directly from: IRS 1031 Tax Deferred Exchange FAQ
1031 Like-Kind Exchange
I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
What you have heard about is a like-kind exchange. A like-kind exchange, when properly executed, represents a way to postpone the recognition (taxation) of gain essentially by shifting the basis of old property to new property. If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. The basis of the property received is the basis of the property given up, increased by the money paid. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. Deferred exchanges will be treated as a sale rather than an exchange to the extent that the taxpayer actually or constructively receives money or other (not like kind) property in exchange for the like-kind property given up. For more information refer to Chapter 1, Gain or Loss, in Publication 544, Sales and Other Disposition of Assets , and Form 8824 (PDF) Instructions, Like-Kind Exchanges .
References:
- Publication 544, Sales and Other Dispositions of Assets
- Form 8824 (PDF), Instructions, Like Kind Exchanges
We sold a rental property last year and used the 1031 Tax Deferred Exchange law to defer the gain into another like-kind property. How do I report this transaction on my tax return?
Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.
If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike kind property, report it on Form 4797 (PDF), Sale of Business Property, and Form 1040, Schedule D (PDF), Capital Gains and Losses. Refer to Chapter 1, Gain or Loss, in Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.
5. Capitalization Rate or Cap Rate
The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, it is the net operating income divided by the sales price or value of a property expressed as a percentage. Investors, lenders and appraisers use capitalization rates to estimate the purchase price for different types of income producing properties. A market cap rate is determined by evaluating the financial data of similar properties, recently sold in a specific market.
It is a more reliable estimate of value than a Gross Rent Multiplier since the Cap Rate calculation utilizes more of a properties financial detail. The GRM calculation only considers properties selling price and gross rents. The Cap Rate calculation Incorporates properties selling price, gross rents, and non-rental Income, vacancy amount and operating expenses thus providing a More reliable estimate of value.
Cap rates may vary in different areas of a city for reasons such as location desirability, level of crime and general condition of an area. Investors expect larger returns when investing in high-risk income properties. In a real estate market where net operating incomes are increasing and cap rates are declining over time for a given type of investment property such as office buildings, values will be generally increasing. If cap rates are increasing over time and net operating incomes are decreasing for residential income property in a particular market place, residential income property values will be declining.
If you are able to obtain a market cap rate from an appraiser, Realtor or Lender for the type of property you are evaluating, check to see if the cap rate value was determined with recent sales of comparable properties or if it was constructed. When adequate financial data is unavailable, appraisers may construct a cap rate through analysis of it's component parts thus reducing the credibility of the results. Cap rates determined by evaluating recent transactions in a particular market place will produce the best market value estimate for a property.
If you are able to obtain a market cap rate, you can then use this information to estimate what similar income properties should sell for. This will help you to gauge whether or not the asking price for a particular piece of property is over or under priced.
NOI/Sales Price = CAP Rate
Example 1: A property has a NOI of $155,000 and the asking price is $1,200,000.
| NOI | $155,000 | Divided by | Price | $1,200,000 | Equals CAP 0.129 |
NOI/CAP Rate = Sales Price
Example 2: A property has a NOI of $120,000 and Cap Rates in the Area for this Type of property are 12%.
| $120,000 | Divided | By Cap | 12% | Equals | Price $1,000,000 |
Net Operating Income (NOI)
Net Operating Income (NOI) is determined by subtracting vacancy amount and operating expenses from properties gross income. Operating Expenses include the following items: advertising, insurance, maintenance, property taxes, property management, repairs, supplies, utilities, etc. Operating expenses do not include the following items; Improvements such as a new roof, personal property such as a lawn mower, mortgage payments, income and capital gains taxes, loan origination fees, etc.
Appraisers use the Income Approach, Cost Replacement and Market Comparison methods to estimate the value of property. The Income Approach utilizes the theory of Capitalization.
Cash on Cash Return:
Cash on Cash Return measures the return on cash invested in an income producing property and is expressed as a percentage. It is calculated by dividing before-tax cash flow by the amount of cash invested. If before-tax cash flow for an investment property is equal to $15,000 and our cash invested in the property is $100,000, cash on cash return is equal to 15%.
B
Before-Tax Cash Flow $15,000 / $100,000 (Cash Invested) = 15% Cash on Cash Return
The following shows how before-tax cash flow is derived.
- Gross Income $54,500
- Less Vacancy % of Gross Rent 4.59% $2,500
- Gross Operating Income $52,000
- Less Expenses % of Gross Rent 31.19% $17,000
- Net Operation Income $35,000
- Less Debt Service $20,000
- Before Tax Cash Flow $15,000
Cash on Cash Return is used to evaluate the profitability of income producing properties. It is one of many financial tools used by investors to compare different income producing properties. Be aware that it only considers before-tax cash flows and doesn't take into account an investor's individual income tax situation. Also it does not consider the wealth building potential of a property via
Appreciation
A property in one area of a city may have better Cash on Cash Return than a property in another location, but it may not appreciate as fast because of its location. One location may be more desirable than the other.
Debt Coverage Ratio (DCR):
Also known as Debt Service Coverage Ratio (DSCR). The debt coverage ratio is a widely used benchmark, which measures an income producing property's ability to cover the monthly mortgage payments. The DCR is calculated by dividing the net operating income (NOI) by a properties annual debt service.
Annual debt service equals the annual total of all interest and principal paid for all loans on a property.
A debt coverage ratio of less than 1 indicates that there is Inadequate cash flow generated by an income property to cover the mortgage payments.
For example, a DCR of .9 indicates a negative cash flow. There is only enough income Available to pay 90% of the annual mortgage payments or debt service. A property with a DCR of 1.25 generates 1.25 times as much annual income as the annual debt service on the property. In this example, the property creates 25% more income than is required to cover the annual debt service.
Example: We are considering buying an investment property with a Net Operating Income of $24,000 and annual debt service of $20,000. The DCR for this property would be equal to 1.2. This means that it generates 20% more annual income than is required to cover the annual mortgage payment amount.
NOI/Debt Service = DCR
Debt Coverage Ratio "DCR"
- Net Operating Income $24,000
- Divided By
- Debt Service $20,000
- Debt Coverage Ratio "DCR" 1.20
Many lending institutions require a minimum debt coverage ratio value to procure a loan for income producing properties. DCR requirements for lending institutions may vary from as low as 1.1 to as high as 1.35. From a lending institutions perspective, the higher the DCR value, the more income there is available to cover the debt service and thus the less the risk.
Net Operating Income (NOI)
Net Operating Income (NOI) is calculated as follows.
Income Gross Rents Possible 35,000
Other Income 2,000
Total Gross Income 37,000
Less Vacancy Amount 3,000
Gross Operating Income 34,000
Less Operating Expenses 10,000
Net Operating Income 24,000
Operating Expenses include the following items:
Advertising, insurance, maintenance, property taxes, property management, repairs, supplies, etc. It does not include Capital Improvement such as a new roof, etc.
Depreciation:
Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age. The cost of reproducing an income property can be recovered over the useful life of the asset, which is determined by law. Only the building can be depreciated and not the land. Residential income property must Be depreciated over a 27.5-year period using straight-line Depreciation. Commercial income property must be depreciated over 39 years using straight-line depreciation.
Straight-line depreciation stipulates that an asset must be depreciated by equal amounts each year over its useful life.
Example: You purchase a warehouse for $900,000. The land where The Warehouse resides is valued at $120,000. The building is valued at $780,000. Current law allows you to depreciate commercial properties by equal amounts annually over 39 years. Your depreciation deduction for the first year is based on the mid month convention. The day of the month that you purchase the property doesn't matter. You can only deduct half of the first months depreciation. If you put the warehouse into service on June 1, you are allowed to deduct 6 and 1/2 months of depreciation for the first year.
| $780,000 | Divided By | 39 | Equals | $20,000 | $1,666.67 | Per month | |
| Building Value | Years | 6.5 | Mo of 1st | ||||
| $10,833.33 | Depreciation | ||||||
Accountants calculate a full year of depreciation for the above warehouse (commercial properties) by multiplying 2.56 % times $780,000, which equals $19,968. A full year of depreciation for residential income properties would be calculated by multiplying 3.64 % times the building basis.
The depreciation deductions that you write-off in any year reduce your taxable income thus increasing your profit for that year.
Capital improvements are subject to the same depreciation laws. Capital improvements include the following: a new roof, a new furnace, an addition to a building, siding, etc.
Example: You have owned the above warehouse for about 7 years now and it is in need of a new roof. The cost of the new roof is $19,500. You are allowed to depreciate the cost of the roof over 39 years. If you put the new roof on in July, you are allowed to deduct 5 and 1/2 months of depreciation in the first year.
| $19,500 | Divided By | 39 | Equals | $500 | $41.67 | Per month | |
| Cost of Roof | Years | 5.5 | Mo of 1st year | ||||
| $229.1 | Depreciation | ||||||
Accountants would calculate a full year of depreciation for the roof by multiplying 2.56 % times $19,500, which equal $499.
All depreciation amounts that you write-off in each year for the building and capital improvements reduce your adjusted basis for the property thus increasing the taxable profit you must declare when you sell.
Gross Rent Multiplier (GRM):
The Gross Rent Multiplier or GRM is a ratio used to estimate the value of income properties. The GRM is calculated by dividing the sales price by either the monthly potential gross income or by dividing the sales price by the yearly potential gross income. When detailed financial information is available for recent sales of similar properties in a particular area, a market GRM can be used to provide a rough estimate of value.
Example 1: If the sales price for a property is $200,000 and the gross monthly rental income for a property is $2,500, the GRM is equal to 80.
Monthly potential gross income is equal to the full occupancy monthly rental amount, which assumes all available rental units are occupied. Generally speaking, properties in prime locations have higher GRM's than properties in less desirable locations. When comparing similar properties in the same area or location, the lower the GRM, the more profitable the property from an income perspective. This statement assumes that operating expenses are proportionate for the properties being compared. Since the GRM calculation doesn't include operating expenses, this statement might not hold true for similar properties where one of the properties has significantly higher operating expenses.
| Sales Price | Divided By Monthly or annual Income | = | GRM |
- Sales Price $200,000
- Monthly Income $2,500GRM = 80
- Annual Income $30,000 GRM = 6.67
Example 2: We have several similar properties that have sold recently and their average monthly GRM is 80. We can use this information to estimate the value of comparable properties for sale. If our monthly potential gross income for a property is equal to $3,000, we would estimate its value in the following way.
Price =GRM X Income (monthly or annual)
- Monthly Income $3,000 GRM = 80 $240,000
- Annual Income$36,000GRM = 6.67 $240,000
The GRM can provide a rough property value when consistent and accurate financial information is available for recent sales of similar properties, but be aware of its limitations. Operating expenses, debt service and income tax consequences are not included in the GRM calculation. We could have a situation where two properties have approximately the same potential gross income, but one property has significantly higher operating expenses. The above formula would result in a questionable estimation of the market value for these properties.
Also, the above GRM formula uses the monthly potential Gross income and doesn't account for vacancy, which could impact the accuracy of the property value estimates. This is why it's important to have recent and accurate financial information for comparable sales when establishing a GRM or Cap Rate for income producing properties.
The GRM is sometimes calculated using the Effective Gross Income (EGI) rather than Potential Gross Income (PGI) thus incorporating the vacancy Factor in the GRM calculation.
Potential Gross Income (PGI) less Vacancy = Effective Gross Income (EGI)
The capitalization rate is a more reliable tool for estimating the value of income producing properties since vacancy amount and operating expenses are included in the cap rate calculation. The GRM is useful in providing a rough estimate of value.
After-Tax IRR
IRR (Internal Rate of Return) simply is the average annual yield on an investment. The After-Tax IRR calculation for each year uses the initial investment amount, the series of After-Tax Cash Flows and the After-Tax Sales Proceeds in a particular year to establish an average return on investment.
Example, to Calculate an IRR 5 years in the future for an investment we would use the Initial Investment amount, the After-Tax Cash Flows for each of the five years and the After-Tax Sales Proceeds in year five, (final year), to calculate an average After-Tax IRR for the investment.
The real estate model calculates an After-Tax IRR in years 1 through 10 using this method. Be aware of one thing when looking at the IRR calculations. If in year 5 you have a return of 15 %, this means that your After-Tax Cash Flows in each year are ran forward at 15%. When calculating the MIRR for Future Wealth
Loan-to-Value Ratio:
The loan-to-value or LTV is a ratio between the loan balance and the market value of a Property expressed as a percentage. For example, a property with a loan balance of $400,000 and a market value of $500,000 has a LTV of 80%.
Balance of Loans $400,000 LTV = 80% of market Value = $500,000
The LTV can be used to estimate the amount of equity you have in a property. If the LTV for a property is 75%, your equity position in a property is 100 minus 75 or 25%. You can then multiply .25 times the market value to determine the equity amount.
Lenders may require mortgage insurance on loans with LTV's that are greater than a predetermined amount, usually 80%. This means that the purchaser of a property will need to put a minimum of 20% down to avoid paying mortgage insurance premiums. Mortgage insurance is a premium amount, which is added to the monthly mortgage payment.
The LTV is also used when an investor wishes to refinance a property.\
For example, you have owned an investment property for a number of years and you would like to refinance the property to take cash out. Most lenders will allow a maximum of 75% the appraised value for the new loan amount. Lenders who refinance at LTV's greater than 75% will usually charge less favorable interest rates.
MIRR for Future Wealth:
The Modified Internal Rate of Return on Future Wealth is the best indicator to evaluate the overall return on an income property investment.
Cumulative cash flows and gains resulting from the sale of the property are accumulated on a year-to-year basis to arrive at a Future Wealth amount. You determine the rate of return you would like to run your cash flows forward at. The IRR calculation determines this value for you and may therefore exaggerate your return on cash flows. Also overestimating the appreciation growth rate can distort Future Wealth. Once you've narrowed down your property selections, you may want to run low, medium and high appreciation growth rate scenarios through the model. This will give you a range of Future Wealth possibilities.
Net Income Multiplier:
The Net Income Multiplier or NIM is a factor that is used to estimate the market value of Income producing properties. It is equal to the market value of a property divided by the net operating income or NOI.
Example 1: A residential income property has an NOI of $15,000 and a market value of $150,000.
Mkt Value / Net Operating Income = Net Income Multiplier
| Market Value | NOI | NIM | ||
| $150,000 | Divided By | $15,000 | Equals | 10 |
Example 2: The average net income multiplier for recent sales of comparable properties in a particular area is 9 and the net operating income for a similar property we are considering buying is $20,000.
| NOI | X | NIM | Market Value | |
| $20,000 | Times | 9 | Equals | $180,000.00 |
The net income multiplier and the cap rate are financial tools used to estimate the market value of income properties. The cap rate is better known and more widely used by most investors. The cap rate and the NIM produce identical results when estimating the market value of an income property since the net income multiplier is the inverse of the cap rate. The cap rate is equal to 100 divided by the NIM. The NIM is equal to 100 divided by the cap rate.
When using the capitalization rate and the net income multiplier to estimate the value of an income property, always use accurate and current financial data for comparable sales of similar properties is required.
Power of Leverage:
Leverage is the use of borrowed money to increase your profits in an investment. Building wealth via real estate requires the use of Leverage. Let's assume you have $100,000 to invest and you purchase a small income property for $100,000. Income properties have been appreciating at an average of 7% per year. At the end of the first year of operation, your property is worth $107,000. At the end of year two, it is worth $114,490.
Now let's assume that you put your $100,000 down on a $500,000 income property. At the end of the first year, it is worth $535,000. At the end of the second year, it is worth $572,450. By borrowing money to purchase a larger income property; you have increased your profit by $57,960 in just two years. To get the full advantage of leverage, put the minimum down on a good property, which has a strong likelihood of appreciating in value. Stay away from questionable properties in run down areas.
Here is an example of the Power of Leverage in a market that is appreciating at an average rate of 8% per year. Let's use that same $100,000 and leverage it with 10% down on income properties that will cash flow. As we say in Texas:
Put some Coveralls on them Green Backs. In other words, put your money to work for you!
| Year | Initial Investment | Appreciation | Leveraged to 10% down |
| Paid Cash | 8% | Property Value | |
| Acquisition | $100,000 | 108% | $1,000,000 |
1 $108,000 $1,080,000
2 $116,640 $1,166,400
3 $125,971 $1,259,712
4 $136,049 $1,360,489
5 $146,933 $1,469,328
Appreciation & Leverage Made
Appreciation Made You but You
$46,933 $469,328
Less original Loan $90,000
Equals $379,328
Leverage made you this much MORE $332,395
See The Power of Leverage?
Abstract of Title: A summary of the public records relating to the ownership of a particular piece of land. It represents a short legal history of an individual piece of property, and traces the ownership of that property from the time of the first recorded transfer to present.
Acceptance: Consent to an offer to enter into contract.
Adjustable-rate mortgage (ARM): A mortgage that allows the interest rate to be changed periodically.
Agency: A legal relationship in which an owner-principal engages a broker-agent in the sale of property or a buyer-principal engages a broker-agent in the purchase of property.
American Society of Home Inspectors (ASHI): A professional trade association that provides training and education in home inspections. Members must meet qualification requirements to join.
Amortization: The gradual repayment of a mortgage by periodic installments.
Annual percentage rate (APR): The total finance charge (interest, loan fees, points) expressed as a percentage of the mortgage amount.
Appraisal: An evaluation of a piece of property to determine its value.
Appreciation: Increase in value due to any cause.
Asbestos: A mineral fiber used in some building materials such as flooring, siding, insulation and roofing.It is presently banned for most uses in real property.
Assessed value: The valuation placed on property by a public tax assessor as the basis of property taxes.
Assumption of mortgage: An agreement whereby the buyer assumes responsibility for a mortgage owed by the seller.
Balloon mortgage: A mortgage where the amount financed is not fully amortized over the period of the loan. When the loan becomes due, a large sum or "balloon" payment is required to satisfy the mortgage.
Bridge loan: A short-term mortgage made until a longer-term loan can be made; it's sometimes used when a person needs money to build or purchase a home before the present one has been sold.
Broker: A person licensed by a state real estate commission to act independently in conducting a real estate brokerage business. Although requirements vary from state to state, an individual must usually have at least one year of experience in the industry and pass an examination to earn a broker's license.
Building codes: State and local laws that regulate the construction of new property and the rehabilitation of existing property.
Cap: The maximum amount an interest rate or monthly payment can change, either at adjustment time or over the life of the mortgage.
Closing: The final step in the sale and transfer of ownership of a property. The title is transferred from the seller to the buyer; the buyer signs the mortgage and pays costs of settlement; any money due the seller and purchaser are paid.
Closing costs: Fees and expenses, not including the price of the home, payable by the seller and the buyer at the closing (e.g., brokerage commissions, title insurance premiums, and inspection, appraisal, recording, and attorney's fees).
Closing Statement: A financial statement rendered to the buyer and seller at the time of transfer of ownership, giving an account of all funds received or expended.
Cloud on the title: Any condition which affects the clear title to real property.
Commercial bank: A financial institution authorized to provide a variety of financial services, including consumer and business loans (generally short-term), checking services, credit cards, and savings accounts.
Comparables: Properties similar in size and character to the one being bought or sold.
Condominium: Ownership of a unit only, rather than of the entire building with the land.
Consideration: Anything of value to induce another to enter into a contract (i.e. money, services, a promise).
Contingency: A condition that must be satisfied before a contract is binding.
Contract: An agreement to do or not to do a certain thing.
Conventional mortgage: A fixed rate, fixed-term mortgage not insured by the federal government.
Deed: A legal document conveying title to a property.
Deed (quit claim): A deed that transfers only that title or right to a property that the holder of that title has at the time of the transfer. It does not warrant or guarantee a clear title.
Department of Housing and Urban Development (HUD): A U.S. Government agency established to implement certain federal housing and community development programs.
Disclosure laws: State and federal regulations which require sellers to disclose such conditions as whether a house is located in a flood plain or whether there are known defects in or affecting the property.
Earnest money: A portion of a down payment given to the seller by a potential buyer indicating the buyer's intent to complete the purchase of the property.
Easement: A right to use the land of another.
Encroachment: A condition that limits the interest in a title to property such as a mortgage, deed restrictions, easements, unpaid taxes, etc.
Equity: The value of real estate over and above the liens against it. It is obtained by subtracting the total liens from the value.
Equity mortgage: A mortgage based on the borrowers' equity in their home rather than on their credit worthiness.
Escrow: The placement of money or documents with a third party for safekeeping pending the fulfillment or performance of a specified act or condition.
Federal Housing Administration (FHA): An agency within the Department of Housing and Urban Development (HUD) that administers loan guarantee programs and loan insurance programs to make more housing available.
Fannie Mae: Nickname for Federal National Mortgage Corp. (FNMA), a tax paying corporation created by Congress to support the secondary mortgages insured by FHA or guaranteed by VA, as well as conventional home mortgages.
FHA Insured mortgage: A mortgage under which the Federal Housing Administration insures loans made, according to its regulation, by approved lenders.
Fixed rate mortgage: A loan that fixes the interst rate at a prescribed rate for the duration of the loan.
Foreclosure: Procedure whereby property pledged as security for a debt is sold to pay the debt in the event of default.
Freddie Mac: Nickname for Federal Home Loan Mortgage Corp. (FHLMC), a federally controlled and operated corporation to support the secondary mortgage market. It purchases and sells residential conventional home mortgages.
Graduated-payment mortgage: A mortgage that starts with low monthly payments and increases at a predetermined rate.
Growing-equity mortgage: A mortgage loan in which the monthly payments increase by a specific amount each year, with the "Overpayments" applied to the principal.
Installment debts: Long-term debts that usually extend for more than one month.
Investor: The holder of a mortgage or the permanent lender for whom the mortgage maker services the loan. Any person or institution that invests in mortgages.
Joint & Survivorship Deed: (Also known as "Warranty deed creating tenants in common with right of survivorship") Upon death of one of the owners, title to the interest transfers "by contract" to survivors.
Lease purchase agreement: Buyer makes a deposit for the future purchase of a property with the right to lease the property in the interim.
Lien: A legal claim against a property that must be paid when the property is sold.
Loan-to-value ratio: The relationship between the amount of a home mortgage and the total value of the property. Lenders may limit their maximum mortgage to 80-95 percent of value.
Lock-in-rate: A commitment made by lenders on a mortgage loan to "lock in" a civilian rate pending mortgage approval. Lock-in periods vary.
Market value: The highest price a buyer will pay for a property and the lowest price the seller will accept.
Mortgage: One type of document used to make property the security for the payment of a loan.
Mortgage broker: An individual or company that obtains mortgages for others by finding lending institutions, insurance companies, or private sources to lend the money; may also make collections and handle disbursements.
Mortgagee: The lender of money or the receiver of the mortgage.
Mortgagor: The borrower of money of the giver of the mortgage document.
Negative amortization: An increase in the outstanding balance of a mortgage resulting from the failure of periodic debt service payments to cover required interest charges on the loan.
Note: A written promise to pay a certain amount of money.
Origination fee: A fee or charge for work involved in the evaluation, preparation and submission of a proposed mortgage loan.
Pre-payment penalty: A fee paid to the mortgagee for paying the mortgage before it becomes due. Also known as pre-payment fee or reinvestment fee.
Private mortgage insurance (PMI): Insurance issued to a lender by a private company to protect the lender against loss on a defaulted mortgage loan. Its use is usually limited to loans with high loan-to-value ratios. The borrower pays the premiums.
Promissory note: A written contract containing a promise to pay a definite amount of money at a definite future time.
Radon: A colorless, odorless gas formed by the breakdown of uranium in subsoils. It can enter a house through cracks in the foundation or in water and is considered to be a health hazard.
REALTOR® and REALTOR®-Associate: Registered collective membership marks that identify real estate professionals who are members of the National Association of REALTORS® and who subscribe to its strict Code of Ethics.
Rent with option: A contract which gives one the right to lease property at a certain sum with the option to purchase at a future date.
Savings and loan association (S&Ls): Depository institutions that specialize in originating, servicing, and holding mortgage loans, primarily on owner-occupied residential property.
Savings bank: A financial institution organized to hold individual depositors' funds in interest-bearing accounts and to make long-term investments, such as home mortgage loans.
Second mortgage/Second deed of trust/Junior mortgage or Junior lien: An additional loan imposed on a property with a first mortgage. Generally a higher interest rate and shorter term than a "first" mortgage.
Severalty ownership: Ownership by one person only. Sole ownership.
Shared equity mortgage: A home loan in which an investor is granted a share of the equity, thereby allowing the investor to participate in the proceeds from resale.
Survey: The process by which a parcel of land is measured and its area ascertained.
Tenancy in common: Ownership by two or more persons who hold an undivided interest without right of survivorship. (In the event of the death of one owner, his/her share will pass to his/her heirs.)
Title: A document that's evidence of ownership.
Title defect: An outstanding claim or encumbrance on property that affects marketability.
Title insurance: Protection for lenders and homeowners against financial loss resulting from legal defects in the title.
Veterans Administration (VA): A government agency that provides services for eligible veterans of the armed forces. Among other programs, it guarantees mortgage loans made by private lenders to veterans.
Variance: A special suspension of zoning laws to allow the use of property in a manner not in accord with existing laws.
Zoning restrictions: Local municipal ordinances that classify property according to specific uses such a single family, residential, commercial, industrial, multi-family, etc.
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