REAL ESTATE TERMINOLOGY
choose the first letter of a term you want defined:
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
ABANDONMENT: the voluntary surrender of property, owned or leased, without naming a successor
as owner or tenant.
ACCELERATED DEPRECIATION: depreciation methods, chosen for income tax or accounting purposes, that offer greater
deductions in early years.
ADJUSTABLE-RATE MORTGAGE (ARM): a mortgage loan in which the interest rate may increase of decrease at
specified intervals over the life of the loan.
AMORTIZATION: a loan in which the principal as well as the interest is payable in monthly or periodic
installments over the term of the loan.
ANNUAL PERCENTAGE RATE: The "APR" is higher
than the simple interest rate that is a part of a mortgage
payment. The APR is based on the loan amount plus any finance
charges paid at closing, then amortized over the life of the
loan. Buyers DO NOT pay the APR; it is merely a rate that is
required to be disclosed to buyers as a part of the Federal
Truth in Lending disclosures.
AUTOMATED UNDERWRITING: Automated underwriting is being used in both the primary and secondary markets. It provides loan analysis by a computer using specialized software. HUD has encouraged the use of computerized loan analysis. It believes that properly designed computer programs can minimize the vagaries of human judgement in loan qualification and act in a less biased manner. It also should mean a cost saving for the consumer and a speeding up of the underwriting process.
BASIS: the point from which gains, losses, and depreciation deductions are computed.
BEFORE-TAX CASH FLOW: cash flow prior to deducting income tax payments or adding income tax benefits.
CANCELLATION CLAUSE: a contract provision that gives the right to terminate obligations
upon the occurrence of specified conditions or events.
CAPITALIZATION RATE (aka Cap Rate): the rate of return used to determine the value of a property's income stream. The higher the cap rate, the lower the value of the property. The basic formula for calculating a cap rate is Value = net operating income / cap rate. For example, a rental property with a NOI of $20,000 that sells for $135,000 has a cap rate of 14.8 percent.
CASH ON CASH RETURN: a measure of property value, also known as equity dividend return. This formula allows real estate investors to determine the return on their equity in leveraged properties. Cash on cash = before-tax cash flow (NOI minus debt service) / initial cash outlay. For example, assume an investor's initial cas investment to buy a property was $50,000 and his NOI this year after paying debt service was $11,000. The return would be 22 percent ($11,000/$50,000). The same formula can be used to calculate after-tax return---just subtract both the payment of debt service and the estimated property taxes from NOI.
CERTIFIED RESIDENTIAL SPECIALIST (CRS): a special designation awarded to only about 5 % of all REALTORS® for recognition of successful sales production and ability.
CHATTEL: anything owned and tangible, other than real estate; personal property.
DESCENT: the acquisition of property by an heir when the deceased leaves no will.
DEVISE: a gift of real estate by will or last testament.
DEVISEE: one who inherits real estate through a will.
DISCOUNT POINTS: amounts paid to the lender at the time of origination of a
loan, to account for the difference
between the market interest rate and the lower face rate of the note.
EMINENT DOMAIN: the right of the government or public utility to acquire property for
necessary public use by condemnation; the owner must be fairly compensated.
ENCUMBRANCE: any right to or interest in land that affects its value.
EQUITY: the interest or value that an owner has in real estate over and above the liens against it. For example, a property owner with a total mortgage loan balance of $66,000 and a property worth $155,000 would have equity of $89,000 ($155,000 value minus $66,000 lien = $89,000).
ESCROW: The term "escrow" is used in two
different ways in real estate. One way refers to the documents
and money involved in a real estate transaction that are held in
trust by a neutral third party, an "escrow agent"
(e.g., title company, or attorney), until all conditions of the
sale are met. The second way that "escrow" is used
refers to a special account that a lender establishes to hold
monthly installments from the borrower to cover property taxes
FICO: A measure of creditworthiness. Lenders like to see FICO scores of 620 or higher for FHA loans, and 660 or higher for Conventional loans. The components used in calculating the score and their weights are as follows: (a) 35--Payment history, (b) 30 percent--Amount owed, (c) 15 percent--Length of credit history, (d) 10 percent--New credit, (e) 10 percent--Credit mix.
FRONTAGE: the linear distance of a piece of land along a lake, river, street or highway.
GRANTEE: a person who receives a conveyance of real estate from the grantor.
GRANTOR: the person transferring title to or an interest in real property to a grantee.
GROSS RENT MULTIPLIER: an easy rule of thumb to forecast a value. Gross rent is the total rental income that is possible if the building were 100 percent rented. To calculate the gross rent multiplier, divide the gross rent into the sales price. For example, if your projected monthly rental income is $10,000 and the sales price is $95,000, your GRM is 10.53 percent ($10,000/$95,000). This calculation can also be made using net income, which is total possible rental income minus vacancies.
HOMEOWNER'S INSURANCE POLICY: a standardized package insurance policy that covers a residential
real estate owner against financial loss from fire, theft, public liability, and other common risks.
HOMESTEAD: land that is owned and occupied as the family home. In Texas, a portion of the area or value
of this land is protected or exempt from forced sale by creditors for judgments for debts other than taxes, purchase
money or improvements.
HUD: The Department of Housing and Urban Development
INTERMEDIARY BROKER: a broker who is employed to negotiate a transaction between both
parties and for that purpose may be an agent of both parties to the transaction, acting fairly so as not to favor
one party over the other.
JOINT TENANCY: Ownership of realty by two or more persons, each of whom has an undivided interest with the right of survivorship.
LESSEE: a person to whom property is rented under a lease; a renter; a tenant.
LESSOR: one who rents property to another under a lease; a landlord.
LOAN-TO-VALUE RATIO (LTV): the portion of the amount borrowed on a property compared to the value of the property. Example: if a $100,000 house is bought with a $10,000 down payment, the result is a 90 percent LTV ($90,000 loan divided by $100,000).
MORTGAGE: a conditional transfer of pledge of real estate as security for the payment
of a debt. Also, the document creating a mortgage lien.
MORTGAGEE: a lender in a mortgage loan transaction.
MORTGAGOR: a borrower who conveys his or her property as security for a loan.
NET LEASE: a lease requiring the tenant to pay not only rent but also all costs incurred
in maintaining the property, including taxes, insurance, utilities, and repairs.
NET OPERATING INCOME: the cash flow a property generates after expenses (exclusive of debt service and taxes) are deducted. NOI is used to calculate property value using a capitalization rate.
NET PROFIT: the amount the seller receives after deducting sales expenses.
OPTION: the right to purchase or lease property upon specified terms within a specified period. For instance, a prospective purchaser will pay a seller of real estate an option fee to have the unrestricted right to purchase the property or withdraw from the deal without penalty during a specified option period. If the prospective purchaser proceeds with the purchase, the option fee may or may not be credited towards the purchase price, depending on the agreement between the parties.
PRIME RATE: the lowest commercial interest rate charged by banks on short-term loans
to their most credit-worthy customers.
PROMISSORY NOTE: a promise to pay a specified sum to a specified person under specified terms.
QUITCLAIM DEED: a deed that conveys only the grantor's rights or interest in real estate, without stating the nature of the rights and with no warranties of ownership.
RATE OF RETURN: the percentage relationship between the earnings and the cost of an
REALTOR®: a registered trademark term reserved for the sole
use of active members of local REALTOR® associations affiliated with
the National Association of REALTORS®. All REALTORS®
are required to have a real estate license, but not all licensed real estate agents are considered REALTORS®.
REGULATION Z: law requiring credit institutions to inform borrowers of the true cost of obtaining credit;
commonly called the Truth-in-Lending Act.
REVERSE MORTGAGE: Reverse mortgages work like a regular mortgage, only in reverse: instead of the borrower sending a payment to the lender, the lender sends a payment to the borrower. The big attraction of a reverse mortgage, a loan available to people 62 and older who have equity in their homes, is that the loan typically does not have to be paid back until the owner dies, sells the home, or moves out for a year. Homeowners should have at least 75 percent equity in their home to consider a reverse mortgage. So, for a home valued at $100,000, the outstanding loan balance should not exceed $25,000. The amount of money a borrower gets depends on several factors, including the property's value, the borrower's age, the costs associated with the type of loan product, and state and federal regulations.
SECTION 1031: Section 1031 of the Internal Revenue Code allows a taxpayer to exchange investment property for other investment property and defer the gain on the sale of the transaction.
SECTION 121: Section 121 of the Internal Revenue Code contains provisions that allow taxpayers to avoid reporting gain from the sale of their principal place of residence on their tax returns. The provisions of Section 121 allow a married couple filing jointly to exclude up to $500,000 of profit (i.e., capital gain) on the sale of a home as long as they have occupied the home for at least two of the last five years. The tax is not deferred, it is forgiven. A taxpayer can take advantage of Section 121 no more than once in any two-year period. However, there is no limit to the number of times a taxpayer may make use of Section 121.
SECTION 8 HOUSING: privately owned rental dwelling units participating in the low-income rental assistance program created by 1974 amendments to Section 8 of the 1937 Fair Housing Act. Under the program, landlords receive rent subsidies on behalf of qualified low-income tenants, allowing the tenants to pay a limited proportion of their incomes (or sometimes no proportion) toward the rent.
SELLER'S DISCLOSURE NOTICE: According to the provisions in Section 5.008 of the Texas
Property Code, a seller of residential real property of not more than one dwelling must deliver a copy of the Seller's
Disclosure Notice to a buyer. The form identifies which items convey with the property (e.g. ceiling fans, refrigerator,
dishwasher, etc.) and identifies any problems that the seller may know about the property. If information is unknown,
that fact may be indicated on the notice.
TAX SHELTER: a legal means by which an investor may reduce or defer payment of part of
is or her federal income tax.
TITLE: the right to or ownership of land. The evidence of ownership of land.
TITLE INSURANCE: a policy insuring the owner or mortgagee against loss by reason of defects in the title
to a parcel of real estate, other than items specifically excluded by the policy.
TRUTH IN LENDING DISCLOSURES: are required by the
federal government. Lenders must let applicants know in advance
the loan-related charges that they must pay.
UNIMPROVED PROPERTY: land that has received no development, construction, or site preparation; raw land.
VARIABLE RATE MORTGAGE: a mortgage loan in which the interest rate may increase or decrease
at specified intervals within certain limits, based on an economic indicator.
VENDEE: a buyer VENDOR: a seller
WARRANTY DEED: a deed in which the grantor fully warrants good clear title to the premises.
Used in most real estate deed transfers, a warranty deed offers the greatest protection of any deed.
WRAPAROUND MORTGAGE: a method of financing in which the new mortgage is placed in a secondary, or subordinate,
position; the new mortgage includes both the unpaid principal balance of the first mortgage and whatever additional
sums are advanced by the lender. If the lender is the seller, such sum is not "advanced" but rather carried
back as a part of the purchase money. In essence, it is an additional mortgage in which another lender refinances
a borrower by lending an amount over the existing first mortgage amount without removing the existence of the first
YIELD: a measurement of the rate of earnings from an investment. "Current yield" is a measurement of investment returns based on the percentage relationship of annual cash income to the investment cost. Current yield = current income/investment cost. Example: A rental house is purchased for $100,000 and generates $19,000 of rental income each year. Property taxes, insurance, and maintenance costs total $9,000 per year, leaving $10,000 of annual before-income tax cash flow. The current yield is 10 percent ([$19,000-$9,000]/$100,000).
ZONING ORDINANCE: act of city or county or other authorities specifying the type of
use to which property may be put in specific areas.
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