Glossary

A

Apartment

A residential unit comprising at least a kitchen area, living/sleeping area, and bathroom, in a building comprising multiple apartments (an apartment building). The apartments are rented to tenants, and therefore contrast with condominiums.

Apartment Building

A building comprising at least two apartments.

Appraisal

A written report detailing the value of a property and the basis for arriving at that value.

Appraiser

A person who is trained in the methodologies of determining the value of a property using such factors as comparative analyses, return on investment, and expected growth. Outside of the United States, such a person is often called a valuer.

Attorney

Short for Attorney at Law, an attorney is a licensed advocate or counsel who can represent clients in court.

B

Bank

A financial institution that among other things lend money to real estate investors, in which case the bank becomes the mortgagee, and the borrower becomes the mortgagor.

Broker

One who is licensed by the state to carry on the business of dealing in real estate. A broker may receive a commission for his or her part in bringing together a buyer and seller, landlord and ten­ant, or parties to an exchange.

Buyer

Person wanting to acquire or buy a property.

Buy-Sell Offer

An offer by one owner of a business or real estate to buy out the interest of another owner of the same business or real estate (a partner or other shareholder), or to sell the offeror's interest at the same price or proportionate price if unequal ownership. Example: A and B each own a 1/2 interest in lot 1. A offers to buy B's interest for $10,000, or to sell A's interest to B for $10,000. Theoretically, very fair, since B has the option to buy or sell. However, B's interest may be worth $12,000, but B is financially unable to buy A's interest (also worth $12,000).

C

Cap Rate

Short for Capitalization Rate, the Cap Rate is the rate at which a building’s income is capitalized to arrive at the building’s value. For instance, if investors in a particular market expect a 10% return, then an annual income of $100,000 would be capitalized to arrive at the building’s value of $1,000,000.

Capital Gain

The increase in capital value of a property since its purchase, or between its purchase and sale. If a tax is levied at the time of a sale on Capital Gains, then usually an allowance is made for expenses incurred in acquiring the property, and any depreciation claimed must be added back in for taxation purposes.

Capital Gains Tax

A tax levied on the Capital Gain of a property. Few jurisdictions levy a Capital Gains Tax on a property that has not yet sold (unrealized capital gains tax). Usually, a Capital Gains Tax is levied on a property when it sells (realized capital gains tax).

Capital Loss

Any decrease in capital value of a property since its purchase, or between its purchase and sale. Depending on the tax jurisdiction of the property, a capital loss may or may not be deducted against other taxable income.

Cash Flow

In an investment property, the actual cash the investor will receive after the deduction of operating expenses and debt service (loan payment) from his gross income.

Cash-on-cash return

Cash-on-cash return is a rate of return often used in real estate transactions. The calculation determines the cash income on the cash(Equity) invested. Calculated as: Cash-on-cash (COC) = Cash flow/Total cash invested (Equity Invested)

C-Corp

The name of a type of legal entity in the United States (a type Corporation), where the entity is taxed separately from its owners.

Certified

Certified means, you make a paper copy of your passport and get it stamped & signed by a Notary Public, or a Justice of the Peace or Solicitor, confirming that it is a true copy of the original passport book.

Close of Escrow

When the transaction facilitated by the escrow process is concluded.

Collateral

Security pledged in accepting a loan, on the basis that if the loan goes into default, the lender can sell the collateral to recover the loan. In real estate, it is usually the title to a property that is pledged when taking on a mortgage to finance a property.

Commercial Real Estate

As its name suggests, commercial real estate is real estate where commerce is conducted (as opposed to residential real estate, which accommodates people). While residential rental properties involve a form of commerce, as do industrial properties, generally speaking, commercial real estate refers to shops, offices and other predominantly retail activities, and therefore covers most forms of real estate between residential and industrial. Mainly in the United States, apartment buildings are also considered commercial real estate for appraisal, financing and marketing purposes.

Commission

A fee paid to an agent to perform a task. For instance, commission may be paid to a real estate agent upon the purchase (or sale) or a property, or to a leasing agent for finding a tenant and negotiating a lease.

Compound Interest

Interest paid on accumulated interest as well as on the principal.

Condo

A colloquial term for condominium.

Condominium

A residential unit in a building comprising multiple condominiums, where each unit is owned individually. This contrasts with an apartment, where all the units in the apartment building are owned by one owner. The word condominium is colloquially shortened to “condo”. The name condo or condominium is typically used in the United States. In Australia and New Zealand, for instance, individually owned units are often referred to as “strata titles”.

Contract

A legally enforceable agreement between two parties. A contract could, for instance, be for the sale and purchase of a property, the lease of commercial premises, or the rent of residential premises.

D

Debit

An accounting term used to designate a payment or owing, as opposed to a credit which is a receiving or being owed.

Debt ratio

The ratio, expressed as a percentage, of a borrower's monthly expenses to gross monthly income. There are two ratios. The first is the expense of the property to income. This includes the mortgage payment, taxes and insurance. The second is the total expense to income. This includes car payments, credit card payments, etc. Acceptable numbers for almost any loan would be 25% property expense to income and 35% total expense to income. The percentages may be much higher especially for a hard money mortgage.

Deed

Actually, any one of many conveyancing or financing instruments, but generally a conveyancing instrument, given to pass fee title to proper­ty upon sale.

Development

A planned construction project, rather than simply the building of unrelated buildings.

Dividend

A dividing into shares of a fund of money or property for dis­tribution as among shareholders of a corporation. The money or proper­ty distributed is the dividend.

E

Equity

(1) A legal doctrine based on fairness, rather than strict inter­pretation of the letter of the law. (2) The market value of real property, less the amount of existing liens. (3) Any ownership investment (stocks, real estate, etc.) as opposed to investing as a lender (bonds, mortgages, etc.).

Escrow

Delivery of a deed by a grantor to a third party for delivery to the grantee upon the happening of a contingent event. Modernly, in some states, all instruments necessary to the sale (including funds) are deliv­ered to a third (neutral) party, with instructions as to their use.

Estate

(1) The interest or nature of the interest which one has in prop­erty, such as a life estate, the estate of a deceased, real estate, etc. (2) A large house with substantial grounds surrounding it, giving the connota­tion of belonging to a wealthy person.

Exit

(1) The leaving or departing, usually of a person. (2) The place through which one leaves, as a door, gate, etc.

F

Fair market value

Price that probably would be negotiated between a willing seller and willing buyer in a reasonable time. Usually arrived at by comparable sales in the area.

Fee

(1) Modernly, and not in strict legal terms, synonymous with fee simple or "ownership". (2) A charge made by a landlord to a tenant, which is not refundable. For example: A cleaning deposit would be refunded if the tenant left .the rented property reasonably clean. A cleaning fee would be a charge by the landlord for cleaning the rented property and would not be refunded regardless of the condition of the property.-an performance

Fiscal year

An accounting year, which may be the calendar year, or any other one year period. The United States budget is based on a fiscal year from July 1 to June 30.

G

Gross lease

A lease which obligates -the lessor to pay all or part of the expenses of the leased property, such as taxes, insurance, mainte­nance, utilities, etc.

Gross profit

The total profit before deductions. A general term which varies, depending upon accounting procedures.

H

High rise apartment building

An apartment building considered "high" in the area where it is built. There is no national height standard.

Holding period

The time period used by the IRS to determine a long or short term capital gain. The period during which the taxpayer owns the capital asset.

I

Income

Generally, any increase in the assets of a person or corpora­tion caused by labor, sales, or return on invested funds. May be different for tax purposes.

Income property

A property which produces income, usually from rental. May also include any property not entirely owner occupied.

Inflation

The expense or increase in an economy over its natural growth. Usually caused by over printing money and over-extending cred­it. Marked by a rapid increase in the price of goods.

Insurance

A contract under which, for a consideration, one party (the insurer) agrees to indemnify another (the insured) for a possible loss under specific conditions. May be a loss of life, health, property, or property rights.

Interest

(1) A share or right in some property. (2) Money charged for the use of money (principal).

Investment

The putting up of money with the intent to make a profit or receive interest.

Investment property

Generally, any property purchased for the primary purpose of profit. The profit may be from income or from resale.

J

Joint appraisal

An appraisal by more than one appraiser, but one which states common conclusions of all.

L

Lease

An agreement by which an owner of real property (lessor) gives the right of possession to another (lessee), for a specified period of time (term) and for a specified consideration (rent).

Leverage

The use of financing to allow a small amount of cash to pur­ chase a large property investment.

Liquid Assets

Cash, or assets immediately convertible to cash.

Liquidity

Having liquid assets

Loan-To-Value (LTV) Ratio

The ratio, expressed as a percentage, of the amount of a loan to the value or selling price of real property. Usually, the higher the percentage, the greater the interest charged. Maximum per­centages for banks, savings and loans, or government insured loans, is set by statute.

M

Maintenance fee

As applied to condominiums and planned developments, the amount charged each unit owner to maintain the common area. Usually a monthly fee pain as part of the budget.

Management fee

The amount paid for property management or the estimated value of such management if owner managed or the building is not yet built.

Market value

The highest price a willing buyer would pay and a will­ing seller accept, both being fully informed, and the property exposed for a reasonable period of time. The market value may be different from the price a property can actually be sold for at a given time.

Mortgage

(1) To hypothecate as security, real property for the pay­ment of a debt. The borrower (mortgagor) retains possession and use of the property. (2) The instrument by which real estate is hypothecated as security for the repayment of a loan.

Multifamily Property

To meet the FNMA definition it is a residen­tial property of not less than five dwelling units with not more than 20 per­cent of the net rentable area rented or set aside for rent to non-residential tenants.

N

Net Lease

A lease requiring the tenant to pay, in addition to a fixed rental, the expenses of the property leased, such as taxes, insurance, maintenance, etc.

Net operating income

The difference between the effective gross income of a property, and the operating expenses (not including tenant installation, debt service, taxes and book depreciation).

Net profit

The remainder after deduction of all expenses from income for a given period. Generally classified as either net before taxes or net after taxes.

Net worth

The difference between total assets and liabilities of an individual, corporation, etc.

O

Occupancy

With reference to land, the word has become synony­mous with possession.

Occupancy Rate

The percentage of space or units rented. Opposite of Vacancy Rate.

Open house

A house which is open without an appointment to prospective buyers (or tenants) for inspection, during certain hours and days of the week.

Operating expense ratio (OER)

The ratio of operating expenses to effective gross income. The percentage derived from the ratio can be used by an appraiser to determine if the operating expenses are appro­priate for the property.

Operating expenses

The cost of operating an income producing property, such as management, utilities, and similar day to day expenses as well as taxes, insurance, and a reserve for replacement of items which periodically wear out.

Option

A right, which acts as a continuing offer, given for considera­tion, to purchase or lease property at an agreed upon price and terms, within a specified time.

Ownership

Rights to the use, enjoyment, and alienation of property, to the exclusion of others. Concerning real property, absolute rights are rare, being restricted by zoning laws, restrictions, liens, etc.

P

Performance

In contracts, the carrying out of the promises given as consideration to form the contract.

Present value

1. The current appraised value of a property. 2. The current value of money that will be received at a future date.

Profit

The difference of income less expenses. Further broken down into net profit and gross profit.

Property

Anything which is owned by someone.

Property management

The branch of the real estate business dealing with the management of a property. The property may be a rented house or a large office or industrial complex. The duties may range from merely collecting rents to complete management of all maintenance and may also include being leasing agent or sales agent.

R

Rate of return

The annual percentage of return, both of and on invested capital.

Real Estate

(1) Lands and anything permanently affixed to the land, such as buildings, fences and those things attached to the buildings, such as light fixtures, plumbing and heating fixtures, or other such items which would be personal property if not attached. The term is generally synony­mous with real property, although in some states a fine distinction may be made. (2) May refer to rights in real property as well as the property itself.

REIT (Real Estate Investment trusts)

A method of investing in real estate in a group, with certain tax advantages. Federal and state statutes dictate procedure.

Rent

Consideration paid for the occupancy and use of real property. A general term covering any consideration (not only money).

Return on investment

The profit from invested capital.

Risk

In lending, the chance of being repaid. High risk may result from poor credit, a high loan to value. ratio, poor general economic conditions, etc. Generally, the greater the risk, the greater the required return (higher interest rate and points).

S

Sublease

A lease, under which the lessor is the lessee of a prior lease of the same property. The sublease may be different from the original lease but cannot contain a greater interest. Example: A leas­es to B for 5 years. B may sublease to C for 3 years, but not for 6 years.

Subordinate

To make subject or junior to.

Subordination agreement

An agreement by which an encum­brance is made subject (junior) to a junior encumbrance. For example: A loan on vacant land is made subject to a subsequent construction loan.

Syndicate

An association of individuals, formed for the purpose of carrying on some particular business venture in which the· members are mutually interested.

T

Title

The evidence one has of right to possession of land.

Trust

A fiduciary relationship under which one holds property (real or personal) for the benefit of another. The party creating the trust is called the settlor, the party holding the property is the trustee, and the party for whose benefit the property is held is called the beneficiary.

U

Underwriter

One who insures another. A small title company may buy insurance from a larger one (the underwriter) for all or part of the lia­bility of its policies. A larger title company may buy part of the insurance from another company on high liability policies.

V

Vacancy Rates

The estimated percentage of vacancies in a rental project. May be based on past records of the property, or a professional guess if a new project. Surrounding area buildings, if similar, may be used for comparison.

Value

(1) The usefulness of an object. (2) The monetary worth of an object. (3) A shortening of the term valuable consideration, as in a pur­chaser "for value".

Vested

Present ownership rights, absolute and fixed. Modernly, own­ership rights, even though on a land contract or subject to a mortgage or deed of trust.

W

Warranty

A legal, binding, promise, given at the time of a sale, whereby the seller gives the buyer certain assurances as to the condition of the property being sold. Warranties as to real property have taken on a lesser role with the increase of the use of title insurance.

Y

Yield

The ratio of income from an investment to the total cost of the invest­ment over a given period of time.

DISCLAIMER: The above definitions are based on Dr Dolf de Roos's real estate dictionary and nothing contained herein should be construed as investment, tax, legal, or other advice, nor is it to be relied upon in making an investment decision.