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Being a successful real estate investor requires having the right tools and knowledge. One of those often overlooked tools is understanding the proper language and terminology of the industry. Many investors go about their daily routine without knowing some of the key terminology and concepts used in the industry on a regular basis, but that lack of knowledge can cost ignorant investors thousands of dollars in missed opportunities and errors.
Here is a short list of some helpful terms every expert real estate investor needs to know.
Absorption Rate – This is a measure of how many months’ worth of real estate inventory is available in a given market. The formula for determining absorption rate is as follows: number of homes currently available in the market (for example 120), divided by the historical number of homes sold in that market per month (let us say 20). Using our example, that would mean the absorption rate for this market is six (6) months. A healthy absorption rate is generally considered between 5-7 months, and investors should consider whether an abnormal absorption rate is a product of abnormal inventory on the market, unusual demand from buyers or both. Investors will especially want to examine absorption rates when flipping properties or deciding where to develop in new areas.
Quitclaim Deed – A quitlcaim deed is a “quick and dirty” transfer of real estate ownership, where the owner transfers their ownership interest in the deed and title to a new owner without guaranteeing that the title history is clean or unencumbered. The transferer is literally “quitting any claim” they have to the ownership of the property and walking away, leaving the responsibility of verifying any liens, liabilities or clouds on the title to the transferee. These are often used in family situations (e.g. two siblings inherit a few acres of raw land, one transfers their half of the ownership interest to the other) or other less formal real estate ownership transactions.
Lis Pendens – Latin for “suit pending”, indicating that a piece of real estate is currently subject to a pending lawsuit. The outcome of the litigation may affect the title of the property.
Sandwich Lease – While you may have never heard of the term, you’re likely familiar with the concept of a sandwich lease which is simply a sublet situation in which the owner leases to a tenant who subsequently leases to another tenant while the initial lease is still active. In a number of states, landlords must have a reasonable explanation for disallowing subleases.
Wraparound Mortgage – A wraparound mortgage is a form of seller financing which offers buyers the opportunity to purchase property they might otherwise be unable to purchase. The wraparound mortgage combines an existing mortgage (seller’s balance) with the difference in the amount of the new loan for the total wrap-around mortgage amount.
Wrap-around mortgages have advantages and disadvantages for both buyer and seller and should be considered carefully only after seeking the advice of a professional before entering into one of these deals. They can, however, be an inexpensive way for investors to acquire properties while maintaining the seller’s inexpensive loan. Wraparound mortgages are generally only offered by private/hard money lenders.
Leasehold Estate – A leasehold estate refers to a way of holding the title to a property, in which the property or land which is not technically owned outright. For example, in Baltimore, MD, many homes are sold with a ground rent, where the buyer owns the house and for all intents and purposes the land, but must pay a ground rent of $90/year to the ground rent owner.
Right of First Refusal – The right of first refusal gives a designated party such as a tenant or some other interested party the right to purchase a property before anyone else. Once a prospective buyer ‘refuses’ to purchase the home, the offer may be opened to other prospects or the general public. Landlords may offer the right of first refusal to anyone they wish, i.e. relative, former tenant, etc, but in most states tenants have the right of first refusal for buying a leased property.
Now that you’re familiar with these terms, making a commitment to familiarize yourself with industry jargon can go a long way in helping you better understand the tools that can be helpful or hurtful to your future deals. Knowledge truly is power.
What are some other terms you feel should be in every investor’s vocabulary? What do you do to keep up with industry terminology?
