AMORTIZATION: Paying off debt with a fixed payment schedule, in regular installments over a period of time, that consists of both principal and interest.
APPRAISAL: An evaluation of value to determine the current market value (sales price) of a specific property at a specific time. An appraiser (who does the appraisal) must be licensed, approved by the bank, and provide a valuation that represents the “fair” sales price of the home.
CAPITALIZATION (CAP) RATE: The ratio of Net Operating Income (NOI) to property asset value. An estimated percentage return, it can be used to compare potential deals. Calculated by dividing Net Operating Income by Current Market Value. (For example, for a property listed for sale for $100,000 that generated a NOI of $10,000, the cap rate would be $10,000/$100,000 [or 10%].)
CASH-FLOW: The profits you collect each month from a rental property. You collect the rent from the tenant (a.k.a., gross income) and subtract your expenses (mortgage, taxes, insurance, repairs, management fees, vacancies, etc.) and that leaves you with your cash flow (a.k.a., net income).
CLEAR TITLE: A title that is free of liens or legal questions as to ownership of the property.
COLLATERAL: A property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making loan payments, the lender can seize the collateral.
COMPS: “Comparable sales”: the recent sales of similar properties in nearby areas, used to help determine the market value of a property.
CONTINGENCY: Money put aside for unforeseen expenses that are possible but cannot be predicted with certainty. (We suggest using a contingency of 15% of construction costs for rehabs. Contingency for new construction is usually lower.)
DUE DILIGENCE: The investigation and review of a property to determine any problems, liabilities, or other issues that a buyer should consider prior to purchasing a property.
FORECLOSURE: When a homeowner is unable to make full loan payments on their mortgage, allowing the lender to seize the property, evict the homeowner, and sell the property.
GRANTEE: The person receiving property ownership, commonly known as “the buyer.”
GRANTOR: The person or legal entity transferring property ownership to another. The grantor is usually the current property owner.
HOLDING COSTS: Costs associated with owning a property during construction. This may include property taxes, interest, insurance and utilities, and/ or vacancy.
LIEN: A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.
MATURITY: The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable.
PRE-APPROVAL: A write-up of a loan to show proof of funds without any legal signatures binding the borrower to the loan. It means that a borrower has completed a loan application and the loan provider has preliminarily approved the borrower for a loan.
PRINCIPAL: In a loan, the amount borrowed or the amount still owed on a loan, separate from interest.
PRO-FORMA: A set of calculations that projects the financial return a proposed real estate development is likely to create.
UNDERWRITING: The determination of the risk a lender would take on if the lender were to approve a particular mortgage loan application.
VARIANCE: A specific waiver to allow deviation from current zoning requirements of a property. If granted, it permits the owner to use the land in a manner not normally permitted by zoning law. It does not, however, change the zoning law. A city or town’s Zoning Board is generally the grantor of a variance.