How To Articles
You've Gotta Know the Terminology, By Brandy Eismon
By Brandy Eismon
Jun 16, 2005, 07:18

When you start investing in real estate, some terminology is necessary. Developing a professional vocabulary builds a solid foundation for your career and gives you a "head start."

Don’t stop learning. This information is just a beginning. If you are Even those already in the business can learn from others. I do.

I started investing in 1988. I knew very little about the real estate industry at large. For my first exposure to investing, I went to the library and got as many books as I could on real estate. And I remember reading them and all I read made very little sense to me. I didn’t even understand the terminology.

When they said "a second note," I didn’t understand what a second was. So...I am going to cover some terminology.

I am going to go on the assumption that the reader doesn't have a real estate background.

So I am going to try to start from the beginning - I’m not going to go into complete detail on the number of ways to invest. They are too numerous to cover here - and there are way more than I know.

My focus is going to be primarily on fixer uppers, wholesale buying, lease options, and pre foreclosures.

There is so much more to real estate investing than I knew when I first started. At first I thought of real estate investing as - you know - find a broken down house, fix it up, and sell it.

Which is good - that is one way to earn money, in fact it can be very lucrative. But there is so much more - much more that I was missing out on. There are other basics, like options, wholesale (also called quick flips), and pre foreclosures.

I can remember one of my earlier deals. It was a very good deal - it was a house - actually, it was two duplexes- 4 units total. It was an estate sale. The children basically wanted to get rid of the property - they didn’t want tenants. It was owned free and clear.

They wanted, I think, a hundred and twenty thousand dollars for the property, which was an absolute steal. You know - four units. If I recall right it was renting below market at $450 and was worth at the time $600 per unit. The rental rate today would be about $900 or so.

So this was a very good deal. I actually offered them $105,000 and inserted all sorts of requests, like asking for a new roof. And it didn’t need any repairs at all - it’s just that I was new and the thought of putting on a new roof kind of scared me. So I kind of threw it in there just because I didn’t know what I should do.

I was surprised when they accepted my offer! Additionally, it also had a lot next to it which could accommodate 4 more units.

So, the deal was very good - but I had no money. No money whatsoever. I even had to borrow $1000 from my mother to put down as earnest money.

What eventually happened on this deal was, I wasn’t able to close.

I was very young and didn’t have a great job as a government employee. I didn’t have a lot of income, so the banks really didn’t want to even look at me.

I think the banks wanted me to put down something like twenty percent. Which, of course, I didn’t have.

And I didn’t have bad credit. It’s just that I didn’t have much credit at all. Maybe a Sears card and that was about it.

So no bank would loan to me. And that was my initial problem. Borrowing from a bank was the only way I knew to get a loan.

I learned later that there are many other ways to pay for a real estate purchase. I was unable to fulfill my offer on this first deal, but I didn’t lose my Mother’s thousand dollars. I got that back. If I knew what I know today, I would have been able to close that deal.

I knew nothing at the time about partnering. I didn't know I could bring in a partner to put up the down payment or float the loan.

On this particular deal, I probably could have gotten a hard money loan since the value was already there. Usually on hard money loans is about 60 to 65% loan to value.

And what that means is, if a person wants a hundred thousand dollars on a purchase, the hard money sources are willing to lend sixty thousand or sixty-five thousand dollars.

So I didn’t get this particular deal. There were numerous things I could have done in retrospect. So losing that first deal made me aware that I needed more education.

Education starts with learning some basic terminology.

I am going to review several terms essential for understanding the real estate investing profession. My definitions are not legal definitions nor are they complete definitions, but just my own understanding of them. I am going to start with Assignment.

Assignment means conveying the rights you have in a contract to someone else. Transfer is made to some other person by way of a document. So if you want to convey a contract to someone, an assignment allows someone else to step in as you.

You might use an assignment to convey a house purchase to someone else. An assignment can be handy when you want to put a house under contract and then flip your deal to someone else instead of doing the rehab work yourself. An assignment is also called wholesaling.

Balloon payment is a large final payment due on a loan. For example, you might have a loan amortized over thirty years, but the purchase agreement requires that you you cash out in five years. This is referred to as a five-year balloon.

Earnest money is a deposit of money to bind a purchase. It is usually given to a real estate agent or escrow company directly. Never give money directly to a seller.

If the seller has no agent, you can give the money to the escrow company or lawyer who will be closing the transaction.

Equity of Real Estate is the value of interest a person has in a property. For instance, a house worth one hundred thousand dollar houses without a mortgage (or, free and clear) has an equity of $100,000. If an underlying mortgage was on the same house, the equity would be twenty thousand dollars.

An Escape Clause in a purchase contract is an exit right for you in the purchase. For example, you can (and should) write in one or more escape clauses in your contracts. It might read, "subject to financing," which means you do not have to fulfill the contract if you cannot obtain financing on the purchase. You can use any sort of escape clause you choose, such as "subject to my partner's approval" or "subject to inspection." This clause allows you to exit the contract.

Flipping is a terminology used for turning over a house quickly. You’ll hear it referred to as "quick flipping". You’ll also hear it called "wholesaling," although wholesaling is a specific type of flipping.

First deed of Trust is a deed, recorded first, terminology used in some states. For example, if you purchased a house for $100,000 by taking out an $80,000 loan with the house as collateral, and the seller agreed that you would owe him or her twenty thousand dollars for the balance, then the first recorded loan amount owed would be called the first deed of trust [in a deed of trust state] and the second recorded loan would be called the second deed of trust. So the amount you owe to the seller is called the second - or the second note. And the eighty thousand dollar amount owed is called the first note.

Hard money loans where you don’t use a bank are companies or individuals who use the property as the collateral. These loans usually don’t go over 65% loan to value. They tend to not have as much red tape as banks, so you can usually close quicker than with a bank. The draw back to hard money is that interest rates are higher than bank rates.

If you were getting a hard money loan on this hundred thousand dollar house, the hard money loan source would not loan you more than sixty-five thousand dollars max.

You can usually find these hard money sources in the newspaper, or by word of mouth. Or sometimes by attending the real estate investment club in your vicinity.

The best hard money sources to find are individuals you encounter on a personal basis during your career in real estate investing. They are often someone with money sitting idle in a bank. You might find them among neighbors, family, and friends - associates who have confidence in you who want a greater return on their idle money and who want the security of a collateralized loan.

Junior lien is just a terminology for a lien that holds second position to the first mortgage.  isn’t in first place on a house. The second mortgage in our earlier example of a $100,000 house with a $20,000 second loan is referred to as a junior lien because it is not in first place. Sometimes it is called a subordinate lien.

Lease option is the right to rent a house for a period of time, and then hold an option to purchase the house. The renter does not have the obligation to buy the house, but only the right to buy at a set price by a set time. All of the particulars of the lease option are contained in a legal document.

An Option is a right (usually a paid right) to purchase a property, but without any reference to renting. If you found a house to buy but did not want to rent it out to anyone, you might ask the seller for an option to buy. This kind of transaction might be desirable when your delay in buying for any reason (such as finding partners, raising funds, etc.) might lose the purchase to someone else if you do not place it under option.

Sometimes you find a property which can be placed on an option for the simple purpose of finding another buyer who will pay you for your option or will pay a higher price for the property than your optioned price.

As with all of your variations in purchasing property, check with a knowledgeable attorney who specializes in real estate.

The following three definitions for mortgagor, mortgagee, and mortgage can be a little confusing.

When you are the person giving the property as collateral to a mortgage company for a loan, you become the mortgagor. By GIVING the mortgage which is the collateral, you become the mortgagor.

And the mortgage is the documentation that holds the mortgagor and mortgagee together.

MLS is the term that stands for multiple listing service. This is a service where local boards of realtors exchange their listings. Realtors list these properties with this service so all agents can show them to their clients.

If you have a real estate agent who has listed your house on MLS, the listing agent/broker divide commission on the sale of your house with the selling agent.

The advantage for listing a house on MLS is the area-wide exposure of the property.

REO’s stands for real estate owned. This is property upon which a bank foreclosed but was unable to sell at auction.

Just an interesting foot note, a lot of the banks don’t seem to know that they even have REOs.If you are going to call on a bank in search of REOs, expect to be bounced around to several bank departments.

I have found that some banks will not deal with you directly as an investor if you want to buy their REOs. Often they list it with a real estate agent, and don't want to be bothered with individual investors. However, in some cases this barrier can be penetrated.

A method for finding REOs is to track a house in foreclosure, and call the bank to find out who the listing agent is. Then, you can try to get to this listing agent before the property is listed in the MLS with exposure to other investors.Agents refer to this stage in the process as a pocket listing. If you catch an opportunity to buy a good property at this juncture, you encounter less competition.

The next definition is wrap-around mortgage. Your mortgage is wrapped around the original mortgaging which is financing left in place.

In other words, the seller sells a property to you on a wrap-around mortgage. Let's say the house is bought for $100,000 and has an existing $80,000 mortgage. You make the purchase but leave the original $80,000 mortgage in place. You might pay the seller $800 monthly for the $100,000 purchase, and the seller in turn pays $600 monthly on the original loan, keeping the $200 spread.

Ugly houses are often called fixers, fixer uppers, or rehabs.

Ugly houses are easy to spot. There are lots of them out there.

And that also means that the competition for buying them may also be more fierce.

This is especially true when they are listed with greater exposure on the MLS.

I have a couple ways to find fixers. One of them is to use bird dogs. This is a terminology for someone who will scout out ugly or abandoned houses for you. Bird dogs can be family and friends, or delivery persons.

I’ve even used my postal mail delivery person - my delivery lady. I asked her to let me know of any vacant houses.

So you can have bird dogs to look for fixer uppers, or you can scout out the territory yourself. Looking for abandoned or ugly houses yourself is pretty easy. They have tall grass, crappy lawns, and often need some paint. Trash is always easy to spot.

The main way I find the ugly house is just driving around. You don’t have to look for ugly houses with "for sale" signs on the lawn.

In fact, these run-down houses often don’t have a sign. When your competition won’t go to the extra trouble to make offers on a house that isn’t listed for sale, the job is easier for you.

The easiest way to make money in real estate is to take the steps that your competition isn’t taking.

I guess some people feel like a house isn’t actually for sale unless they see a sign on it.

I do a little bit of research before I approach the home owner. It just so happens that my county assessor’s office is on the Internet and I can get all the pertinent information I want.

Your county may or may not be on line, or you can pay a data service for this info, even though it can be expensive. But discovering this information will be well worth the effort.

From these records, I can find out the size of the hosue, who owns it, where they live, and how much they paid for it.

This is pertinent information. You know that if this owner has had it for twenty years that the loan balance is pretty low. This also might mean they will be a little more flexible.

If you find a house which was bought last year, the mortgage is probably high in relation to the value, and the margin is minimal.

Sometimes I drop a letter on the door step asking the seller to call me if interested in selling.

Interestingly enough, my response rate at this point in leaving a note is about one in ten owners who give me a call. That does not mean that the tenth owner is always willing to sell on my terms, but that the response rate to my note is rather high.

Buying properties is a numbers game. Sorting out responses and negotiating with owners is a necessary process in the game.

I especially like to look for out-of-state owners. This kind of owner is notorious for not taking care of a house, or for being too cheap to list the property with an agent to sell it. And often they don't find a good property manager to deal with the tenants.

Sometimes an out-of-state owner rents out a property, and the tenants trash it. When word gets back to the owners, they often become prime candidates for considering an offer. Landlords often get tired of dealing with tenants. And the tenant can be a hassle for trashing the house as well for not paying the rent. You can sometimes come on the scene like a white knight to the rescue!

Hopefully these terms can familiarize you with some of the basic concepts in getting started in real estate investing. Learning is an on-going process in the investor's professional career.