A transaction that allows you to defer capital gains taxes on profit realized for the sale of an asset such as real estate when that profit is reinvested in a “like kind exchange”: real estate for real estate. Both the old property and the new property must be held for investment purposes and not be personal residences. The tax code also states that any proceeds must be reinvested within 180 days after the sale and that the new property must be identified in 45 days.
An assessment of your home’s current market value according to a licensed professional (an appraiser). Mortgage companies require a current appraisal as part of the loan-approval process.
To determine its value, the appraiser visits your house and considers factors such as
A predetermined percentage (usually 10 percent) of the eventual selling prices of a rehab project. By adding a base profit amount in your offer price, you’re accounting for the risk associated with the eventual selling price of the house.
The offer that a buyer makes to a seller to purchase his or her property. The details of the offer are in the terms of the contract to purchase. When multiple buyers are interested in the same property, bidding is a competitive process where the seller evaluates each offer to select the one that best meets his or her needs.
A lender’s term outlining how much money a potential buyer can take as a loan. Lenders will evaluate a potential borrower’s income, assets, credit history, and credit score.
The final amount of money disbursed to the seller after all expenses are paid.
A real estate agent who exclusively represents the buyer’s interests in a transaction. The buyer’s agent represents and advocates for the buyer; in return the buyer works exclusively with that real estate agent for a specified period of time. This relationship is outlined in a signed buyer-representation agreement.
A tax paid on profits from the sale of an asset that was purchased at a lower price. Capital gains are either short-term (if the purchase and sale occur in one year or less) or long-term (for transactions that take longer than a year).
A person who has demonstrated his or her expertise in international real estate by completing a program that focuses on ownership and transaction principles of international real estate, including markets in Europe, the Americas, and the Asia/Pacific region. Topics covered in the CIPS classes also include cultural diversity, market data, investment trends, marketing strategies, currency issues, and financing.
See Settlement.
The miscellaneous expenses the buyer and seller pay when a real estate deal closes. These costs include the realtor’s commission, mortgage-related fees, the attorney’s settlement charges, transfer taxes, appraisal fees, recording fees, and title insurance. (Download a PDF version of a buyer’s closing-costs worksheet here).
A document the buyer initiates that lays out his or her offer to purchase a property. The contract details the purchase price and the conditions of the transaction. The seller, accepting the terms of the contract, finalizes the sale of a home.
The meeting where the buyer’s representative presents his or her client’s offer to the seller and his or her agent. The presentation outlines the terms of the contract. The buyer does not attend this presentation because fair-housing laws prohibit the seller from making a decision based on age, race, sex, nationality, or other non-material factors that a seller could determine by meeting the buyer.
The conditions, beyond the purchase price, of the real estate transaction as outlined in the contract to purchase. Terms are flexible variables that outline who does what, when, where, and how (for example, when the buyer will take possession of the home and what repairs will be done beforehand).
Terms can make a buyer’s offer more appealing to a seller—even if the price offered is lower than other bids. For example, sellers prefer buyers who are offering to pay cash or who have a strong financial position because there is less of a chance that the deal will fall through because of financing problems. A settlement date that meets the seller’s needs may make an offer more attractive. Sellers prefer less rigorous inspection requirements that decrease the likelihood of finding expensive problems. The contract terms do not covey some of the home’s nicer items (such as new curtains or a Sub-Zero refrigerator) to the buyer (that is, the seller gets to keep them).
A response to an offer occurs when either party in a real estate transaction alters the contract’s terms before the final signing. Typically, the counter offer is the seller’s response to the buyer’s initial offer.
An indicator lenders use to determine how likely someone is to pay as agreed to on a loan or credit card. Lenders use information from an application and a credit report to determine if the borrower will make his or her payments in the future.
Credit scores are derived from a computerized model based on a large sample of credit profiles compared over time. A credit score takes into account
Real estate offices that offer lower sales commissions for reduced services.
The portion of the purchase price that the buyer pays in cash and does not finance with a mortgage. The larger a down payment, the less a buyer needs to borrow and the smaller the mortgage payments will be.
Down payments may be as small as three percent of the purchase price. But lenders often view mortgages with larger down payments as more secure because more of the owner’s money is invested in the property.
A down payment, usually 3 percent of the purchase price, that the buyer deposits into an escrow account as a sign of good faith. The deposit is made when the contract to purchase is presented to the seller. It demonstrates that the buyer intends to purchase the seller’s property. The deposit is credited to the buyer at closing or is returned if the contract is voided.
A separate, neutral account a real estate broker establishes to hold documents and funds involved in a real estate transaction until all conditions of a sale are met.
Borrowing money to buy a house.
A legal process in which a lender takes the title or forces the sale of a property as a result of the borrower’s failure to comply with the terms and conditions of the mortgage. Properties that are in preforeclosure or foreclosure typically can be purchased by investors for below market value.
The selling of a property without representation by a licensed real estate agent.
Insurance for the loss or damage to property caused by fire, tornado, flood, or other disaster.
The costs incurred by an investor on a property based on the time the house is owned during the flip. Holding costs is a component of quiet costs and includes taxes, insurance, utilities, and maintenance. One of the four components of quiet costs.
Getting in the car and looking at property.
A licensed expert who inspects a property for defects. The home inspector provides the buyer with a home-operating manual, which outlines the proper operation, maintenance, and repair needs of the systems in the home.
The real estate investing strategy of buying a house and then living in it while you renovate. Homesteading is an economical way to start flipping, since your holding costs are offset by your not having to pay for rent or a mortgage on a separate living space. The downside is that, for the duration of your flip, your living space is a construction zone.
Inspections evaluate the physical condition and financial value of a property. This information is important to the buyer and the lender. Inspections and tests throughout the buying and selling process include
The sum, expressed as a percentage, that a lender charges a borrower for using its money to finance a home. Interest payments on most home loans are tax deductible.
Lead is a metal found in older homes that poses a health risk, particularly to children. Lead was used in paint (up until 1978), gasoline, and water pipes. If you have lead in your home you can follow lead abatement procedures to avoid or minimize the health risks: Read about lead and renovations at www.nsc.org/ehc/nlic/ledrep.htm Read about lead and children at www.nsc.org/ehc/nlic/ledepa.htm.
A document from a lender that says a buyer is pre-approved for a loan up to a specific dollar amount (see pre-approval).
A claim laid by a person or company on the property of another, as security for money owed (such as for unpaid services or back taxes). All liens must be satisfied before a house can be sold. To find outstanding liens, a title search is conducted. If no liens are found, the seller is given a certificate of clear title.
Buyers, however, must purchase title insurance to protect themselves from liens not found in the title search. Title insurance is a one-time fee, usually around $3.50 per $1,000 of the home’s value.
An agreement between a seller and a real estate agent outlining the timeframe and conditions under which the property will be made available for sale. Listing a property means placing it on the real estate market.
Lenders establish qualifications for different loan terms. A loan term is the amount of time the buyer has to pay back a mortgage (typically 15 to 30 years). These qualifications, together with the loan regulations, are called “loan programs.”
A calculation that expresses the amount of a first mortgage lien as a percent of the total appraised value of the property. For example, if an investor borrows $450,000 to finance a property appraised at $500,000, his or her loan-to-value ratio is 90 percent. Lenders assess this ratio when qualifying borrowers for a loan. In their view, the higher the loan-to-value ratio, the riskier the loan.
The economic, social, and political factors that influence the sale of homes in an area.
Getting the largest possible return out of an investment.
A legal contract a buyer signs to promise that he or she will pay back the money he or she borrows to buy a new home, plus interest. The mortgage specifies the loan's term (the number of years the borrower has to repay it), the interest rate, and other costs, like taxes and insurance.
The home is the collateral for the loan; the mortgage document gives the lender a legal claim against it if the borrower defaults on the loan's terms. If the borrower doesn't pay his or her mortgage, the lender can take the property and sell it to cover the debt.
There are many types of mortgages, with different terms to suit different situations. During a pre-qualification interview with a lender, borrowers can ask questions and explore their options.
Two common types of mortgages are - Fixed-rate mortgages-the interest rate does not change during the loan; typically these come in 15-, 20-, and 30-year terms - Adjustable-rate mortgages (ARM)- the interest rate varies; it may increase or decrease based on market interest rates.
An organization that collects, compiles, and distributes data about all of the homes in an area for sale through real estate agents. Although MLS data may be sold to real estate websites, the MLS is not open to the general public. MLSs are local or regional.
The proposal that a buyer makes to a seller to purchase his or her property. The details of the offer are in the terms of the contract to purchase. An offer can be accepted, rejected, or countered. Also called a bid.
Doing a flip deal without having to lift a hammer or do any improvements. This is also called wholesaling. The entire transaction is done simply by exchanging paperwork (for example, assigning an accepted contract to another investor for profit).
Money paid to a lender at settlement so the borrower can obtain a lower interest rate on a mortgage. One point is equivalent to 1 percent of the mortgage amount.
Paying points may save a buyer money over time; it depends on how long the mortgage is held. To determine if it is beneficial to pay points, a buyer must estimate how long he or she will hold the mortgage. A lender can help a buyer make these calculations.
Pre-approval is the process of a buyer securing a guaranteed mortgage approval before he or she finds the property he or she wants to purchase. Pre-approval strengthens the buyer's bargaining position and eliminates a lot of the stress involved in buying a new home because much of the paperwork is done up front.
To be pre-approved a lender will look at the buyer's credit score, debts, and assets. Then it will issue a pre-approval letter that guarantees it will grant the buyer a loan for a specified amount. There's one catch though: final disbursement of the loan is subject to terms the lender outlines (usually including an appraisal and review of the sales contract). If the property does not meet the lender's guidelines, the buyer will need good negotiation skills and creative thinking. But don't worry: Brandon and his associates will guide you through this unlikely scenario.
Finally, pre-approval demonstrates that a buyer has a strong financial position, giving him or her a competitive advantage in the bidding process. Pre-approval also allows the buyer to construct an offer with contract terms that meet the seller's needs. (Do not confuse pre-approval with pre-qualification.)
The period between when the lender formally notifies the borrower that the property will be sold at auction and the actual auction that transfers the title to another party or back to the lender. Some investors prospect for preforeclosed properties.
Pre-qualification is a verbal, non-verified interview with a lender to determine how much a buyer can borrow. This discussion is the best time for a buyer to ask the lender questions to determine the best loan options.
During pre-qualification the lender will perform a cursory check of a borrower�s credit, asset, and debt status, usually in less than an hour.
Though pre-qualification gives any offers a buyer makes an added stamp of approval and may lead to a full pre-approval, final approval takes more time and there is no guarantee that a buyer will be approved for a mortgage.
An individual or group that lends money to real estate investors often called "hard money lenders". The decision is based primarily on the merits of the opportunity rather than the personal finances of the borrower. The interest rates and origination fees are typically higher than with institutional, long-term mortgage loans.
The final price for which a property is bought and sold.
The less obvious expenses associated with flipping a house (including your buying costs, holding costs, cost of money, and selling costs). These often overlooked costs can quietly consume your profit if they are not accounted for when you make an offer.
A test to determine the amount of radon gas in a home. Radon is a toxic, odorless, and radioactive gas that comes from the earth and rock beneath a home, well water, and building materials. It seeps into homes through basement drains, sump pumps, or cracks in the foundation. Radon is a common occurrence: usually it moves up through the soil and escapes harmlessly into the atmosphere.
Radon is only hazardous in insufficiently ventilated homes where it can accumulate and be inhaled for long periods of time, contributing to lung cancer.
Radon became an issue in the mid-1970s with the construction of energy-efficient homes that did a better job of heating and cooling but also retained radon gases. The solution to high radon levels in a home is to install or upgrade the ventilation system.
Learn more about radon at www.epa.gov/iaq/radon/radonqa1.html.
When both parties have signed and received a copy of the real estate contract.
When the seller leases the property he or she just sold from the new owner for a specified period of time.
Real estate owned by institutional lenders as a result of foreclosure, usually after an unsuccessful attempt to sell the property at auction. Some investors regularly purchase REO property for below market value.
The ratio of money gained or lost in a venture relative to the amount of money invested. For example, if an investor spends $500,000 to purchase a house and sells it later for a profit of $50,000, his or her ROI was 10 percent ($50,000/$500,000 = 10 percent). When calculating ROI for real estate, one must factor in all of the costs and taxes involved, not just the purchase and sale prices.
A borrower's right to redeem property that was taken at foreclosure. The borrower has a limited amount of time to exercise the right and must make full payment of any outstanding debt including interest, fees, and any other costs.
ROI does not reflect how long an investment was held. In the previous example, the investor's ROI was 10 percent, regardless of whether he or she owned the property for six months or six years.
The money disbursed to the seller after all expenses are paid.
The process where all parties in a real estate transaction (the buyer, seller, agents, and settlement attorney) meet to complete the financial dealings and contractual arrangements. At settlement all debts are paid, adjustments made, money disbursed, and a deed is prepared in the new owner's name. Also called closing.
The organization that conducts the closing. The settlement company coordinates the final mortgage details with the lender, performs a title search, notifies the government of the transaction, and ensures that all parties sign in the right places.
Preparing a home to be put on the market for sale. Preparations may include a thorough cleaning, organizing and removing clutter, painting, replacing old fixtures, replacing the carpet, and exterior landscaping.
Local tax rebates or reductions that a buyer receives for purchasing a home. For example, first-time homebuyers in Washington, DC, receive a $5,000 tax rebate.
A professional who looks for termites and termite damage.
The number of years it will take to pay off a loan, assuming the buyer makes regular payments.
The legal document establishing ownership of a piece of real estate.
A check of the public records to determine that the seller is indeed the legal owner of the property and that there are no liens against it.
A company that performs and insures title searches.
Anything wrong with a title that has not been recorded with the city building department or the county recorder's office.
Insurance that protects a property owner against liens or title defects. Lenders require that buyers purchase title insurance, a one-time fee of approximately $3.50 per $1,000 of the home's value.
Contractors who give you a price for both the materials and the labor. They're specialists at doing one thing and can give you a fast, accurate, and consistent price for doing many of the tasks (carpet, countertops, paint, tile, appliances, etc.) in a rehab project. Also called one-call wonders because all it takes is one call to hire and manage them.
A unique slogan and/or advertising campaign that is strong enough and memorable enough to pull customers to a product, service, or opportunity.
The buyer's final physical inspection of the property just prior to settlement to make sure it is in the same condition as when the contract was written.
The walk through is somewhat ceremonial but if the sellers have kicked a hole in the wall or ripped out the kitchen sink, a buyer can resolve the situation before signing the final papers.
A real estate investing strategy that focuses on finding houses for other investors to fix up and sell. Wholesalers either assign an accepted offer contract to another investor or purchase the house and sell it to another investor. The purchase and sale often are done on the same day as a double close.
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