In this article, you’ll learn the top 25 real estate terms and concepts that every realtor needs to understand in order to adequately represent and educate their clients. While this is primarily designed for new and newer agents, experienced agents can also benefit from sharpening their skills. Let’s get started.
1. Absorption Rate
Absorption rate is a way to measure how quickly homes in a given area are selling by measuring the percentage of homes that sell over a certain time period vs the number of homes on the market during the same time period. In order to understand how absorption works, it helps to think of homes for sale as water, and the area you’re trying to measure as a sponge. As you know, a sponge can only hold a limited amount of water. After absorbing its limit in water, it cannot absorb more until it’s wrung out or dried.
In real estate, a home is only “absorbed” into the local market when it’s sold. If we look at how many home are absorbed into the local market every month, we can get an idea of how quickly homes are selling. This can tell us if it’s a buyer’s market or a seller’s market and can have a big impact on how you price your listing and how long it will take to sell.
How to Calculate Absorption Rate
Absorption rate is very easy to calculate. All you need to do is divide the number of homes on the market in a given time period (usually one month) by the number of homes that have sold in that time period. For example, if there are 100 homes for sale in march and 10 homes sold in march, the absorption rate would be 10%.
Generally speaking, absorption rates of 20% or more indicate homes are selling quickly and it’s a seller’s market.
2. Months of Supply
Months of supply is a measure of how many months it will take for all the homes for sale in a given market to to close based on how quickly homes have sold in the past.
Months of supply can be a useful metric to judge the health of a given market. For example, if there are many months of supply left on the market, this means that homes will more than likely sell slowly. If there are very few months of supply on the market, this means homes should sell very quickly. The average months of supply for a normal market is roughly 5 to 7 months. A seller’s market will have less than 5 months supply on the market and a buyer’s market will have more than 7 months supply on the market.
How to Calculate Months of Supply
Calculating months of supply is very simple. All you need to do is divide current inventory by homes sold per month. Let’s say your area currently has 100 homes for sale. This is our inventory. Now, let’s say that 10 homes sell per month in this area. 100/10 = 10 months of supply on the market. Using our criteria above, that means this is a buyer’s market.
For a great discussion on using absorption rate and months of supply to understand your market and educate your clients check out Drew Kondo’s great post over on southtahoehouses.com.
3. Capitalization Rate (Cap Rate)
Capitalization rate, frequently abbreviated as “cap rate”, is an investment property’s ratio of net operating income (income after fixed and variable expenses like taxes, utilities, etc.) to the total purchase price (or value) of an asset.
For example, let’s say your client is considering buying a 5 family house for $1,000,000. Now, let’s say the net operating income from the rent roll in the building is $100,000 per year. If we divide the purchase price of the building by the net operating income (NOI) we get a capitalization rate of 10%.
Capitalization rate is the gold standard criteria used to assess the value of an investment property. The reason cap rate is so important is that it gives a potential investor an idea of the returns they would make on an all cash purchase. It can also be used as part of a formula to determine how quickly loans can be paid back on an investment property.
For a more in-depth discussion on cap rate, check out Property Metrics’ excellent post on the subject here.
4. Estoppel Certificate
An estoppel certificate is a due diligence tool used by mortgage lenders or other entities to verify facts and financial obligations of rental buildings.
For example, let’s say your client is interested in purchasing a rental building with ten units. The owner of the building is claiming that their rent roll is $10,000 per month. In order to verify this information, an estoppel certificate can be sent to the current tenants to verify their monthly rent and lease terms.
5. Lis Pendens
Latin for “pending lawsuit” lis pendens is a public notice sent to a homeowner by their lender when they have missed two or more mortgage payments. A lis pendens is generally the first step in the foreclosure process. That said, a homeowner can still try and sell the home via short sale, or attempt to refinance to avoid foreclosure.
6. Sale to List Ratio
The sale to list ratio is the percentage of the asking price that a home ended up selling for. For example, let’s say a home was last listed at $500,000 but only ended up selling for $450,000. In this case we would say the sales to list ratio is 90% because the home sold for 90% of the last list price.
This is pretty obvious when you’re dealing with one listing, but can be a great way to assess the health of a market when applied to multiple listings. For example, if you look at 50 homes in a particular market and find they have an average sale to list ratio of 120%, that means that people are generally willing to pay 20% more than asking for homes in that area. This is essential information when pricing a home for a seller client.
7. Special Assessments
Special assessments are charges that co-op boards, Condo boards, or homeowner’s associations (HOA) charge for repairs that exceed their current budget. For example, an aging boiler, sewer system, or air conditioning system may need to be replaced. If the cost to replace the system is higher than the current budget, owners or shareholders will be charged a special assessment to pay for it.
Planned special assessments need to be disclosed to potential buyers one week after submitting an offer. If you’re working with buyers who are considering co-ops, condos or homes with HOA’s, you need to make them aware of the possibility of special assessments coming up in the declaration of covenants, conditions, and restrictions. (CC&R)
An easement refers to a portion of privately owned land that the owner agrees to allow another party to use for a specific purpose. Easements are generally agreed upon by both parties, but they can also be very contentious and have been at the core of many failed deals and lawsuits.
Here’s how they work:
One of the most common easements is when a neighbor must cut through another neighbor’s land to access a public road, or in some cases the beach. The easement will spell out that the neighbor can use a portion of her neighbor’s property to access the road, but not to say, build a shed or put up a fence.
Easements are also commonly granted to local municipalities or utilities to put up streetlights, water lines or sewer lines. Another common easement in oceanfront communities is beach access. There are often paths or trails from public roads to public beaches that cut through private property.
Easement and encroachment are two real estate terms that are often confused with each other. Unlike an easement, an encroachment is when one party is using a portion of someone else’s property without their formal permission. For example, one neighbor might build a fence or shed that is fully or partially on someone else’s land. This is actually very common with large rural properties. Once they are discovered both parties can come together and create an easement for the use of the property.
10. Arms Length Transaction
An arms length transaction is a transaction where both parties have a vested interest in getting the best deal possible for themselves. For example, a single buyer representing herself is solely interested in closing the deal for the lowest price possible. A homeowner selling her the home and representing himself is only interested in selling the home for the highest price possible. As you can imagine this can get a little bit murky when brokers are involved, but at the end of the day the vast majority of real estate transactions are arms length.
An example of a transaction that is not arms length might be a mother selling her home to her daughter. While the mother is still interested in selling the house for a decent price, she will be much more likely to reduce the price for her daughter than for a stranger.
11. Certificate of Occupancy
A certificate of occupancy (C of O) is a document produced by local or city governments to prove that a property conforms to the building code and is safe to occupy. Without a certificate of occupancy, a building cannot be used for any purpose. For example a newly built home cannot be moved into by its new owners until the city issues a certificate of occupancy. Likewise a restaurant may not open for business until they have a certificate of occupancy.
Certificates of occupancy also spell out the legally allowed use for the building. This is largely dependent on the zoning of the area the building is located in. For example, a building in an area that is zoned for industrial use may not allow residential or retail use.
12. Hard Money Loan/Hard Money Lender
A hard money loan is an often short term loan used by investors and house flippers to quickly raise capital to pay for a property they plan to rehab and flip for a higher price. The only drawback to hard money loans is that they generally have higher interest rates. Other properties are used as collateral when securing a hard money loan.
If you want to learn more about options for hard money lenders, check out our in-depth guide here.
13. Bridge Loan
A bridge loan is a short term, high interest loan that is generally used to buy property when the buyer is planning to sell another property, or eventually take out a mortgage to pay back the loan. Generally speaking, bridge loans are used to buy property quickly. For example, a homeowner may want to purchase a new home before selling the home they are currently in. In this case, they may take out a bridge loan to purchase the new house, then either pay off the loan or take out a new mortgage when their old home sells.
14. Vacancy Rate
Vacancy rate is the percentage of available rental units that are currently on the market at any one time. Generally speaking a higher vacancy rate means there are too many vacant units for the market to absorb, or asking rents are too high. Higher vacancy rates can also be seasonal. In Eastern and Mideastern cities, vacancy rates are generally much higher in the winter due to the cold weather.
High vacancy rates can be addressed by lowering rents or offering concessions to attract new renters. For new developments, concessions are often preferred because they allow the property manager to keep the rent roll high.
15. Rental Concessions
Rental concessions are offers made by landlords in order to entice new renters to move into their buildings. One month free rent is a very common rental concession.
Since apartment buildings are often valued largely on their current rent roll, lowering rents due to a high vacancy rate is not always a good idea. Instead, many developers offer new tenants rental concessions to keep their rent rolls high. For example, a developer may offer new tenants a free month’s rent, or free moving and storage if they agree to sign a lease. However, the tenant will still be paying the $1000 rent every month.
16. Net Effective Rent
Net effective rent is the amount of rent paid to the landlord over the course of the lease after factoring in rental concessions like free rent. For example, if a landlord is offering one month free as a rental concession on a $1000 apartment with a 12 month lease, over the course of the lease the tenant would pay only $11000. If they were to break that $11000 per year down by month, they would have effectively spent $923 per month (the net effective rent) on rent. However, they are still paying $1000 to the landlord every month they pay rent.
17. REO (Real Estate Owned home)
REO’s are foreclosed homes that are owned by a bank or other lender. Helping your client purchase REO’s can be a very tricky process. You need to make sure they are very well qualified and understand that REO homes often have serious condition issues that may need to be addressed before the home is livable.
18. Gift Letter
A gift letter is a letter written to a bank to prove that money given to a potential borrower to help purchase a home is indeed a gift and not a loan. This is a very common occurrence with starter homes. Relatives will often give money to their children in order to purchase a home with no expectation of repayment.
While you should always ask if the bank has a preferred format for gift letters, you can get a basic template over at Nolo.com.
19. Gross Commission Income (GCI)
Gross commission income often abbreviated as GCI, is the amount of total commission income a real estate agent earns for a brokerage over the course of a financial quarter or year. Generally speaking, gross commission income is then split between the brokerage and the agent. The most common way to split gross commission income is to split it 50/50 between the brokerage and the agent. That said, commission splits can vary wildly in this industry. Companies like RE/Max for example are famous for having splits of up to 90%.
Gross commission income is a very popular metric for brokers to measure their agent’s performance for the quarter or year.
20. Transaction Sides
Transactions sides are one half of a real estate deal closed by a real estate agent. Every real estate deal has at least two transaction sides, one for the buyer and one for the seller. The reason that brokerages measure success by transaction sides rather than closed deals is that multiple agents from multiple brokerages can represent different transaction sides for the same deal.
21. Sales Volume
Sales volume is the total dollar amount of real estate sold by an agent over the course of a quarter or year. Sales volume is also a very popular way for agents to measure their performance for the quarter or year.
22. IDX (IDX enabled website)
IDX or Internet Data Exchange, is an online technology that syndicates data from multiple listing services to individual brokerage and agent’s client facing websites. IDX technology allows agents to feature MLS properties on their websites that are automatically updated on their sites whenever they are updated by the MLS.
Matterport is a combination of a 3D camera and software that allows real estate agents to generate virtual tours and walk throughs that can be posted on their websites or on listing websites like Zillow. While there are several competing 3D cameras and software packages on the market, Matterport is the industry standard in real estate.
A Supra is an electronic lockbox that can be opened by anyone who has the appropriate software on their phone. Since listing agents and homeowners can grant or restrict access to Supra lockboxes remotely, they are far more secure than traditional lockboxes.
25. Virtual Staging
Virtual staging is the art of using computer generated furniture to stage empty homes. Since home staging can be very expensive, virtual staging offers a much more affordable alternative for realtors with smaller marketing budgets. If you want to learn more about virtual staging and see which virtual staging service we chose as the best value for realtors, check out our in-depth guide here.
Over to You
Have you come across any useful real estate terms that would be a benefit for new realtors? Let us know in the comments.