10 Real Estate Terms We Should Know But Probably Don’t

June 29, 2022
real estate terms

If you are starting a new career in real estate, property management or just looking to invest in the real estate market, there are certain real estate terms you should know. 

These terms can help you become a real estate agent, sell your personal property faster, narrow your search for a new apartment and help you learn more about the industry. 

This post will explore ten real estate terms everyone should know. 

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Real estate terms you should know

1. Auction

real estate terms

Many may know the word auction as one of the most common real estate terms but do you know exactly how real estate auctions work?

An auction is an outright sale of a property by the homebuilder, homeowner, or the Government. The person with the right to the private or commercial properties may decide to auction it to the general public, and this allows intending owners to bid for the property.

This is done with the help of a real estate agent and under an auction agency agreement. 

People opt for real property auctions for several reasons. For example, it might just be to get the property off the market as quickly as possible. 

Other times, it may be that the personal property has been on the market for too long, and the seller is trying very hard to sell it.

The real estate agent acting on the property will recommend an auction. Also, auctions are held when the Government or bank may seize property owned by an individual or business and decide to auction it to recover funds.

2. NOI (Net Operating Income) 

Every potential investment comes with risks. Due to the risks involved in Real Estate, it is vital to estimate the potential profit of the investment property in question without all expenses involved in the maintenance of the property. 

This estimate is known as the Net operating income. In much simpler terms, this is the profit realised from an investment property every year. 

NOI = Actual real estate revenue in a year minus (-) Operating expenses in a year.

3. Bond

real estate terms

In private or commercial real estate, bonds are issued as a form of security. A bond gives the property owner some reassurance for damages that may occur on the rental property and if there is any form of default in payment by the renters. 

Sometimes, a bond can be seen as fixed-income security or investment on a lease real estate property. Rental bonds can be four times the rent. So whether you are a weekly or monthly tenant of the leased property, bonds will be paid in a large chunk. 

However, the good thing about bonds is that they are refunded at the contract’s expiration if all the conditions were adhered to.

4. Capital expenditure (CapEx)

This is one of the major real estate transactions you will come across in the industry. Capital expenditure or CapEx is used to describe huge expenses made by personal property owners and investors to renovate or maintain a commercial real estate or private property. 

These expenses may include changing the roof or the furnace. The idea behind the capital expenditure is that it is usually capital intensive.

5. Capitalisation rate or Cap rate

The capitalisation rate in the real estate sales can be obtained by dividing the original purchase price by the net operating income actualised in the first year of purchase.

Now, let’s consider a private or commercial real estate property purchased at $250k and realised a net operating income of $20k. 

The Cap rate is the ratio of the Net operating income of the first year and the purchase price paid. So to derive the cap rate of an income-producing real estate, the Net operating income must be estimated first. 

6. Caveat emptor

real estate terms

In the real estate industry, the caveat emptor is the risk associated with the purchase of a property. Every form of investment has impending risk, and real estate investments are no different. 

A caveat emptor warns intending buyers of the risks associated with the purchase and urges the buyer or investor to do due diligence on the residential or investment properties sold to ascertain how genuine they are. 

Caveat emptor is not limited to real estate alone. It can also be used in other purchases, such as a car or heavy equipment. So whether you are going for an outright buy or mortgage, you should know what a caveat emptor is.

7. Mortgage

During a property transaction in real estate, the term ‘Mortgage’ is a loan used to acquire or maintain a property. Two parties are usually involved in any mortgage payment, the Borrowers and the private lenders. 

The borrower needs to meet some laid down requirements to purchase property, including having a perfect credit score and a steady source of income.

An agreement binding the borrower to pay back the loan is usually spread over time. 

The property acquired is often used as collateral and may be taken over if there is a failure in adhering to the existing mortgage payment conditions.

8. Gazumping and Gazundering

real estate terms

Home builders and owners of rental properties may decide to hasten real estate transactions by selling off the property intended to an intending buyer even after having agreed to sell to another buyer.

Such a buyer may have offered to buy at a higher rate than the previous one and may have offered more favourable terms, referred to as gazumping. 

On the other hand, a buyer may withdraw an offer and make a lower offer to the real estate agent based on the market valuation of the existing property. This is then referred to as gazundering. Gazumping may only occur if there has been no binding or exclusive agency agreement to the purchase between both the buyer and the owner.

9. Commission

Ever wondered how real estate agents make money? Yes! You guessed right, through commissions. Commissions are paid to a licensed estate agent based on the cost of purchase or rental of commercial property or residential real estate. This is one of the most important real estate terms and fees you need to know about.

Many property owners do not have the time and skill needed to negotiate and make the sale of a property smooth and easy. So they usually contract the sale of their commercial or personal property to the real estate agent authorised to sell real estate properties.

These real estate agents take the rigorous route of sorting for a buyer and getting the property leased or sold in exchange for a percentage of the selling price. Now you will agree that we can not mention real estate terms without mentioning commissions.

10. Due diligence

real estate terms

It has never been a good idea to embark on a purchase without properly conducting due diligence despite how real your instincts are. You can never be too sure. 

Due diligence is a proper investigation conducted on a property to determine the market value and real estate prices, and confirm property ownership before committing financially.

So if you intend to make a purchase or commitment on rental properties, think about conducting due diligence on the property before signing the dotted lines.

Liked our guide to must-know real estate terms?

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