This section breaks down the mumbo-jumbo and gives you Phillip's definition for sometimes overly complicated real estate terms.
A report that can protect your butt! It's also a tool that can leverage significant reduction in price and save you $$$$.
The objective, financial value of the house. It can make/break a deal. It sets home sellers straight who think their house is worth big money when the market tells them otherwise (I've been there with one of my properties before!).
Basically, it's an expensive loan for a house! Common terms are 30 years, 20 years, and 15 years. The lower the term, the higher the payment but the lower the interest rate. Although it's tax deductible, it's still a debt until you pay off the house (but you have to live somewhere, right?).
Clear Termite Letter
The bank won't lend you money if there are active termites.Termites destroy houses. So, you have to get a certified pest control company to inspect and provide a written report to the bank demonstrating that there are no active termites (for obvious reasons).
Fru-fru language but an open living/kitchen/dining space. It's popular now, but these types of things can be trendy. Some people love the separation of kids/adults while others love the open space. It's all about what you like.
Earnest Money Deposit
It's like a deposit for an apartment. Most people aren't going to accept your house purchase offer unless you are earnest about it, so it common practice to provide an Earnest Money Deposit with your offer. If you end up not purchasing the property, you generally get the deposit back. If you do purchase the house, it goes towards the downpayment.
It's a piece of paper that you need to put an offer on a house. Without this, sellers won't even consider you.
Determines how high your house is off the ground. Generally costs $400 to purchase from a land survey company. Sometimes, homeowners will get this to help lower their flood insurance premiums.
Private Mortgage Insurance or Mortgage Insurance Premium
It's a money-suck out of your budget. You never see it back. It's like $100 to $200 that you pay each month until you have 20% equity in your property. The bank, on top of getting thousands of dollars in interest upfront from you, adds this cost to serve as insurance for them in the event that you default on your loan (can't pay anymore!) The thinking is that once you have 20% equity, you'll be less likely to walk away from the property. You can avoid PMI by putting 20% down. Or using unique strategies that I counsel my clients on how to put just 3.5% down and then remove PMI less than a year later.
A community association that you belong to and pay money each month. Dues could be $20 per month or several hundred dollars. These associations are good and bad, it really just depends on the community.
Insurance for a house just like you have for your car. It's required if you have a loan on the house. Don't bother making a claim unless it's significant. Like your car, you can expect your premium to go up.
Think personal property for your house. It's the tax bill for your house, or property taxes. The city "assesses" how valuable your house is and taxes you based upon the assessed value. In many cases, the assessed value is comparable to the appraised value. With that being said, it is definitely not always the case and not a substitute for appraised value. Sometimes the city will over-assess you (over tax) and you can appeal it. Sometimes, they may under-assess your property, in which case you probably would not plead the local tax authority to collect more money from you. Tax assessment is a huge item in real estate finance and generally the #1 revenue source for local municipalities. See why governments promote home ownership?
PITI (Principal, Interest, Taxes, Insurance)
This is your monthly payment. All of those items will be rolled into your loan, so that you can budget and make an affordable monthly payment.
Just like your car, you need to put a downpayment on a house! Well, sometimes you don't. There are 0% downpayment mortgage programs, most notably for military buyers. This is good and bad. If done correctly, then it's very wise. But you have to implement real estate investment strategies to maximize this financing to protect your financial health.
Home Equity Line of Credit (HELOC)
Title loan for your house except with pretty solid interest rates. Use your house as collateral for a loan. You can use a Home Equity Loan or a Home Equity Line of Credit. Incredibly risky but incredibly rewarding if done right. Definitely a buyer beware situation. I once knew a guy that tapped into $100K of his house and purchased a quadplex with cash. He then rented it out for $2400 per month.
After Repair Value (ARV)
Usually an investor term. It's how much the property will be valued at after repairs are done. Rehab estimates and financial contingencies are crucial to succeeding in this arena.
Hard Money Loan
Obtaining a loan from a private lender. Very risky and not for the faint of heart. It's for investors and typically the lender has to approve the investment. Designed for flippers who need access to quick capital (cash). High interest rates due to high risk.
Capitalization Rate (Cap Rate)
Investors use this formula as a quick baseline to determine their potential Return on Investment (ROI). This is one way to run numbers on a property but is certainly not an in-depth look.
Formula: Annual Income/Purchase Price = Cap Rate
Example: $15,000/$120,000 = .125 or 12.5%
When a bank lets a homeowner sell their house for less than it's worth. It's preferable for a homeowner to do this because the step after this is foreclosure. Short sales damage your credit for a few years but foreclosures can damage your credit for up to 7 years. It's in the banks interest to sell at a smaller loss than to totally let go of the property at a total loss. Buyer's can reap the benefits of someone else's loss, but the process to buy/sell a short sale can literally take years. Very cumbersome.
When the homeowner totally walks away and stops paying for the house. The bank or responsible agency is now tasked with owning a property that is distressed and forced to sell it at a loss. The homeowner could not sell it for what they owed and just sought immediate relief and stopped making payments. This is very damaging to your credit, to property values in your neighborhood, and emotionally taxing for most people.
Foreclosures, though, can present tremendous purchase opportunities for the right buyer. Not all foreclosures are equal, so finding the right one requires a keen eye and a plan on how to make the best deal out of a foreclosure. I have experience with them personally and professionally in helping clients. A great deal where you get 20-30% equity instantly may be right around the corner for you.
757-288-8680 | Southerland Real Estate, Inc. | 638 Independence Pkwy., Suite 240, Chesapeake, VA 23320
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