An arm’s length transaction in real estate refers to a transaction between two parties who are independent and unrelated to each other, and who act in their own best interests to reach a fair and equitable agreement. In other words, an arm’s length transaction is characterized by the absence of any special relationship or undue influence between the buyer and the seller.
In real estate, an appraisal is the process of estimating the fair market value of a property. The appraisal is typically conducted by a licensed and certified appraiser who evaluates various factors to determine the property’s value. The primary purpose of a real estate appraisal is to provide an unbiased and professional opinion of a property’s value, which is crucial for various real estate transactions, such as buying, selling, refinancing, or obtaining a mortgage.
An assignment fee refers to a fee charged by the wholesaler to assign or transfer their rights to a purchase contract to another party, typically an investor or buyer. Real estate wholesaling involves finding distressed or below-market-value properties, entering into a purchase agreement with the property owner, and then assigning that contract to another buyer for a fee.
As-Is Loan to Value
In the context of real estate appraisal and valuation, “comparables,” often referred to as “comps,” are similar properties that have recently sold or are currently on the market and are used as a basis for estimating the fair market value of a subject property. The process of comparing a subject property to these comparable properties is known as the Comparative Market Analysis (CMA).
In the context of a renovation budget, a contingency refers to a predetermined amount of money set aside to cover unexpected or unforeseen costs that may arise during the renovation process. Renovation projects can encounter various challenges, such as hidden structural issues, unexpected permit costs, or the need for additional materials or labor. A contingency fund acts as a financial buffer to address these unforeseen circumstances without causing a significant impact on the overall budget. It is a proactive measure to account for uncertainties and helps ensure that the renovation project can proceed smoothly even when unexpected expenses arise. Contingency amounts are typically calculated as a percentage of the total renovation budget, and the specific percentage may vary based on the complexity of the project and the level of risk involved.
In lending, a “draw” refers to the disbursement of funds from fix and flip or construction loan. Draws are requested by the borrower from their construction/rehab escrow and released and disbursed by the lender after an inspection is completed to confirm the work that will be reimbursed by the draw has been completed.
A double close, also known as a “simultaneous closing” or “back-to-back closing,” is a real estate transaction in which an investor, typically a wholesaler, acquires a property and then immediately sells it to another buyer on the same day. This process involves two separate, but closely timed, closings: one where the investor buys the property and another where they sell it.
DSCR stands for Debt Service Coverage Ratio. It is a financial metric used in real estate and finance to assess a borrower’s ability to cover their debt obligations, particularly the repayment of a mortgage or other long-term debt. The DSCR is calculated by dividing the property’s net operating income (NOI) by its total debt service.
A deed of trust is a legal document used in real estate transactions to secure a loan by transferring the title of the property to a third-party trustee until the borrower repays the debt. The deed of trust involves three parties: the borrower (trustor), the lender (beneficiary), and the trustee. This arrangement is commonly used instead of a mortgage in some U.S. states.
A down payment, in the context of purchasing real estate, refers to the initial, upfront payment made by a buyer toward the total purchase price of a property. It is a percentage of the property’s total value that the buyer pays in cash, and the remaining amount is typically covered by a mortgage loan from a lender.
A plan outlining how the borrower intends to repay the loan, often through the sale of the property, refinancing, or other means. Private lenders assess the viability of the exit strategy as part of the lending decision.
Experience refers to a borrower’s purchase history and “track record” proving to the lender that they have experience purchasing, and executing upon the real estate investment strategy. In terms of flipping houses, lenders like to see the history of purchasing, renovating, and selling (exiting investment) to prove the borrower is capable of completing the next investment.
Foreclosure is a legal process through which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments and has defaulted on the mortgage or deed of trust. When a borrower fails to meet the terms of the loan agreement, the lender has the right to take possession of the property through foreclosure and sell it to recoup the outstanding debt.
A HUD-1 Settlement Statement, commonly referred to as a HUD statement or closing statement, is a standardized form used in real estate transactions in the United States. It provides a detailed breakdown of the financial aspects of a real estate transaction, particularly at the closing of the sale. The form is issued by the Department of Housing and Urban Development (HUD).
Lis pendens is a Latin term that translates to “pending litigation.” In real estate, a lis pendens is a notice filed in the public records indicating that there is a legal action or lawsuit involving a specific property. This notice serves as a public warning to potential buyers or lenders that the property’s title is in dispute or that there is pending legal action related to the property.
Liquidity refers to the ease with which an individual or business can convert their assets into cash or cash-equivalents. It’s a measure of financial flexibility and the ability to meet short-term financial obligations without causing a significant impact on overall net worth. Lenders often consider liquidity as an important factor when evaluating a borrower’s financial health.
Loan-to-Value
Loan-to-Cost; This is a ratio, displayed as a percentage, of the Loan Amount to the total Project Cost. The Project Cost includes the purchase price of a property plus the rehab or construction costs.
A mortgage is a type of loan specifically used to finance the purchase of real estate. In a mortgage arrangement, a borrower (typically an individual or a family) obtains financing from a lender (such as a bank or a mortgage company) to buy a home or other real property. The property itself serves as collateral for the loan, meaning that if the borrower fails to repay the mortgage according to the agreed-upon terms, the lender has the right to take possession of the property through a legal process known as foreclosure.
Origination points, in the context of mortgage lending, refer to upfront fees charged by a lender for the initiation or creation of a new mortgage loan. These points represent a percentage of the total loan amount and are typically paid at the time of closing. One origination point is equal to 1% of the loan amount. These fees are compensation for the lender’s services in processing and underwriting the loan.
An individual or non-institutional entity that provides loans, often secured by real estate, to borrowers. Private money lenders are part of the private lending sector.
Pre-paid interest refers to interest paid in advance on a loan. This can occur in various lending situations, such as mortgage loans or personal loans. When a borrower pays interest upfront, they are essentially covering the interest expense for a specific period before it accrues. This can be done at the time of closing or as part of the loan origination process.
In real estate investing, profit margin refers to the percentage difference between the revenue generated from an investment property and the total costs associated with acquiring, owning, and selling the property. It is a key financial metric used by investors to assess the profitability of their real estate ventures.
Per diem interest, in lending, refers to the daily interest that accrues on a loan. The term “per diem” is Latin for “per day.” Lenders may use per diem interest calculations for various purposes, such as determining the amount of interest due on a short-term loan, calculating interest during a partial month, or assessing interest charges for the period between the loan closing date and the first regular payment date.
Lis pendens is a Latin term that translates to “pending litigation.” In real estate, a lis pendens is a notice filed in the public records indicating that there is a legal action or lawsuit involving a specific property. This notice serves as a public warning to potential buyers or lenders that the property’s title is in dispute or that there is pending legal action related to the property.
A mortgage release, also known as a mortgage satisfaction or discharge, is a legal document issued by the lender when a borrower has fully repaid a mortgage loan. This document is recorded in the public records to officially acknowledge that the borrower has satisfied the debt, and it releases the mortgage lien from the property. It is an essential document to have, as it provides evidence that the borrower has fulfilled their financial obligations and that the property is no longer encumbered by the mortgage.
In the context of real estate, “rehab” is short for rehabilitation, and it refers to the process of renovating or restoring a property to improve its condition, functionality, or appearance. Real estate rehab typically involves making repairs and upgrades to both the interior and exterior of a property with the goal of increasing its value.
Underwriting, in the context of lending, refers to the process that financial institutions, such as banks or mortgage lenders, use to evaluate the creditworthiness of a borrower and assess the risk associated with providing a loan. The underwriting process involves a thorough analysis of the borrower’s financial situation, credit history, and the details of the loan application. The goal is to determine whether the borrower meets the lender’s criteria for loan approval and to establish the terms and conditions of the loan.
