Regardless of the industry, it’s important to understand the common terminology or jargon associated with the field. In real estate, there are a lot of terms you need to know that will make it easier to understand what you’re getting into when buying and selling properties. Some new investors start by acquiring fix and flip properties or buying homes in distress, fixing them up, and then selling them for a profit. If you’re interested in the fix and flip aspect of real estate investing, take a look at this vocabulary list to help you better understand the industry.
Return on Investment
Return on investment (ROI) is a term used to compare the amount of money used to purchase a property versus how much the property sells for. This amount includes the money used to make repairs to the home, which has to be subtracted from the total selling price when calculating profits. The lower the purchase price and repair costs are, the higher the ROI will be.
After Repair Value
Typically, a fix and flip property refers to a home that needs repairs, although the amount it will cost to make repairs varies from house to house. The after repair value (ARV) refers to how much the house will be worth after you complete the repairs. This is an important number to know, as it will determine your selling price, but it’s also difficult for beginners to estimate.
Hard Money Loan
A hard money loan is typically secured from a private lender instead of a bank. These types of loans can be easier to access for new investors because they don’t require you to have a good credit score and will use the property you’re investing in as collateral. You still need to meet certain criteria, but they’re often not as rigid as those required by a bank. Hard money loans can be faster to get, but they may have higher interest rates and shorter repayment terms.
You may hear the term comparables, or comps, when you get into real estate investing. This term refers to the other houses in the area that are similar to the property you’re interested in and what they’re selling for compared to the home you want to fix and flip. It also takes the prices of homes that have sold recently into consideration. The comps will give you an idea of the home’s value, and what you can sell it for once it’s fixed up.
A foreclosure refers to a home that a bank has taken possession of. This happens because a borrower fails to make their loan payments, causing the bank to repossess the home. It then sells the home to recover the amount still owed on the loan. Sometimes a bank will auction off a foreclosure, but investors interested in fix and flips can also obtain these types of properties, which often need repairs.
Governments use tax liens on properties where the owner has unpaid property or income taxes. The state, county, or federal government can impose these liens to try to recover the taxes owed. If a property owner fails to pay the overdue taxes by a certain date, the government will auction off the property to recover the tax amount due.
To rehab a property means to make repairs and return it to a livable condition, making it attractive to potential buyers. Since many fix and flip properties require some sort of rehab work, it’s also important to familiarize yourself with construction terms to help you understand the extent of the work required. This will ensure you make a proper ARV estimate.
A homeowner’s association (HOA) is an organization that’s responsible for collecting dues and ensuring property owners follow the rules and regulations a community has established. These associations also maintain any common areas within the community, such as pools or clubhouses. When buying a property, make sure you understand the regulations and fees associated with being part of an HOA. You typically pay the dues on a monthly basis, but sometimes they’re collected annually.
Equity refers to the value of a home after paying off the mortgage. As you make payments on the principal of a home loan, you own more of that home. If its value increases, your equity does as well.
Scope of Work
A scope of work is a document that outlines the work a home requires to get it ready to sell. The document describes exactly what the project requires, including how much time it’ll take to complete each project and how much it’ll cost. This is important for understanding exactly what the fix and flip entails to help you accurately estimate the ROI and ARV.
A single-family home is designed for one family to live in. It often consists of three bedrooms and two bathrooms but can vary in size. Single-family homes can be easier to sell because demand for these types of dwellings is higher. They can be less expensive to buy because they’re smaller, and getting financing for them can be easier as well.
Multifamily homes can house more than one family and contain many individual units with their own kitchens and bathrooms. Because these types of dwellings are larger, they can be more expensive to buy. They’re also more expensive to maintain and insure, which is important for investors to keep in mind. If you want to fix and flip a multifamily unit, you’ll need to consider the cost to rehab each unit to ensure you calculate your ROI properly.
If you’re a new investor looking to get into the fix and flip market, contact Titan Funding to find out how we can help. We offer a variety of loan options to investors of all types, and we’re familiar with the Boca Raton, Florida area. This means we can help you make an informed decision regarding your potential investment property before you buy.