If you have ever started a new job, you have probably found that there is a certain lingo that is used at the workplace that you have never heard of anywhere else. If no one takes the time to explain to you the industry jargon, you may find yourself wondering what people are saying at times. When I first started my engineering job, I discovered that there were a million acronyms that people were using that I had no idea what they meant. Most of the time the people had worked there for years and years and did not even realize they were using terms that would be unfamiliar to anyone else. Starting in real estate is no different and you will find that you will have to become familiar with certain terms and acronyms in order to be able to correctly understand what other investors as saying and to build your credibility. Below is a list of terms every new investor should become familiar with sooner rather than later.
After Repair Value
The After Repair Value, or ARV, is the value of a home after the projected repair and/or remodel work has been completed. Most successful investors only purchase homes that are below market value due to deferred maintenance, being severely outdated, or any other situation that causes distress to the home. When doing their analysis on the property, one of the main values they are concerned with is the ARV. A good way to determine the ARV is by looking at the comps in your area that closet resemble what your property will look like when you’re done working on it. For a more detailed explanation on analyzing comps you can read one of our previous posts.
Maximum Allowable Offer
Maximum Allowable Offer, or MAO (pronounced “mayo”), is the maximum amount of money that you should offer when trying to purchase a property. Different investors will have different criteria for calculating their MAO, such as the popular “70% rule.” Basically, your MAO is supposed to prevent you from paying too much for a property and putting yourself at unnecessary risk. If you have a standard rule that you always follow when making offers on properties, it will help take emotion out of the equation and reduce the risk of overpaying. Another term that you might hear in place of MAO is “strike price.”
Rehab costs is another common term that you will hear and is short for rehabilitation costs. Basically, rehab costs are the amount of money you are expecting to spend on the repair and/or remodel work. Your projected rehab cost is a very important number as it will play a large role in determining your MAO.
In essence, a short sale is when the lender allows the borrower to sell the home for less than the mortgage that they owe. It is called a short sale because the balance of the money that will be paid to the lender will fall short of what is actually owed. Some people mistakenly think that it is called a short sale because the length of time for the sale to process is short, but this is definitely not the case. There is a lot of red tape with getting the lender to agree to a short sale and then going through the process of getting the property listed and an offer approved. Short sales are known in the investing world as a potential source to find great deals. However, most investors that successfully invest in a substantial number of short sales know the process in and out and have the patience to wait six months or more for a short sale purchase to complete.
Real Estate Owned
Most commonly known as REO, these are properties that are owned by the bank or other lending institution. More often than not, the lender takes possession of these properties through the foreclosure process. Since banks are not in the business of owning property, they have a certain level of motivation to try and get these homes off of their books. Homes that are foreclosed on have a tendency to not be in the best of condition, so there is opportunity for investors to get good deals on REO properties.
Fix and Flip
A fix and flip is when an investor purchases a property, does some amount of repairs or remodeling, and then sells the house a short term later in order to turn a profit. You will commonly hear investors who focus on this as flippers, rehabbers, or even residential redevelopers. The most effective way to perform a fix and flip is to find a home that is in some form of distress, either due to being in poor condition or because the owner needs to urgently sell for some reason. Flipping homes has become extremely popular over the last 5 years or so due to the improving economy, flipping shows on television, and gurus selling their various education programs.
Buy and hold
Unlike the fix and flip model where you try and flip a home quickly for a profit, the buy and hold model is for investors looking to keep the property for a longer term. The most common type of buy and hold investor is one who looks for a property to rent out and collect a monthly pay check. Where flipping can carry considerable risk, especially if you miscalculate your numbers or the market turns sour, successful buy and hold investors usually buy properties looking well into the future and realize that holding onto the property in the long term usually protects you from short term market fluctuations.
Wholesaling is becoming more and more controversial, but in general terms it is when an investor gets a property under contract for a certain amount and then turns around and assigns the contract to another investor for an amount higher than they have it under contract for. In its purest form, the wholesaler never actually owns the property so theoretically does not have to come up with the purchase price. Wholesaling is gaining in popularity due to the fact that it is possible to make money without needing much capital of your own. However, in order to consistently find properties to wholesale, you generally need to do quite of bit of marketing, which often times entails spending money. Some states are starting to crack down on wholesaling by saying that wholesalers are acting as unlicensed agents, thus the controversy over wholesaling as an investment strategy.