Investing in land can be a fantastically profitable and rewarding venture, but like any new business endeavor, it can also be confusing and overwhelming for those new to the industry.
One of the biggest challenges I had as a new investor was understanding the unique vocabulary and terminology used in the land investing business. From “abstract of title” to “zoning,” there were a lot of uncommon words and phrases I needed to learn to navigate this new space.
In this blog post, I'll do my best to demystify these commonly used words and provide a clear and concise explanation of what you need to know.
Since there are so many things to learn, I'll group them into three basic categories: Land Investing Terminology, Closing Terminology, and Seller Financing Terminology.
Land Investing Terminology
Arm's Length Transaction: In real estate, an arms-length transaction happens when a property is bought and sold between two unrelated parties acting independently, in their own best interests, and there is no pre-existing relationship between the buyer or seller to skew the sale price from the property’s fair market value.
Non-Arm's Length Transaction: A non-arm’s length transaction in real estate occurs when two parties have a pre-existing relationship (such as marriage, blood relation, friendship, business partnership, or employment) that may influence the fairness and outcome of the sale.
ALTA/NSPS Land Title Survey: A comprehensive boundary survey for high-value real estate transactions. The survey follows the standards of the American Land and Title Association (ALTA) and the National Society of Professional Surveyors (NSPS).
Acquisition: In real estate, “acquisition” describes the effort, action, and process of buying a property.
Absentee Owner: Someone who owns a property but doesn’t live in it or actively manage it. Technically, “absentee owner” could apply to any property investor who rents out their properties and uses an agent or service to manage them.
Appraisal: A real estate appraisal is an unbiased assessment of a property's value, prepared by a professional appraiser, accompanied by supporting data to support the validity of the valuation.
Bidding War: A bidding war happens when several buyers put in competitive bids (the amount of money they’re willing to pay), resulting in a higher demand for the property or item.
Blue Ocean Strategy: A Blue Ocean Strategy is a business plan that captures uncontested market space through differentiation and innovation. Executed properly, it can render the market competition irrelevant, improve profitability, and lower operating costs.
Comparables: Comparables (often abbreviated as “comps”) are properties that have similar attributes (such as the size, age, location, condition, and features) to the subject property being evaluated.
Carrying Costs: Carrying costs or “holding costs” are the ongoing expenses an owner pays for the duration of their property ownership.
Cash Flow: Cash flow measures cash and cash equivalents flowing in and out of an organization. In real estate, a property owner generates cash flow when they lease their property to a tenant in return for monthly rent payments.
Capital: Capital is a resource, such as money or assets, that an individual or an organization uses to run its daily operations and fund future growth.
Capital Gains: Capital gains occur when selling a capital asset (such as real property or securities) at a higher price than its original acquisition cost. The IRS taxes realized capital gains depending on several factors.
Curb Appeal: Curb appeal refers to the exterior, and physical features of a property that appeal to a prospective buyer. In most cases, a buyer's impression of a property’s physical features will be from the curb, hence the name.
Delinquency: Delinquency occurs when a person or company is behind on payments, usually more than 30 days past the due date. In real estate, delinquency typically describes back-due mortgage payments or property taxes.
Direct Mail: Direct mail is a type of marketing that involves sending a physical copy of promos, offers, or other information to interested parties through a courier, such as the U.S. Postal Service.
Dispositions: “Dispositions” refers to the effort, action, and process of selling a property. As an antonym to the real estate investing term “acquisitions,” dispositions is the act of “disposing” of inventory, which happens either through selling it or donating it to charitable institutions
DBA: A “Doing Business As” (DBA) name is a secondary name a company may use instead of its legal business name. It is also known as a “fictitious name” or “assumed name.”
Easement: An easement is the legal right of another party to access or use property they do not own but can utilize for a specific purpose.
Economies of Scale: Economies of scale refer to the advantages or savings in cost when a company becomes more efficient in their scale of operations (i.e., production), hence the name.
Equity: Equity is the value of an asset less any liabilities against it. Equity can apply to a single asset, such as a car or a piece of real estate, or an entire business entity.
Equitable Interest: Equitable interest allows a person to use, enjoy, and eventually take title to a property, even though they do not currently own it. In real estate, a buyer receives equitable interest upon signing a purchase contract and paying an earnest money deposit.
Fair Market Value (FMV): Fair market value (FMV) is the hypothetical price a buyer and a seller would agree upon for an asset (such as a piece of real estate) on the open market in an arms-length transaction.
Fixed Costs: Any cost that does not increase or decrease based on production volume within a given period.
Flood Zone: Flood hazard areas identified on the Flood Insurance Rate Map are identified as Special Flood Hazard Areas (SFHA). These areas have an elevated risk of flooding on an annual basis.
Freedom of Information Act (FOIA): The Freedom of Information Act (FOIA) is a federal law that gives citizens, foreign nationals, or other legal entities the right to access public or government agency records.
Geographic Information System (GIS): A Geographic Information System (GIS) is a computer system that combines geographic data with attribute data. A GIS captures, displays, and records this data in various ways. A land investor will commonly use this data to view parcel maps.
Geotechnical Investigation: A procedure that evaluates whether the soil's physical characteristics, load-bearing capacity, and underlying layers at a site are suitable for a proposed purpose (such as construction or land development).
Hard Money Loan: A type of asset-based financing used by real estate investors to fund the acquisition and improvement of real property. Hard money loans are useful in financing higher-risk transactions that a conventional lender will not participate in. Due to the higher risk of these transactions, interest rates for hard money loans are higher than those offered by conventional lenders.
Home Equity Line of Credit (HELOC): A home equity line of credit (HELOC) is a revolving credit line that allows a homeowner to borrow against their home equity, essentially using it as collateral.
Homeowners' Association (HOA): A homeowners’ association (HOA) is a community-run organization that manages the common property and provides services for its community members.
Land Entitlement: Land entitlement is the legal process in which a real estate developer or landowner obtains approval from the local governing body for their development plans.
Land Survey: A land survey maps the boundaries and features of a parcel of land, including roads, utility lines, structures, and natural elements, such as ponds and streams.
Land Lease: A land lease or ground lease is an arrangement where a landowner rents out a parcel of land to a tenant. This is a more common arrangement in commercial real estate than in residential.
Letter of Intent (LOI): A letter of intent (LOI) or letter of interest is a written statement that expresses a desire to do business without entering into a formal agreement.
Limited Liability Company (LLC): A limited liability company (LLC) is a corporate structure that shields a business owner's personal assets from liability arising from actions taken by the business entity, with a few exceptions.
Maximum Allowable Offer (MAO): Maximum Allowable Offer or MAO refers to the highest amount real estate investors can pay for a property and realistically expect to earn a profit when they sell or lease it.
Metes and Bounds: Describes a property's boundaries using natural or artificial landmarks. Landmarks used this way are a method of identifying the legal description of a parcel of land on site.
Multiple Listing Service (MLS): A multiple listing service (MLS) is a local and private real estate database that compiles current and historical property listing data from local real estate agents and brokers for MLS users.
Option: An option gives a buyer the exclusive right but not the obligation to buy a property from a seller at a pre-determined price within a specific timeframe.
Other People's Money (OPM): Other People's Money (OPM) refers to the use of third-party financing to purchase real estate, equipment, and other capital expenditures.
Owner-Occupied: Owner-occupied refers to property that is the titleholder’s primary residence. Owner-occupied is the opposite of an absentee-owned property, where the titleholder lives at a different location.
Phase I ESA (Environmental Site Assessment): A Phase I ESA (Environmental Site Assessment) is an investigation by a licensed environmental professional to establish if the subject property and nearby properties have recognized environmental conditions (RECs) due to historical or current use.
Probate: The legal process that settles the estate of a deceased person. During probate, the court supervises the payment of expenses and debts and the distribution of assets to heirs following the will or state law if the deceased died intestate.
Property Insurance: “Property Insurance” is a generic term for various types of insurance that protect a specified property against damage, theft, or personal liability. Real estate is the most popular subject of property insurance, but one can get a policy for almost anything of value.
Records Search and Risk Assessment (RSRA): A Records Search and Risk Assessment (RSRA) is an environmental due diligence report for SBA loans. It provides a faster, less expensive way to assess environmental risk for a site with no known environmental issues.
Perc Test: A soil evaluation that tests the rate at which water drains through the soil. The results of this test will provide crucial information needed to design and install a septic system, which is relevant for any property without access to a municipal sewer system.
Plat: A plat or plat map represents how one property is divided into parcels or lots, shown to scale. It may also show details for each parcel, including easements if any.
Private Money: Private money describes a private individual or entity's loan or equity contribution to another company or investor.
Real Estate Agent: A real estate agent is a licensed professional representing a buyer and/or seller in a real estate transaction. The seller pays the real estate agent a commission based on the property's final sale price. The term is often used interchangeably with Realtor and Real Estate Broker, but there are subtle differences between the three terms.
Real Estate Dealer: A real estate dealer is one who buys and sells real estate as a business. Common examples of real estate dealers include flippers, wholesalers, and developers.
REIA: REIA is an acronym for Real Estate Investors Association. A REIA is a group of real estate investors that comes together to support and help each other through group and individual meetings. These meetings provide a venue for education, exchanging ideas, and mutual contacts. Some groups have been around for many years, and some are newly formed.
Real Estate Developer: An individual or business entity that buys land, develops it for human use or habitation, and rents or sells the developed property. Some may also undertake renovation or restoration of an old property or one that is poorly maintained or abandoned.
Red Ocean Strategy: The Red Ocean Strategy is a business plan designed to help a company thrive in a fiercely competitive market. The term represents a saturated market where competitors, represented by sharks, fight to gain and control market share.
Return on Investment (ROI): Return on investment (ROI) measures the profitability of an investment. ROI is an investment's net gain or loss ratio versus its return.
Ringless Voicemail: Ringless voicemail drops evolved as a way to provide less invasive voice messages for marketing purposes. Users receive a voicemail message that bypasses the phone call function, dropping directly into the voicemail box “ringlessly.”
Self-Directed IRA: A Self-Directed IRA (individual retirement account) allows individuals to invest their retirement money in unique and more diverse investment assets (including real estate). It differs from traditional individual retirement accounts because self-directed IRAs provide a more extensive selection of a person's investment assets in their retirement account.
SMS (Text) Marketing: Text message marketing involves using Short Message Service (SMS) messages to deliver advertising and other content directly to mobile devices. It’s considered one of the most cost-effective ways to engage mobile consumers.
Skip Tracing: Skip tracing is a method of searching public and private records and contacting neighbors and associates to find the current contact information of a property owner.
Subdivision: Dividing land into pieces that are easier to sell or develop. Subdivisions may be simple, involving only a single seller and buyer, or complex, involving large tracts of land divided into many smaller parcels.
Surveyor: A surveyor is a professional who measures and documents the size, location, dimensions, and features of a property, such as land.
Sunk Costs: Sunk costs are resources (such as money or time) that have been spent on an activity and can no longer be recovered. It is associated with the sunk cost fallacy, a psychological tendency for individuals to follow through on actions they have already invested resources in, no matter how irrational.
Sweat Equity: Sweat equity is the “hard work” an investor or seller performs to increase the value of an asset (such as real estate) instead of spending money to hire a third party to improve it. In many cases, sweat equity is itself a form of capital.
Tax Deed: A tax deed is a document granting the government ownership of a property that fails to pay its taxes. The tax deed allows the government to sell the property to an investor (called a tax deed sale) to recoup the loss.
Tax Lien: A tax lien is placed on a delinquent owner's property after failing to pay their property taxes. This tax lien is sold to an investor as a tax lien certificate so the local governing body can recoup the loss. The delinquent owner still owns the property during this lien period but owes the tax lien certificate holder for its amount plus interest.
Topographic Survey: A map that shows the relative elevation, depth, contour lines, and other physical characteristics of a parcel of land.
Virtual Assistant (VA): A Virtual Assistant (VA) provides various administrative services remotely. A VA typically delivers staff and clerical functions but may perform other tasks as needed.
Wetlands: Wetlands are areas where water covers the soil, or is present either at or near the surface of the soil all year or for varying periods of time during the year, including during the growing season.
Wholesaling: Real estate wholesaling is a business model that involves finding deeply discounted properties from motivated sellers and getting them under contract, with the intent of assigning the contract to another buyer while collecting an assignment fee or simply re-selling the property to another buyer at a higher price.
Zoning: Zoning organizes land in a community and sets limits on how it can be used. It categorizes land into specified sectors for specific developmental or operational uses.
Abstract of Title: An abstract of title is a list of documents detailing a property's title history, such as legal transfers, mortgages, and liens of record.
Assignment: An assignment (or assignment of contract) involves one party to a contract assigning their contractual rights and responsibilities to a third party. In turn, the third party fulfills the terms of the contract.
Cloud on Title: A cloud on title is an unresolved issue in the chain of title. If a property owner cannot resolve a cloud on title, they cannot transfer a clear title to the new buyer when selling the property.
County Tax Collector (Treasurer): The office responsible for the billing and collection of property taxes throughout the county and for the receiving, processing, investing, and, most importantly, safeguarding of public funds, as mandated by state law.
County Recorder (Register of Deeds): Whenever a deed is transferred, and ownership is transferred to a new buyer, the deed (and, in some cases, other supplemental documents) must be recorded by the county to reflect the current property owner and to keep tax records up to date. The recording of these documents is handled by the County Recorder (in some states, it is known as the Register of Deeds).
County Assessor: The elected official responsible for assessing all property within the County. The assessment of property (or the valuation of property) is one component that determines the amount of taxes owed. In most cases, a property is re-assessed whenever the ownership changes hands.
Closing Costs: Closing costs are the expenses, fees, and charges that must be settled at the end of the buying and selling process to complete a real estate transaction.
Double Closing: A double closing is a coordinated real estate arrangement involving two separate transactions between three parties: from a seller to a wholesaler and then from the wholesaler to a buyer. A double closing typically occurs on the same day.
Single-Source Funding: Single-source funding is a method to finance two or more transactions in a double closing using only an end buyer's purchase proceeds.
Flash Cash: Flash cash (also known as transactional funding or same-day funding) refers to money borrowed for a short timeframe, usually 24 to 48 hours, to conduct a double closing.
Transactional Funding: Transactional funding (also known as flash cash or same-day funding) is a creative financing strategy that involves a short-term loan borrowed and paid back quickly to conduct a double closing.
Encumbrance: Encumbrance is a broad term that pertains to any liability or limitation that affects one’s ability to sell a property or use it as intended, such as a non-owner or third party’s claim.
Earnest Money Deposit: An earnest money deposit is a cash deposit made by a home buyer alongside an offer to purchase a home. The deposit shows that the buyer is committed to their offer.
Escrow: An escrow is an arrangement where a neutral party temporarily holds assets following a transaction. Once the primary transacting parties have fulfilled the conditions stated in the escrow agreement, the neutral party releases the held assets to the other party.
Joint Tenancy: Joint tenancy is a form of property ownership involving two or more parties who hold equal ownership of the property and enjoy equal rights and responsibilities.
Legal Description: A legal description describes the exact location and boundaries of a piece of land. It is information critical to a transfer of legal ownership.
Lien: A lien is a claim against an asset (such as real estate) that empowers a creditor to collect on a debt. A lien is generally used as collateral to satisfy a loan.
Preliminary Title Report: A preliminary title report or title commitment is a report issued by a title company after conducting a thorough title search.
Purchase Agreement (PA): A purchase agreement (PA) is a written agreement between a buyer and seller to purchase and sell real estate.
Quiet Title Action: A quiet title action is a legal proceeding that establishes the rightful owner of the property, especially when there is a disagreement or competing claim on it. Its name refers to “quieting” the disputing claim.
Quit Claim Deed: A quit claim deed transfers ownership interest from one party to another without legal guarantee. The grantor (seller) of the quit claim deed merely relinquishes all ownership interest (hence “quitting” their claim), whether they own the property or not.
Notary: A notary is a state-appointed official who serves as an impartial witness to verify the identities and validate the signatures of parties who sign legal documents.
Special Warranty Deed: A special warranty deed transfers ownership from the seller (grantor) to the buyer (grantee) but with limited guarantees (specifically, only title defects that have arisen during the seller's ownership).
Tenants in Common (TIC): Tenants in common (TIC) are two or more entities that share undivided ownership interest in a single piece of real estate.
Title Company: A title company insures and verifies the authenticity of the property's title and the seller's legal right to sell.
Title Insurance: An insurance policy that covers past title problems that come up after you buy or refinance a property and that are unknown at the time of purchase.
Title Search: A title search is a comprehensive examination of public records on the history of a particular property to confirm its chain of title and discover encumbrances on it (if any).
Warranty Deed: A warranty deed transfers property ownership from a seller (grantor) to a buyer (grantee) and guarantees a clear chain of title with no liens or encumbrances.
Seller Financing Terminology
5 Cs of Credit: The 5 Cs of Credit are character, capacity, capital, conditions, and collateral. Lenders use these metrics for underwriting loans and determining the creditworthiness of a loan applicant.
Amortization: Amortization is an accounting method that spreads out the costs for the use of an asset over time. The most common example is amortizing a loan, which involves paying down debt in regular intervals.
Balloon Payment: A balloon payment is the final payment of a loan, typically a mortgage, that does not fully amortize. Generally, it is a considerable sum because it covers the remaining principal balance.
Collateral: Collateral is an asset or property pledged to secure a loan. The borrower forfeits this asset to the lender in case of default. Collateral protects the lender's interests and allows them to recoup some (or all) of their losses on the defaulted loan.
Creative Financing: Creative financing describes any financing arrangement that does not involve conventional means, such as a mortgage. Some examples are hard money loans, seller financing, rent-to-own, among others.
Deed of Trust: A deed of trust is an agreement similar to a mortgage that entrusts the legal title of the property to a neutral third party until the loan is paid in full. Some states use deeds of trust instead of mortgages.
Fixed Interest: Fixed interest or fixed-rate interest is an interest rate that remains unchanged over a specific period, usually for the life of the loan.
Variable Interest: An interest rate that changes over a specified period in the life of the loan. Interest rates fluctuate due to market factors.
Imputed Interest: Imputed interest is interest that the IRS assumes the lender has collected even though the lender did not. It is often associated with loans that charge no interest or interest below applicable federal rates.
Interest: Interest is an expense paid by a borrower for the use of borrowed money. Interest is usually expressed as a percentage of the outstanding balance of money owed to the lender. Interest can also be expressed as a rate of return on an investment.
Land Contract: A land contract is a legal agreement between two parties on the sale of real estate, such as land and any structure on it. A land contract is a form of seller financing where the buyer makes payments to the seller or owner.
Loan Servicer: A third-party entity that handles the collection of installment payments for a loan, whether it's a seller-financed property, private note, or conventional mortgage loan.
Loan Underwriter: A loan underwriter is a specialist who determines the risks associated with lending to a loan applicant, typically based on the applicant's financial standing, credit profile, and other factors.
Loan-to-Value Ratio (LTV): Expresses the correlation between the amount of a loan against an asset and the asset's value. It’s one of the metrics lenders use to gauge the risk involved in a loan.
Mortgage: A mortgage is a legal document that typically comes with a home loan. It allows the lender to repossess the property if the borrower defaults on payments or violates the terms of the loan agreement.
Mortgage Loan Originator (MLO): A mortgage loan originator (MLO) is an entity, organization, or individual that initiates and assists a borrower through the loan application, underwriting, and approval process.
Note: A note, specifically a real estate note, is a legal document that spells out the terms and conditions of an agreement or loan between two parties, such as a buyer and a lender.
Notice of Default (NOD): A notice of default is a letter sent to a defaulting party as a notification that they have failed to meet their contractual obligations.
Power of Sale: A power of sale is a mortgage clause that authorizes the lender to sell the property if the borrower defaults on the loan. This process only applies to non-judicial foreclosure states.
Promissory Note: A promissory note is a document that legally binds a borrower to repay the loan according to the note's terms and conditions. It is also known as IOU, loan agreement, or simply a note.
Seller Financing: Seller financing or owner financing is a real estate financing agreement where a buyer agrees to pay the seller in installments instead of taking out a mortgage from a lender.
Judicial Foreclosure: Judicial foreclosure is a foreclosure process that proceeds through the courts. It offers more protection for the borrower, but it takes much longer to conclude.
Non-Judicial Foreclosure: Non-judicial foreclosure is a foreclosure process that allows the lender to foreclose the property without involving the courts. Its timeline is much shorter than a judicial foreclosure.
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