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Terms All Real Estate Investors Should Know

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real estate terms

Insiders of any industry often use a lot of specific terms and jargon. For an outsider, trying to make sense of it all can be confusing and overwhelming. 

This post will help you increase your knowledge of the most common real estate terms. So the next time you find yourself interacting with industry experts, you’ll be able to follow the conversation with ease.

In time you’ll be able to use the terms confidently and effortlessly. Fellow real estate investors will also appreciate that you know the terms because it’ll save them time in explaining details.

Here are some of the most important terms to get you started:

1. Lease

A lease is a written contract that lays out the terms and conditions of renting a property. The tenant signs the lease to indicate agreement. A lease contains the details of the agreed rental price for the given period and specifies the frequency of the payments. 

Leases are legally binding and can be used as evidence in court. Therefore, if either party does not follow the conditions stated in the lease, they will be legally liable.

Residential property leases contain both landlord and tenant rights and responsibilities. It also includes property policies such as rules about pets, smoking, subletting and visitor limitations. 

Other things you can find in a lease are the security deposit amount, disclosures and conditions for entering the rental property.

signing lease

2. Lease Option

A lease option gives the tenant a choice to buy the rented property. A lease option can take place either renting period or once the tenancy ends. The tenant can decide to buy or forfeit the option. The tenant also has an exclusive option before the property owner decides to offer it to the market at large.

The price of the property is set at the current market value. This makes it attractive to a renter looking to purchase the property in the future. It also offers a degree of flexibility for the tenant.

3. Property Management Agreement

A property management agreement is a written contract between the property owner and the property management company. This is an agreement that details and clarifies the duties and responsibilities that a property management company must fulfill on behalf of the rental owner.

Often, companies offer a full range of management services from marketing to property maintenance. However, some property owners will only choose a limited number of services. 

That’s why it’s important to always read over your agreements because it will state the kinds of services a property management firm was hired to perform for the property owner’s rental unit.

4. Fixture

Fixtures are items in the home that cannot be categorized as personal property anymore. The reason for this is that they are affixed to the rental unit.

Shelves bolted to the walls are a good example of this because they’ve become a permanent part of the home. Fixtures can also be objects that provide utility or enjoyment to residents.

shelves

5. Escrow Account

Escrow is the practice of using an agent outside of the buyer and seller of the property to hold an asset. It’s referred to as escrow money but could also be securities and other types of assets. The asset is held until the terms and conditions of the contract are completed.

Typically, real estate transactions entail setting up an escrow account. The reason is to safely keep the funds while the transaction is ongoing. The buyer might need to review details and conduct due diligence before transferring the money to the seller’s account. 

Opening an escrow account also reassures the seller that the buyer has sufficient funds to close the sale.

6. Rent Control

Rent control refers to a government-initiated law to regulate the rent price. This means the landlords don’t have the ability to raise the rental rate to any price they want. Typically, this is common in cities where living costs are kept at a low level as protection to residents.

Some landlords are not encouraged to invest in rental properties where the neighborhood is governed by rent control. Some prefer to convert a residential rental into a commercial property instead. Although annual rent increase is permitted in rent-controlled properties, the percentage remains small.

Keep in mind that rent control will vary depending on the state, city, and municipality you live or looking to rent in. 

7. Tenant

A tenant is someone who occupies a rental unit for a given period of time. The tenant pays the landlord an agreed-upon amount of money, or rent, for staying in the unit. The tenant also agrees to the terms and conditions set in the lease presented by the property owner.

tenant

8. Terms of the Lease

These are conditions set in the lease that a tenant agrees to before moving into the rental unit. Terms can refer to the rent amount and payment schedule, security deposit amount, late fees, grace periods and rental period. 

Terms of the lease also include pet policies, occupancy limits, subletting policies, and maintenance and repair. Other terms of the lease could also mention the landlord’s right to access the rental property and specify under what conditions they’re free to do this.

9. Tenant Improvements

Tenants often need to ask permission from the landlord to make changes, alterations or improvements to their rental property.

Tenant improvements refer to a clause that indicates if a tenant can proceed with renovations and under what circumstances. It will also mention whether the landlord will repay the tenant for the improvements performed on the property.

10. Warranty of Habitability

A warranty of habitability is a guarantee that landlords are legally attending to their duties to maintain the rental property. These can include ensuring that the unit is a safe and secure place for tenants to stay in. 

In addition, the rental unit must be sanitary and equipped with the basic necessities such as hot water, drinking water, a working bathroom and electricity. It must also adhere to the building codes to meet safety standards.

For more information check out Realty Management Associates, Inc.