Real estate investments can look overwhelming at first. That’s mainly because of the language used. Terms like “fair market rent”, “short sale”, and “property valuation” get thrown around a lot. However, not everyone knows what they mean. That’s where this guide can help. Continue reading below as we will share the key real estate terms that every buyer and investor should be aware of.

How Property Values and Pricing Are Determined in the Market

A common question we get from buyers and investors alike is: How is price determined? There are several factors at play when it comes to determining the value of a property.

Location always comes first

The value of a property in an urban area will almost always eclipse that of one in a rural location. Schools, local businesses, crime rates, and available transportation are just some of the factors that influence location desirability and how much a buyer is willing to pay.

Competitive marketplace or “comps.”

Real estate agents and appraisers study the market by analyzing recently sold properties in the same area. These homes are known as “comparables” or “comps”. If three homes near the subject property sold for $300k last month, it is safe to say that your target will probably fall around that price point. A Comparative Market Analysis (CMA) is the resource agents use to pull this data.

Appraisal verifies the value

Before approving a mortgage, lenders require an appraisal of the home. Appraisers visit the property to analyze square footage, amenities, home conditions, location, and recent sales of neighboring homes. They will then compile this information into a report that estimates the market value of the property. This protects the lender (and you!) from overpaying for a home.

Supply and demand can sway pricing too

If more buyers are searching for homes than there are properties for sale, you can bet prices will soar. During a buyer’s market, when there are more homes for sale than buyers, prices tend to fall. Economic factors such as interest rates and job growth can also impact the supply and demand of housing.

Now that you understand how property pricing works, you can identify a good deal and avoid overpaying.

What Is A Short Sale In Real Estate and How It Affect Buyers and Sellers

A short sale in real estate is a property sale in which the lender agrees to accept less than the remaining mortgage balance to avoid foreclosure. In a short sale, homeowners sell their property for less than what they owe on their mortgage. The lender agrees to accept the proceeds from the sale rather than foreclosing on the home.

Let’s look at an example. You owe $250,000 on your mortgage, but now your home value has decreased, and it’s worth only $200,000. You’ve fallen on hard times and can’t afford your mortgage payment. Instead of allowing your bank to foreclose on your home, you ask the bank to approve a sale for $200,000. That $50,000 gap is what makes it a “short” sale.

Effects on sellers:

Selling your home through a short sale is difficult for the homeowner. You’ll have to show the lender that you’ve experienced financial hardship. Expect the process to take months. Your credit score will decrease, but not as much as it would with a foreclosure. The lender may forgive your remaining debt. But this isn’t always the case, and you might still be responsible for the difference.

Effects on buyers:

As a buyer, short sales can seem like the perfect opportunity to score a deal. And they can be. You might be able to purchase a home at a price below its market value. However, like with any transaction, there are pros and cons. Short sales take time. Not only does the seller need to approve, but the lender does too. You can expect to wait anywhere from 30 to 120 days for a response from the lender. The home will also likely be sold as-is. You get what you see when you see it.

Short sales can be frustrating, but they’re worth considering if you’re not in a rush to find a home. If you’re looking to find value, keep an eye out for motivated sellers who may be open to a short sale.

What Does Fair Market Rent Mean In Real Estate and How It Is Calculated

In real estate discussions, people often ask what fair market rent means in real estate when trying to understand how a property’s rental price is determined based on current local market conditions.

Fair market rent (FMR) is the rent a property would command if it were available for rent on the open market. It is the rent that a landlord could “reasonably expect” to charge – and that a tenant could “reasonably expect” to pay. Each side has had time to research the market, and neither is under duress.

Why should you care

Investors, landlords, and tenants should all care about fair market rent. Landlords use fair market rent to price their units competitively in their area. Investors calculate expected rental income when determining the value of a rental property. Section 8 and other government housing programs also use FMR numbers to determine how much assistance a tenant is eligible for.

What affects FMR

The U.S. Department of Housing and Urban Development (HUD) considers several factors when calculating FMR.

• Location – Rent can vary greatly from city to city, neighborhood to neighborhood, and even street to street. A 2-bedroom apartment in downtown Indy will rent for a different price than one in the suburbs.
• Size and attributes of the home – Square footage, number of bedrooms/baths, off-street parking, and amenities all factor into the rental rate.
• Comparable rentals – Just like when estimating home values based on recent sales, landlords consider the rental rates of nearby similar homes.
• Market conditions – Increasing demand, low vacancy rates, and inflation can cause rents to increase. If it’s a tenant’s market, rents will likely decrease.

HUD releases official fair market rent numbers broken out by region every year. You can also look at rental listing sites to see what comparable units are renting for currently.

Final Words

Real estate investing doesn’t have to be complicated. If you know how property values are determined, what a short sale really is, and how fair market rent is derived, you are already way ahead of most buyers and investors. Learn all about these three topics, and you will do well.

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