Welcome to the Real Estate Investing From A to Z series. Each week we’ll take a letter from the alphabet and define all the real estate investing terms you need to know that begin with that letter. Today’s letter is……E!
The words that we’ll look at this week are: Equity, Earnest Money, Easement, Escrow, and Encumbrance. These are a few words that a real estate investor would need to know and understand to effectively run their business.
The first word we’ll look at is Equity. Equity is the difference between the appraised value of your property and the amount owed on the mortgage. This number would be valued in dollars and cents. If your home was valued at $100,000 and you had a mortgage for $60,000, then the equity would be valued at $40,000. A portion of this amount may be available for you to borrow to put towards another property or pay yourself.
Earnest Money is the amount of money needed to bind a contract of sale. This money is usually non-refundable unless there are issues prohibiting the buyer from purchasing the property that are beyond his or her control. At settlement, these monies would make up a portion of the needed down payment.
An Easement is the right to use the land of another for a specific purpose, such as a right of way for utilities. The existence of an easement may affect your desire to purchase a property in a certain location.
Escrow refers to an account used to hold monies that are being used for a specific purpose. Escrow will generally be held in an interest bearing account that would hold earnest money and/or down payments for purchases of property, etc.
An Encumbrance is a lien (such as a mortgage, tax or judgment lien), easement, restriction of the use of land, or other interest that may diminish the value of property to its owner. If a property has an encumbrance, you may want to find another property to purchase for your business.
As always, these are a few terms that every new real estate investor should know. Keep a record of these words so they will always be available to you when you need them. Keep an eye out for next week, when our featured letter will be “F”.