What will this green one do?

The real estate investment arena is filled with its own language and often features terms from property law, banking concepts and feudal times. As a continued segment to help you navigate the real estate investment lingo, we will be periodically posting commonly used real estate investment terms and definitions provided by many sources including www.investorwords.com and www.creonline.com.

This posting will focus on terms you will encounter regarding the financials of your property.

5 C’s of Credit
The five C’s of credit are the important factors a borrower must have to obtain credit. They include conditions of the economy and borrower, collateral to secure the debt, capital, capacity (cash flow to pay the obligation) and character. As the economy changes, lenders focus on different c’s.

Absorption Rate
The absorption rate is the rate by which properties are leased or sold in an area.

Amortization Schedule
The amortization schedule is the schedule of payments to complete a loan.

Assignments of Rent
Assignments of rents are written documents or contracts that transfer the owner’s ability to collect rent to the lender upon default of the mortgage.

Basis Points
Basis points are generally used to note changes between yields on fixed income securities. They equal one hundredth of a percentage point.

Current Production Rate
The current production rate is the highest interest rate allowed on current GNMA mortgage-backed securities, which is generally half a point below the current mortgage rate.

Debt Service Coverage Ratio (DCR)
Debt service refers to the measurement of a property’s ability to generate enough revenue to cover the cost of the mortgage payments. To calculate debt service, divide net operating income by total debt service.

Liquidity Risk
Liquidity risk refers to risk generating from the inability to sell an asset. When secondary markets are insufficient, liquidation of the asset can be minimal or limited. Real estate is generally considered a highly liquid asset with a high liquidity risk.

Negative Amortization
Negative amortization is a gradual increase in the mortgage debt that stems from the monthly payment being insufficient to cover interest. This results in the balance due growing.

Retrocession
Retrocession refers either to the voluntary act of returning property that was previously ceded to its original holders. It can also refer to purchasing reinsurance by a reinsurance company, which limits the risk a reinsurance company can face.

Right of First Offer
A right of first offer is a contractual right that requires the seller to provide the opportunity to purchase the asset to the first offer holder before entertaining any other offers. A first right holder provides consideration to the seller (i.e. funds to hold the option). The first offer contract does not dictate the terms of the transaction, but does require the seller to first negotiate with the first offer holder.

Second Lien Debt
A second lien debt refers to the place in line a secured party sits to receive compensation in the event of bankruptcy or default. Second lien holders follow first lien holders, which means if the first lien holder exhausts the available funds, the second lien holder will not be entitled to compensation.