Common Real Estate Terms And Definitions: Real Estate Glossary
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by Richard Morrison
- January 13, 2020
- Buying
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Stepping into the Canadian real estate market can seem like deciphering a foreign language. Did you know there are well over 100 specialized terms used commonly in property transactions? This article demystifies these confusing jargon, breaking them down into plain English to guide your home buying journey.
Get ready to become fluent in “real estate-ease”.
Read More:
- Real Estate Clauses For Purchase & Sale Contract in BC
- Dates In A Real Estate Offer In BC, Canada
- What You Need To Know Before Making An Offer On A Home in Canada
- Contract Of Purchase And Sale In BC, Canada
- Explanation: Completion vs Adjustment vs Possession Date
- How to Buy a Home in Canada Without a Realtor
Understanding Key Real Estate Terms in Canada
To understand the Canadian real estate market, it is important to be familiar with key terms such as ‘As Is’ clause, After-Repair-Value (ARV), Power of Attorney (POA), Cap Rate, Central Air-Conditioning (CAC), Gross Debt Service (GDS), Total Debt Service (TDS), Escrow, and Loan to Value (LTV).
‘As Is’ Clause
Navigating the Canadian real estate market is smoother when you understand key terminologies such as the ‘As Is’ Clause. This clause dictates that sellers are selling their property in its current condition, exempting them from any obligation to conduct or finance repairs before sale.
It underscores the importance of buyer diligence because any faults discovered post-purchase become their sole responsibility. So while an ‘As Is’ sale might offer a lower purchase price, it could potentially yield higher subsequent repair costs.
After-Repair-Value (ARV)
The After-Repair-Value (ARV) plays a crucial role in the Canadian real estate market, especially for investors and flippers. This term refers to the projected value of a property after comprehensive repairs or renovations have been completed.
The ARV is often used by real estate investors when deciding whether to purchase an investment property. It’s not just about buying at a low price; it’s also critical to assess the potential post-renovation value.
Arriving at an accurate ARV requires keen insight into local market conditions, comparable properties, and renovation costs – making it as much an art as a science! Additionally, lenders use this figure when providing loans for fix-and-flip projects, potentially impacting finance options available for those looking to invest in property repair opportunities.
Power of Attorney (POA)
The Power of Attorney (POA) holds significant value in Canadian real estate transactions. It’s a legally binding document that empowers an individual to act on the behalf of another party concerning property or monetary affairs.
Two common types used in real estate are General and Continuing Power of Attorney. The POA allows for nuanced control over one’s assets, making it essential for those unable to manage their properties personally or who desire expert assistance.
As part of property management expertise, a certified property manager may be awarded this responsibility, heating up the real estate market with intensified competition among professionals wishing to represent clients.
Cap Rate
Cap rate, short for capitalization rate, is a crucial real estate term in Canada that helps investors assess the potential profitability and value of a property. It is calculated by dividing the net operating income (NOI) of a property by its purchase price.
The cap rate essentially represents the return on investment an investor can expect from an income-generating property. A higher cap rate indicates a higher potential return, while a lower cap rate suggests lower returns.
Central Air-Conditioning (CAC)
Central Air-Conditioning (CAC) is a sought-after feature for many Canadian homebuyers. It refers to a cooling system that distributes air conditioning throughout the entire home, providing optimum comfort during hot summer months.
Having CAC can significantly increase the value of a property, as it is considered a luxury amenity. When considering real estate options in Canada, it’s important to understand the various aspects of CAC systems such as efficiency, capacity, and energy consumption.
Gross Debt Service (GDS)
Gross Debt Service (GDS) is a crucial real estate term in Canada that lenders use to assess borrowers’ mortgage eligibility. It is a percentage of the borrower’s gross income, and it includes the costs of the mortgage payment, property taxes, and heating expenses.
Essentially, GDS helps determine whether a borrower has enough income to comfortably cover these housing-related expenses. Lenders typically have specific GDS ratio requirements and will only approve mortgages if the borrower’s GDS falls within their acceptable range.
By factoring in these costs, lenders can ensure that borrowers can manage their debt obligations without being financially strained. So, when applying for a mortgage in Canada, understanding your GDS ratio is essential to gauge your affordability and increase your chances of loan approval.
Total Debt Service (TDS)
The total debt service ratio (TDS) is a critical concept in the Canadian real estate market. It refers to the percentage of a borrower’s gross income that goes toward paying their housing expenses, like mortgage payments, property taxes, heating costs, and other debt obligations.
Lenders use this ratio to assess whether borrowers have enough income to cover their monthly expenses and repay their mortgage loan. Typically, lenders have a maximum TDS threshold – around 40-44% of gross income – that borrowers must meet to qualify for a mortgage.
Understanding your TDS ratio is crucial because it directly impacts your eligibility for a mortgage and overall financial stability when navigating the Canadian real estate market.
Escrow
Escrow is a crucial term to understand when it comes to real estate transactions in Canada. It refers to a financial arrangement where a neutral third party, known as an escrow agent, holds and regulates funds and important documents during the entire transaction process.
This provides security for both the buyer and seller by ensuring that all conditions of the sale are met before funds are transferred. In addition to managing the transfer of funds like the down payment and closing costs, escrow also handles the transfer of essential documents such as the title deed, mortgage papers, and property insurance policies.
Loan to Value (LTV)
Loan to Value (LTV) is a crucial metric used by lenders to assess the risk associated with a mortgage or loan. It is calculated by dividing the loan amount by the appraised value of the property, expressed as a percentage.
For example, if you are borrowing $200,000 for a property that is appraised at $250,000, your LTV would be 80%.
Lenders use LTV to determine how much they are willing to lend and what interest rate to offer. The higher the LTV, the riskier it is for lenders because there is less equity in the property as collateral.
In general, lower LTV ratios are more favorable for borrowers because they indicate lower risk.
Lenders typically have maximum LTV ratios that they adhere to based on their lending guidelines. This means that if your desired loan exceeds this ratio, you may need to provide additional down payment or seek alternative financing options.
Special Real Estate Terms in BC
BC has its own unique set of real estate terms, including the BC Agreement of Purchase and Sale, which outlines the terms and conditions of buying or selling a property in the province.
Contract of Purchase and Sale in BC
The BC Contract of Purchase and Sale is a crucial legal document used in real estate transactions across the province. It outlines the terms and conditions of the sale, ensuring transparency and protecting the rights of both buyers and sellers.
This agreement covers important aspects such as the purchase price, deposit amount, closing date, financing conditions, property inspection provisions, and any other agreed-upon terms.
Prepared by real estate agents or lawyers, this legally binding document ensures that all parties involved are aware of their responsibilities and obligations throughout the buying process.
Important Real Estate Organizations and Services
The Canada Mortgage and Housing Corporation (CMHC) provides mortgage loan insurance products in Canada.
Canada Mortgage and Housing Corporation (CMHC)
Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation that plays a crucial role in the Canadian real estate market. As part of its mandate, CMHC administers the National Housing Act for the federal government and provides mortgage loan insurance products to home buyers with less than a 20% down payment.
This means that if you are buying a home with less than 20% down, you will need to pay CMHC insurance premiums. These premiums can be an important factor to consider when calculating your overall budget for purchasing a property.
CMHC also works closely with important real estate organizations and services in Canada, such as the Ontario Real Estate Association, professional appraisers, real estate brokers and associates, mortgage prepayment penalties, refinancing options, and assessment of closing costs.
Canadian Real Estate Association (CREA)
The Canadian Real Estate Association (CREA) is a prominent organization in the real estate industry in Canada. It collaborates with other organizations to provide valuable resources and services related to real estate terms across the country.
CREA plays a significant role in promoting and protecting the interests of both real estate professionals and homeowners. Through its advocacy efforts and policy development, CREA actively shapes the real estate market landscape.
The association works closely with the Canada Mortgage and Housing Corporation (CMHC) to offer mortgage loan insurance products, ensuring that homeowners can access affordable financing options.
In addition, CREA works with reputable mortgage lenders like BMO and TD to provide promotional rates and helpful mortgage tools for potential homebuyers. With its involvement in developing and maintaining the Multiple Listing Service (MLS), CREA provides an essential platform for tracking properties listed for sale nationwide.
Multiple Listing Service (MLS)
The Multiple Listing Service (MLS) is a valuable tool used in the real estate industry that allows realtors to share and access information about properties for sale. It’s essentially a database of listings from different real estate brokers, providing a centralized platform for buyers, sellers, and agents to connect.
With MLS, you can find detailed information on property features, pricing, location, and more. This helps both homebuyers and sellers by offering a comprehensive view of the market and ensuring maximum exposure for listed properties.
In Canada, each province has its own MLS system managed by local real estate boards or associations. So whether you’re looking to buy or sell a property, leveraging the power of MLS can greatly simplify your search process while increasing your chances of finding the perfect match.
Common Real Estate Terms
In the world of real estate, there are several common terms that every buyer or seller should be familiar with. Some examples include amortization, assessed value, bully offer, chattels (and fixtures), closing costs, comparative market analysis, conditional offer, down payment versus deposit, duplex, for sale by owner (FSBO), home appraisal, home inspection, irrevocable offers, and the difference between a real estate agent and a real estate broker.
Amortization
Amortization refers to the process of gradually paying off a mortgage debt over time through regular payments. It is calculated based on factors such as the loan amount, interest rate, and length of the repayment term.
Each payment made towards the mortgage includes both principal (the amount borrowed) and interest (the cost of borrowing). Initially, a larger portion of the payment goes towards interest, while over time, more money is applied towards reducing the principal balance.
This allows homeowners to build equity in their property as they make their mortgage payments. The length of an amortization period can vary but typically ranges from 15 to 30 years for residential mortgages.
Assessed Value
The assessed value of a property is the value that has been determined by the municipality for the purpose of calculating property taxes. It is important to note that this value may not necessarily reflect the actual market value of the property.
Assessors take into consideration various factors such as location, size, age, and condition of the property when determining its assessed value. This value plays a role in determining how much property tax an owner will have to pay each year.
Keep in mind that while assessed values are meant to be fair and accurate, they can sometimes differ from what buyers or sellers believe a property is worth.
Bully Offer
A “bully offer” refers to an aggressive and enticing offer made by a buyer for a property before the seller has officially set a date for reviewing offers. This tactic is often employed in hot real estate markets where competition is fierce, and buyers want to secure their dream home without facing a bidding war.
A bully offer typically involves submitting an exceptionally high bid with favorable terms, such as a quick closing or waiving certain conditions. Sellers may choose to accept a bully offer if they find it attractive enough, even though they haven’t yet received other offers or held an official bidding process.
It’s important for both buyers and sellers to weigh the pros and cons of opting for this strategy as it can be advantageous or disadvantageous depending on the circumstances.
Chattels (and Fixtures)
Chattels and fixtures are important terms to understand when it comes to buying or selling a property in Canada. Chattels refer to easily removable items, such as furniture and appliances, that are not permanently attached to the property.
These items are assumed not to come with the property unless specified otherwise in the purchase agreement. On the other hand, fixtures are items that are permanently attached to the property, like built-in cabinets or light fixtures, and are usually included in the sale of the property.
It’s essential for both buyers and sellers to clarify which items will be considered chattels or fixtures during negotiations to avoid any misunderstandings or disputes.
Closing Costs
Closing costs are additional expenses that buyers and sellers incur when completing a real estate transaction in Canada. These costs go beyond the purchase price and can include legal fees, land transfer taxes, appraisal fees, title insurance, and more.
It’s important for both buyers and sellers to budget for these costs as they can add up significantly. For example, in BC, closing costs typically range from 1.5% to 4% of the property’s purchase price.
Understanding and accounting for closing costs is crucial to avoid any financial surprises during the buying or selling process.
Comparative Market Analysis
A comparative market analysis (CMA) is a valuable tool in the real estate industry that helps determine the fair market value of a property. It involves evaluating similar properties in the same area to assess their selling prices and other relevant factors.
By comparing these properties, real estate professionals can provide clients with an estimate of what their property is worth. A CMA takes into account various aspects such as location, size, condition, and recent sales data to ensure accuracy.
This information is crucial for both buyers and sellers as it helps them make informed decisions about pricing strategies and negotiations. With a CMA, you can gain insights into the current market trends and position yourself effectively in the competitive real estate landscape.
Conditional Offer
A conditional offer is a common feature in real estate transactions that allows buyers and sellers to protect their interests. It is an offer to purchase a property that includes specific conditions that must be met before the sale can be finalized.
These conditions can range from obtaining financing and completing a home inspection, to selling the buyer’s current property. The timeframe for meeting these conditions is usually specified in the offer.
If the conditions are not met within this timeframe, the offer can be terminated without any legal consequences. Conditional offers provide flexibility for both parties involved, allowing negotiations and adjustments to be made based on certain uncertainties or risks associated with the transaction.
Down Payment versus Deposit
A down payment and a deposit are two important aspects of a real estate transaction in Canada. The down payment is the amount of money that the buyer contributes upfront towards the purchase price of the property, while the deposit serves as a guarantee of the buyer’s intention to proceed with the purchase.
Both these financial components are considered part of the buyer’s total investment in the property. The down payment is typically paid directly to the lender and is credited towards the purchase price, while the deposit is given to the seller’s real estate brokerage or lawyer and held in trust until the closing date.
It’s worth noting that while a down payment can vary based on factors like mortgage type and lender requirements, deposits are usually smaller percentages of the purchase price negotiated between buyer and seller.
Duplex
A duplex is a type of property that consists of two separate units within the same building. It’s commonly referred to as an in-law suite or legal apartment. Each unit has its entrance, and they may share common walls or be completely independent.
This arrangement offers homeowners the opportunity to live in one unit and rent out the other for additional income. Duplexes are especially popular among investors who want to maximize their rental profit potential.
They provide flexibility and affordability, making them an attractive option for those looking to enter the real estate market or expand their investment portfolio.
For Sale By Owner (FSBO)
For Sale By Owner (FSBO) is a common practice in real estate where homeowners choose to sell their property without the help of a real estate agent. In this case, the owner takes on the responsibility of marketing, showing and negotiating the sale themselves.
This approach allows homeowners to save money on commission fees that would typically go to an agent. However, it also means that they have to handle all aspects of the selling process, including pricing their home accurately, advertising effectively and navigating legal paperwork.
FSBO can be a good option for those who are confident in their selling abilities and want more control over the transaction. It’s important for sellers considering this route to thoroughly research local market conditions and familiarize themselves with all relevant laws and regulations pertaining to property sales in their area.
Home Appraisal
A home appraisal is a crucial step in the real estate process that involves estimating the market value of a property. This assessment is typically carried out by a certified professional appraiser before the completion date.
The appraiser evaluates various factors such as the location, size, condition, and comparable sales in the area to determine an accurate value for the property. The assessed value is then used by municipalities to calculate property taxes.
It’s important to note that an appraisal differs from a home inspection, which focuses on identifying any potential issues or repairs needed in the house. Overall, a home appraisal provides both buyers and sellers with confidence and assurance about the fair market value of the property they are dealing with.
Home Inspection
A home inspection is an essential step in the real estate process in Canada. It allows buyers to assess the condition of a property and identify any potential issues before making their purchase.
Conducted by a certified professional inspector, this thorough evaluation helps ensure that buyers are aware of any repairs or maintenance that may be needed. Home inspections are typically done before subject removal, highlighting their significance in the home buying process.
By understanding the true condition of a property, buyers can make informed decisions and negotiate repairs or adjustments if necessary. So when purchasing a home in Canada, it’s important not to overlook the importance of a comprehensive home inspection.
Irrevocable Offers
When making an offer on a property in Canada, it is important to understand the concept of irrevocable offers. An irrevocable offer means that once the offer is submitted to the seller, it cannot be withdrawn or revoked within a specified time period.
This timeframe is typically set by the seller and stated in the terms of the offer. The purpose of an irrevocable offer is to give the seller time to consider and respond to the offer without worrying about it being retracted.
It also helps create a sense of urgency for potential buyers, as they know their offer will be binding during this period. It’s crucial for buyers to carefully consider their decision before submitting an irrevocable offer, as they are legally obligated to follow through with the purchase if their offer is accepted within that designated time frame.
Real Estate Agent vs Real Estate Broker
The difference between a real estate agent and a real estate broker is critical to understand when navigating Canada’s real estate market. This article outlines significant differences and roles, providing a clear picture for those entering the real estate field or planning to buy, sell, or rent a property in Canada.
| Real Estate Agent | Real Estate Broker |
|---|---|
| A real estate agent is an individual who has completed the necessary education and licensing to assist clients in the buying, selling, or renting of properties. | A real estate broker, on the other hand, is a licensed professional with additional education and experience beyond that of a real estate agent. |
| Real estate agents often work under the supervision of real estate brokers. | Real estate brokers can work independently or manage a real estate brokerage firm. |
| A real estate agent typically earns a commission based on the sale or rental of a property. | In contrast, real estate brokers may earn a commission and also receive a portion of the commission earned by the agents they supervise. |
| Both real estate agents and brokers vary in their understanding of common real estate terms and their ability to explain them to clients. | Understanding common real estate terms such as adjustable mortgage interest rate, amortization, appraisal, appreciation, and assignees is crucial in their respective roles. |
| Real estate agents play an essential role in guiding individuals through the process of buying, selling, or renting a property in Canada. | Real estate brokers, in their managerial role, ensure that all procedures, rules, and regulations are adhered to, making the process smoother and more effective for all involved parties. |
FAQs:
What is real property?
Real property refers to land, including any structures or improvements on it, such as houses or buildings.
What is the maturity date?
The maturity date is the date on which a mortgage loan is fully repaid.
What does term of the mortgage mean?
The term of the mortgage is the length of time for which the loan agreement is in effect. It defines the period during which the borrower is obliged to make regular payments to the lender.
What is the lending value of the property?
The lending value of the property is the estimated value of the property that a financial institution considers when determining the maximum amount it is willing to lend.
What is meant by length of time in real estate?
In real estate, length of time typically refers to the duration of a specific event or process, such as the time it takes to complete a real estate transaction or the length of a lease agreement.
What does principal and interest mean?
Principal refers to the amount of money borrowed or still owed on a loan, while interest is the additional amount paid to the lender as the cost of borrowing that money.
What are common elements in real estate?
Common elements are areas or features within a property that are shared by multiple owners or tenants, such as swimming pools, parking lots, or common recreational areas in a condominium complex.
What is a financial institution?
A financial institution is an organization that provides financial services and products, such as banks, credit unions, or mortgage companies.
What is a mortgage broker?
A mortgage broker is a professional who acts as an intermediary between borrowers and lenders, helping individuals secure mortgage loans from various financial institutions.
What happens when a property is transferred?
When a property is transferred, its ownership is legally and officially transferred from one party to another, typically by means of a signed deed or other legal documents.
What is the last day of the term?
The last day of the mortgage term refers to the final day of the agreed-upon period within which the borrower is required to fulfill all obligations and repay the loan.
Conclusion
In conclusion, understanding key real estate terms in Canada is crucial for anyone involved in the industry. From ‘as is’ clauses to CMHC insurance premiums, knowing these terms can help buyers, sellers, and investors navigate the Canadian real estate market with confidence.
By familiarizing oneself with the terminology and organizations mentioned above, individuals can make informed decisions and successfully navigate their real estate transactions in Canada.
Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.
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