Most important real estate terms every property buyer should know

As a property investor, you must understand the real estate terms used by industry professionals. After all, knowledge is power, and being armed with the right information can help you make smarter investment decisions.

In this post, we’ll introduce you to some of the most important real estate terms every investor should know. By the end, you’ll have a better understanding of the industry lingo and be better equipped to navigate the world of real estate investing.

So, without further ado, let’s jump into it!

• • Builder Buyer Agreement (BBA): A contract between a builder and a buyer that outlines the terms and conditions of the sale of a property.
  • Due diligence: Due diligence is the process of investigating a property before making an offer to purchase it.
  • Encumbrance: An encumbrance is a legal claim or restriction on a property that may affect its title or possession.
  • Yield: Yield is a measure of return on investment, typically expressed as a percentage. It is used to evaluate the performance of an investment over time.
  • Carpet Area: RERA defines ‘carpet area’ as  the net usable floor area of an unit, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.
  • Built-Up Area: The built-up area is carpet area plus area under external walls of an apartment
  • Super Built-Up Area: Super Built Up Area refers to a unit’s built-up area plus common areas proportioned to a unit. Lobby, lift ducts, staircases, pipe ducts/ shafts, air ducts, covered community centers/ clubs, and other covered common facilities are all included in the super built-up area. It excludes open spaces such as parks, gardens, roof terraces, and so on.
  • Common Areas: The undivided portions of the commonly owned premises are referred to as common areas. The parking lot, lawns, swimming pool, community centers, corridors, lobbies, elevators, and so on are not owned by a single individual. The responsibility for the upkeep and maintenance of these areas is shared by everyone.
  • Covered Area: It is the same as built up area.
  • Plinth Area: The total covered area of the apartment or commercial property unit, which includes the area within and outside the unit’s walls. It is calculated by adding the carpet area, utility duct areas within the property unit, and the internal and external walls of the unit. The same as the built-up area.
  • BSP: The BSP (basic selling price) is the starting price of a property. It does not include taxes, stamp duty, or other charges.
  • Preferential Location Charges (PLC): A PLC (preferential location charge) is an extra cost that a home buyer would pay for booking a housing unit that has a location advantage over others. A preferred apartment complex location could be an apartment facing the park or a corner plot near the main road. The preferred location and the fee for it vary depending on the project type, city location and climatic conditions, floor number, and so on.
  • IFMS : IFMS refers to interest free maintenance security, which is an additional charge or  security deposit to be paid to the developer for upkeep, maintenance, security , etc.  Usually doesn’t carry any interest on it.
  • External Development Charges (EDC): External development charges (EDC) are a type of Infrastructure Development Charge levied by some states by the state development agency on the developer/colonizer in order to provide better public infrastructure facilities at the town level. External Development Works include water supply, sewerage, drains, and other necessary infrastructure. These fees are then passed on to property buyers by the developer.
  • Infrastructure Development Charges (IDC): The state government imposes Infrastructure Development Charges on real estate developers in order to fund state infrastructure. These fees are then passed on to property buyers by the developer.
  • Construction linked payment Plan (CLP): In a construction-linked payment plan, the payment to be made by the buyer is linked to the construction milestone of the project. Bank loans can usually be availed in this payment plan.
  • Possession linked Payment plan (PLP): In the possession-linked payment plan, investors pay only 20%-40% initially, and the balance amount is paid on possession or completion of the project.
  • Down Payment Plan: In down payment plan, property investor pays around 80-90 % of the payment initially as down payment and balance is to be paid at the time of the possession.  Under this payment plan a discount of 10-15 % is offered by the builder vis a vis in a construction linked payment plan.

  • Assured Return Plan: In an assured return payment plan, the developer offers a certain return on investment for a fixed period or till possession, which starts from the date of bullet payments received. In this payment plan, generally a higher initial payout is required from the investor, which is to the tune of 50% to 95% of the Basic Sales Price. The investor receives anywhere from 10%-12% return on the amount paid to the developer, usually till the offer of possession. A bank loan is generally not sought after under this payment plan.

  • FAR: The FAR (floor area ratio) is the ratio of the total floor area of a building to the size of the lot on which it is built. It is used to determine the maximum amount of development that can take place on a given piece of land. Example : FAR of 3 means  total area of the building on all floors is 3 *plot area
  • FSI: The Floor space index  is a same FAR but described differently . FSI = Total area  of all floors of the building/land or plot area x 100. FAR is ratio where as FSI is index. 
  • Ground Coverage: Ground coverage is the percentage of a lot that is covered by a building. It is used to determine the maximum amount of development that can take place on a given piece of land.
  •  Density:  Number of dwelling units per gross acre of land. As per the master plan of the city, different land zones in a city are categorized as; high, medium, and low density.
  • Efficiency: Efficiency is a measure of how well a property utilizes the space available to it. A high-efficiency property makes good use of its square footage, while a low-efficiency property has a lot of wasted space.
  • Loading: Loading is the percentage of a property that is used for common areas, such as lobbies, corridors, and recreational facilities. A high-loading property has a large percentage of its space dedicated to common areas, while a low-loading property has a small percentage of its space dedicated to common areas.
  • Setback: The distance between a curb, property line, or other reference point and which construction is prohibited.
  • Frontage: Frontage is the total length of a plot of land or a building measured alongside the road that it fronts.
  •  Agreement to Sell: The contract between the buyer and seller outlines all their terms, including the price. It is not to be confused with sale deeds or conveyance documents; this one comes before them! Also known as a “Sale Agreement.”
  • Allotment Letter: A letter issued by a builder or developer allotting a specific plot or built-up unit in a project that is currently in development or under construction. It contains all of the unit’s specifications, payment plans, and any additional fees that the buyer will be required to pay. It also includes a construction timeline, house plans, a delivery date, and other terms and conditions. This letter is required when applying for a loan from a bank. Builder buyer agreement supersedes this.
  • Anchor Tenant: Large tenants such as hypermarkets, megastores, etc.  in a shopping mall, or retail developments are called Anchor tenants. They play key roles in increasing footfalls and also help in enhancing occupancy of the entire development as it motivates or encourages other prospective retailers to take space in the development.  
  • Bare Shell: Any built-up space which is offered right after completion of the building with limited amenities and fixtures and without air conditioning, plumbing, electrical fixture, etc.
  • Warm Shell: These types of built-up spaces typically have finished walls, concrete floors, air conditioning systems, finished restrooms, and plumbing. etc.
  • Building Bye-Laws: Building standards promulgated by local governments to regulate and control the use of land, property, and areas in cities and towns.
  • Buy Back Offer: The builder or developer’s offer to the buyer to buy back the property after a set period of time at a predetermined appreciated rate. Typically, the builder guarantees a return of 10-15% per year to the investor for the buyback period, which is usually two to five years from the booking date.
  • Catchment Area: It is the area in Real Estate that contains those people who can be expected to obtain goods, services, employment, or other benefits from a specific property. More specifically, forecasting success in retail premises is dependent on the accuracy of estimating the number of purchasers (catchment population) likely to be attracted from various parts of the area and the average expenditure that can be expected from them.
  • Central Business District (CBD): Commercial area located near the city center, which serves as the focal point for all major commercial activity in a city. This area would house the majority of the larger corporate entities, large retail outlets, and financial institutions. In comparison to the rest of the city, the real estate prices here would be the highest.
  • Circle Rate: The bare minimum value for which a property can be registered fixed by district authorities based on the area within the district.
  • Common Area Maintenance: The contribution or fee paid collectively by the owners of individual units for the maintenance and upkeep of a real estate complex’s common areas. Residents Welfare Associations or outsourced Facilities Management Companies typically manage and maintain these areas.
  • Completion Certificate: A certificate/statement issued by the local development authority certifying that all required works have been completed and the property is ready for occupation. In the case of a private development, the builder can provide such a certificate to individual unit owners at the time of possession. To claim tax benefits, owners must have a completion certificate.
  • Contiguous space or land: Multiple suites/spaces on the same floor and within the same building or plot that can be combined and rented or sold to a single tenant or buyer.
  • Conveyance: The act of transferring ownership of real estate from one party to another. Conveyance also refers to the written instrument that transfers the legal title of a property from the seller to the buyer, such as a deed or lease.
  • Deed: A legal document to claim ownership of a property.
  • Deed of Assignment: A legal document that governs the transfer of a property interest from one party to another, particularly a lease
  • Depreciation: A decrease in property value caused by aging, physical deterioration, functional or economic obsolescence, and so on.
  • Discounted Cash Flow (DCF) Analysis: A method of estimating the attractiveness of an investment opportunity in which future cash inflows and outflows associated with a specific project are expressed in present-day terms by discounting. Internal rates of return (IRR) and net present value are the two most common types of DCF (NPV). The techniques can be used for things like land valuation and investment, as well as ranking projects or their components.
  • Discount Rate: A compound interest rate is a rate of interest used to convert expected future income into present value income.
  • Internal Rate of Return (IRR): The discount rate in capital budgeting that causes the net present value of all cash flows from a specific project to equal zero. The higher the internal rate of return on a project, the more desirable it is to undertake the project. As a result, IRR can be used to rank several potential investment projects. Assuming all other factors are equal, the project with the highest IRR would most likely be considered the best and undertaken first.
  • Net Present Value (NPV): The difference between the present value of cash inflows and the present value of cash outflows in a time series of cash flows. In capital budgeting, NPV is used to assess the profitability of an investment or project.
  • Amortization: A portion of the loan payment is applied to the accruing interest on the loan, while the balance is applied to the principal. As the loan balance decreases, the interest portion decreases, and the amount applied to the principal increases so that the loan is paid off (amortized) in the specified time.
  • Amortization Schedule: A table indicating how much of each payment will be applied to the principal and how much to interest over the loan’s life. It also depicts the loan balance gradually decreasing until it reaches zero.
  • Annuity: A yearly sum of money paid as a legal obligation under a contract or undertaking, such as a pension scheme. It may be paid in monthly installments rather than once every twelve months.
  • Down payment: The portion of a property’s purchase price that the buyer pays from their own rather than financing with a loan.
  • Earnest Money Deposit (EMD): A deposit paid to a seller to demonstrate the buyer’s confidence in a transaction. Earnest money gives the buyer more time to look for financing. Earnest money is typically held in a trust or escrow account jointly by the seller and buyer.
  • Escrow Account: An escrow account is a temporary pass-through account held by a third party during the course of a two-party transaction.
  • Fit-outs: Interior permanent furnishings required in a property include HVAC ducting, fire protection system, workstation setup, and telephone/computer cabling, among other things, to make the property usable.
  • Fixtures: Personal property that becomes real property when permanently attached to real estate.
  • HVAC (heating, ventilation, and air conditioning): Refers to the temperature-regulating heating, ventilation, and air conditioning system installed in a building.
  • Freehold Property: A property in which the holder of the title paramount has conveyed the property in favor of the purchaser by conveyance/sale deed with no restrictions on the holder’s right to further transfer the property. The sub-office registrar can provide a record of ownership of freehold property. It can be transferred through the registration of a sale deed.
  • Leasehold Property: A property that has been “purchased” for a set period of time. The “owner” of such a property will have “bought” it from the original landlord and will be legally entitled to rent, lease, or “sell” it to a third party during the leasehold period. The property is returned to the original landlord at the end of the leasehold period.
  • General Power of Attorney: A power of attorney is a legal document that allows another person, known as an agent, to act on behalf of the person who created the power of attorney, known as the principal if the principal is unable to make those decisions himself or herself. The agent has broad authority under a general power of attorney. The agent may be able to make medical or legal decisions, as well as financial or business decisions. Check for special powers of attorney as well.
  • Hard Costs: Hard costs are direct expenses incurred as a result of a specific construction project. Labor, materials, equipment, basic building services, shell features, interior enclosures, fit-out costs, mechanical services, and electrical services are all examples of direct construction costs. 
  • Soft Cost: The cost is spent on services, transport, etc rather than the actual physical equipment. 
  • Immovable Property: Land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries, or any other benefit arising from land, and things attached to the earth or permanently fastened to anything attached to the earth, but not standing timber, growing crops, or grass, are examples of immovable property.
  • Investment Property: A property that generates income or is otherwise intended to be used as an investment rather than a primary residence. It is common for investors to own multiple properties, one of which serves as a primary residence and the others to generate rental income and profits through price appreciation. 
  • Lease: A written agreement between a landlord and a tenant granting a period of tenancy in exchange for certain terms and conditions.
  • Pre-Leased: Space in an under-construction building that has been leased before the completion of construction 
  • Lessee: A person who rents out a property.
  • Lessor: The owner of a property that has been leased to someone else.
  • Escalation Clause: Specified in lease agreements where lease renewals are built in. It entails an increase in the base rent at each lease renewal and is typically a percentage rate that is agreed upon or negotiated prior to the lease renewal.
  • Long-Term Lease: Generally, refers to a lease with a minimum tenure of three years from the date of signing to the date of expiration or renewal option.
  • Lock-in Period: Generally, this refers to the minimum period before which a lessee will not vacate the rented premises as part of the agreement .
  • Rent Free Period: A period which is offered by the landlord to a lessee for doing fit-outs in case of commercial or retail development.
  • Sub-Leasing: A method in which the primary lessee of a property has the right to sublease a portion or the entire property to another occupier or lessee. Essentially, the right to sublet is decided ahead of time when the main lease agreement is signed, with the consent of both the lessor and the lessee.
  • Reverse Mortgage: A mortgage (loan) that allows a homeowner to borrow money against the value of his or her home. There is no obligation to repay the loan (principal or interest) until the borrower dies or the home is sold. This product is especially beneficial for retirees who can convert the equity in their home into cash and use it to meet their expenses. Because the traditional mortgage payback stream is reversed, the loan is referred to as a reverse mortgage. Rather than making monthly payments to a lender, as in a traditional mortgage, the lender pays the borrower.
  • Sale and Leaseback: A leaseback arrangement in which a freeholder or lessee sells his interest in a property for an agreed-upon sum and accepts a lease on the whole or part of the property from the purchaser, usually at a rack rent or a lower rent related to the price paid.
  • Letter of Intent (LOI): A letter of intent (LOI) is a document that summarizes an agreement between two or more parties before it is finalized.
  • Lien: A legal claim made against a property that must be paid off when it is sold.
  • Loan Processing Fee: A fee paid to a lender (bank) for processing a loan application. The lender charges this fee to cover administrative and other application-related costs. Also known as a loan application fee or a setup fee.
  • Loan to Value Ratio (LTV): The amount of the loan financed expressed as a percentage of the property value.
  • Maintenance Charges: Charges paid by the owners/occupants of a development (apartment complex / commercial complex / plotted development, for example) for the upkeep and maintenance of all common areas and facilities. It is usually a monthly fee, and the amount payable is determined by the amenities included in the project. Also known as Common Area Maintenance (CAM) fees.
  • Market Value: The price at which a seller is eager to sell and a buyer is eager to purchase. This assumes that there is enough activity in the market to generate enough buyers and sellers that neither party has a monopoly on the price.
  • Master Plan: A Master Plan is a long-term vision plan that guides the planned development of a city, an area, or an infrastructure project. This document establishes the planning guidelines, policies, development code, layouts, and infrastructure and space requirements for various socioeconomic activities during the planning period.
  • Mixed-Use: Space within a building or project that can be used for more than one purpose, such as a loft or apartment building with retail space, an apartment building with office space, or an office building with retail space.
  • Mutation: Mutation is the recording in the revenue records of a transfer of title to a property from one person to another. The documentation procedure and the fee payable differ from state to state. The mutation in municipal records is for the purpose of paying property taxes and does not imply legal title for the person whose name the property has been mutated in municipal records.
  • Occupancy Certificate: A certificate issued by the local development authority certifying that all necessary works have been completed in accordance with the approved plans and that the property is ready for occupancy. The OC is issued following approval from the water, electricity, sewerage, and fire fighting authorities, among others.
  • Power of Attorney: A power of attorney is a legal document that authorizes another person, known as an agent, to act on behalf of the person who created the power of attorney, known as the principal, if the principal is unable to make those decisions himself or herself.
  • Pre-Launch Property: A property in a project that is still in the planning stages and does not yet have all of the necessary approvals, but is expected to do so soon. In general, many developers offer huge discounts in the pre-launch stage in order to raise public funds. Investors, on the other hand, should be wary of the risks involved.
  • Real Estate Investment Trust (REIT): A security that trades on major exchanges like a stock and invests directly in real estate through properties or mortgages. REITs benefit from special tax treatment and typically provide investors with high yields as well as a highly liquid method of investing in real estate.
  • Resale Property: An under-construction property that has been placed on the market for sale by the investor.
  • Secondary Market or resale market: A market in which investors buy properties from other investors rather than from developers. The secondary market includes resale and ready-to-move properties. 
  • Cooperative Housing: Cooperative housing is a type of housing scheme in which land is purchased, developed, and built by a Cooperative Housing Society. By registering with the state government department and applying for land, a group of people can form a cooperative housing society. The state development agency generally allots land to cooperative housing societies on a first come, first served basis at reduced rates. When a society receives land, it appoints a construction contractor, and upon completion of construction, individual flats are allotted to society members using a draw system.
  • Virtual Office Space: A virtual office offers communication and address services, allowing users to save money on traditional office costs while maintaining business professionalism. This is not the same as a business  center or an executive suite. 

Now that you know some of the most important real estate terms, you’re one step closer to becoming a savvy investor. With this knowledge under your belt, you’ll be able to better understand property listings, make informed investment decisions, and negotiate deals like a pro.

Have any other real estate terms you want defined? Let us know in the comment section below.