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Confusing Real Estate Terms Explained: What is the Difference...
Certain words associated with real estate can often create a lot of confusion. In this post, we try to explain some terminology related to real estate. This is our first post in a series called “What is the Difference…”
What is the Difference in Real Estate Between Primary and Secondary Market
Primary vs Secondary Market by Location
There are two different angles to look at this question. Firstly, the terms can be understood in terms of size, economic output, and investment characteristics of a particular location. In this case, primary markets are the largest and most economically significant cities.
Other characteristics of primary markets in this context include:
– They typically have populations exceeding five million people.
– Primary markets are known for high economic output and dense urban environments.
– Examples include cities like New York, London and Tokyo.
– Real estate in primary markets tends to be more expensive due to higher demand and limited supply.
Secondary Markets refer to cities that are slightly smaller, with populations typically ranging from one to five million people.
Other characteristics of secondary markets include:
– Secondary markets produce less economic output compared to primary markets but are still significant.
– They are characterized by lower population density and often experience above-average growth rates.
– Examples include cities like Munich, Melbourne, and Denver.
– Real estate in secondary markets can be more affordable and may offer higher growth potential and better returns for investors due to emerging economic opportunities.
Primary vs Secondary Market by Type of Property
The second way of answering this question, is by looking at a division of the types of properties in a real estate market. Primary market sales refer to sales of a particular property for the very first time. This often includes sales by a real estate developer to an investor or an end-user.
Secondary market properties are previously owned properties, usually in more established residential areas. There is generally a much wider range of property options in the secondary market.
Let’s look at some pros and cons of primary versus secondary markets:
Primary markets
Pros
- Latest design
- Lower entry level
- Fixed price
- More choice of different types of units
- Higher chance of capital appreciation
Cons
- May take months or even years to finish building
- Lower initial rent
- Possibility of abandonment
- Initial cost of furnishing the property
Secondary markets
Pros
- Cost of property is negotiable
- Immediate rental return
- Established location
Cons
- Old design
- May require repair and maintenance
- Price increase
What is the Difference in Real Estate Between Pending and Contingent
In real estate, the terms “pending” and “contingent” refer to different stages of a property sale process:
- Contingent:
- A property listed as contingent means the seller has accepted an offer, but the sale is dependent on certain conditions or contingencies being met.
- Common contingencies include home inspections, financing approval, and the buyer selling their current home.
- The property remains active on the market because these contingencies might not be fulfilled, which could allow other potential buyers to make offers.
- Pending:
- A property listed as pending means that all contingencies have been met, and the sale is in the final stages before closing.
- At this point, the property is no longer active on the market, and no further offers are being accepted.
- The sale is typically expected to close soon, barring any unforeseen issues.
What is the Difference in Real Estate Between a Buyer’s Agent and a Seller’s Agent
In real estate, a buyer’s agent and a seller’s agent have distinct roles and responsibilities, each representing different parties in a transaction:
- Buyer’s Agent:
- Represents the interests of the buyer in a real estate transaction.
- Helps the buyer find suitable properties, schedule showings, and provide information about neighborhoods and market conditions.
- Assists with making offers, negotiating terms, and guiding the buyer through the inspection and closing processes.
- Their primary goal is to secure the best possible deal for the buyer.
- Seller’s Agent (also known as a Listing Agent):
- Represents the interests of the seller in a real estate transaction.
- Helps the seller market their property, set a competitive price, and stage the home for showings.
- Negotiates with potential buyers and their agents to achieve the best possible sale price and terms for the seller.
- Manages the listing process, including advertising, open houses, and handling offers.
What is the Difference in Real Estate Between an Exclusive Contract and an Open Contract
In real estate, the primary difference between an exclusive contract and an open contract lies in the representation and the rights to sell the property.
An exclusive contract allows only one real estate agent or brokerage to represent the seller and market the property. This agent has the sole right to earn a commission if the property is sold, regardless of who finds the buyer. This type of contract often includes more comprehensive marketing efforts by the agent since they have guaranteed compensation if the property sells.
On the other hand, an open contract allows multiple agents to list and market the property. The seller retains the right to sell the property independently without paying any commission. Only the agent who actually finds the buyer and completes the sale earns a commission. This type of contract provides more flexibility for the seller but may result in less dedicated marketing efforts from agents since there is no guaranteed commission.
What is the Difference in Real Estate Between a Fixed-Rate and an Adjustable-Rate Mortgage
Property buyers will generally be offered two different types of mortgages: fixed-rate and adjustable-rate. A fixed-rate mortgage has an interest rate that stays the same for the entire loan term, providing predictable monthly payments. An adjustable-rate mortgage (ARM), on the other hand, has an interest rate that can change over time based on market conditions. Changes can happen on a monthly or yearly basis. The rate for an ARM is usually lower initially but can increase over time.
What is the Difference in Real Estate Between Remortgaging and Refinancing
In real estate, the terms “remortgaging” and “refinancing” are often used interchangeably, but they can have distinct meanings depending on the context and location.
Differences:
- Refinancing:
– Definition: Refinancing involves paying off your existing mortgage with a new loan, typically from a different lender.
– Purpose: The main goal is often to secure a lower interest rate, change the loan term, or access home equity for cash (known as cash-out refinancing).
- Remortgaging:
– Definition: Remortgaging, particularly in the UK, refers to switching your mortgage to a new lender while staying within the same property. It can also mean switching to a new deal with the same lender.
– Purpose: Similar to refinancing, the aim is usually to get better terms, such as a lower interest rate, or to release equity.
What are the general purposes of both refinancing and remortgaging:
– Lower Interest Rates: Both processes aim to reduce the interest rate on your mortgage, thereby lowering monthly payments and overall interest costs.
– Change Loan Terms: Homeowners may seek to change the duration of their mortgage, either extending it for lower monthly payments or shortening it to pay off the loan faster.
– Access Home Equity: Through a cash-out refinance, homeowners can borrow against the equity in their home to obtain funds for other needs.
– Consolidate Debt: Some homeowners refinance or remortgage to consolidate higher-interest debt into a single, lower-interest mortgage payment.
What is the Difference in Real Estate Between Property Appreciation and Depreciation
In real estate, property appreciation and depreciation are terms that describe changes in the value of a property over time. Here are the key differences between the two:
Property Appreciation:
– Definition: Property appreciation refers to an increase in the value of a property over time.
– Causes:
- Market Demand: High demand for properties in a particular area can drive up prices.
- Location: Proximity to amenities, schools, and transportation can enhance property values.
- Economic Factors: A strong local economy can lead to higher property values.
- Improvements: Renovations and upgrades to the property can increase its market value.
- Inflation: Over time, inflation can lead to higher property prices as the cost of living increases.
– Implications:
- Equity Growth: Homeowners build more equity in their property as its value increases.
- Investment Returns: Investors can realize significant returns when selling an appreciated property.
- Higher Taxes: Property taxes may increase as the assessed value of the property rises.
Property Depreciation:
– Definition: Property depreciation refers to a decrease in the value of a property over time.
– Causes:
- Market Conditions: A downturn in the real estate market can lead to falling property values.
- Location: Decline in neighborhood quality or amenities can reduce property values.
- Economic Factors: Economic downturns or high unemployment rates can negatively impact property values.
- Physical Deterioration: Wear and tear, lack of maintenance, and aging of the property can lead to depreciation.
- Obsolescence: Changes in building standards or consumer preferences can make a property less desirable.
– Implications:
- Reduced Equity: Homeowners may lose equity in their property as its value decreases.
- Investment Losses: Investors may face losses if they sell a depreciated property.
- Lower Taxes: Property taxes may decrease if the assessed value of the property goes down.
What is the Difference Between Commercial and Residential Real Estate?
Commercial real estate is designed for business activities and includes properties like office buildings, retail spaces, and warehouses, while residential real estate is intended for living purposes, encompassing single-family homes, townhouses, and condos. Financing for commercial properties typically involves larger loans with higher interest rates, focusing on the property’s income potential, whereas residential loans are more standardized and based on the buyer’s creditworthiness. Lease terms for commercial properties are longer and more complex, compared to the simpler, shorter leases of residential properties. Additionally, commercial real estate involves different zoning laws and often requires professional management due to its complexity, whereas residential real estate is subject to regulations focused on habitability and can be managed by the owner.
What is the Difference in Real Estate Between a Broker, a Real Estate Agent and a Realtor
In real estate, the primary difference between a broker and an agent lies in their levels of training, licensing, and responsibilities. Please note that there is a distinction in the use of these terms depending on the location.
- Real Estate Agent:
- A real estate agent is a professional licensed to help clients buy, sell, and rent properties.
- Agents must work under the supervision of a licensed broker.
- They are responsible for tasks like listing properties, showing homes, negotiating deals, and handling paperwork.
- Agents earn their income through commissions on the transactions they facilitate.
- Real Estate Broker:
- A real estate broker has more advanced training and education compared to an agent and must pass a broker’s licensing exam.
- Brokers can work independently and may own or manage a real estate brokerage.
- They have the authority to hire and supervise real estate agents.
- Brokers can perform all the duties of an agent but also take on additional responsibilities such as managing the brokerage, ensuring compliance with real estate laws, and handling more complex transactions.
Realtor is a term commonly used in the US.
- Realtor
- A Realtor is a real estate agent who is an active member of the National Association of Realtors (NAR) in the US.
- Realtors must adhere to the NAR’s strict Code of Ethics, which ensures a higher standard of professionalism and ethical behavior.
- The term “Realtor” is a trademarked designation that signifies the agent’s commitment to these ethical standards and continuous professional development.
This is the end of part 1 of words associated with real estate explained. Follow us if you want to learn more.
