22 April 2013 Build real estate knowledge

Buyer’s market, seller's market, caveats, company titles, liens, gearing, the list goes on, but don't be bamboozled by fancy property terms.

A little education can go a long way in stripping away real estate jargon.

To uncover and explain 20 key terms that real estate buyers, sellers and watchers should know, Your Money consulted a panel of experts: Metropole Property, Real Estate Institute of Australia, Assist Finance Corporation, adviser Catherine Cashmore, Terri Scheer Insurance and BMT Quantity Surveyors.

Gearing: It's a fancy term for borrowing money to invest. Debt gives you the ability to speed up both returns and losses, hence the common terms leverage and gearing. There are three types of gearing: negative, neutral and positive. Negative gearing means your expenses and borrowing costs are higher than your returns, neutral is when your costs are matched evenly with the investment returns, and positive is when the costs are less than the returns, giving you a profit.

Disclosure statements: Also known as vendor statements and schedule one documents, these are the formal statements prepared by the person selling the property. In most states, they are a legal requirement and form part of the contract of sale. The documents usually include information about any mortgage, permits, outgoings, title and boundary details.

Strata title: Legal ownership title to a "lot" within, typically, a large multi-unit property such as an apartment block. It usually relates to part of the property within the internal walls, floors and ceilings. These titles also include membership to the owners corporation or body corporate.

Gazumping: When the seller agrees to sell the property to one party but then finds and accepts an offer from someone else for a higher price or more favourable terms.

Unencumbered property: Real estate that does not have any mortgage, covenant or lease attached to it.

Buyer's market: Buyers have the advantage when it comes to negotiating a price. Usually this is because market conditions are in their favour, such as too many properties to pick and choose from, prices are coming down or sellers are desperate to sell. The opposite to this is a sellers market, where the seller has the advantage.

Tenants in common: When property is owned by two or more people but they are not joint owners. It's often used if purchasers have an unequal ownership stake such as 60-40 per cent, or there are multiple owners. Each part owner is allocated a percentage of the property through a separate agreement.

Lien: This is a claim by a person or a company on the property, usually for money owed. It is also known as an encumbrance.

Caveat: This is a formal or legal notice that asks the titles office to notify the person who lodged the caveat before any transaction or dealings on the title occur. It does not necessarily stop a transaction going ahead but alerts all parties that someone has an interest in the transaction or property.

Caveat emptor: A phrase from Latin origin that means "let the buyer beware". In other words, it's your responsibility to do your own homework and research.

Feng Shui: A belief that physical characteristics of a property and its aspect and position will affect the fortunes of the owner.

Median price: This is the price in the middle of recent property sales in a particular location. In contrast, an average price is the number of properties sold divided by their combined total sale price.

Yield: Yield is the percentage return from a property. It can include two factors, rental income and price growth.

LVR: These three little letters stand for Loan to Value Ratio. They mean the ratio (or split) between what you can pay as a deposit and what you borrow. Most lenders will only lend up to 80 per cent of the property's value, which would give an LVR of 80 per cent.

LMI: Lenders Mortgage Insurance: Your lender may require you to purchase LMI but even though you have to pay for it, only the lender benefits. It protects the lender if you default on your mortgage repayments.

Depreciation: Often investors can claim a portion of the depreciating value of their property. A depreciation schedule prepared by a quantity surveyor lists the items and different rates of depreciation that can be claimed against tax. When it comes time to sell, these amounts are deducted from the cost base to calculate any potential capital gain.

Capital gains tax: When an investment property is sold, the profit between the cost base (which is the purchase price, cost of improvements, depreciation adjustments and inflation) and the sale price is subject to CGT. If you have owned the property for more than 12 months this profit is halved, known as the 50 per cent exemption. Tax is then paid on the remaining profit at your marginal tax rate.

Company title: An old-style title that gives ownership of shares in a company that, in turn, owns the property. The shares allow you to occupy your part of the property. Most institutions are unwilling to lend money against a company title as it does not give them clear access to the property, only to the shares

Rental guarantee: A rental guarantee is often offered by developers on new or redeveloped properties. It is a promise to guarantee a minimum rental income. The guarantee often requires the developer to appoint its own property manager and control all rental issues. The developer then pays the owner the rental guarantee amount each month, regardless if it has a tenant or what rent the tenant is paying.

Landlord insurance: Unlike building or contents insurance, this type of cover is specifically for property investors. It can help protect or compensate landlords from specific risks such as malicious damage by a tenant, accidental damage, loss of rental income or even landlords’ legal liability.

Reproduced in full with permission: News Limited Network Build real estate knowledge 7 April 2013

Attention: This article is intended to provide general information only. Every attempt has been made to ensure the accuracy of this information at the date of publication. The opinions expressed in this article do not reflect those of DHA, its staff or agents. Property prices are subject to fluctuation. Prospective investors should seek independent advice. DHA will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person relying on information in this article.