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Real Estate · 8 Essential Terms
Valuation and loan vocabulary for the salesperson exam: CMA versus appraisal, the three approaches, PITI, loan-to-value, amortization, and discount points.
License law is state-specific and manuals are revised. Confirm every item against the candidate handbook for the state where you will test.
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A licensee's opinion of a likely selling price, built from recent comparable sales, listings, and expired listings. It is not an appraisal.
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Every term, definition, memory hook, and exam trap is written out here so you can review the whole set or print it.
A licensee's opinion of a likely selling price, built from recent comparable sales, listings, and expired listings. It is not an appraisal.
Mnemonic. A CMA is the licensee's pricing opinion. An appraisal is an appraiser's valuation.
Exam trap. Calling a CMA an appraisal is the trap, and in many states it is a disciplinary one. Use the words your license allows.
An appraisal approach that starts from recent sales of similar properties and adjusts those prices for differences in features, location, and terms.
Mnemonic. Sales comparison asks what similar houses actually sold for, then adjusts.
Exam trap. Adjust the comparable, not the subject. If the comparable has a garage the subject lacks, you subtract, because the comparable's price included something the subject does not have.
An appraisal approach that estimates land value, adds the current cost to build a similar improvement, and subtracts depreciation. It is useful for special-purpose property.
Mnemonic. Cost approach is rebuild cost, minus wear, plus land.
Exam trap. The trap is using cost when plenty of comparable sales exist for an ordinary house. Cost is the fallback for a unique property, not the first choice for a tract home.
An appraisal approach that converts the income a property can earn into value. A simple direct-capitalization form divides net operating income by a capitalization rate.
Mnemonic. Income approach: value comes from the money the property earns.
Exam trap. NOI is not the same as cash flow after debt service. Debt service is below NOI. Using the mortgage payment inside NOI double-counts financing and misses the exam definition.
The four parts of a typical mortgage payment: principal, interest, taxes, and insurance.
Mnemonic. PITI is the house payment in four letters: principal, interest, taxes, insurance.
Exam trap. Taxes and insurance in escrow are part of PITI even though they are not profit to the lender. A question that calls PITI interest only is dropping the letters.
The loan amount divided by the property value (the lower of price or appraised value in many lender rules), expressed as a percent.
Mnemonic. LTV is how much of the value the lender is funding.
Exam trap. A higher LTV is more leverage and, to the lender, more risk. The trap is inverting the fraction and calling a small down payment a low LTV.
Paying a loan with level payments that gradually shift from mostly interest to mostly principal, so the balance reaches zero at the end of the term on a fully amortizing loan.
Mnemonic. Amortization is the slow walk from interest-heavy payments to a zero balance.
Exam trap. A partially amortizing or interest-only loan does not reach zero with the regular payment. The exam trap is a balloon that the borrower did not see because the payment looked level.
A prepaid interest charge equal to one percent of the loan amount, paid to lower the note rate. It is not the same thing as an origination fee, though both can be a percent of the loan.
Mnemonic. A point is one percent of the loan, paid up front to buy a lower rate.
Exam trap. Points are calculated on the loan amount, not on the purchase price. The trap is taking one percent of the price when the buyer is borrowing less than the price.