Cutting Through Real Estate Jargon

Back in 2005, during the heyday of real estate investment before the Great Financial Crisis, I attended a hotel conference in Manhattan where a fund manager spelled out his approach to a potential deal. “Oh yeah,” he muttered, “that deal has so much hair. We’d give it a haircut, warehouse it, and then flip it.” His explanation was so clear to those present that there were no follow-up questions.

Industries love their jargon, and real estate is no different. Yet while jargon is used as shorthand for those in the know, it can leave some, including those for whom English is not their first language, feeling isolated and lost. And sometimes it’s just a stretch.

So how can we help bridge that divide? Let’s take a look at some commonly heard industry terms and deconstruct their meaning. Chances are you’ll encounter these words and phrases at your next real estate panel, cocktail event, or business deal discussion.

Hair or Haircut

In real estate, many potential deals will come with hair, meaning problems or risks that reduce value and should result in lower acquisition costs for investors. To give a deal a “haircut” is to solve these problems to add value to the completed project or to discount the acquisition cost to compensate for having to fix these problems. Some hair is not that simple to cut, like fixing the title to the ownership of a property or resolving environmental issues.

Dry Powder

This one goes back a few centuries, but it is quite often heard today from investment fund managers, who brag about their possession of “dry powder.” The term comes from Oliver Cromwell who, in 1642 at the Battle of Edgehill during the English Civil War, said, “Put your trust in God, my boys, but mind to keep your powder dry.” In other words, real estate investors need to have capital readily available to invest when the time is right. Just having your own funds available, however, will not be sufficient to close on a good deal.  Real estate often requires “other people’s money” as well, especially from lenders, who, in the current environment, may be reluctant to provide loans at interest rates low enough, or loan-to-value ratios that are high enough to enable investors to deliver the financial returns they promised to those who provided them with the dry powder they are holding. 

Headwinds

It is difficult to hold onto dry powder in the face of headwinds. Headwinds refer to obstacles or challenges that hinder progress. Many industries overuse this term, which comes from sailing and seems to imply that you cannot sail against the wind. Sailors understand, however, that to reach your desired goal in the face of headwinds, you simply need to tack in a zig-zag pattern. Sailors cannot control the wind, but they can still harness its power to get where they need to go. Flying into prolonged headwinds slows down an airplane in flight, but headwinds also make it easier for the plane to take off. Students seeking to take off in their careers may face headwinds in the form of fewer hiring opportunities, but they may also benefit by taking on greater responsibilities sooner during more challenging times. 

There is no question that the real estate industry currently faces a number of headwinds including reduced demand for existing office and retail space and increased costs for new development. In the Master’s in Real Estate program at Georgetown University, we simplify complex real estate dynamics so you can harness the skills you need to chart and reach your individual goals. We try to minimize the jargon. Our goal is to guide you through the headwinds and help you make your own way among the waves.