Aug
20
2025
What is private equity?

Private Equity: Examples, Ways to Invest

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on Private Equity: Examples, Ways to Invest

Private equity involves partnerships, whereby qualified investors combine their capital in a private equity fund, which in turn funnels the money into an ownership stake in other companies in order to manage, overhaul, and/or acquire them.

The goal of private equity firms is to then sell these companies for more than they invested. The key word in private equity is “private” — as these companies don’t trade on public exchanges.

Private equity investing requires a significant amount of capital, typically invested for a period of years; thus it’s generally only available to high net-worth or accredited investors. Individual investors may be able to access private equity through exchange-traded funds (ETFs) and other vehicles.

Private equity, which is a type of alternative investment, has a high-stakes reputation for good reason, as these investments can be highly risky.

Key Points

•   Private equity investments use a strategy whereby qualified investors pool their capital into a fund that’s used to manage or take over other companies.

•   The goal of private equity investing is to sell the target companies for a profit.

•   Owing to the amount of capital involved, and the longer time commitment, private equity is typically only available to high-net-worth or accredited investors.

•   Private equity firms do not trade on public exchanges, and are not subject to SEC regulations.

•   Private equity is considered a type of alternative investment.

What Is Private Equity?

Private equity can be confused with hedge funds and venture capital, but it’s important to understand what private equity is and how it differs from other high-risk alternative strategies.

Private equity firms raise capital from institutional and accredited investors in order to set up private equity funds that can then be used to buy, manage, and/or acquire other companies.

Private equity firms are typically not publicly traded on a stock exchange or regulated by the Securities and Exchange Commission (SEC), and typically neither are the companies they invest in.

With publicly traded companies, investors purchase shares of the company on a public market such as the New York Stock Exchange (NYSE), or buy stock online. With private equity, qualified investors can combine their assets to invest in private companies that aren’t typically available to the average investor.

Key Characteristics of Private Equity

Certain characteristics help define private equity:

•   Private equity firms pool capital from various investors into a designated fund that can then invest in private companies (those typically not listed on public exchanges).

•   A private equity investment typically involves large sums of money, invested for a period of years.

•   Private equity is typically available to high net-worth, institutional, and accredited investors.

•   Most retail investors would have to use other vehicles, such as exchange traded funds, or ETFs, to gain exposure to PE strategies.

•   Private equity funds also use leverage to invest in target companies.

•   The goal of private equity is to make a profit by overhauling a company and its product or operations, by breaking it apart and selling off parts of it, or by selling the company in an acquisition later.

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How Do Private Equity Firms Work?

Private equity firms have funds that allow qualified investors to pool their assets in order to invest in existing private companies and manage them. PE firms typically don’t target startups, but rather mature companies that may benefit from restructuring or other interventions. Note that this process is separate from the type of self-directed investing most individual investors are familiar with.

Private equity investors are referred to as limited partners. They are often high net-worth individuals or institutions such as endowments or foundations. Equity firms usually require a sizable financial commitment from limited partners for a long period of time to qualify for this investment opportunity.

The equity firm uses the assets from investors to help the companies they invest in achieve specific objectives — like raising capital for growth or leveraging operations.

Private Equity Objectives

To help further these objectives, equity firms offer a range of services to the companies they invest in, from strategy guidance to operations management.

The amount of involvement and support the firm gives depends on the firm’s percentage of equity. The more equity they have, the larger the role they play.

In helping these private companies reach their business objectives, private equity firms are working toward their own goal: to exit the relationship with a large return on their investment. Equity firms may aim to receive their profits a few years after the original investment. However, the time horizon for each fund depends on the specifics of the investment objectives.

The more value a firm can add to a company during the time horizon, the greater the profit. Equity firms can add value by repaying debt, increasing revenue streams, lowering production or operation costs, or increasing the company’s previously acquired price tag.

Many private equity firms leave the investment when the company is acquired or undergoes an initial public offering (IPO).

Role of General Partners and Limited Partners

In private equity firms, general partners and limited partners play very different roles.

•   General partners are typically those who are involved in the oversight of a private equity fund, taking a more strategic role. For example, a general partner may look for target companies to invest in, evaluate these opportunities, and then oversee the companies ultimately added to the private equity firm’s portfolio.

•   Limited partners are the investors who put up the capital for these partnerships: e.g., pension funds, endowments, HNW investors. They are typically less involved in daily operations, and as such they assume less risk for the success or failure of the companies in the portfolio.



💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Types of Private Equity Funds

Typically, private equity funds fall into three categories: Venture Capital (VC), Leveraged Buyout (LBO) or Buyout, and Growth Equity.

Venture Capital Funds

Venture capital (VC) funds focus their investment strategy on young businesses that are typically smaller and relatively new with high growth potential, but have limited access to capital. This dynamic creates a reciprocal relationship between VC fund investors and emerging businesses.

The start-up depends on VC funds to raise capital, and VC investors can possibly generate large returns.

Leveraged Buyout

In comparison to VC funds, a leveraged buyout (LBO) is typically less risky for investors. LBO or buyouts often target mature businesses, which may generate higher rates of return. On top of that, an LBO fund typically holds ownership over a majority of the corporation’s voting stock, otherwise known as controlling interest.

Growth Equity

In some cases, a private equity fund may invest in an established company that has a working business model, but requires capital in order to expand. This is considered a growth equity play.

Can Anyone Invest in Private Equity?

According to the SEC, under securities laws, private equity funds are not registered or regulated as investment companies. Thus, a PE fund cannot offer its securities on a public exchange. In addition, in order to remain exempt from securities regulations, the structure of private equity funds must fall within one of three defined categories:

•   a traditional 3(c)(1) fund with no more than 100 owners

•   a 3(c)(7) fund that’s limited to qualified investors

•   and a qualifying VC fund

So when it comes to how to invest in private equity, only qualified or accredited investors are allowed to become limited partners in a private equity fund. Because private equity funds are not registered with the SEC, investors must understand the risk of such investments and be willing to lose their entire investment if the fund doesn’t meet performance expectations.

Since the initial investment is typically pretty high, and may be well into the millions of dollars, an individual must meet strict criteria to qualify as an individual accredited investor.

•   A person must make over $200,000 per year (for two consecutive years) as an individual investor or $300,000 per year as a married couple.

•   Alternatively, an investor can qualify as accredited if they have a net worth of at least $1 million individually or as a married couple to qualify (excluding the value of their primary residence), or if they hold a Series 7, 65, or 82 license.

•   In addition, some private equity opportunities may require that investors be considered qualified investors, which can mean having assets of at least $5 million.

Other examples of accredited investors include insurance companies, pension funds, and banks.

Direct vs. Indirect Investment Options

As interest in private equity has grown, and private equity firms have sought to develop new avenues to give retail investors that access, there are a growing number of direct and indirect private equity investment options.

•   Direct private equity investments include new offerings from large financial institutions as of Q2 2025, that include a mix of public and private assets. These may include active as well as index options. Some platforms also offer investors the chance to invest their capital into so-called feeder funds, which provide exposure to certain private equity strategies.

•   Indirect private equity investments can include ETFs, and Limited Investment Trusts (LITs), which are closed-end funds that enable investors to pool their capital in a multi-asset fund.

How to Invest in Private Equity

As noted above, there are an increasing number of options for average investors seeking to gain exposure to private equity, including:

Publicly traded stock: Some private equity firms have publicly traded stock that investors can buy shares of. This includes PE firms like the Carlyle Group, the Blackstone Group, and Apollo Global Management.

Funds of funds: Mutual funds are restricted by the SEC from buying private equity, but they can invest indirectly in publicly traded private equity firms. This is known as funds of funds.

Interval funds: These closed-end funds, which are not traded on the secondary market and are largely illiquid, may give some investors access to private equity. Interval funds may invest directly or indirectly through a third-party managed fund in private companies. Investors may be able to sell a portion of their shares back to the fund at certain intervals at net asset value (NAV). Interval funds typically have high minimum investments.

Advantages and Disadvantages of Private Equity

While private equity funds provide the opportunity for potentially larger profits, there are some key considerations, costs, and high risks investors should know about.

Advantages

Here are some possible benefits of private equity investments.

Potentially Higher Returns

With private equity, returns may be greater than those from the public stock market. That’s because PE firms tend to invest in companies with significant growth potential. However, the risk is higher as well.

More Control Over the Investment

Private equity investors are typically involved in the management of the companies they are invested in.

Diversification

Private equity investments allow investors to invest in industries they may not be able to invest in through the public stock market. This may help them diversify their holdings.

Disadvantages

The drawbacks of investing in private equity include:

Higher Risk

Private companies are not required to disclose as much information about their finances and operations, so PE investments can be riskier than publicly traded stocks.

Lack of Liquidity

Private equity funds tend to lack liquidity due to the extensive time horizon required for the investment. Since investors’ funds are tied up for years, equity firms may not allow limited partners to take out any of their money before the term of the investment expires. This might mean that individual investors are unable to seek other investment opportunities while their capital is held up with the funds.

Conflicting Interests

Because equity firms can invest, advise, and manage multiple private equity funds and portfolios, there may be conflicts. To uphold the fiduciary standard, private equity firms must disclose any conflicts of interest between the funds they manage and the firm itself.

High Fees

Private equity firms typically charge high management fees and carry fees. Upon investing in a private equity fund, limited partners receive offer documentation that outlines the investment agreement. All documents should state the term of the investment and all fees or expenses involved in the agreement.

Private Equity Comparisons

Private equity is one type of alternative investment, but there are others. Here’s how a few of them compare.

Private Equity vs IPO Investing

From an investor’s standpoint, private equity investing means you’re putting money into a company, and hopefully making money in the form of distributions as the company becomes profitable.

Investing in an IPO, on the other hand, means you’re buying stocks in a new company that has just gone public. In order to make money, the company’s stock price needs to rise, and then you need to sell your stocks in that company for more than you initially paid.

Private Equity vs Venture Capital

Venture capital funding is a form of private equity. Specifically, venture capital funds typically invest in very young companies, whereas other private equity funds typically focus on more stable companies.

Private Equity vs Investment Banking

The difference between these two forms of investing is of the chicken-and-egg variety: Private equity starts by building high-net-worth funds, then looks for companies to invest in. Investment banking starts with specific businesses, then finds ways to raise money for them.

The Takeaway

Private equity firms manage funds that invest in private companies that are typically not available to investors. Sometimes these companies are small and new with high growth potential; in other cases, the companies are well-established, and may offer a higher rate of return.

Not everyone qualifies to invest in private equity. If you do qualify, it’s important to remember that while private equity funds may offer the opportunity for profitability, they also come with some hefty risks. As with any investment, it’s a good idea to make sure you fully understand the risks of investing in a private equity fund before moving forward.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What’s the history of private equity?

Pooling money to buy stakes in a private company can be traced back to the early days of the industrial revolution, when this type of financing was a common source of equity for the burgeoning railroad industry. Modern private equity took hold in the 20th century, however, with its roots in venture capital firms that emerged after WWII. Private equity as it’s known today gained popularity when leveraged buyouts took off in the 1980s.

How does private equity make money?

Private equity firms make money by buying companies they consider to have value and potential for improvement. PE firms then make improvements, which in turn, can increase profits. These firms also benefit when they can sell the company for more than they bought it for.

How much money do you need to invest in private equity?

Private equity funds have very high minimum investments that typically start at $1 million, with a diversified portfolio reaching much higher than that. In addition, an individual usually needs to be an accredited investor with a net worth of at least $1 million, or an annual income higher than $200,000 for at least the last two years ($300,000 for those who are married).

What are common private equity exit strategies?

Common exit strategies for private equity firms include initial public offerings (IPOs), where a refurbished once-private company goes public; secondary buyouts, whereby a company is sold to another private equity firm; and liquidation, when a company is dissolved and sold off.

Is private equity suitable for individual investors?

It depends. While direct investments in private equity are generally out of reach for most individual investors, today there are investment options that provide private equity exposure for individuals. These include ETFs, and closed-end funds (like interval funds), and typically permit lower minimums than traditional PE funds.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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How College Financial Aid Works

By | Budgeting & Goals, Going to College, Student Loans, student_loan | Comments Off on How College Financial Aid Works

It doesn’t matter whether you’re the student or the parents wading through college application and tuition figures: Going to college is a huge life decision, almost always synonymous with huge sticker shock.

According to U.S. News & World Report, the average cost for tuition and fees to attend a private college for the 2022-2023 academic year was $39,723. The price tag for a public college was $10,423 as an in-state student and $22,953 as an out-of-state student. Tuition, it should be noted, does not include room and board and other living expenses.

Fortunately, there are financial aid systems in place for college students to help offset the high costs. Here’s what you need to know about college financial aid, including how it works, the different types of financial aid, and how to apply.

Key Points

•  Financial aid includes support from federal and state agencies, colleges, high schools, community groups, foundations, and corporations in the form of grants, loans, scholarships, and work-study programs.

•  Filing the Free Application for Federal Student Aid (FAFSA) is required to be considered for federal, state, and many institutional funds.

•  After submission, colleges will determine your demonstrated financial need based on information on your FAFSA and your school’s cost of attendance.

•  Need-based aid is calculated from your financial situation and includes grants, loans, and work-study. Merit-based aid, on the other hand, is awarded for talents, achievements, or qualifications and doesn’t consider your income.

•  Beyond federal aid, there are other options such as institutional grants/scholarships, private scholarships, and loans — both federal and private — to help bridge funding gaps.

What Is Financial Aid?

Broadly speaking, the term “financial aid” refers to any funding that doesn’t come from the student’s (or their family’s) savings. It can be heartening to know that schools typically don’t expect enrollees to cover college costs from their savings and income alone.

Financial aid is available from a variety of sources, including federal and state agencies, colleges, high schools, community organizations, foundations, and corporations. It can be awarded in the form of loans, grants, scholarships, and work-study programs. The type of aid determines whether it will have to be repaid or not: federal grants don’t need to be repaid, for example, but a loan will.

You can generally use financial aid to cover a range of college-related costs, including tuition and fees, room and board, books and supplies, and transportation.



💡 Quick Tip: Fund your education with a low-rate, no-fee SoFi private student loan that covers all school-certified costs.

Federal Student Aid

To apply for federal financial aid, you simply need to fill out the Free Application for Federal Student Aid (FAFSA®). This form is required in order to be considered for federal aid as well as for most college and state assistance. (Some private colleges use a supplemental form called the College Scholarship Service Profile, or CSS, which is more detailed and can be more time-consuming to complete.)

The Federal Student Aid office advises filling out the FAFSA as soon as possible after it becomes available, even if you’re unsure whether or not you will qualify for any financial aid.

Some states award aid on a first come basis, so submitting a FAFSA application early could be helpful. A FAFSA application is also a prerequisite to be considered for federal grants like the Pell Grant, which is “usually awarded only to undergraduate students who display exceptional financial need and have not earned a bachelor’s, graduate, or professional degree.”

The FAFSA is also required to be considered for the federal work-study program, which provides part-time jobs to help pay for education expenses. Such programs usually encourage community service work and work related to the expected course of study.

State-Based Student Aid

Depending on where you live or choose to go to school, you’ll likely also have access to aid at the state level. Virtually every state education agency has at least one grant or scholarship available to residents, and many states have a long list of available student aid programs.

While eligibility for state-based financial aid is usually restricted to in-state residents, that’s not always the case. SoFi has a state-by-state breakdown of grants and scholarships available for college students.

Merit- vs Need-Based Financial Aid

Financial aid can generally be broken down into two types — need-based aid and merit-based aid.

Some federal aid is need-based — like the Pell Grant and Direct Subsidized Loans (more on this loan type below) — meaning eligibility is based solely on the assets and income of the prospective student and their family. Factors like test scores or athletic ability, for example, have no bearing here.

The opposite is true for merit-based scholarships, which are based on a student’s talents and interests, whether they are artistic, academic, or athletic. A student’s financial situation is not considered here.

To learn about both merit- and need-based aid programs that may be a good fit for you, it’s a good idea to talk to your high school guidance counselor, as well as the financial aid office at your selected school.

You’ll be automatically considered for many need-based aid programs just by filling out the FAFSA. However, you may also want to search for private scholarships (which can be merit- or need-based) online. While these awards tend to be small, you may be able to combine several scholarships, which could make a dent in your expenses.

Recommended: SoFi’s Scholarship Search Tool

Federal Student Loans

Most students’ federal financial aid packages include federal student loans, which are awarded based on financial need and the cost of attending college. These include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.

The advantages of federal student loans include low, fixed interest rates, no credit checks required, unique borrower protections (like forbearance and deferment), and repayment plans based on income and/or your commitment to eligible public service work post-graduation.

With Direct Subsidized Loans, the government pays the interest while the student is attending school at least half-time. These loans are awarded based on financial need.

Direct Unsubsidized Loans, on the other hand, are awarded regardless of financial need. However, interest starts accruing on these loans from the moment you get them, though you can defer making any payments until six months after you graduate.

Direct PLUS Loans are also unsubsidized, and are awarded to either eligible graduate students or parents of undergraduate students. They require a credit check to ensure there’s no “adverse credit history.” In short, that means they can be more difficult to qualify for as compared to Direct Unsubsidized Loans.

Note that there will be no new Direct PLUS loans for graduate and professional students after July 1, 2026. However, students who already received a Grad PLUS loan before that date can continue borrowing under current terms through the 2028-29 academic year.

💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than Federal Parent PLUS Loans. Federal PLUS Loans also come with an origination fee.

Private Student Loans

If your federal student aid package and other forms of funding don’t quite cover your cost of attending college, there are also private student loans to consider.

Private student loans are offered by banks, credit unions, and online lenders. The interest rates may be fixed or variable, and are set by the lender. Unlike federal student loans, private student loans require a credit check. Students who have excellent credit (or who have cosigners who do) tend to qualify for the lowest rates.

An advantage of private student loans is that you may be able to borrow up to 100% of the cost of college tuition and living expenses. However, private loans don’t always offer the same protections, such as income-driven repayment plans, that come with federal loans.

The Takeaway

Navigating the world of college financial aid can seem daunting, but understanding the process is crucial for making higher education more accessible and affordable.

By familiarizing yourself with the different types of aid available, such as grants, scholarships, loans, and work-study programs, you can create a comprehensive plan to finance your education.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What is the FAFSA, and why is it important for college financial aid?

The FAFSA (Free Application for Federal Student Aid) is a form that students and their families must complete to be eligible for federal financial aid, including grants, loans, and work-study programs. It is crucial because it helps determine the amount of aid a student can receive.

What are the main types of financial aid available for college students?

The main types of financial aid include grants, scholarships, loans, and work-study programs. Each type serves a different purpose and has its own eligibility criteria and application process.

What are some tips for maximizing financial aid opportunities?

To maximize financial aid opportunities, students should complete the FAFSA early, research and apply for additional scholarships and grants, consider work-study programs, and stay informed about their college’s financial aid policies and deadlines. Additionally, maintaining good academic performance can open up more merit-based aid options.


SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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College vs University: What’s the Difference?

By | Going to College, Student Loans, student_loan | Comments Off on College vs University: What’s the Difference?

Many Americans use the words college and university interchangeably, but there are actually some key differences between colleges and universities.

Generally, schools that are called colleges tend to be smaller and focused on two- or four-year degrees. Those with the word university in their name are often larger institutions that offer a variety of both undergraduate and graduate degree programs.

If you’re applying to college or graduate school, it can be helpful to understand the similarities and differences between colleges and universities. Here are key things to know.

Key Points

•   Colleges often focus on undergraduate degrees and may offer a more intimate educational environment with smaller class sizes.

•   Universities typically provide both undergraduate and graduate programs and may have a stronger emphasis on research.

•   Community colleges and career colleges offer two-year degrees and certificates with some students transferring to four-year institutions.

•   Universities might have various colleges within them, such as a College of Arts and Sciences.

•   The choice between a college and a university can depend on the student’s educational and career goals, as well as the desired campus environment.

Comparing College vs University

Colleges and universities are both higher educational institutions that people attend after finishing high school, but there are some major distinctions between the two. Here’s a helpful overview explaining the difference between college vs. university.

Community Colleges

When it comes to understanding colleges, there are a few different types to keep in mind. Community colleges and career colleges are usually smaller than traditional colleges, often offering two-year degrees, like an Associate’s Degree or pre-professional certificate. Many community colleges also host online degrees and, in some cases, do not expect students to live on campus.

Some students attend a community college with the intention of then transferring to a four-year college or university to get their undergraduate degree. Others opt for community colleges precisely because they want to earn a pre-professional or technical certificate and then work right away.

Four-Year Colleges

Another major type of college is a four-year institution. These schools offer undergraduate degrees, typically a Bachelor of Arts (BA) and Bachelor of Sciences (BS). Sometimes, students choose to go to community college first because it is less expensive. But, some students will choose to go directly to a four-year college after high school.

Generally, four-year colleges are smaller schools that tend to focus on offering undergraduate degrees and a broad-based curriculum, including the liberal arts. Frequently, four-year colleges expect students to reside on campus during some or all of their studies.

Recommended: Ultimate College Application Checklist

Understanding Universities

Universities also offer undergraduate degrees, but they differ from colleges in some significant ways. Usually, a university is a larger institution, frequently offering graduate degrees as well.

In addition, most universities tend to be research-focused, hosting on-campus laboratories and hiring faculty recognized for their publications or academic findings. Universities can be either public or private.

One extra (and confusing) snarl here: At some institutions, the word “college” is also used to describe certain departments or divisions of the school. For instance, a university might have a College of Arts and Sciences or College of Engineering.

Pros and Cons of a College

When debating college vs. university, one potential advantage of choosing a college over a university is its smaller size. Not all colleges are smaller than universities, but it is a common difference.

In some cases, going to a smaller school can mean getting more one-on-one time with professors. If you’re hoping to maintain a relationship with professors after graduation (or intending to apply to graduate school), more interaction with professors can be an added benefit. Having smaller class sizes could also make it easier to get to know classmates.

Some colleges, especially liberal arts colleges, tend to focus more on general education (rather than offering pre-professional or research-based programs). If you have a particular interest or career you want to focus on as soon as you start college, it can be a good idea to make sure any colleges you’re applying to offer that field of study.

In some cases, a college might also have more limitations in regards to class availability, as some limit the number of students allowed per class. This isn’t the case for every college, so it can be useful to research each specific school’s policies carefully.

Depending on your chosen major, some classes may not be offered every semester at smaller colleges, which could mean you’ll need to engage in more long-term planning to ensure you’re able to take all required classes before graduating.

Pros and Cons of a University

Universities are, generally, larger and therefore boast more opportunities when it comes to availability of classes, diversity of majors, and extracurricular activities. Whether you’re interested in a niche major or looking for a wide variety of social clubs, you may be more likely to find it at a larger university.

Both public and private universities offer four-year degrees. There’s typically a difference in price — public universities are typically more affordable for in-state residents compared to private universities and colleges.

Universities might also offer both undergraduate and graduate degrees. Because universities can offer graduate degrees, there’s usually a stronger commitment to research at these schools, including master’s or doctoral degree programs.

If you’re looking to get an undergraduate and graduate degree at the same school, a university may be a good choice, since it might be easier to get accepted to the graduate program if you’ve already earned a degree at that school.

The cons of going to a university can also be tied to size. A larger university might not offer as many opportunities to secure one-on-one time with professors that you might find at a college. There may be more large lecture classes offered at a university than at smaller colleges, too.

Large class sizes can also make it harder for students to get to know their fellow classmates.

Recommended: States That Offer Free College Tuition Programs

Why Choose One Over the Other?

Whether it’s better to go to a college or a university will depend on each student’s specific situation and academic or career goals. Identifying a specific course of study (or professional trajectory) up front might make it easier to choose which schools to apply to and, ultimately, which one to attend.

If you’re interested in getting research experience and/or you’re looking for a variety of extracurricular activities, you might be happier with a university. If, on the other hand, you’re keen on getting a liberal arts education, value smaller classes, and/or would enjoy more opportunity to interact with your professors and classmates, you might feel more at home at a college.

Neither a college or university is, by definition, a better choice. It’s okay to apply to both colleges and universities, as long as each school meets your specific needs.

Funding College or University

Cost can also be a major factor when deciding where you will ultimately go to school. It can be a good idea to apply to a mix of schools (including both colleges and universities), then consider the cost of attendance and compare financial aid packages offered by each one.

Attending one of your state’s public universities is often more affordable than going to a private college or university. However, that may not always be the case, depending on what scholarships and grants a college is able to offer.

A smart first step to figuring out how you’ll pay for a college or university is to fill out the Free Application for Federal Student Aid (FAFSA). This will let you know if you are eligible for any federal aid, which may include grants, scholarships, work-study, and federal student loans (which can be subsidized or unsubsidized). Grants and scholarships typically don’t have to be repaid, but loans generally do. There are different types of student loans, so doing your research and making sure you understand what is available is a key part of the process.

To fill in any gaps in funding, you may also want to explore private student loans. Private student loans aren’t based on need, and are available through banks, credit unions, and online lenders. To apply for a private student loan, you generally fill out a loan application either alone or with a cosigner. Rates vary depending on the lender but borrowers with excellent credit typically qualify for the lowest rates.

Just keep in mind that private student loans may not offer borrower protections, such as deferment and income-driven repayment plans, that come with federal student loans.

The Takeaway

Typically, colleges are smaller, two- or four-year institutions while universities are larger schools, offering undergraduate and graduate degrees. There’s no right or wrong choice between the two. It’s a personal choice depending on a student’s needs and preferences for their higher education. Also, the price may come into play, with one option being more affordable than the other.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What makes a university different from a college?

Typically, universities are larger than colleges and they offer graduate degrees as well as undergraduate ones.

Is it better to go to a college or a university?

Deciding between a college and a university is a matter of personal choice and circumstances. Some students may want a research university and the exposure that can offer them to working with a professor; others may opt for an Associate’s degree at a college because that makes sense financially.

Which is cheaper, a college or university?

Prices can vary greatly when considering colleges and universities, so there’s no definitive answer about which is cheaper. In general, however, community colleges are a budget-friendly option.

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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14
2025
50 Investment Phrases, Decoded

50 Investment Terms and Definitions

By | Growing Wealth, invest, Investing | Comments Off on 50 Investment Terms and Definitions

Some investment terms and definitions may seem complex, but a little research can take the mystery out of most common investing terminology. That can help investors feel even more confident about starting their investing journey. It’s more or less the same as starting any new endeavor — from rock climbing to investing — at first, you need to get familiar with new words and phrases.

Given the girth of the investment space, the sheer amount of investment terminology investors need to know can be intimidating. But the more you read, invest, and envelope yourself in it, the easier it’ll become. If you’re just starting out, though, it may be helpful to get a big rundown of some of the more common investing terms.

Key Points

•   Stocks and bonds are two types of securities, one is an equity and one is a debt instrument.

•   Alpha and beta are terms that refer to the success of an investment strategy and a portfolio’s risk profile.

•   P/E ratio evaluates stock price compared to company earnings.

•   Mutual funds pool money to invest in various securities, and are similar to ETFs, though there are differences.

•   Market cap calculates total value of a company’s outstanding shares.

Investment Terminology Every Beginner Investor Needs to Know

Here are a slew of common investing terms and definitions (in alphabetical order) that investors may benefit from committing to memory.

1. Alpha

Alpha is used to gauge the success of an investment strategy, portfolio, portfolio manager, or trader compared with a relevant benchmark. You may also hear alpha defined as “excess return” in that it refers to returns that can be attributed to active management, over and above market returns.

2. Assets

An asset is anything that holds value that can be converted to cash. Personal assets might include your home, a car, other valuables. Business assets might include machinery or patents. When it comes to investing, assets are typically the securities you invest in.

3. Asset Class

An asset class is a group of investments with similar characteristics that is likely to perform differently in the market than another asset class. Types of asset classes include stocks, bonds, real estate, currencies, and more. Given the same market conditions, stocks and bonds often move in opposite directions. Most financial advisors typically recommend you invest in multiple asset classes in order to have a well-diversified portfolio and minimize risk.

4. Asset Allocation Fund

An asset allocation fund is a diversified portfolio consisting of various asset classes. Most asset allocation funds have a mix of stocks, bonds, and cash equivalents. These types of funds can be popular as some advisors stress the importance of having diverse portfolios to minimize potential losses.

5. Beta

Beta refers to how risky or volatile a security or portfolio is compared with the market overall. Calculating the beta of the stocks in your portfolio can help you determine how your portfolio might respond to market volatility. You can also gauge the beta of a stock to help determine how much risk it might add to your portfolio.

6. Bear Market

A bear market occurs when the market declines, typically when broad market indexes fall 20% or more in two months or less. Bear markets can accompany a recession, but not always. They often signal that investors feel pessimistic about their investments’ ability to make money and the market’s ability to rebound.

7. Bull Market

A bull market is the opposite of a bear market, meaning prices are rising or are expected to rise for extended periods of time. Bull markets usually mean security prices are rising for months or even years at a time.

8. Blue Chip

Blue chip companies are generally thought to be well-established, financially sound, and therefore high-quality investments. Blue chip stocks are typically large companies, and many of them are household names. In some cases, blue chips may be more expensive to invest in since they can be considered relatively stable and likely to grow.

9. Bonds

When governments or corporations need to borrow money they issue bonds. Investors who buy the bonds are effectively loaning that entity cash, which will be repaid according to the terms of the bond (e.g., a 10-year bond with an interest rate of 3%). Bonds are often considered to be relatively stable, lower-risk investments compared with stocks.

10. Broker

An investment broker, whether a person or a firm, acts as a middleman to help investors buy and sell securities. Brokers may be necessary because some securities exchanges only allow members of that exchange to make an investment order. A broker’s primary function is to help clients place trades, although many brokers also help clients with market research and investment planning.

11. Diversification

You’ve probably heard that you should aim to have a diversified portfolio. That means investing in a range of asset classes that are likely to behave differently under different market conditions, in order to mitigate risk. A portfolio of only stocks, for instance, could be more vulnerable to market volatility than a portfolio that also included bonds, real estate, commodities, and so on.

12. Dividends

When a company shares their profits with investors, these are called dividends. Dividends are often paid in cash (although they can be paid in stocks). Some companies — e.g., many blue chip firms — pay dividends, but not all companies do. Ordinary dividends are taxed differently than qualified dividends, so you may want to consult a tax professional if you own dividend-paying stocks.

13. Dollar Based Investing

Also called fractional share investing, dollar based investing is a way for investors to buy partial shares of stocks. Instead of buying shares of a company, you instead invest a dollar amount. Dollar based investing is a great way for smaller investors to buy into popular companies that they may otherwise be priced out of.

14. EBITDA

EBITDA is a way to evaluate a company’s performance that is considered more precise than simply looking at net income. EBITDA stands for: earnings before interest, taxes, depreciation, and amortization. To calculate EBITDA, use the following formula: Net Income + Interest + Taxes + Depreciation + Amortization.

15. EBIT

EBIT is a simpler way to calculate a company’s profits than EBITDA, as it’s only one part of the EBITDA equation (literally!). It stands for “earnings before interest and taxes.” It’s calculated using this formula: Net Income + Interest + Taxes.

16. EPS

EPS stands for earnings per share, which is a common way investors measure how well a stock is performing. EPS is calculated by finding a company’s quarterly or annual net income and dividing it by the company’s outstanding shares of stock. Increases in EPS can be a sign that the company’s profit performance is on the upswing, whereas a decrease can be a red flag for investors.

17. ETF

Exchange-traded funds, or ETFs, are similar to mutual funds in that the fund’s portfolio can include dozens or even hundreds of different securities, and investors buy shares of the fund. Unlike mutual funds, ETF shares can be traded like stocks throughout the day (mutual fund shares are traded once a day). Most ETFs are considered lower-cost, passive investments because they track an index, although there are actively managed ETFs.

18. Expense Ratio

An expense ratio is an annual fee investors pay to cover the operating costs of mutual funds, index funds, ETFs and other types of funds. Fees are typically deducted from your investments automatically (you don’t pay a separate charge), and they can reduce your returns over time so it’s wise to shop around for lower fees. Expense ratios are calculated using this formula: Total Funds Costs / Total Fund Assets Under Management.

19. FCF

Free cash flow is the money a company has after it has paid its expenses. This number is important to investors because it can show them how likely it is that a company could have extra cash for dividends or share buybacks. A continuous decrease in free cash flow over a few years can also be a red flag to investors.

20. Growth Stock

Growth stocks are shares in a company that’s growing faster than its competitors, typically showing potential for higher revenue or sales. Growth stock companies may be considered leaders in their industry.

21. Hedge Fund

Hedge funds are usually managed by an LLC or limited partnership that invests in securities and other assets using money from multiple investors. Hedge funds tend to be more risky and expensive than mutual funds or ETFs, which often makes them accessible to more wealthy investors.

22. Index Fund

Index funds are a type of mutual fund that invest in securities that mirror a particular index, such as the S&P 500 Index or the MSCI World Index. Indexes track many different sectors, from smaller U.S. companies to big global companies to various kinds of bonds. Each index acts as a proxy for how that market sector is performing; the corresponding index funds reflect that performance.

23. Interest Rate

The interest rate is the amount a lender charges to borrow money — and it can also mean the amount your cash earns in a savings, money market, or CD account. The baseline interest rate in the U.S. is set by the Federal Reserve. This rate in turn influences savings rates, mortgage rates, credit card rates, and more. Generally, when the Federal Reserve lowers interest rates, the stock market tends to rise.

24. Large Cap

A large-cap company has between $10 billion and $200 billion in market capitalization. These companies are often considered industry leaders, and are relatively conservative, low-risk, and safe investments. A company’s stock may be considered large cap, mid cap, or small cap.

25. Market Cap

Market capitalization, or market cap, is the value of a company’s total outstanding shares. It’s often used to measure a company’s value and build a diversified portfolio. You can calculate market cap by multiplying the number of outstanding shares by the current price per share. Companies with lower market caps usually have more room to grow and usually are associated with newer companies, meaning they can also be riskier.

26. Mid Cap

Mid-cap companies are usually between $2 billion to $10 billion in market capitalization, putting them somewhere between small- and large-cap companies. Many mid-cap companies are in a growth phase, making them attractive to some investors who believe the company may grow into a large-cap over time, although this is not guaranteed to happen.

27. Mega Cap

Mega-cap companies are the largest companies you can invest in, with a market value of $200 billion or more. Mega-cap stocks are typically industry leaders and household name brands.

28. Mutual Fund

Mutual funds may invest in stocks, bonds, and other securities — or a combination of these (e.g., a blended fund). Mutual funds can also be industry-specific (such as a mutual fund consisting only of energy stocks, green bonds, or tech companies, and so on).

29. Net Income

When talking about investing, net income usually refers to how much a company makes (or its total losses) after it has paid all its expenses. Net income is therefore usually calculated by subtracting a company’s expenses from its revenue. Investors may want to know a company’s net income because it can help determine how profitable the company is, although EBITDA (defined above) is another measure.

30. Over-the-Counter Stocks

Not all stocks are publicly traded. These “private” stocks, often called over-the-counter stocks, usually have to be traded through a broker. Companies may offer OTC stocks if they don’t meet the requirements to be traded publicly. Such companies are often startups or other small companies. So, while these companies may eventually grow to be able to trade publicly, investing in them also carries the risk that they may fold or even engage in fraudulent activity since the market is far less regulated than publicly traded markets are.

31. Price-to-Earnings Ratio

Investors commonly use P/E, or price-to-earnings ratios, to gain insight into how profitable a company is compared to its stock price. In other words, price-to-earnings ratios can help investors decide if the price of a stock is worth it when compared to how much a company is making.

32. Prime Interest Rate

Banks are likely to offer their best customers — those with the best credit histories and the lowest risk of defaulting — a prime interest rate for a loan. The prime interest rate is generally the lowest rate the bank will offer. A bank’s criteria for determining their prime interest rate may vary, but most banks consider the federal funds rate when setting any interest rate. For investors, the prime interest rate may impact a company’s earnings, and thus, stock valuations.

33. Portfolio Management

Portfolio management simply refers to how you select and manage the investments in your portfolio. There are many different management styles, such as active or passive, growth or value. Additionally, you can elect to manage your own portfolio or hire an individual or group to manage it for you.

34. Preferred Stock

A preferred stock means investors own shares in a company and get scheduled dividends, similar to how bond interest payments work. Preferred socks may not fluctuate in price like common stocks do, meaning they are often less volatile and risky.

35. Profit & Loss Statement

You probably know what profit and losses are, but do you know how to read a company’s P&L, or profit & loss statement? It can help you determine a company’s bottom line, as it can show you how well a company is doing compared to its peers in the same industry. If you’ve never read one before, this article about profit & loss statements could give you some tips on what to look for.

36. Prospectus

Companies that offer stocks, bonds, and mutual funds to investors are required to file a prospectus with the Securities and Exchange Commission that provides details about the investment they are offering (e.g., the expense ratio, the constituents of a fund, and more). Investors can use the prospectus to better understand a given security and how it might fit in their portfolio, or not.

37. Recession

A recession is a period of economic contraction. The National Bureau of Economic Research (NBER) defines a recession further as a decline in monthly employment, personal income, and industrial production. As an investor, a recession may indicate a drop in the value of your portfolio, although this may be temporary: When looking at the history of U.S. recessions, the stock market has always rebounded, sooner or later, after recessions.

38. REIT

Real estate investment trusts (REITs) are a way that investors can further diversify their portfolios. Instead of having the responsibility of managing an investment property yourself, you can invest in REITs, which are generally large-scale real estate projects that investors can help fund in exchange for partial ownership. Most REITs are publicly traded and pay dividends to investors.

39. Retained Earnings

When looking for a company’s net income statement, you may come across the term “retained earnings,” also sometimes called unappropriated profit, uncovered loss, member capital, earnings surplus, or accumulated earnings. In general, retained earnings is the amount of money a company keeps and potentially reinvests after it gives its investors a dividend payout.

As an investor, knowing whether a company had positive retained earnings can help you determine how much money it has to continue growing. If its retained earnings are negative, that could be a sign the company is in debt and may not be a good investment.

40. Return on Equity

Return on equity, sometimes called return on net worth, can help investors compare how well companies are managing their stockholders’ contributions. You can calculate it using this formula: Net income/Average shareholder equity. A higher return on equity can signal to investors that a company is managing its money efficiently.

41. ROI

Return on investment (ROI) is just that: the return you get after making an investment in a stock, bond, mutual fund, and so forth. Investors generally hope for a positive ROI, meaning that their investment has made a profit. While a good ROI will vary depending on the type of investments you’re making, some investors look to the historic return of the stock market as a barometer.

42. Small Cap

A small-cap company usually has a market cap of $250 million to $2 billion. Investors may be attracted to a small-cap company because they believe it has growth potential or may be undervalued.

43. SPAC

SPAC stands for special purpose acquisition company. SPACs are shell companies that list shares on an exchange to raise money so they can merge with a privately held company. Once the merger between the public SPAC and the private company is complete, that company is now in effect a public company — which is why a SPAC is sometimes called a backdoor IPO. Many companies may elect to use SPACs instead of traditional IPOs because they are often faster and less expensive.

44. Stocks

If you’ve made it this far, you probably know what a stock is. To review, a stock is a way to buy a piece of ownership into a company. You can buy and sell your stocks depending on whether you anticipate your stocks will decrease or increase in value.

45. Stock Exchange

A stock exchange is the place where you buy, sell, or trade stocks. Common U.S. stock exchanges are the New York Stock Exchange (NYSE) and the Nasdaq.

46. Stop-Loss Order

A stop-loss order can help investors have more control over their stocks. When a stock reaches a certain price that you choose, your broker will sell, buy, or trade that stock. Having a stop-loss order can help you limit how much money you make or lose in the stock market.

47. Target Date Fund

A target date fund is a type of mutual fund that includes a mix of asset classes to provide investors with a portfolio that adjusts over time to become more conservative as they age. Target date funds are often used to help investors plan their retirements. Target funds are typically constructed around various target retirement years (e.g., 2030, 2040, 2050) so investors can pick a date that corresponds with their hoped-for retirement.

48. Value Stock

A value stock is a stock that investors believe is undervalued and/or inexpensive compared to its past prices on the stock market or with its competitors. Investors may consider a stock’s price-to-earnings ratio to help them determine if something is a value stock.

49. Venture Capital

Venture capital is money a startup uses to grow its business. This money usually comes from private investors or venture capital firms. Investors may elect to invest venture capital into startups they believe have the potential to be profitable with time.

50. Yield

Yield is another way of referring to the return of an investment over a set period of time, expressed as a percentage. You may hear the term in relation to bonds (e.g., high-yield bonds), but yield is more accurately a measure of the cash flow an investor gets on the amount they invested in a security during that time period, and is different from total return.

The Takeaway

Getting familiar with a few key investing words and phrases can go a long way in helping you gain confidence when you’re new to investing. Getting fluent with investing terminology is like any other pursuit — there’s a learning curve at first, but the terms will feel more natural as you move forward and start investing regularly.

Learning key investing terms and definitions is only the beginning, though. Putting your knowledge into practice is another thing entirely. Although, it is helpful to know the lingo before diving into investing.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What are the main investment types?

There are many guidelines investors might want to follow, but the basic rule of investing is that you shouldn’t invest more than you’re comfortable losing — which is associated with an investor’s risk tolerance.

What is the basic rule of investing?

There are many guidelines investors might want to follow, but the basic rule of investing is that you shouldn’t invest more than you’re comfortable losing — which is associated with an investor’s risk tolerance.

What does yield refer to in investing?

Yield is another way of referring to the return of an investment over a set period of time, expressed as a percentage.

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2025
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A Guide to How Counteroffers Work in Real Estate

By | Home Ownership, mortgage | Comments Off on A Guide to How Counteroffers Work in Real Estate

Most people aren’t prepared for the wild and sometimes-bumpy ride of negotiating counteroffers in real estate, even though the experience is remarkably common.

Home sellers are free to make a counteroffer if they’re dissatisfied with a buyer’s initial bid. Usually, that counteroffer indicates they’ve accepted the buyer’s offer subject to certain changes, including updates to contingencies, closing date, and sales price.

Counteroffers are a fairly standard part of the home-buying process, but the rules of engagement might not seem remotely intuitive at the time. To help you understand how counteroffers in real estate work, what the typical negotiating steps look like, and how to counteroffer on real estate, here’s a guide you can cram with.

Key Points

•   Common reasons for counteroffers include changes to sales price, requesting a later closing date, changing the earnest money deposit, and removing certain contingencies.

•   The number of counteroffers can vary and can ping-pong back and forth for weeks or longer depending on the market and circumstances.

•   To negotiate effectively, buyers should have a comprehensive picture of costs, including closing costs, and be prepared to make a strong initial offer backed by market data.

•   Negotiable items in a counteroffer include possession date, personal property, home warranty, and earnest money deposit.

•   Being timely and responsive is crucial in the counteroffer process, as offers may come with expiration dates, typically ranging from 24 to 48 hours.

Common Reasons for Counteroffers

From the beginning of the home-buying process, unexpected twists and turns can arise. After sifting through hundreds of listings, attending several showings, and putting an offer in on a dream home (or two, or three), the deal can still be far from done.

There are many reasons why it takes time to buy a house, and counteroffers can certainly be one of them. Counteroffers in real estate can come into play in these scenarios:

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A Change in Sales Price

One of the most commonly contested items during the purchase of a house is the sales price. If buyers come in with an offer lower than the asking price and sellers might counter with the original asking price (if they’re unwilling to negotiate) or somewhere between the asking price and the offer.

Recommended: What to Know About Getting Preapproved for a Home Loan

Requesting a Later Closing Date

Sometimes sellers simply need more time to vacate the premises. Whether they have unfinished business or unexpected plans, they may present a counteroffer that extends the escrow period to allow them more time to move out.

Increasing the Earnest Money Deposit

In some cases, the seller could up the ante by increasing the earnest, or “good faith,” money deposit the buyer submits with the offer. Earnest money deposits are typically between 1% and 3% of the purchase price, but in a hot market, there’s a chance the seller could ask for more to ensure the buyer is serious about purchasing the property.


💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.

The Removal of Certain Contingencies

Contingency clauses detail actions or conditions that must be met before a real estate contract becomes binding. If you’re a first-time homebuyer (or even if you aren’t) it’s wise to brush up on these terms. Common contingencies, which most sellers will see as standard in a real estate offer, are:

•   An appraisal contingency to protect buyers if the property is valued at less than the amount they offer.

•   A financing contingency that allows buyers adequate time to get a mortgage or other financing to purchase the property.

•   An inspection contingency that ensures buyers have the right to a thorough inspection of the property within a specified period of time.

Some contingencies, however, are considered less than standard. For example, a home sale contingency grants buyers a set amount of time to sell their existing home so they can finance the new property. Some sellers may find this contingency burdensome, particularly in a hot market, so they could make a counteroffer that removes the home sale contingency. They can also counter with a “kick-out clause” that gives a real estate agent the right to keep showing the house while buyers attempt to sell their existing home.

Requesting Repairs

If a home inspection reveals that repairs or renovations to the property are needed, the buyer could submit a counteroffer to negotiate a lower price or ask the seller to complete the repairs before closing.

Deciding Who Covers Closing Costs

In a buyer’s market, it might be possible to negotiate the house price or to request that the seller pay some or all of the closing costs. These costs can include appraisal fees, settlement fees, title policies, recording fees, land surveys, and transfer tax. Many buyers are surprised by how expensive closing costs are, but in particularly hot markets with multiple offers, sellers can counter with a simple “no” to indicate they won’t be covering those costs for the buyer.

How Do Counteroffers Work in Real Estate?

While real estate counteroffers vary depending on the market, the seller’s unique circumstances, and other standalone factors, there are some fairly standard parameters to the counteroffer process:

What’s a ‘Normal’ Number of Counteroffers?

There’s no legal limit to the number of counteroffers in real estate transactions. Initial offers, counteroffers, and subsequent counteroffers could ping pong back and forth for weeks or more.

Knowing the local real estate market trends can be key here. In a buyer’s market with plenty of houses for sale, sellers might want to be cautious about submitting an unnecessary number of counter offers.

Similarly, in a seller’s market where inventory is low and buyer competition is high, buyers might want to limit the number of counteroffers they push back at the seller.

Can a Seller Make Simultaneous Counteroffers?

Depending on the state where the real estate transaction takes place, a seller may or may not be able to make counteroffers to more than one buyer. That said, most real estate agents advise against multiple simultaneous counteroffers, as it could end up in two legally binding contracts for the seller.

How Long Does the Process Take?

Number of counteroffers aside, homebuyers can expect a closing to take about 45 days, on average. But how long it takes still varies from buyer to buyer, with factors like whether they’re paying cash, how long it takes them to find an inspector, and if the house appraises at a lower value, affecting the overall timeline.


💡 Quick Tip: You deserve a more zen mortgage. SoFi Mortgage Loan Officers are dedicated to closing your loan on-time — backed by a $10,000 guarantee offer.‡

How to Counteroffer in Real Estate

To some degree, there’s such a thing as real estate counteroffer etiquette. Here are a few things to consider when engaging in the counteroffer process:

Have a Comprehensive Picture of Costs

For buyers, having an accurate handle on what it will cost to buy the house is essential for negotiating counteroffers discerningly.

Closing costs can be one of the most negotiated items between buyers and sellers and add up to as much as 5% of the mortgage amount. Having a firm grasp of how much to expect in closing costs can help guide the counteroffer process.

Setting realistic expectations for the monthly housing payment (including the mortgage principal and interest, insurance, maintenance, any homeowners association fees, and other costs) and what they can afford to pay as a lump sum at closing can help shape this picture for the buyer.

A mortgage calculator helps buyers break down the cost of purchasing a home. Understanding the various factors that might affect your home loan costs is important, too.

Recommended: The Cost of Living by State

Go In With a Strong Offer

A “strong” offer is backed by data that defines what’s happening in the market and research (with the help of an agent) about what’s considered “fair market value.” Being preapproved for a home loan will make you an attractive candidate from the seller’s point of view.

Coming in at 15% or more under the fair market value is generally considered a “lowball” offer and can start buyers off on the wrong foot. In some cases, sellers might skip right over anything that isn’t considered a strong offer.

Know What Can Be Negotiated

One of the first steps in making a real estate counteroffer is knowing what can be negotiated:

•   Possession date. Giving the sellers more time to move out could mean an exchange for a condition the buyer desires. Buyers hoping to move in sooner might make a counteroffer requesting an earlier possession date.

•   Personal property. Some of the seller’s personal property – like furniture, window treatments, artwork, or gardening tools – could be negotiated into the contract in a counteroffer.

•   Home warranty. Older houses can come with their own unique sets of systems and appliances, so buyers might make a counteroffer asking the sellers to cover the cost of a one- to two-year home warranty ($350 to $700 annually, on average) if unexpected repairs need to be made after move-in.

•   Earnest money deposit. Whether buyers are trying to reduce their risk of something going wrong during closing or strengthen their offer, they can negotiate a lower or higher earnest money deposit with a counteroffer.

Be Timely and Responsive

Real estate offers and counteroffers often come with a set expiration date, so time is usually of the essence. Forty-eight hours is a standard acceptance window in many real estate markets, but in hot markets offers might expire within 24 hours or less.

Some sellers take this concept to a whole new level, setting stringent requirements around offer acceptance. It’s up to buyers to determine whether or not they’re willing to reply quickly enough to meet the sellers’ time demands or risk losing the deal.

Try Not to Take Things Personally

It might not feel like “all’s fair in buying and selling a home” since it’s one of the biggest financial transactions many will make in their lifetime. But buyers and sellers shouldn’t be surprised if it comes with a liberal amount of give-and-take.

And while it might seem like a personal affront to have a real estate offer rejected, it’s possible (and even likely) that the seller has multiple offers or was simply able to strike a better deal.

When push comes to shove and purchase comes to close, buying a house is a matter of business, no matter how personal the home-buying journey can feel.

The Takeaway

Real estate offers and counteroffers are a common form of business negotiation, and a first step in making a counteroffer is knowing what can be negotiated. Being cognizant of counteroffer etiquette can also be helpful.

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FAQ

How do you handle counteroffers in real estate?

Counteroffers are an expected part of the negotiation process so approach any counteroffer calmly. Know your goal for the overall cost of your home purchase or sale, and what levers you can pull to get there, including a lower/higher price or a change in contingencies or closing timeline. Come back with your strongest counteroffer but always be prepared to walk away.

What are the steps in a counteroffer?

Understand the complete picture of costs involved in the transaction. Go in with your strongest counteroffer, in a timely fashion, and don’t take it personally if you don’t get 100 percent of what you want from the deal.

What is the general rule of counteroffers?

The number one rule of counteroffers, whether you’re buying or selling, is to know what total price you can ultimately afford. Keep calm and negotiate on, but don’t get emotionally involved — you may need to walk away at any time.

‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.

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