Essential Terms in Real Estate

 

Real Estate can sometimes feel like a whole new world with its unique terminology and jargon. But fret not, because I'm here to be your friendly guide through the realm of essential terms in real estate. Whether you're a first-time homebuyer, a seasoned investor, or simply curious about the industry, we'll break down the key concepts and vocabulary in a way that's easy to understand. So, let's dive in and explore the fascinating world of real estate together!

Adjustable-Rate Mortgage (ARM)

ARM loans offer a unique feature where the interest rates can change after an initial fixed-rate period. These changes are based on the interest rate index that the ARM is tied to, such as LIBOR or COFI. While this type of loan is less predictable than a traditional fixed-rate mortgage, it has the potential to provide lower interest rates during certain periods.

Property Assessment

A property assessment is necessary to determine the estimated value of a real estate piece. During the process of selling a home, the mortgage lender will send an appraiser to evaluate and provide a professional opinion on the value of the property. This appraisal helps the lender determine if the property is worth the amount of the loan the potential buyer is seeking.

Appraisal Contingency

An appraisal contingency is a clause in a purchase agreement that allows a buyer to back out of the deal if the appraised value of the home is lower than the sale price. To ensure that the loan is secured by an appropriate home value, an appraiser hired by the buyer's lender evaluates the property. This helps prevent the lender from overpaying for the property.

"As-Is" Condition

When a property is marketed in "as-is" condition, it means that the seller is unwilling to make any repairs. It may also indicate that the property is priced lower than the market value in the area. The condition of the property at the time the offer is written is considered the "as-is" condition. If any changes occur to the property between the offer and closing, the seller is responsible for restoring it to its original "as-is" condition or releasing the buyer from their obligation to purchase.

Backup Offer

If a buyer is interested in a property that is already under contract with someone else, they can submit a "backup offer". This offer serves as a backup in case the first transaction falls through. The backup offer must be negotiated and any necessary payments, like earnest money, must be submitted to secure its position. Only one backup offer is allowed, as having a backup to the backup is not permissible.

Blind Offer

A blind offer is when a buyer makes an offer on a property without physically seeing it, even if it was possible to do so. This type of offer is often used in highly competitive areas or circumstances where buyers want to be the first to make an offer and secure the property quickly.

Buyer's Agent/Listing Agent

A buyer's agent, also known as a selling agent, is a licensed real estate professional who helps buyers find their next property. Their role is to negotiate on behalf of the buyer to obtain the best price and purchasing scenario. They act as a fiduciary for the buyer.

On the other hand, a listing agent, also known as a seller's agent, is a licensed real estate professional who markets the seller's property and represents their best interests during negotiations to secure the best price and selling scenario. They act as a fiduciary for the seller.

Covenants, Conditions & Restrictions (CC&Rs)

CC&Rs are rules and regulations placed on real property by a homeowner's association (HOA), neighborhood association, developer, or builder. These rules outline the requirements and limitations of what homeowners are allowed to do with their property. They may also include monthly or annual fees and special assessments.

Conventional Sale

A conventional sale refers to a property that is owned outright or has a remaining mortgage balance lower than the market value. These sales are often smoother transactions compared to non-conventional sales, such as foreclosures or short sales.

Closing

Closing is the final step in a home sale process. It involves all parties signing the necessary documents, conveying all monetary transactions, and obtaining full approval from the lender if applicable. In some markets, recording the deed with the county clerk's office is the ultimate and final step. Once all requirements are met, the buyer gains access to the property and becomes the new homeowner.

Closing Costs

Closing costs are various fees associated with a real estate transaction. These fees include charges from lenders, title companies, attorneys, insurance companies, taxing authorities, homeowner's associations, real estate agents, and other settlement-related companies. Typically, these costs are paid at the closing of the transaction.

Days on Market (DOM)

DOM refers to the number of days a property has been listed for sale on the local real estate brokers' multiple listing service (MLS) until a seller signs a contract with a buyer. The average DOM for homes sold in a market during a specific period is also considered. A low average DOM indicates a strong seller's market, while a high average DOM suggests a weak buyer's market. Seasonality can also impact DOM, with homes generally selling faster in the spring compared to winter.

Debt-to-Income Ratio

Debt-to-income ratio, also known as DTI ratio, is a crucial figure used by mortgage lenders to assess your financial situation. It is calculated by adding up all your monthly debt expenses and housing payments, dividing it by your gross monthly income, and multiplying by 100. This ratio helps lenders determine your affordability for a mortgage and estimate the amount you can comfortably pay each month.

Lenders typically prefer borrowers who spend 28 percent or less of their total monthly income on housing and less than 36 percent on debt payments, according to Investopedia. If either of these percentages is higher, and you're looking to buy a home, you might need to adjust your budget accordingly.

Due Diligence

During the home-buying process, you may have a due diligence period in the purchase agreement. This period allows you, as the buyer, to thoroughly examine the property by hiring experts for inspections and tests. It gives you the opportunity to make informed decisions on how to proceed with the purchase. You may also have the chance to renegotiate the contract or even terminate it within a specified time frame if you discover any issues, ensuring you're not in default of the agreement. Due diligence is crucial for buyers to fully understand what they're getting into.

Earnest Money Deposit (EMD)

When making an offer on a property, the seller may ask for an earnest money deposit (EMD), also known as a "good faith deposit." This initial payment demonstrates your seriousness and commitment as a buyer. The amount of the EMD can vary between 1 to 5 percent of the sales price and is typically held by an escrow company or as specified in the purchase and sale agreement (PSA).

Escrow Holder

The escrow holder, an impartial third-party agent, is responsible for collecting and holding the funds, documents, and other valuable items until specific events or conditions occur. The instructions for the escrow holder's actions are usually provided in written form by both parties.

Equity

Equity is the investment a homeowner has in their property. To calculate equity, subtract any mortgages or liens against the property from its market value. The remaining amount represents the homeowner's equity. For example, if you buy a home worth $250,000 for $240,000, you instantly gain $10,000 in equity. When you sell a home you bought for $250,000 for $260,000, you keep the equity after deducting expenses.

Building equity is essential for homeowners as it can be leveraged to obtain loans for home repairs or to pay off high-interest debts.

FHA Loans

FHA loans are part of a group of loans insured by the federal government. Instead of lending money directly, the FHA insures banks and private lenders against losses if borrowers fail to repay the loan in full or on time.

FHA 203k Rehab Loan

FHA 203k rehab loan is designed for properties that require repairs or updates. It combines the mortgage loan with a loan specifically for these improvements, such as structural repairs or energy-related updates.

Fixed-Rate Mortgages

Fixed-rate mortgages have an interest rate that remains the same throughout the loan term. They are available in various durations, such as 10, 15, 20, and 30 years. The 15- and 30-year loans are the most popular types in the United States.

Hard Money Loans

Hard money loans are an alternative to traditional lenders. They are based on the property being used as collateral rather than the borrower's credit score. Hard money lenders typically require a substantial down payment and have shorter repayment schedules.

Homeowner's Association (HOA)

A homeowner's association (HOA) is a private association that manages planned communities or condominiums. When purchasing a property managed by an HOA, you are obligated to follow their rules and pay monthly or annual dues. Failure to comply or pay can result in a lien or foreclosure on the property.

Home Sale Contingency

A home sale contingency allows a buyer to make their purchase of a seller's property conditional on the successful closing of their current property. This contingency is often negotiated through a contract clause or addendum. It can be used when a buyer needs to sell their current property to fund the down payment on the new property.

iBuyer

An iBuyer is a company that uses technology to quickly make an offer on your home. They take on the responsibility of owning, marketing, and reselling the property. Choosing an iBuyer can provide the benefits of a cash offer and more control over your moving timeline.

Inspection

An inspection is a thorough assessment of a property's condition and any necessary repairs. Buyers hire licensed professionals to conduct inspections during the due diligence period to make informed decisions about the purchase.

Inspection Contingency

An inspection contingency, also known as a due diligence contingency, allows buyers a specific timeframe during escrow to perform inspections. This clause grants them the opportunity to address any necessary repairs or negotiate with the seller before finalizing the purchase.

Leasehold Arrangement

In the traditional home ownership model, when you purchase a house, you not only own the property itself but also the land it is built on. However, there are certain cases where a leasehold arrangement comes into play. This means that while you own the house, you are required to pay rent to the landowner for the use of the land.

Contingency for Loans

A loan contingency, also known as a mortgage contingency, is a clause or addendum included in a purchase contract. It allows the buyer to back out of the deal and retain their deposit if they are unable to secure a mortgage with specific terms within a fixed period of time.

Pre-Approval Letter for Mortgage

Obtaining a pre-approval letter for a mortgage is crucial as it provides home buyers with an understanding of what they can afford. This letter is issued by the lender and outlines the loan type, loan amount, and terms that the buyer qualifies for. To determine this, the lender assesses the buyer's debt-to-income ratios, available cash, and credit history.

Multiple Listing Service (MLS)

The MLS is a comprehensive database that enables real estate agents and brokers to access and contribute information about properties available for sale in a particular area. When a home is listed for sale, the listing agent adds it to the local MLS. Buyer's agents often refer to the MLS to explore the market and analyze the selling prices of similar properties. In the United States, there are over 600 MLS organizations, according to Inman.com.

Disclosure Report for Natural Hazards (NHD)

Most states require a disclosure report for natural hazards, known as an NHD report. This report reveals if a property is located in an area with a higher risk of natural hazards. Typically, the seller covers the cost of this report and provides it to the buyer during the escrow process. The NHD report covers various natural hazard zones, including flood-prone areas, high fire hazard severity zones, earthquake fault zones, and seismic hazard zones.

Offer and Counter Offer

When buyers are interested in purchasing a home, they make a formal offer. This offer can be the full list price or a value mutually agreed upon by the buyer and their agent. The buyer's agent puts the offer in writing, obtains the buyer's signature, and submits it to the seller's agent. The seller may accept the offer immediately, resulting in a purchase contract, or they may make a counteroffer as part of the negotiation process. This negotiation is documented in written form.

Option Period (Texas only)

In Texas, there is a unique concept called the option period. This is a form of due diligence period that allows the buyer to terminate the contract by paying a negotiated amount of money within a specific period of time. During this option period, the buyer is encouraged to conduct inspections and perform other due diligence activities. If the buyer chooses to terminate the contract within the option period, they will receive a refund of their earnest money.

Pre-Approval for Mortgage

To obtain pre-approval for a mortgage, home buyers must complete an application that allows the lender to assess their financial situation, including their debt-to-income ratio, ability to repay, and creditworthiness. Based on this information, the lender issues a pre-approval letter stating the exact loan amount and total sales price the buyer is approved for. The letter also includes the estimated down payment and potential interest rate. A pre-approval letter is more comprehensive than a pre-qualification letter and is preferred by most sellers when considering an offer.

Preliminary Report

A preliminary report is essential in identifying any issues with the property's title that need to be addressed by the seller to ensure a clear title. It provides details about ownership history, liens, and easements. The title company prepares this report by examining existing property records at the county recorder's office. A preliminary report is required for the issuance of a title insurance policy, which most lenders require borrowers to purchase to protect their interest in the property. In many areas, it is customary for the seller to cover the cost of this policy, although it can be negotiated.

Pre-Qualification

Pre-qualification is an initial assessment by a lender to estimate the amount a home buyer can expect to be approved for during the loan process. It is based solely on the information provided by the buyer to the lender and does not involve any verification or proof. Unlike a pre-approval, a pre-qualification is less thorough and does not carry the same weight as sellers. However, it can give buyers a general idea of their purchasing power.

Principal

The outstanding balance of a mortgage loan represents the amount of money that the borrower owes to the lender, excluding interest. For example, if someone borrows $300,000 to purchase a home, that $300,000 is considered the principal of the loan. Each month, buyers make payments that go towards both the principal and the interest. However, in most cases, the payments primarily go towards the interest first, as it is the reason the bank agrees to lend the money.

Probate Sale

A probate sale occurs when a homeowner passes away without leaving a will or designating someone to inherit the property. In such cases, the probate court authorizes an estate attorney or representative to hire a real estate agent to sell the home. This process is typically more complex and time-consuming compared to a conventional sale.

Verification of Funds

When making an offer on a property, sellers often require buyers to provide proof of funds. This requirement ensures that buyers have the necessary cash available for their down payment and closing costs. If the buyer is paying in cash, proof of funds demonstrates that they actually possess the money. Acceptable forms of proof of funds include original or online bank statements with the bank's letterhead, a copy of a money market account balance with the bank's logo or letterhead, certified financial statements signed off by an accountant, or an open equity line of credit.

Purchase and Sale Agreement (PSA)

A purchase and sale agreement, also known as a written contract, is a binding agreement between the buyer and seller that outlines the terms and conditions of the real estate transaction. When a property is "under contract," it signifies that both the buyer and seller have committed to buying and selling the property.

Real Estate Owned (REO)

Real Estate Owned refers to properties that are owned by a lender due to an unsuccessful foreclosure sale at auction. These properties can sometimes be purchased below market value, as banks prefer to reinvest the proceeds rather than spend time marketing the property for an extended period. However, financing can be challenging as the bank typically sells the property "as-is" without making any repairs.

REALTOR®

A REALTOR® is an actively licensed real estate agent who is a member of the National Association of REALTORS® (NAR). While all REALTORS® are real estate agents, not all real estate agents are REALTORS®. REALTORS® adhere to a Code of Ethics and are committed to providing a high standard of practice and care when serving the public, customers, clients, and each other.

Rent-back

Rent-back, also known as leaseback, is an arrangement where the buyer allows the seller to remain in the property after the close of escrow. The terms of the rent-back, including lease deposit, daily rental rate, and length of time allowed, are negotiated before the situation occurs. The rental rate may be determined based on the new homeowner's mortgage expenses and potential inconvenience caused by the delay in their own move.

Seller Concession

Sellers may offer concessions to entice buyers to purchase their home. These concessions are often contributions towards the buyer's closing costs, up to certain limits and subject to approval by the buyer's lender. Ultimately, these concessions result in more money remaining in the buyer's pocket after the transaction is complete.

Seller Disclosure

A seller's disclosure is a document provided by the seller that discloses information about the property or any factors that could influence a buyer's decision to purchase the property. It includes information known to the seller to the best of their knowledge. This disclosure may cover issues specific to the property itself, as well as factors that could affect the buyer's enjoyment of the property, such as pest problems, property disputes, nearby construction projects, or other relevant information.

Short Sale

A short sale occurs when a property is sold for an amount less than the debt secured by the property. The approval of the seller's lender(s) is required, as the proceeds from the sale will fall short of the amount owed. The process of approving short sales is often lengthy and time-consuming, resulting in a longer closing period compared to a traditional sale.

Subject to Inspection

Subject to inspection means that the seller does not allow the property to be viewed without an accepted offer. This is typically due to privacy concerns or uncooperative tenants. While it may be daunting for buyers to purchase a property without seeing it, the standard purchase contract usually includes an inspection period during which the buyer can cancel the sale without penalty.

Tenancy in Common (TIC)

Tenancy in common refers to a form of joint property ownership, whether it's a single-family property or a commercial building. Each tenant in common possesses a share of the property but in varying proportions.

The ease or difficulty of obtaining financing depends on the type of property. Additionally, it's important to note that tenants in common do not have the right to survivorship. In the event of a tenant's death, their ownership interest or percentage is transferred to their own estate as specified in their will or by the governing law, rather than being divided among the surviving owners.

Termite Inspection

Termites are small, pale insects with soft bodies that feed on wood and can cause extensive damage. The Wood-Destroying Insect (WDI) report, commonly known as the Termite Report, includes a property diagram highlighting areas with current or past termite activity.

The report may also recommend necessary measures to address potential infestations, such as spraying or tenting. However, it is unusual for the WDI report to provide cost estimates for such treatments, as this could be seen as a conflict of interest.

Title Search

A title search involves examining public records to trace the history of a property, including previous sales, purchases, and any outstanding liens or encumbrances.

Typically, a title examiner utilizes title plants and sometimes county records to determine the current record owner of the property. The Preliminary Report, which includes information about the property owner and any recorded liens or encumbrances, is then provided to the parties involved for review before the escrow is closed.

Trust Sale

A trust sale occurs when a home is being sold by a trustee who represents a living trust, rather than an individual seller. This often happens when the original homeowner has passed away or has placed their assets in a living trust.

Since the trustee may not have the same emotional attachment to the property as a traditional owner, they may be more inclined to accept less attractive offers in order to quickly dispose of the property.

VA Loan

A VA loan is a type of loan guaranteed by the government through the Department of Veteran Affairs. It is available to military personnel, both active and retired, as well as eligible spouses. VA loans offer low-to-no-down payment options, competitive interest rates, and fees.

 

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