Common Real Estate Terms You Should Know!
I recently had a client who just purchased their first home. With first time home buyers, as a realtor you have to remind yourself to move a little slower and to explain things in more detail so that your clients completely understand what they’re getting into. I remember one particular conversation where I was explaining earnest money and escrow, and judging from the look in their eyes I’m pretty sure that I lost them at “Hello”. With that said, I thought, “Why not compile a list of some of the most common real estate terms and blog about it?”, so if you are a first time home buyer or a seasoned home buying veteran, here’s a list of words you should know! If you come across any other words you need clarification on, just comment below.
COMMON REAL ESTATE TERMS
Appraisal – The process of estimating or setting the market value of a piece of property, partially based on an analysis of comparable sales of similar homes in the area. An appraisal usually takes the form of a written report. Appraisals are usually required during the mortgage loan approval process.
Closing Costs – For buyers, closing costs consist of expenses that must be paid in addition to the purchase price of the home, like loan origination fees, appraisal fee, credit report, title insurance, survey, etc. For sellers, closing costs include expenses that will be deducted from the proceeds of the sale, like attorney fees, transfer taxes, real estate commissions, etc.
Commission – Compensation paid to real estate professionals for services rendered in connection with the sale or exchange of real property. (Typically paid for by the seller. Buyers agents will often say that their services are “Free”, which means that the home buyer doesn’t directly pay commission to the agent, but rather the commission is paid via the seller at the end of the transaction).
Comparative Market Analysis (CMA) – An in-depth analysis of nearby comparable home sales done by a real estate agent to estimate a home’s market value, usually performed to help select the most appropriate sale price. (This is especially useful for home buyers as well as we can determine an appropriate price for a home you are interested in making an offer on).
Contingencies – Conditions written into a real estate contract that specify that the contract will cease to exist in the event of certain conditions. Contingencies, like requiring an acceptable property inspection report within a certain time period, must be met for a contract to be legally binding and carried out as written. (Contingencies are meant to protect the buyer from purchasing a home that could end up being a “money pit”. Typical contingencies you can include in contracts are: Inspection, Appraisal and CL-100 (Wood Infestation report).
Contract – An oral or written agreement between competent parties who agree to perform or refrain from performing a certain thing. In real estate there are many different types of contracts, including listings, contracts of sale, options, mortgages, assignments, leases, deeds, escrow agreements, and loan commitments, among others.
Deed – A written, legal document that conveys or transfers property. (You will want to make sure that the owner of the home you want to buy is actually, in fact, the owner!)
Escrow – The process in which an item of value, money or documents is deposited with and held by a trusted third party to be delivered upon the fulfillment of a condition. For example, the earnest money deposit is put into escrow, the transaction is closed, at which time it is delivered to the seller. (Earnest Money is the deposit you make when making an offer on a home. The amount of earnest money you put down can be the determining factor in how serious the seller views your offer).
Foreclosure – The process of taking possession of a mortgaged property as a result of a failure to keep up with timely mortgage payments. This can involve a forced sale of the property at public auction after which the proceeds of the sale are applied to the mortgage debt. (The bank provided you with funds to purchase a property, unfortunately after a few years you could no longer make payments to pay back those funds. This gives the bank the right to take back the home and resell it to recoup the money they let you borrow in the first place!)
Home Inspection – A thorough inspection by a qualified professional who evaluates the structural and mechanical condition of a home. A home inspector may assess the condition of a property’s roof, foundation, heating and cooling systems, plumbing, electrical work, water and sewage and some fire and safety issues. In addition, the home inspector will look for evidence of issues that may affect the value of the property. (I always recommend getting a home inspection prior to purchasing a home. You want to know everything there is to know about the home before you buy it, it’s just common sense! Some of the best home inspection companies that I have worked with have been: CFM Home Inspections, and B-Home Inspections)
Homeowner’s Insurance – An insurance policy that combines personal liability insurance and hazard insurance coverage for a dwelling and its contents, often required by mortgage lenders. (State Farm, Allstate, Geico, etc. While you’re at it, you might as well ask them about earthquake insurance and flood insurance).
Lien – A legal claim against the property as a result of a debt that must be paid off when the property is sold. (Ie. A contractor did electrical work in the home. Unfortunately the previous home owners did not pay them. That contractor can put a lien on the home to get paid when the home is sold.)
Mortgage – A legal document that specifies a temporary, conditional pledge of a property to the lender/creditor as security for the repayment of a debt, in this case a home loan. (Two of the more popular mortgages out there are the 30 year fixed rate mortgage to the 15 year Adjustable Rate Mortgage).
Pre-approval – Pre-approval is a loosely used lending term that usually implies that a buyer has already talked to a lender. The lender has, in turn, checked the buyer’s credit history and income to determine that they will be able to get a loan up to a certain amount. The pre-approval helps a buyer find a home within their price range and submit a strong offer. (You always want to get a pre-approval letter as it is a more in depth analysis of what you can afford. You may also heard about a “Pre-qualification” letter which is just a preliminary estimate of what you can afford and is typically not as strong as a “Pre-approval”.) Get a pre-approval now by contacting Matt Dorsey at Starkey Mortgage.
Short Sale – A short sale occurs when a property is sold at a moderate loss, as an alternative to foreclosure. The home is listed at a price lower than the amount owed on the mortgage. Buying a short sale home can require approvals from multiple lenders. (You can typically spot a short sale when you see “Third party approval” in the description. This literally means, that when you make your offer, they will take your offer to the bank and see if they will take it, however it usually takes quite a while to get an answer back!)
Title – A legal document evidencing a person’s right to or ownership of a property. A title report, often done by a title insurance company after an offer has been accepted, will show the history of the title as well as applicable encumbrances such as easements or liens.
There you have it! Some of the most Common Real Estate Terms you should know when you’re thinking about buying a home! If you have any questions at all just let me know!