Real Estate Jargon & what it means
Understanding Real Estate Talk
Appraisal
An appraisal is required to gather the estimated value of a piece of real estate. During the home sale, the mortgage lender sends out an appraiser to get a professional opinion of the value of the property. This helps the lender decide if the property is worth the amount of the loan the potential buyer is seeking. An appraiser hired by the buyer’s lender evaluates the value of the home to ensure that the loan is secured by an appropriate home value. Lenders want to ensure they are not “over-paying” for a property.
As-is
A property marketed in “as is” condition usually indicates that the seller is unwilling to perform most if not all repairs. It could also mean that it is priced “as is”, which is typically lower than market pricing in the area.
Finally, “as is” is in the condition at the time the offer was written, and should something happen to the property from the time the offer was written to the closing time which alters that condition, then that property is no longer “as is”, as it was, and should be brought back to its original “as is” condition at the time of offer, at the cost of seller. Or in the alternative, the seller should release the buyer from their obligation to purchase and refund the monies spent by the buyer, such as earnest money.
Backup offer
When a buyer is interested in purchasing a property that is already has a conditional offer with someone else, that buyer has an opportunity to submit a “backup offer”, in case the first transaction falls apart. A backup offer must still be negotiated and any monies, such as earnest money, submitted, to confirm it is the next offer in line. There can only be one backup offer legally, as you cannot have a backup to the backup. The backup offer has to be conditional on the first offer fulfilling its conditions.
Blind offer
When a buyer makes an offer on a property they haven’t seen, even when it was possible to see it, that offer is considered a “blind offer”. It is most commonly used in a highly competitive area and/or circumstance, and used as an attempt to be first and win quickly.
Buyer’s agent/listing agent
A buyer’s agent, also known as a selling agent, is a licensed real estate professional whose job is to locate a buyer’s next property, represent their interests by negotiating on behalf of that buyer to obtain the best price and purchasing scenario for that buyer as possible. This agent is a fiduciary for the buyer.
The listing agent, also known as the seller’s agent, is a licensed real estate professional whose job is to market the seller’s property, and to represent the seller’s best interest by negotiating on behalf of the seller to secure the best price and selling scenario as possible. This agent is a fiduciary for the seller.
Buyer and listing agent commissions are each typically 2-2.5% of the contract price in each sale.
Conventional sale
A conventional sale is when the property is owned outright (has no mortgage remaining) or the owner owes less on their mortgage than what the market indicates the owner could sell their property for. Such conventional sales are often smoother transactions than non-conventional sales, such as power of sale and probate related sales.
Closing
Closing is when the home sale is considered final, which typically includes all parties’ signatures on all required documents, all monies conveyed, and when a lender is involved, with full lender’s approval. Once all of these items are completed, then a buyer’s access to the property is then provided, and the buyer is considered the new homeowner.
Closing costs
Closing costs are an assortment of fees, including fees charged by: a lender, title insurance, lawyers fee, land transfer tax, real estate agents, and other closing settlement related companies. These closing costs are typically paid at the time of closing a real estate transaction via the lawyer. They will be found on the Lawyers statement of adjustments.
Days on market (DOM)
DOM is defined as the number of days from the date on which the property is listed for sale on the local real estate brokers’ multiple listing service (MLS) to the date when the seller has signed a contract for the sale of the property with the buyer.
A related metric is the average DOM for homes sold in a market during a specified period. A low average DOM indicates a strong market that favors sellers. A high average DOM signals a weak market that favors buyers. Seasonality can also be a factor.
Homes generally appear to sell faster in Spring than Winter, since you often have more people looking to purchase and sell during the more pleasant weather months rather than the colder more uncomfortable weather months.
Debt-to-income ratio
Debt-to-income, or DTI, ratio is a number used by mortgage lenders which is determined by the total of your debt expenses, plus your monthly housing payment, divided by your gross monthly income, and multiplied by 100. This helps lenders determine affordability based off of their available loan programs, and allows them to estimate how much you can afford to pay monthly for a mortgage.
Lenders typically look for borrowers who pay 28 percent, or less, of their total monthly income on housing, and less than 36 percent of their income on debt payments, according to Investopedia. If either percentage is on the higher side, and you want to buy a home, you might need to adjust your budget.
Due diligence
A due diligence period of time might be available in the purchase agreement, which is a time frame provided to a buyer to fully examine a property, often by hiring experts to inspect the property, perform tests, etc., so that a buyer may decide on how to proceed.
A buyer might also be afforded an opportunity to renegotiate the contract based off of their findings or possibly even to terminate within a specified time period, in order to not be considered in default of the contract. Due diligence allows a buyer to fully understand what they are buying.
Deposit
A deposit , sometimes referred to a “good faith deposit”, is the initial funds that a buyer is asked to put down once a seller accepts the buyer’s offer. It shows not only that the buyer is serious about buying, but that they are also willing to put their money where their mouth is.
The amount of the deposit can vary between 1 to 5 percent of the sales price. The deposit is often held by the trust account of the Listing Brokerage.
Equity
This is the investment a homeowner has in their home. To calculate equity, take the market value of the home and subtract any mortgages or liens against the property. The amount leftover is the amount of equity you have in the home.
If you buy a home worth $250,000 for $240,000, you gain what is known as instant equity, because there is a $10,000 difference between the value and the cost. When you sell a home you bought for $250,000 for $260,000, you’ll get to keep the equity in the home after the close, once all the expenses are paid.
It’s important to build equity as homeowners can leverage this financial asset to obtain loans to help finance items such as home repairs, or to pay off higher interest debt.
Fixed rate mortgage
With fixed rate mortgages, your interest rate stays the same for the duration of the loan. They are often available as 10, 15, 20 & 30-year loans. The 25-year loan are by far the most popular type of home loans
Sale of Buyer’s Property
A sale of buyer’s property condition is for a buyer to indicate to a seller that part of their condition to purchase the seller’s property relies on the buyer’s ability to finalize a close on their current property. This is often negotiated with a clause in a contract offer An example of how such a condition can be used would be if a buyer needs to sell their property in order to have the down payment required on the purchase of the new property, or would rather use their sale proceeds instead of their savings to make the down payment.
Depending on the market, it could hamper negotiations with a seller when a condition is part of the picture.
Inspection
An inspection happens when buyers pay a licensed professional inspector to visit the home and prepare a report on its condition and any needed repairs. The inspection often happens as part of the due diligence period, so buyers can fully assess if they want to buy a particular home as is, or ask the seller to either complete or pay for certain repairs.
Inspection condition
The inspection condition is a clause sometimes offered in a purchase agreement that grants buyers a predetermined amount of time to perform any necessary inspections.
Land lease
Traditionally, when you purchase a home, you own the home and the land the property is built on. There are some circumstances that involve a land lease, which means you would own the home while paying rent to the landowner for the land.
Finance Condition
A Finance is a clause or addendumin an offer contract that allows a buyer to back out of a deal and keep their deposit if they are unable to secure a mortgage with specified terms during a fixed period of time.
Mortgage pre-approval letter
Getting a mortgage pre-approval letter is important because it gives home buyers an idea of what they can afford. A mortgage pre-approval letter is issued by the lender and identifies the terms, loan type and loan amount the buyer qualifies for after checking the buyer’s debt-to-income ratios along with cash on hand and credit history.
Many sellers or their agents require a mortgage letter with any home offer that isn’t all-cash, since it acts as proof the buyer has been qualified to get financing.
Multiple listing service (or MLS)
An MLS is a database that allows real estate agent and broker members to access and add information about properties for sale in an area. When a home is listed for sale, it gets logged into the local MLS by a listing agent. Buyer’s agents often check the MLS to see what’s on the market and what similar homes have sold for. Natural Offer/counter offer
Buyers make a formal offer on the home they want to purchase. The offer can be the full list price, or what you and your agent deem a fair market value.
The buyer’s agent puts the offer in writing, asks you to sign it, and then submits it to the seller’s agent. The seller might immediately accept it, in which case it becomes the parties’ purchase contract, or may make what’s known as a counter offer.
Pre-approval
Getting pre-approved requires home buyers to fill out an application that allows a lender to determine their financial situation, including their debt-to-income ratio, ability to repay and credit-worthiness. Once this is in hand, the lender can give the buyer a letter stating the exact loan amount they have been pre-approved for along with the total sales price they are approved for.
The letter will usually indicate both the buyer’s estimated down payment along with the potential interest rate. Because it is much more thorough than a pre-qualification letter, most sellers prefer to see a pre-approval letter with an offer.
Pre-qualification
A pre-qualification is a lender’ estimate of the amount a home buyer can expect to be approved for during the loan process. Getting pre-qualified is a quick assessment by a lender of the buyer’s financial situation based solely off of what a buyer tells a lender, and not based with any proof or verifications.
Principal
The principal balance of a mortgage loan is the amount of money owed to the lender, not including interest. Say you borrow $300,000. That’s the principal of the loan, or what you borrowed to buy the home. Buyers pay the principal plus interest each month, although calculated on a daily basis for most loan type. Payments nearly always go toward interest first, then toward paying down the principal. After all, the interest is the reason the bank agrees to make the loan.
Probate sale
A probate sale happens when a homeowner dies without writing a will or leaving a property to someone. In such situations, the probate court would authorize an estate attorney, or other representative, to hire a real estate agent to sell the home.
The total process will usually be a bit more complicated and therefore will take more time than a conventional sale.
Proof of funds
When you make an offer, sellers will require you to submit proof of funds. If you’re buying a house with a mortgage, it shows them that you have the cash available for your down payment and closing costs. If you’re paying all cash, your proof of funds shows you actually have the money.
The following documents qualify as proof of funds:
- Original or online bank statements with bank letterhead
- Copy of a money market account balance with bank’s logo or letterhead
- Certified financial statements, such as an income or cash flow statement that’s been signed off on by an accountant
- An open equity line of credit
Purchase and sale agreement
A purchase and sale agreement is commonly referred to a written contract between the buyer and seller, which outlines the terms of the parties to sell and purchase real property.
When a home is “under contract” it usually signifies that the Buyer and Seller have formalized their commitment to sell and purchase the real property.
REALTOR®
An actively licensed real estate agent and REALTOR® are often used interchangeably, although not every real estate agent is a REALTOR®. A REALTOR® is a member of the CREA.
A REALTOR® promises to uphold the Code of Ethics of the association and to hold each other accountable for when serving the public, customers, clients and each other, with a high standard of practice and care.
Rent-back
Rent-back, or leaseback, refers to an arrangement whereby the buyer, who is now the new homeowner, agrees to allow the seller, the now-tenant, to stay in the house beyond the close. The terms are negotiated prior to the situation occurring and will often involve a lease deposit, a daily rental rate, and a length of time allowable.
The rate can sometimes be determined by looking at the new homeowner’s monthly out-of-pocket for the mortgage as well as the possible inconvenience this may cause them in delaying their own move, all factoring into a daily rate.
Seller disclosure
A seller’s disclosure is a disclosure by the seller of information about the property, or which could affect a buyer’s decision to purchase the property, all of which to the best of the seller’s knowledge.
A seller must also indicate items which are not specific to the property itself but related to a person’s enjoyment of the property, such as pest problems, property line disputes, knowledge of major construction projects in the area, military base related noises or activities, association related assessments or legal issues, unusual odors caused by a nearby factory, or even recent deaths on the property as permitted by law.
Subject to inspection
Subject to inspection, or “submit offers subject to inspection”, means that the seller is not allowing the property to be viewed without an accepted offer. Some common reasons for this are privacy concerns of the occupants or uncooperative tenants.
The thought of buying a property sight unseen can be daunting for the traditional buyer, which can be used to your advantage as this will inevitably drive overall interest down.
It’s also not as bad as it seems as, under the standard purchase contract, you will have an inspection period, during which you can cancel the sale with no penalty.
Termite report
Termites are small, pale, soft-bodied insects that feed on wood, and can be highly destructive. The WDI (wood-destroying insect) report, also known as the Termite Report, includes a diagram of the property and the location of active and/or previous WDI activity.
The report can also and sometimes include what may be necessary to resolve such possible infestations such as spraying or tenting. The WDI report will rarely if ever include the cost for such items, as that may be considered a conflict of interest.
Title search
A title search examines public records for the history of the home, including sales, purchases, and tax and other types of liens.
Generally, a title examiner will conduct a search using title plants, and sometimes the county records, to see who is listed as the record owner of the property. Such information, along with any liens or encumbrances that are recorded against the property, will be listed in the Preliminary Report for the parties to review prior to the close of the house