Real Estate Terms Explained – (Part One!)
Most industries have their own unique jargon or lingo, and real estate is no exception. In addition, many industries utilize acronyms. An acronym is defined as a word formed from the first letter of several words.* For example, did you know the word ‘scuba’ actually stands for Self-Contained Underwater Breathing Apparatus? You can thank the Donnelly Group if that ever wins you a trivia quiz!
Before diving into (no pun intended) a real estate transaction, it’s best to be familiar with some of the terms associated with real estate. The following is a list of common real estate terms explained.
Addendum – This is a document that is attached to, and made a part of, the original contract. It’s used to clarify certain terms of the contract or to make changes to the contract. For instance: the purchase contract states the closing date as July 30, but the buyer’s lender needs a little more time to finalize the loan. An addendum is put into place to extend the closing date. Addendums must be signed by all the parties to the contract.
Appraisal – If you’re using a home loan to purchase a property, your lender will want to know the property’s fair market value before granting you a mortgage. They will hire a real estate appraiser who is an unbiased third party and is licensed to determine the current value of the property. The report they provide is the appraisal.
BINSR (Buyer’s Inspection and Seller’s Response) – Once a buyer completes their inspections they have the opportunity to request that the sellers make some repairs. The form used to list the requested repairs is the BINSR. It must be submitted to the seller before the expiration of the 10-day inspection period. The seller then decides which repairs they are willing to make and responds on the same form.
Closing Costs – These are the costs over and above the purchase price that you’ll be required to pay at closing. Both buyers and sellers have closings costs. Buyers have fees associated with their loan. Sellers will have to pay the agreed upon real estate commissions. In addition both parties will have to pay the fees charged by the title company for handling the escrow.
Counter Offer – This form is used to “counter” the terms of the original offer. Suppose you submit an offer to purchase a property for $300,000. The seller of the property can accept your offer, reject it outright, or they may counter your offer stating a higher price (ex: $325,000). Counter offer are also used to propose different terms such as a different closing date, etc.
Contingency – In real estate, anything that puts a condition on the buyer’s willingness to purchase is a contingency. If the buyer is relying on a loan for the purchase then the appraisal becomes a contingency item as the lender will only grant a mortgage on the property’s fair market value. The buyer’s mortgage is a contingency of the contract. If the buyer fails to qualify for the mortgage, the sale will not go through. The home inspection is also a contingency. During the 10-day inspection period if the buyer disapproves of problems found in the inspection or information provided on the SPDS, they may cancel the contract and receive a refund of their earnest deposit.
Contingent Offer – This is an offer to purchase with conditions that must be met before the home can close escrow. Most commonly, the buyer has a home that they must sell before they can close escrow on the new home. These offers are more risky for sellers as they are taking the home off the market and could miss out on other buyers without contingencies. Check out this blog post for more detail – What is a Contingent Offer?…How to avoid it!
Disclosures – You may encounter a number of disclosure forms during a transaction. Disclosure forms provide pertinent information that could effect either party’s decision to proceed with the transaction. In Arizona a seller is required to complete and submit to the buyer the Seller’s Property Disclosure Statement (SPDS). The seller fills out this form detailing everything they know about the property. Another common disclosure is the HOA Addendum (Homeowner’s Association Addendum). This document is used for properties located in an HOA and it discloses the amount of the regular HOA fees the owner pays as well as the fees associated with the transfer of the property to the new owner.
Due Diligence – This is a legal term that is taken very seriously. In Arizona a buyer has ten calendar days from the date the contract is executed to perform all desired inspections and investigations of the property they’re purchasing. It’s common to schedule a number of inspections including home inspections as well as termite, roof, HVAC, pool inspections, etc. In addition the buyer may investigate whether the property is located in a flood zone or if a sex offender is living in the area, etc.
Earnest Money Deposit – When a buyer submits an offer on a property he or she will show good faith by designating a certain amount of money as an earnest deposit. This is typically 1% of the purchase price. Once the contract is executed and in force, the buyer will deposit the earnest money with the title company and it will be held in escrow until the closing date when it will be applied toward the purchase price.
Escalation Clause – This is commonly used in a seller’s market when there is high competition for properties. Basically the buyer offers to pay a certain amount over the next highest offer up to a ceiling amount. For example: the buyer offers $400,000 for a home and includes an escalation clause stating that they will pay $1000 over the next highest offer up to a maximum purchase price of $425,000.
Escrow – This can be a confusing term for many, especially first-time homebuyers. Put simply, escrow is a neutral third party with no ties to the transaction who holds all the associated documents and money until it’s disbursed at closing. Escrow and title companies perform this service.
Personal Property vs. Real Property – It’s important to understand the difference. Real property is considered to be “real estate” or part of the property being sold. It’s anything that is physically attached to the property such as the AC or lights. Personal property on the other hand, is the items that do not transfer with the property such as furniture and décor.
Possession – The buyer obtains possession of the property when escrow has closed and the deed is recorded with the county assessor’s office. The buyer now has control and right of entry to the home. There are times when the seller may want to stay in the home after closing occurs because they need more time to secure their new home. In this scenario, it’s important to put in place a well-written Post-Possession Agreement and have it signed by all the parties. This agreement should clearly state the terms including the length of time the sellers may continue to occupy the home, the amount of rent the seller must pay, if a security deposit will be required, etc. In a seller’s market, a buyer can make his offer look stronger by offering the seller a post-possession. However it’s important to consider the risks. If the seller refuses to move at the end of the term, the buyers would need to use the eviction process to remove the sellers from the home.
Pre-Qualification Vs. Pre-Approval – Many buyers who have decided to start seriously looking for a home will contact their lender for a Pre-Approval letter and may believe that this is enough to show that they can qualify for a loan. However, a Pre-Approval letter is just a cursory estimate of the borrowing ability of the buyer. In Arizona, this isn’t enough, and a lender-signed Pre-Qualification form is required to be presented with any offer. The Pre-Qualification is more involved and will require the buyer to submit documentation including pay stubs, bank statements, tax returns, etc. to the lender to prove that they really are in a position to purchase the home. Here’s more information on Pre-Qualification.
What’s in Part Two?
Once you, as the buyer or seller, have successfully negotiated a contract for a property, that property is now “in escrow.” As confusing as real estate terminology can be, escrow related words and phrases can be even more overwhelming. That’s what we’ll dig into in Part Two.
The Bottom Line…Contact The Donnelly Group!
These are some of the most critical real estate terms that buyers and sellers should understand. You don’t need to know everything, that’s our job…but it is good to be informed! Knowing these terms helps to keep you on track with your home purchase/sale and to not get caught by unexpected surprises. If you have any questions about any of these terms, or need help buying or selling a home in metro Phoenix, please contact the Donnelly Group at 480-792-9700 or by email.