Learn the Lingo of Real Estate
Buying and selling real estate can be a complicated process, so it is important to learn the lingo before you get started. So here is a short list of the more common terms you will hear and what they mean to you.
1. Equity - Equity is simply the difference between what your home is worth minus anything that must be paid off in order to sell the property such as mortgages, back taxes and closing costs. As you pay off your mortgage over time and the value of your home increase so does your Equity in your home.
2. Earnest Money Deposit - Usually the term Earnest Money Deposit gets shortened to just Deposit. This is the amount of money held by the Title Agent or Attorney during the period when an offer is accepted and when the transaction closes. If the buyer fails to perform to the terms in the contract then the Deposit is forfeited. The Deposit is a negotiable term that is typically from 2% to 10% of the purchase price.
3. Down Payment - The down payment sometimes gets confused with the Deposit. The Down Payment is the amount of cash the buyer puts up towards the purchase in a financed transaction. As an example, if the purchase price is $300,000 and the buyer is financing 80% of that ($240,000) then the Down Payment is difference which is $60,000.
4. Appraisal - An Appraisal is estimate of value report put together by a licensed professional using standardized practices. It is based on recent sales of similar homes in the immediate area. It isn't an absolute value that a home would, or must, sell for. An appraisal is most commonly used by the lender to protect their interest in the property. They need to know if they are lending as much as 97%, or in more rare cases 100%, of the purchase price, the home is worth that much.
5. Escrow - The Earnest Money Deposit is held in Escrow by a third party such as the Title Agent or Attorney. At closing the funds in escrow are applied to the purchase when all the conditions in the contract are met. It can also be funds the lender collects in addition to the mortgage payment and paid on the buyers behalf on a monthly basis. Most commonly the lender will collect funds for the property taxes, hold them in escrow and pay them for the borrower to protect their interest in the property.
6. Due Diligence - This is research on the property the buyer will conduct prior to purchasing. Due diligence is usually done after a contract is signed. Inspection, lien searches and title searches are all part of due diligence. A contingency is written into the contract that allows the buyer to be released from the contract if defects are discovered that affect the properties value.
7. Contingency - A contingency is a provision written into a contract that allows the buyer to be released from the contract if certain requirements can't be met. Common contingencies are Inspection, Appraisal, and Financing. In other words if the inspection revealed a lot of hidden defects, or the property appraisal came in well below the purchase price, the buyer can be get out of the contract. Occasionally a sale could be contingent on the successful sale of the buyers current home.
8. Inspection - It is highly recommended that a buyer have their home inspected prior to purchasing it. A professional home inspector can go through the property and look for hidden, and visible, defects that affect its value. Typically a purchase contract will allow one to two weeks for the buyer to have this done. If defects are found they can be released from the contract or renegotiate the terms of the contract.
9. As-Is - When a buyer purchases a property As-Is, it is just as it implies. They are buying it in its current condition without any repairs or improvements done by the seller. An As-Is contract will typically allow the buyer a period of time to do their inspections and other due diligence. If for any reason they decide they don't like what they see they can be released from the contract.
10. Closing - The transaction is completed at Closing. The Title agent or attorneys will collect all the funds and have both parties sign the required documents, then disperse the funds to all the interested parties. It is common for the buyer and seller to meet at the closing table at the same time, but not necessarily.
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