Real Estate Terms Buyers and Sellers Should Know
Whether you are buying or selling if you are planning on making a real estate transaction, you are going to run into a few terms you are unfamiliar with.
To make things a little easier, here are a list of common real estate terms – and not so common terms – that you can reference as you move forward with your purchase or sale.
These are the real estate terms all buyers and sellers should know. Keep in mind some of these legal terms are obscure enough that your real estate agent might not even know how to handle them properly.
In fact, the first two real estate terms on the list, what’s known as dual agency and an escalation clause are often misunderstood. These real estate terms sellers and buyers should be familiar with. Unfortunately, they are not, along with many other terms.
Grab a cup of coffee and become more educated on some vital aspects of real estate.
An escalation clause is legal jargon a buyer can put in an offer that states that the buyer will outbid other offers on a home up to a certain price point.
For example, a buyer may offer $400,000 initially, but state in an escalation clause that he or she will outbid other offers by $5,000, up to a ceiling of $425,000. That means that the buyer will most likely get the home as long as no one makes an offer higher than the ceiling price. Unless of course, the buyer has additional unacceptable terms.
Escalation clauses are more common in seller’s markets. Escalators are designed to help a buyer win a bidding war which becomes quite common in hot real estate markets.
While an escalation clause can be useful for the buyer, some sellers may find the addition of such a clause confusing. The seller may wonder why the buyer did not offer more if he or she was willing to pay the ceiling amount for a home. With an escalation
It is always important to clarify with a real estate agent who he or she represents – because it may not be you, or just you. In the case of dual agency, an agent will take over the role of buyer’s and seller’s agent, serving both the buyer and seller in a real estate transaction.
Some states have made dual agency illegal, while others have strict rules that must be adhered to during dual agency. Whatever your state’s laws concerning dual agency, the fact is that it is an arrangement that does not serve your best interests.
In most transactions, the buyer wants to buy for as little money as possible, while the seller wants to sell for as much money as possible. Those two goals are at odds with one another, which means that a dual agent cannot effectively serve both parties. You are much better off with an agent beholden only to you, whether you are a buyer or a seller.
What many real estate agents do not understand about dual agency is you CANNOT by law give either the buyer or seller any pricing advice. The agent essentially must become a neutral party. In dual agency, both the buyer and the seller give up someone in their corner fighting for their best interests.
It is an awful arrangement. The only real winner in dual agency is the real estate agent.
One of the biggest problems with dual agency is lots of consumers agree to it. If buyers and sellers understood the dynamics of dual agency, they would never agree to allow it. Unfortunately, they don’t get it, and the person who is explaining it to them is the real estate agent who benefits from them saying yes to it.
In a hot real estate market it is not uncommon for you to find the perfect home right as another buyer is signing a contract with the seller. While this can be frustrating, not all hope is lost. Real estate deals fall through all the time, for a myriad of reasons. You may not have control over whether the deal goes through, but you can make a backup offer that will put you first in line should the seller need another buyer.
A backup offer may not guarantee that you get the home you want, but it is a useful tool to keep you in the running in the unpredictable world of real estate transactions.
Right of First Refusal
A right of first refusal clause is a valuable tool for sellers who find themselves dealing with a home sale contingency. A home sale contingency is a clause that some buyers will put into offers that state they will buy a home – but only if their home sells first.
While the home sale contingency is quite convenient for the buyer, it puts the seller in a weak position. But a right of first refusal clause provides an alternative for the seller.
The right of first refusal clause allows you to keep your home on the market. If you get an offer on the home, you inform the first buyer and give him or her a specified amount of time to eliminate the home sale contingency and purchase the home – typically 24 to 72 hours.
Giving a buyer a right of first refusal only makes sense if the buyer can qualify to purchase your home without selling theirs.
Private Mortgage Insurance
Private mortgage insurance, also referred to as PMI, is insurance that a lender will force you to take out as a buyer if you put down less than 20% on your home. PMI is there to protect the lender, who considers you a greater risk based on your lack of down payment.
Unfortunately, private mortgage insurance can boost your monthly mortgage payment noticeably, so most home owners are eager to get rid of it. The most straightforward way to eliminate PMI is to reach 80% of your mortgage. You can also try creative options like refinancing, appraisal, and remodeling.
Many home buyers will, in fact, go out of their way to avoid paying private mortgage insurance. Often seeking other means of getting a loan that doesn’t require putting down twenty percent. Private mortgage insurance is a good thing. Without it, many buyers would not be able to get into a home.
Real estate title insurance is a type of insurance that covers financial loss from defects in title to real property and the invalidity of mortgage liens. If a lawsuit attacks the title of your home due to defects in the title, the insurance protects you financially. Lenders will offer the option of purchasing title insurance when you take out your mortgage. It is a one time fee for the insurance, which can be a substantial extra cost when added to all the other costs of buying your home.
While it is a significant one time fee to a buyer, it’s worth it! Learn more about title insurance in this comprehensive article. See the pros and cons of title insurance.
A Zillow estimate is a “fun” tool for home buyers and sellers because it is a free, easy to access tool to get an idea of a home’s value. However, it is important to realize that a Zillow estimate is no substitute for the services of a skilled real estate agent.
The problem with the Zillow estimate is that it’s completely inaccurate. Their tool misleads both buyers and sellers on the value of a property.
Real Estate agents are left to explain to consumers constantly they should take a Zillow estimate with a grain of salt. You have better odds of seeing Bigfoot than you do an accurate value unless you live in track housing.
Zillow uses a program based on averages that give a general idea of the price of a property, whereas a real estate agent will calculate the value using detailed information and experience that the Zillow program does not.
A major component of the Zillow algorithm is an assessed value which most recognize has no correlation to market value.
Pricing a home is one of the most important parts of a sale. You want to get it right the first time, which means using the services of a Realtor experienced in your market.
Remember Zillow doesn’t visit your home. Don’t expect an algorithm to know what your home is worth. You could dump $50,000 into your property tomorrow, and Zillow would never know about it.
Pre-Qualification Vs Pre-Approval
Sellers need to know the difference between pre-qualification and pre-approval letters from a lender. A pre-qualification letter is relatively easy to get and simply states what the estimated borrowing ability of a buyer. A pre-approval letter is much more involved, requiring most of the documents and verification necessary to get a mortgage loan. When you are selling, you want a pre-approval letter to prove that a buyer is really in a position to purchase your home.
A pre-qualification letter is most useful for buyers who want to get an idea of what price range they can shop in. It is not adequate for a seller considering offers from buyers. If you are selling, do not settle for anything less than a pre-approval letter.
With a pre-approval you’ll the lender will mention that they have run the borrowers credit, as well as verifying their income and employment.
An escrow holdback agreement lets the buyer hold back a portion of the seller proceeds in escrow. There are a variety of reasons why you may want an escrow holdback, like if the seller has not finished repairs to the home by the time of closing and you still want to close on time.
You may also choose an escrow hold-back if there are title issues, or you need to wait until a system has been approved, such as a septic system. The escrow hold-back motivates the seller to get things done so he or she can get the money, while still letting you close on the home.
Typically the amount of the holdback is commensurate with what the buyer thinks will motivate the seller to get something done. It is not at all uncommon for thousands of dollars to be held back from the seller.
Use and Occupancy Agreement
A use and occupancy agreement is an agreement that allows a buyer to use/occupy a property while protecting the seller. The use and occupancy agreement let the seller remove the occupant of the property legally if circumstances dictate the need to do so. For instance, if a buyer’s home has sold and he or she wants to move
For instance, if a buyer’s home has sold and he or she wants to move into the seller’s property before closing, the seller can draft a use and occupancy agreement. Ideally, the sale will close, and the buyer will take over ownership of the home. But if the deal falls through, the use and occupancy agreement will make it easier to remove the buyer if necessary.
The use and occupancy does not create a standard tenancy relationship, which is why removal is easier. The use and occupancy agreement is often using when someone is in a tough spot with their housing situation. Sellers grant buyers the ability to use their home until the closing takes place.
Closing Cost Credit
Closing cost credits are a common request you will get from buyers when selling a home. They are also often referred to as seller’s concessions when a credit is given for something other than closing costs.
While at first, it can seem strange to be asked to help a buyer purchase your home, closing cost credits can be quite useful. They give the buyer more breathing room to take care of all the little things that need taking care of after purchasing a home, and they help you close a sale.
For instance, as a seller, you may be able to get a buyer to agree to purchase your home with existing problems by offering closing cost credits. The buyer can use the money saved to make the improvements after purchase.
Maybe the buyer would like to put in new carpets to the tune of $5000. They might not have a significant amount of cash so by having a closing cost credit they don’t need to.
Quite often sellers get caught up in the semantics of buyers asking for a closing cost credit when they should be thinking about their net.
Here is the perfect example – you home is listed at $310,000. The buyer offers you $310,000 less a $5000 closing cost credit. This is the same thing as a buyer offering you $305,000. Not a bad offer right? Don’t get hung up on the little things!
Value Range Pricing
Value range pricing is a marketing and pricing strategy that involves listing a home with a price that ranges from low to high – encompassing the range of offers that the seller will consider for the home.
For instance, you could have a home worth $400,000, and list the home using value range pricing at $375,000 – $425,000. The idea is that you can bring in buyers that may not otherwise consider your home.
The general advice on value range pricing is that you start at a range of about 5 percent above and below your home’s estimated value. You still want to consult an experienced Realtor to get an accurate price on your home based on your area and the current market.
Value range pricing is not a substitute for accurate pricing. Many home buyers feel value range pricing is deceiving because the lower price is what’s usually published in MLS. Only later does a buyer read the description and realize they have been duped.
Some Realtors swear by value range pricing. However, it can be argued that it is better to just price your home accurately from the beginning and forego all the hassle that is inevitable with value range pricing.
There will also be real estate agents who use value range pricing because they don’t have the ability to price a home correctly. Not what you want as someone selling your home. At times I have wanted to call it “I don’t know what the hell I am doing pricing.” Always keep this in mind when picking a real estate agent.