by Scot Campbell | Broker | Realtor | 714-336-0394 | Scot@CampbellRealtors.com
Whether a home buyer, home seller, investor, or Realtor, there are some words and phrases that frequently crop up. With the help of Inman News and 30+ years in the industry, I chose 50 terms to create an easy-to-use glossary you’ll return to again and again.
Accessory dwelling unit (ADU)
Sometimes referred to as a “mother-in-law suite,” an accessory dwelling unit is a second residential area on a homeowner’s property. The accessory unit is typically either detached from the main home as a separate structure, or walled off from the home for the privacy of the second residents. These units are often installed on a property to house family members close by, or to rent out to another family altogether. Local laws and zoning ordinances often restrict the size and other features of these structures, and sometimes do not allow them at all.
Active Under Contract
This means the seller of the home has received an offer from a potential buyer. However, there are certain contingencies that need to be met before the sale can be finalized. A purchase contract may include contingencies — such as a buyer’s contingency for a property inspection and negotiating any necessary repairs with the seller before closing. If any of these contingencies are not met, the contract will be null and void, and there may or may not be penalties assessed. Most of the time, the contingencies within a contract can be worked through without any issues. But there are times when a buyer will back out of a deal because an agreement cannot be reached. Once all of the contingencies have been removed and the active contingent stage is completed, the property will show a “pending” status. If a buyer is very interested in an “active contingent” home, it is a good idea to write a Back-Up Offer. If the buyer who is in escrow cannot perform, the seller will often “jump” straight to the Back Up Buyer.
An addendum is an additional document that gets added to the purchase and sale agreement. The document will include any additional information or requests that the buyer did not put into the original purchase and sale agreement. The language in the addendum has the ability to override the original terms of the agreement. For this reason, any addendums that are attached can be very powerful. Adding an addendum to a contract is often preferred to other methods, such as striking out clauses within the contract.
Adjustable rate mortgage
An adjustable-rate mortgage is a mortgage that does not have a fixed interest rate. The rate changes throughout the lifetime of a loan based on the movements in an index rate. This type of mortgage usually offers a lower initial interest rate compared to fixed-rate loans.
Amortization is the schedule of a homeowner’s monthly mortgage loan payments. An amortization schedule shows you how much of their monthly mortgage payment goes to interest and how much to principal. Near the beginning of a loan’s term, most of the monthly payment will be applied to the interest and a smaller portion to the principal balance. As the homeowner continues to make payments, the monthly amount going toward interest will decrease and a greater share of the payment will be put towards the mortgage balance.
An appraisal is the estimation of a home’s current market value. A licensed appraiser completes this estimation, which is calculated by comparing the recent sales of homes in the area as to the property that is being appraised. This is required by mortgage lenders to be sure that the money they are lending to a new homeowner or a current homeowner is a fair amount for the home. The lenders want to be sure that the buyers are not overpaying for the property. This is to protect the lender. If the borrower stops making payments on the home and the lender needs to sell it, the lender wants to be sure it can recuperate the amount owed on the loan.
‘As is’ or ‘where is’
When a property is sold “as is” or “where is,” it means the sellers don’t want to perform any repairs on the home prior to closing. There’s no guarantee from the seller that everything is in working condition, and thus, a buyer who purchases a home “as is” is responsible for fixing any problems the home may have or any repairs that may be needed. Bank Owned Homes and Probate Sales are often sold “As-Is”.
While a home is “Active Under Contract” the buyer is in the process of doing inspections, reviewing the preliminary title report, HOA documents, disclosures, and attempting to obtain a loan approval. Another buyer who is highly interested in the property may benefit by submitting a “Back Up Offer”. If the buyer who is in escrow cannot perform, the seller will often “jump” straight to the Back Up Buyer.
The term “Basis Point” is a term from the lending industry. One hundred basis points is equal to one percent. One might hear a lender say that mortgage rates dropped 50 basis points… this means that mortgage rates dropped one half of one percent (ie: from 7% down to 6.5%).
Though not typically advisable, some homebuyers will purchase a property sight unseen. Known as a blind offer, these types of deals are more popular amongst buyers seeking to flip homes as a business venture.
Broker price opinion
When preparing a home to list on the market, a real estate professional will often give a broker price opinion on how much the home should sell for. This opinion is usually based on a market analysis of similar homes and can incorporate a more detailed evaluation of the home’s interior condition. A broker price opinion is most frequently used to inform the home’s eventual list price. BPOs are sometimes ordered by banking asset managers when borrowers default on their mortgage payments. BPOs are more affordable than a full appraisal and are commonly used to estimate property value for foreclosures and short sales.
When a seller wants to provide an incentive or “increase the buyer pool” for their home, they may elect to offer a “Buy Down” of the buyers mortgage rate. Some Buy Downs are 2-1 (two percent lower mortgage rate first year of loan, one percent lower mortgage rate the second year of loan). Similarly, it is possible in some market segments to get a 3-2-1 Buy Down. The seller can also reduce the mortgage for the life of the loan by paying Loan Points for the buyer; however, the reduction in rate is much smaller than with a buy down.
Concessions are benefits or discounted offers by the buyer to help sell a home and close a deal. Usually specified during negotiations, concessions can include covering the cost of new appliances in a home, moving expenses and any repairs needed. Concessions can impact the selling price of a home, so oftentimes, appraisers take concessions into consideration when evaluating the home and comparable properties in the area.
Cancellation of contract
According to the terms of the initial contract, the buyer or seller may have opportunities to cancel it. Cancelation can happen when a buyer fails to secure financing for the purchase, or when an inspection reveals flaws that the seller is unwilling to address. Typically the buyer has more opportunities to back out than the seller, but may lose their earnest money or option fee in the process.
Cancelled Status in the Realtor MLS
If a homeowner decides they no longer want to sell their home, sometimes the listing agent and the seller elect to “cancel the MLS listing”. When this happens, the home will show up as “Cancelled” status in the Realtor MLS.
Close of Escrow
In Southern California we say “Escrow has Closed” when we get confirmation that the grant deed was recorded by the County Recorder’s Office.
Comparative market analysis
A comparative market analysis (CMA) is used by real estate agents to estimate the value of a property by comparing and evaluating the property to similar ones that have recently sold in the same area. CMA is one of the cornerstones of pricing a property well, or making a competitive offer. Agents should familiarize themselves with the various search parameters that can help find similar properties, from number of bedrooms and bathrooms to the home’s square footage, age and more.
A contingency is a clause in a formal real estate contract that states there are certain conditions that must be met, by either the buyer or the seller, in order to continue to the next step in the contract. There are contingencies in almost every real estate contract. They are there to protect the buyer and the seller. If the contingencies are not met, there might be a breach in the contract, and the transaction could fail to close. One of the most important types is a financing contingency. This type of contingency ensures the buyer is able to secure the needed mortgage within a reasonable time period before closing. Contingencies can also be tied to the results of the home inspection, or the timely sale of the buyer’s current home.
When a buyer’s offer doesn’t live up to a seller’s expectations, the seller can submit a counteroffer. This typically amounts to a rejection of the original offer. Sellers who do this put the original offer at risk, and give the buyer a chance to walk away without going under contract. If the buyer accepts a counteroffer and makes the up-front payments required, both parties are under contract.
When you are transferring the ownership of a home, whether through a home purchase or an inheritance, you will need a Grant Deed in the State of California. This is the legal document that transfers the property ownership from one person to another. The Grant Deed to a home is also known as a title and is the written proof of who owns the home. The new homebuyer will receive a copy and the original copy recorded at the county and copies will be available from title companies.
A “default” occurs when a borrower does not make his or her mortgage loan payment and falls behind. When this happens, he or she risks the home heading into the foreclosure process. Usually, the foreclosure process is started within thirty days after the due date is not met. When a mortgage loan goes into default, the agency that is the loan holder has the option of taking over the property.
Depreciation is defined as a decrease in the value of a property over time. While the main driver of depreciation is usually a sustained downturn in home prices, other factors can also play a role, such as the amount of wear and tear on the home and any changes in the neighborhood. At the end of the day, the home is only as valuable as the price sellers will pay for when the homeowner is ready to sell.
In California, there are many Disclosure Forms used to complete the disclosure process. Transfer Disclosure Statement, Seller Property Questionaire, Natural Hazards Disclosure Report, Structural Pest Control Report, HOA Packet, and many others. The seller is expected to disclose defects they are aware of and other information if it is deemed to affect the use, value, or desirability of the property now or in the future. Lack of disclosure is the primary reason for litigation between buyers & sellers after close of escrow.
A down payment is the amount of money that a buyer has saved to help fund the purchase of a home. This amount is usually given as a percentage of the total of the home’s purchase price. For example, a common down payment amount is 20 percent, which means the buyer will be paying 20 percent of the total purchase price upfront. The remainder of the purchase price over and above the down payment is typically covered through a mortgage loan.
Earnest money deposit (EMD)
The earnest money deposit is a portion of the sales price that is typically held in escrow until buyers complete a purchase transaction or cancel a contract. Depending on the reason and timing for backing out of a contract, the buyer may lose this earnest money amount, and could also be the target of a legal dispute. Buyers write contingencies into their offers to maintain their right to back out of the deal while protecting their earnest money. In California it is customary to remove contingencies “in writing”… the buyer’s EMD is not at risk in most cases until the buyer has removed all contingencies in writing.
An easement is defined as someone’s right to use a piece of land — someone who is not the owner of the land. There are many easements that can affect the value of land, but oftentimes there is nothing a homeowner can do about them. An easement is usually put into place to serve a purpose and is limited to this particular type of use only — such as for utility companies to access underground infrastructure. Easements are why it is important for homebuyers to review the Preliminary Title Report. The utility and any other recorded easements will show up on the Preliminary Title Report.
When you own a home or you are preparing to purchase a home, you do not want anyone to have their personal property on what is supposed to be your property. But boundary issues happen, and they can be ugly. There is a term for this battle of land: “encroachment.” An encroachment happens when a fence or another piece of your neighbor’s property crosses the property lines. Other examples of encroachments could involve trees, parts of a building, fencing or any other fixtures located on both pieces of property.
Equity is the market value of real property, minus the amount of any liens — including mortgages — that may exist against the property. For a client who has $280,000 in mortgage debt against a home that could sell for $800,000 on the market, their equity in the home is generally the difference between the two amounts, or $520,000.
An escalation clause, oftentimes referred to as an escalator, is a clause in a real estate contract that lets homebuyers increase their offer by a pre-determined amount over other offers in case the seller receives another offer at a higher price point. Escalation clauses are typically reserved for when a buyer is confident there will be multiple offers or if the buyer expects to pay an increased price for the property.
Escrow is a term that homebuyers, sellers and real estate agents should be very familiar with and have a complete understanding of before buying or selling a home. Escrow is a term that refers to a third party hired to handle the property transaction, the exchange of money and any related documents. Escrow comes into play once both parties have reached a mutual agreement or offer. The escrow officer handles the transfer of the buyer’s loan documents and property taxes, as well as working with the lender for the buyer to be sure that the title does not have any liens on it before the transfer of ownership is completed. “Being in escrow” is a legal procedure that is used when real property requires a transfer of title. An escrow account is opened by the listing agent when the sellers of the property and the buyers of the property have come to an agreement on the selling price, the terms and any other contingencies that they may have and are ready to close the deal. The parties on both sides will sign all appropriate documents, and then escrow is ready to be opened.
“Fiduciary” is a term that refers to a legal relationship that is confidential between two parties. This relationship gives one party the right to act and make important decisions for the other party. In the world of real estate, the real estate agent and his or her clients (buyers or sellers) participate in a fiduciary relationship. The two parties enter into a signed agreement in which the client puts trust in the real estate agent to work with their best interests in mind. The duties that are required in a fiduciary relationship will vary from state to state, but all require confidentiality. The real estate agent’s responsibility is to protect the privacy of the client and to keep all of the client’s information confidential. Throughout the entire process, including negotiations and closing, the real estate agent should keep all of a client’s information (personal and financial) private.
The vast majority of mortgages in recent years come with a fixed interest rate. This means the rate is locked in for the full duration of the loan — usually a 15-year or 30-year period. Because the rate cannot change, the portion of the mortgage payment that goes toward principal and interest is also fixed. Making this fixed monthly payment in full over the lifetime of the loan results in a complete repayment of the loan balance, and no further money is owed.
For Sale By Owner (FSBO)
One way to sell a home is “For Sale By Owner” (FSBO). This means that a real estate agent will not be involved in the sales process. The seller of the home has decided not to involve a real estate agent and will handle the transaction completely by his or herself. The owner of the home will be involved in every part of the process, from showing the house to handling the negotiations. Usually sellers decide to do this because of the potential to save money. But many who try to list a FSBO home end up hiring an agent to complete the transaction because they are ineffective in finding a buyer willing to pay full market value and the seller lacks the expertise necessary to prepare the disclosure packet and manage the escrow process.
Foreclosure is the legal process by which the right of homeownership is transferred from the person or persons who occupy the home to the bank or lender that holds the mortgage loan. The foreclosure process will usually begin when homeowners stop making payments on mortgage loans. Lenders may begin the foreclosure process after two or three months of missed payments. If the homeowner receives the Notice of Default but the owner does not contact the lender, the lender will proceed with further action. The homeowner will receive notice that he or she will have 90 days to bring the outstanding balance current. During those 90 days, if the balance is cleared, the lender will stop all actions of a foreclosure and the property will remain the property of the owner. However, if the owner does not pay the outstanding balance within the designated time period, the lender may file Notice of Trustee’s Sale (foreclosure auction).
This homeownership model is one of several options for the would-be real estate investor who either can’t afford or prefers not to own an entire investment property outright. In fractional ownership, a company typically purchases a single-family home and sells it to a group of investors, who thereafter split the costs of ownership. This method is different from investing in a real estate investment trust (REIT), which provides shares in a company that owns properties, not the properties themselves. It’s also different from a timeshare, which grants the buyer a right to use a property for a specified period of time, and often doesn’t require an ownership stake in the property.
Home Owners Association (HOA)
Condominiums, townhouses, and some single family home communities have common areas. Thus a HOA is needed to collect dues, manage maintenance, and organize Board of Directors elections/meetings. Another function of the HOA is to provide a copy of the CC&Rs, Meeting Minutes, Budget, Reserve Study, and HOA rules (HOA disclosure packet) to prospective purchasers of units within a community managed by a HOA. The HOA Disclosure Packet is absolutely necessary to sell a property within an HOA and the cost of the packet must be paid for upfront by the seller per State of California statute.
Hold Status in Realtor MLS
If a homeowner is ill, celebrating a holiday, has family in town, or is even doing some home repairs, they may elect to have their home “off” of Active Status in the Realtor MLS for a few days. The listing agent and the seller may elect to “put the MLS listing on Hold”. When this happens, the home will show up as “Hold” status in the Realtor MLS and “Days on Market do not accumulate while the home is on Hold Status. However, the listing agent retains an Exclusive Right to Sell the property. Normally, MLS rules do not allow showings when a property is on Hold Status. If a buyer is interested in buying a home which has a “Hold” status in the MLS, the offer will be submitted to the listing agent just as if the property was an Active Status MLS listing.
When you receive a loan of any kind, it is more than likely you will pay interest. The term “interest” can be defined as the cost of borrowing money and is usually expressed as a yearly percentage that is paid as part of your monthly loan payment. Mortgage loans come with an interest rate. Interest rates change on a daily basis depending on what the current market looks like. However, once a borrower has “locked in” an interest rate on a fixed-rate mortgage loan, that interest rate will not change. It will remain the same for the entire length of the loan.
Lease Back (a.k.a. Rent Back or Seller in Possession After Sale)
If the seller needs additional time to get their affairs in order before moving, they can ask for a leaseback in the buyer’s offer. This can allow the transaction to close quickly — even before the seller is ready to move. It also allows the seller to use money from the first transaction on their next home. Eventually the seller will have to move out according to the terms outlined in the contract. The amount of the rent for the “Seller in Possession After Sale” is typically equal to either the buyer’s total Principle, Interest, Taxes, Insurance, & HOA Dues… or Market Rent.
When there’s a “lien” on a home, that means the home is being held as collateral until a certain debt is paid. The most common types of lienholders are the mortgage companies, but other examples can include utility companies, or even contractors. Basically, if the borrower owes money to anyone, that person or company can file a lien against the property. When it comes to selling a property that has a lien or liens placed against it, the seller and the purchaser will find that it is next to impossible to complete the transaction until the liens have been cleared. However, there are some situations — such as the homeowner not paying their mortgage or other debts — where the lienholder will ask for the sale of the property in order to collect the money that is owed.
A buyer who has put a home under contract and has submitted a loan application will have the opportunity to do a “Loan Lock”. This will be the rate of the mortgage when the escrow closes. Caveat: The longer the loan lock, the higher the mortgage rate. So, a 30 day escrow will allow for a lower loan lock than a 60 day escrow. Thus, many buyers will request that the seller close in 30 days and will give the seller a 30 day “rent back” in the event the seller wanted to do a 60 day escrow. This technique will lock in a lower payment.
Mortgage points (a.k.a. discount points)
When taking out a loan to buy a house, borrowers often have an option to spend extra money upfront on “points” to buy down the interest rate they’ll pay over the life of the loan. The more they pay upfront for these points, the lower their interest rate — and therefore, their monthly payments — will be. For a given amount of points, borrowers can usually calculate a break-even period — a specific time in the future where the savings from the lower interest rate exceed the initial up-front costs of buying the points in the first place. Before buying discount points, buyers should be aware of this break-even period and consider how likely it is they will reach it before having to move. There is no “free lunch in lending”. If the rate is less, then the upfront “points” are usually higher.
Multiple Listing Service (MLS)
The letters “MLS” stand for “multiple listing service.” This is a service that is either local or regional that gathers real estate listings — homes that are for sale. The MLS will have detailed information on it that brokers and agents can access online. There are many different searches that can be completed on the MLS. These searches can be customized — you can search by any given ZIP code, by using a certain distance radius from a location that you enter, by street name, subdivision name, property size and more.
Opening of Escrow
The California Assn of Realtors “Residential Purchase Agreement” has a clause which indicates escrow is “Open” when the document is fully executed. However, the term Opening of Escrow typically applies to either the buyer or seller’s agent sending a copy of the fully executed purchase agreement to the Escrow Officer and an escrow number is issued. P
When a home is listed as “pending,” it means that there is a closing date set and that all contingencies have been met or waived. At this time, the lender and the escrow company are busy working with the loan and title documents to be sure that everything will be ready by the closing date. The seller has not sold the property until it has closed and the deed has been recorded. Sometimes, the original buyer will encounter an emergency and will need to back out of the contract. This leaves the door open for a new buyer to walk through.
“Per diem” is a Latin term that means “per day.” When someone enters into a contract on a home, there is a date entered into the contract, which is known as a closing date. Per diem charges may occur if the loan is not approved for some reason by the date that the loan was scheduled to be completed. During closing, these charges will be payable to the lender and will appear on the Closing Disclosure.
Planned Unit Development (PUD)
Planned unit developments are housing developments that are not subject to the standard zoning requirements, but instead work with the local government to develop criteria that will determine common areas, private areas and building guidelines. The homeowner community will be operated by an association and will be designed to offer certain amenities and features that are not typically found in a traditional type of subdivision. There will generally be association dues assessed to help cover the amenities, maintenance and any other fees associated with living in a PUD.
Present Condition Subject to Inspection
Properties sold by an ordinary private seller using the standard CAR Residential Purchase Agreement are sold in their “Present Condition Subject to Inspection”. The buyer will often do a property inspection and then submit a “Request for Repair” for defects the buyer did not anticipate when making the offer. This is a second negotiation between the buyer and seller that most often works out, but can also cause an impasse and a cancellation of contract.
Real Estate Owned (REO)
The term “REO” stands for “real estate-owned home” and commonly grouped together with “bank owned.” These are homes that have been foreclosed on by banks or lenders. The banks or lenders now own and wish to sell the home. Once the home has gone through the foreclosure process, the bank has two options for selling it. The first option is to put the home on the market with a sign that states “bank-owned.” This will alert potential buyers that the owner is the bank, and it wants to sell the home sooner rather than later. If the home fails to sell through this method, the bank may decide to put it up for auction. REO homes can sometimes be purchased for less than their typical market value.
Homeowners with a mortgage loan have the option to refinance, a process that involves obtaining a new loan to pay off a current one. Usually with a refinance loan, the goal is to have a better interest rate and better terms than the current loan. When mortgage rates are low, homeowners have an incentive to refinance and lower their monthly payment.
Seller concessions are closing costs agreed to be paid by the seller. At times, you can ask the seller to contribute toward certain closing costs, and other times, sellers may just pay a percentage of the total. Examples of closing costs that are typically covered by the seller include prorated property taxes, title insurance, city and county transfer taxes and any HOA fees.
In real estate, “settlement” is a less commonly used term for the closing of a purchase contract. This is the final stage in the home transaction. This is when the ownership of the property will be transferred from the seller to the buyer. The funds will be distributed in the form of a check to the sellers, the real estate agents that were involved in the sale will receive a check for the commissions that they earned, and the buyer will need to have a cashier’s check in the amount of the closing costs if he or she has not already wired the money to the escrow/title company. In Southern California, the term “Close of Escrow” is used more often than “Settlement”.
A short sale occurs when a home is sold but the amount of the sale is not enough to cover what is owed on the seller’s mortgage loan, as well as closing costs, taxes and the commission owed to the real estate agent. In a short sale, the seller is not willing to make up the difference. Oftentimes, a short sale is happening because the owners are behind on their mortgage payments and are heading down the trail to foreclosure.
A title gives the person the right to or ownership of a certain piece of real estate property. One next thing that often confuses homebuyers is why they need to purchase title insurance. This is something that should be purchased whether you are obtaining a mortgage loan or paying cash for your home. Title insurance will help the homeowner deal with any issues that were not discovered when the preliminary title report was completed. This could be anything from liens to claims on the property that were not yet recorded. During the closing process, the buyers will receive a final copy of the title policy. This title will show their names as the new legal owners and will be recorded with the appropriate government agencies. Other information recorded on the title is the principal loan amount and who holds the mortgage loan. Once this information is recorded, it becomes public record for the county.
The term “under contract” means that a buyer has made an offer on a home and the seller has accepted it. This does not mean that the sale is final. There are still several things that need to happen, and it is possible that the sale could fall through. When a property is Under Contract and the contingencies have not yet been removed, the MLS system will typically show the home being “Active Under Contract” status.
Walkthrough (Verification of Property Condition)
Taking buyers on a final walkthrough of the property helps ensure that the repairs the seller agreed to have been made, and that the property is still in good condition before the sale. If a buyer has an issue with the condition of the property during walkthrough, typically the condition is not a contingency of the closing in the CAR Residential Purchase Agreement. Typically, the buyer & seller write out a resolution to the defect or item to be fixed on the Verification of Condition Form.
A home warranty helps a new homeowner cover the costs of an appliance or system issue in the first year after the purchase. These warranties can provide buyers with peace of mind, and protect sellers from accusations that they must have known about future issues that might arise.
Withdrawn Status in the Realtor MLS
If a homeowner decides they no longer want to have their home on the market, sometimes the listing agent and the seller elect to “withdraw the MLS listing”. When this happens, the home will show up as “Withdrawn” status in the Realtor MLS; however, the listing agent retains an Exclusive Right to Sell the property. If a buyer is interested in buying a home which has a “Withdrawn” status in the MLS, the offer will be submitted to the listing agent just as if the property was an Active Status MLS listing.