Real Estate Jargon in Everyday Language
You're ready to buy or sell your home. You reach out to an agent a friend or neighbor recommended. The process gets underway....and now, you're confused. What do all those words mean? Is this agent trying to pull a fast one? Appraisal? Earnest money? Due diligence? AH!
To help you weed through some of this lingo, here are some of the top words and phrases you'll hear during the buying or selling process that you may not fully understand:
Appraisal: A real estate appraisal is the process of estimating a property's market value or the likely sales price the property would bring in an open and competitive market. Lenders require an appraisal before loaning money because it gives them assurance that the property will sell for at least the amount of money they are lending you. Appraisals are conducted by a licensed appraiser, an objective third party who has no financial or other connection to any person involved in the transaction.
Comparative Market Analysis (CMA): Don't confuse an appraisal with a CMA. A CMA is a sales report based on data entered into the multiple listing service (MLS) that helps agents and homeowners determine a realistic asking price for a home or property. This report uses properties that most closely resemble yours in size, shape, and condition. It may look at things such as similar square footage, similar age, similar amenities, upgrades, condition, and similar location. For example, you wouldn't compare your single story ranch style home with three bedrooms and two bathrooms to a three story home with five bedrooms and four bathrooms.
Commission: The real estate commission is the agent's fee for their service in helping you buy or sell a home. Traditionally, the seller pays the commission. Sometimes, buyers think they can negotiate the commission, but they can't. When a seller lists their home with a brokerage firm, they enter into a contract called a listing agreement. This contract details the exact terms under which a commission is paid along with the total amount to be paid. Although not always, commonly the total commission to be paid is 6% of the sale price. 3% going to the seller's agent and 3% going to the buyer's agent.
Pre-approval: Mortgage pre-approval is a commitment from a lender to provide you with financing, up to a specific amount, to purchase a home. The lender looks at your income, your credit history, and any assets you have to determine that amount. There is a ton of paperwork involved in getting pre-approved such as pay stubs, tax returns, W2 forms, residential history, and more!
You may be asking yourself what the benefit of getting pre-approved is. Firstly, a lot of agents won't take you to see a single home without a pre-approval letter. Secondly, it gives you a leg up. When sellers accept an offer, they want the deal to go through. Pre-approval provides that extra measure of security to a seller that as a buyer, you are both willing and able to buy their home. This being said, a seller is more likely to accept an offer from someone with pre-approval verses someone without.
Earnest Money: Earnest money, or a good faith deposit, is pretty much the buyer saying, "I really want to buy your home and I'm willing to put money on the line to prove it." The earnest money deposit is usually 1% to 2% of the purchase price of the home. Earnest money is usually paid after your offer is accepted and you sign a purchase agreement. This money is held until the home sale is in the final stages then applied to your down payment. Just remember, if a buyer backs out, unless they have a very good reason, the seller gets to keep the earnest money.
Due Diligence: In real estate, due diligence is a fancy way of saying DO YOUR HOMEWORK! Once a seller accepts a buyer's offer, there is a period of time in which the buyer is told to "do their due diligence" on the home. This is the time to investigate the home for potential costly problems and to make sure you're getting what you're paying for. Things a buyer may do during this due diligence period are hire a home inspector, complete a title search to make sure the person selling the home can legally sell it to you, review any covenants, conditions, or restricts by a homeowner's association. This last one is key. I'll give you an example. Let's say you own three vehicles but the home your buying only has room in the driveway for two. No problem, you'll just park the third one on the street, right? In a lot of cases, this is a reasonable option. BUT, there is also the chance that the homeowner's covenants state that street parking is not allowed OR is only allowed until 5:00pm then all vehicles must be cleared from the street until 6:00am. This leaves you in the predicament of finding another place to park your third vehicle. Make sure you do your due diligence before buying a home!