When it comes to real estate, there are a lot of terminologies and basic concepts that exist in the realm of the industry that both professionals and clients would need to understand. These terms are critical regardless of whether you are investing in commercial or residential real estate. So here are five of the most common real estate terms everyone should know.
1) Warranty Deed
As standard when someone owns a piece of real property, the official record of ownership is reflected in a document called a deed. A deed is an official legal document that is signed to express the ownership and legal rights of an owner of a piece of property. But perhaps more important than a standard deed is called a warranty deed, which begs the question, “What is a warranty deed?” A warranty deed is basically the same as a regular deed except it can offer special covenants or terms. A warranty deed can come in the form of three main types: a Special Warranty, a General Warranty, and a Statutory Warranty.
2) Pre-Qualification
As a prospective home buyer, when you are ready to put in an offer for a property that is on sale, you will want to inform the seller that you are a serious buyer and that you have the assets needed to make a real estate purchase. Pre-qualification is usually the best way to signal to a mortgage broker and seller that you have the assets needed to go through an offer process. A pre-qualification is in the form of a letter that states based on an initial background check and verbal assessment of assets and income, you have the necessary capital and income requirements to afford a purchase and mortgage on a property.
3) Pre-Approval Letter
Like pre-qualification, a pre-approval process will usually occur right after an agreement of sale is reached between the buyer and seller. Once the seller is on board with the buyer taking the property, the mortgage application process will begin. The first step is to run a verification of a person’s assets and income, and once its verified, the application can move forward pending a good appraisal. A buyer can skip an appraisal if they pay with cash, although it is not recommended. Technically, when an agreement of sale is reached, there is a loan contingency in place in case financing cannot be reached, but a pre-approval letter can easily expedite this process.
4) Contingencies
When it comes to the negotiation of a sale, there may be clauses in the agreement that enables the buyer to back out of a deal if one or multiple conditions are not met. This mitigates some of the risks that come with buying homes. These are generally referred to as contingencies, which offer protection for the buyer if the terms or conditions of the house are not met. The three main types of contingencies are loan contingencies, inspection contingencies, and appraisal contingencies.
Inspection contingencies protect the buyer to back out or renegotiate the cost of purchase if any concerns regarding the condition of the house pop up. Additionally, an appraisal contingency protects the buyer if a lender/bank appraisal comes back and finds that a fair value cost of the property is less than what the bank is being asked to lend out. In these instances, either the buyer has to be willing to cover the difference between purchase cost and appraisal cost in cash, or they will have to renegotiate with the seller to bring the house down to a price closer to the appraisal. If a buyer plans to buy a home with 100% cash, they can avoid the appraisal process.
5) Closing Costs
One of the most common things that prospective first time home buyers tend to forget about is that on top of the cost of the home itself, is the numerous additional costs required to close a sale. Closing costs include application fees, appraisal fees, attorney fees, and required escrow to cover property tax and home insurance. These costs can generally be added onto a mortgage but will add on a considerable amount of money to a typical sale.