Real Estate Definitions
The real estate buying and selling process can be confusing and complex. Here are a few definitions that will help you better understand the transaction:
Appraisal: The process of estimating or setting the market value of a piece of property, partially based on an analysis of comparable sales of similar homes in the area. An appraisal usually takes the form of a written report. Appraisals are usually required during the mortgage loan approval process.
Closing: The execution of legal documents of conveyance and loan paperwork to transfer and/or mortgage a property. The parties meet at the closing attorney’s or title company’s office. The closing attorney or settlement agent executes the closing documents, collects funds, and disburses proceeds.
Closing Costs: For buyers, closing costs consist of expenses that must be paid in addition to the purchase price of the home, like: appraisal fees, title fees, loan application & origination fees, inspection fees, insurance, etc. For sellers, closing costs include expenses that will be deducted from the proceeds of the sale, like commissions, pest inspections, etc.
Commission: The fees paid to the real estate agents who represent the buyer and seller. Typically, the amount of commission and the party responsible for paying the commission are outlined in the Listing Agreement, in the sales contract, and/or in a separate commission agreement. Commissions are generally calculated based on a percentage of the sales price. Commissions are reflected on the HUD-1 Settlement Statement.
Comparative Market Analysis (CMA): An in-depth analysis of nearby comparable home sales done by a real estate agent to estimate a home’s market value, usually performed to help select the most appropriate sale price.
Contingencies: Conditions written into a real estate contract that specify that the contract will cease to exist in the event of certain conditions. Contingencies, like requiring an acceptable property inspection report within a certain time period, must be met for a contract to be legally binding and carried out as written.
Contract: The instrument memorializing the agreement between a buyer and seller to purchase and sell real property. The contract contains all material terms relevant to the transaction: sales price; property description; amount of earnest money; who is paying closing costs and how much; closing date; and items to be completed at or before closing, e.g. repairs, etc.
Deed: In some states, the mortgage is called a Deed of Trust. The Deed is the instrument which is recorded at the county courthouse to secure the property as collateral for the loan.
Earnest Money: Upon making an offer to purchase real estate, a buyer will generally deposit a sum of money to the seller as a demonstration of the buyer’s good faith intention to purchase the property; this deposit is generally refunded to the buyer at closing on the settlement statement. The contract generally spells out specific guidelines for who shall hold the earnest money and how it should be handled in the event of default on the contract.
Escrow: An account maintained by the lender on behalf of the borrower for the payment of annual taxes and insurance. Borrowers pay 1/12 of the amount due for taxes and insurance into the account with each monthly payment, and the lender disburses the full annual payments to the taxing authority and insurance company when each becomes due.
Hazard Insurance: Also known as “homeowner’s insurance,” hazard insurance insures a home against liability and loss due to fire, wind, vandalism and other damage. Hazard insurance is generally required by lenders as a condition of the loan.
Home Inspection: A thorough inspection by a qualified professional who evaluates the structural and mechanical condition of a home. A home inspector may assess the condition of a property’s roof, foundation, heating and cooling systems, plumbing, electrical work, water and sewage and some fire and safety issues. In addition, the home inspector will look for evidence of issues that may affect the value of the property.
Homeowners Association Dues: Assessments charged by a Homeowners’ Association to the individual homeowner which are generally used to maintain common areas of the subdivision.
Lien: A legal claim against the property as a result of a debt that must be paid off when the property is sold.
Mortgage: A legal document that specifies a temporary, conditional pledge of a property to the lender/creditor as security for the repayment of a debt, in this case a home loan.
Pre-approval: Pre-approval is a loosely used lending term that usually implies that a buyer has already talked to a lender. The lender has, in turn, checked the buyer’s credit history and income to determine that they will be able to get a loan up to a certain amount. The pre-approval helps a buyer find a home within their price range and submit a strong offer.
Promissory Note: The instrument signed by a borrower wherein the borrower promises to repay, on demand or at some time fixed in the future, a sum of money to a lender or holder of the promissory note. This document outlines the terms of the loan including the principal amount, interest rate, term, late payment penalty, and prepayment penalty, if any.
Property Taxes: Taxes paid to the city and/or county based upon the assessed value of the property. Inquire with the specific city and county for the computation rates.
Settlement Statement: document developed by the United States Department of Housing and Urban Development which itemizes all fees and services associated with closing the loan.
Short Sale: A short sale occurs when a property is sold at a moderate loss, as an alternative to foreclosure. The home is listed at a price lower than the amount owed on the mortgage. Buying a short sale home can require approvals from multiple lenders.
Survey: A survey is a drawing prepared by a registered land surveyor, after a physical inspection, that depicts the property boundary lines, size and improvements, as well as setback lines, easements and encroachments. Specialty surveys also exist which show topography and waterflow, the elevation of any structures on the property in relation to the maximum 100 year flood zone, and the location of any septic and drain lines.
Tax Stamps: The taxes paid to the State on the transfers memorialized by the deed of conveyance and the mortgage deed. Generally, state tax stamps are calculated on the deed of conveyance based on the sales price, and tax stamps are calculated on the mortgage deed based on the loan amount. Formulas vary from state to state.
Title: A legal document evidencing a person’s right to or ownership of a property. A title report, often done by a title insurance company after an offer has been accepted, will show the history of the title as well as applicable encumbrances such as easements or liens.
Title Exam: An examination of the public records in the county where the property is located. The title examiner reviews the history of the title, or the “back chain” to ensure the seller owns the property, and to determine if there are any mortgages, taxes or liens on the property that will require payment at closing. Each previous owner of the property is a link in the chain of title.
Title Insurance: Title insurance protects the insured from claims regarding ownership of the property, liens against the property and marketability of title to the property. Title insurance companies offer two types of policies; the mortgagee policy protects the lender, and the owner’s policy protects the buyer.