Terms to Know in Real Estate
Financing: How will you be paying for the home? Cash? Lender (loan)? When purchasing, you must know BEFORE making an offer, either if you will be paying cash for the home or if you are pre-approved for a loan.
Contingency: When a contract is "contingent" upon something, it means that one thing has to happen before something else can occur. For example, is the sale of a home contingent upon happening before purchasing a new one? Buyers can add a contingency to their offer. It is not often recommended because the seller has to wait for certain dominoes to fall before their home can be sold. It usually weakens an offer to have one BUT if it's hard-to-sell property, it may have to happen. Other contingencies could be financing - if the loan doesn't get approved within the time frame set in the contract, earnest money can be lost as well.
Option: This is known as the due diligence period for the buyer. Buyers have to pay for this privilege. This price (typically) comes at $10-25/day for 7-10 days. This is negotiable but if you want your offer to look great, raise that price and lower the days. After an offer has been accepted on a home, an option check is delivered DIRECTLY to the seller, paid UP TO 3 days of contract execution.. From the time of the executed contract to the time specified in the contract is the length the buyer has to do their due diligence on the property. If the contract continues on without the buyer backing out, the option MAY be returned at closing, depending on how that is specified in the contract.
Earnest Money: This is a "good faith" deposit. Typically a buyer puts down 1-3% of the purchase price down on the home. This is paid no later than 3 days after the contract is executed (same time as option). This is to show you are a motivated buyer to the seller. This money is also used to go towards closing costs if everything goes smoothly and the property closes. As long as the buyer doesn't back out without some kind of contingency, they buyer's earnest money will be returned to them. If the buyer backs out without a contingency, the money belongs to the seller. It is strongly recommended to listen to your realtor and lender during the entire transaction to make sure you do not lose that money over something preventable.
Inspection: During your due diligence period (option period), you are recommended to get an inspector, of your choosing, to the home. Keeping in mind they do not have x-ray vision, they will use their expertise in homes to inspect the property. This is such a useful tool for negotiating a contract. During your option period, you may renegotiate the terms of the contract. You now know more after inspection, is there something that is in dire need of fixing that the price doesn't include? This inspection may cost you somewhere between $400-$600 BUT this is such an important investment. A home is likely your largest purchase in your entire life. Don't go into it blindly.
Appraisal: This is necessary if the property is being financed with a mortgage. Cash purchase does NOT require this. The lender is also investing in this property, just like you. They do not take a realtor or individual person's word on what the property's worth is. They send out an appraiser to figure out that value. Even though this is still very subjective, the value will (hopefully) come in close to what the buyer is willing to pay for it. This process DOES NOT need to be done during the option period. In a completely different addendum, we have specified a time for the lender to do their own due diligence (typical timeframe is 21-25 days). All of this needs to be worked out within that time frame. If the price comes in lower than the purchase price, this allows a few different opportunities; 1) negotiate with seller a new price 2) buyer pays the difference 3) request a new appraisal, at a cost 4) back out of the contract (within that time frame) and still lose option money but, hopefully, retain earnest money.
Title: Once a contract has been executed, it goes to the title company that is specified in the contract. They review the history of a property. Does it have any liens or claims to the property? For example, if the property was from an estate, does it require multiple signers to sell it? They are working the back end to make sure someone doesn't show up out of the woodwork to claim that property later on. They also make sure taxes and judgements are taken care of. This helps make sure that a bank or some other entity doesn't come to take the home after a buyer receives the keys. They also act as the closing agent for the transaction. This is known as the escrow agent or escrow officer. They are the unbiased third party in the transaction that hold the funds and verifies all documents to get to the closing table successfully.
Title Insurance: Generally this is required for the lender and the buyer of the property. Once the property has closed, this is to protect the buyer and lender in case there is a title issue post-closing. This insurance can help cover the costs and damages to the buyer and lender.