Remember that first day on a new job when it sounded as if your colleagues were speaking a different language? Most industries have their own jargon and real estate is no exception. In fact, this industry seems to be the “King of Jargon”. What’s worse is that those who use it assume that the rest of us know what they’re talking about.
Today we’re going to help you master this language by defining some of the most common terms you’ll hear throughout the process of buying or selling a home. Soon you’ll be slinging this jargon as if you were a real estate pro!
Addendum – This is a document that is attached to and made a part of the original contract. It is typically used to provide clarity on certain parts of the contract. An example of an addendum is the “Addendum for Seller’s Disclosure of Information on Lead-Based Paint Hazards as Required by Federal Law”. Another example is the “’As-Is’ Addendum”, used to disclose to the buyer that the seller refuses to warrant the condition of the property and that the seller will not be responsible for the replacement, repair or modification of any defects in the home.
The addendum is submitted before the contract is ratified and ratification won’t occur unless all parties sign it.
Amendment – Suppose you make an offer on a home and the seller accepts it – you have a contract. Then, suppose that you discover that you need to extend the closing date. Your agent will submit an amendment to the contract (the purchase agreement) stating the new closing date. If accepted by the seller, the information, obligations or terms stated in the amendment supersede the previous terms and become part of the original contract.
Contingency – The dictionary defines a contingency as “a provision for an unforeseen event or circumstance.” In a real estate contract, anything that puts a condition on the buyer’s willingness to proceed with the purchase is a contingency. For instance, you, as the buyer, agree to consummate the purchase if the home appraises for X number of dollars. The appraisal becomes a contingency item. If you need to sell your current home before closing the purchase on this home, you will create a contingency to that effect. In essence, what contingencies do is tell the seller that you will consummate the purchase if x, y or z occurs by a certain date.
Counteroffer – This is a form used to counter the terms put forth by the other party. Suppose you submit an offer to purchase a home for $125,000. The seller wants $150,000. Now he or she can either ignore your offer and hope for a better one, or submit a counteroffer stating his desired price. Counteroffers are also used to propose different terms (such as closing date, possession date, etc).
Disclosures – You’ll encounter a number of disclosure forms during the buying and selling process. This form is used to let the parties know about something that either the seller or the broker is legally obligated to disclose. A common disclosure form is a Transfer Disclosure Statement. The seller fills out this form which details everything he or she knows about the home that may affect the buyer’s safety, comfort and enjoyment of the home.
Due Diligence – Due diligence is a legal term, and one that should be taken very seriously. It describes the buyer’s duty to undertake a thorough assessment of the property to determine its assets and liabilities. For instance, after closing on a home, a buyer discovers that the home doesn’t have air conditioning and he assumed when he bought it that it did. He attempted to extract the price of a new unit from both the seller and the real estate broker. The judge determined that, since the seller’s Transfer Disclosure Statement stated there was no air conditioning unit in the home, the buyer failed in his due diligence (either by signing the disclosure statement without reading it or by not inspecting the home thoroughly) and denied remedy.
Earnest Money Deposit – When a buyer submits an offer to purchase a home, or shortly thereafter, he or she will show good faith by submitting an earnest money deposit. This is often confused with the down payment. This deposit also satisfies one of the six elements required for a contract to be enforceable and is known in the legal world as “consideration.” The amount of the deposit varies, but plan on paying at least 1 percent of the purchase price of the home. The deposit is held in escrow, or the broker’s trust account, until the close of escrow when it will be applied toward the purchase price.
Escrow – We’ve found this to be one of the most confusing terms for our first-time buyer clients. Escrow is, simply, a third party with no ties to the transaction who holds all of the pertinent documents (the purchase agreement, deed, etc.) and money until it’s disbursed, according to the terms of the contract, at closing.
Escrow Impounds – This is where the confusion comes in for folks new to the real estate purchase process. Escrow impounds describes an account set up by the lender to hold your prepaid taxes and insurance. Not all lenders require an escrow impound, but most do and it’s wise for the homeowner to have one.
Title Insurance – Title insurance protects the new homeowner and the lender against any future claims to the property, liens and encumbrances. There are two types of policies, one for the lender (which is required) and one for the homeowner. Before issuing either policy, the title insurance company will do a thorough examination of the home’s title to ensure that the owner really does own it, that there is no additional owner who hasn’t been listed as a party to the transaction, as well as other issues.
Naturally, this list is far from comprehensive, but we hope it answers your questions. Should we ever use a term that you don’t fully understand, please speak up. We’re happy to clarify it for you.