The real estate process can be tricky for seasoned veterans, let alone a beginner who has never worked in the industry before. Whether you’re buying or selling, one of the most basic things anyone can do before dipping their toe is to educate themselves about the important terms and vocabulary that will be used. The more you understand the basics, the less likely you’ll be confused and more likely you’ll be able to complete a smooth transaction.
Here are 30 real estate terms you should know, no matter what side of the transaction you find yourself on.
General real estate terms
- Closing costs
- Days on market (DOM)
- Due diligence
- Homeowner’s association (HOA)
- Multiple listing service (MLS)
- Real estate agent
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Sale & property info
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Financial & documentation
- Adjustable-rate mortgage
- Earnest money deposit
- Preliminary report
- Purchase and sale agreement
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Offers & contingencies
- Appraisal contingency
- Inspection contingency
- Loan contingency
- Title & title insurance
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Most Common Real Estate Terms
Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage, or ARM, is a mortgage in which the interest rate can change throughout the life of the loan. The interest rate is fixed for a specific amount of time and then resets periodically, usually yearly or monthly. An adjustable-rate mortgage is also referred to as a variable rate mortgage or a floating mortgage. The interest rate is reset based on benchmark data plus a spread. This loan is typically more unstable but could allow for a lower interest rate for a certain period of time.
An appraisal is a way for a piece of real estate’s value to be determined in an unbiased manner by a professional. Appraisals happen in almost every real estate transaction to determine whether or not the contract price is appropriate considering the location, condition, and features of the property. Appraisals are also used during refinance transactions as a way to determine if the lender is providing the appropriate amount of money given the value of the property.
An appraisal contingency is a clause in a purchase agreement that allows the buyer to cancel the contract if the home’s appraised value is less than the purchase price.
An appraiser is hired by the buyer’s lender to make sure the loan is secured by an appropriate home value. The bank wants to make sure the buyer is not “over-paying” for a property.
A property marketed as “as-is” means that the seller is unwilling to make all or some of the repairs necessary. Properties sold “as-is”, typically are priced lower due to the amount of risk that a potential buyer is taking on.
Typically, when someone buys a house “as-is“, they still may perform a home inspection and get an appraisal. This doesn’t mean the homeowner is required to make any repairs, but it gives the buyer a better understanding of some of the repairs that the property needs.
Closing, sometimes also referred to as “settlement”, typically is the process of completing a real estate transaction in which all documents are signed by both parties, an exchange of money or funds is conveyed, documents are recorded, and all other details such as loan documents and insurance is taken care of. Once all of these items are completed, access to the property is granted and the buyer is considered the new homeowner.
Closing costs are the name given to all of the fees that you pay at the close of a real estate transaction once all of the demands of the contract have been satisfied. Once closing costs are paid, the property title can be transferred from the seller to the buyer. Both sides of the transaction incur closing costs, which vary depending on state, city, and county. Common closing costs include the application fee, escrow fee, FHA mortgage insurance premium, and origination fee.
If a seller feels as though their property isn’t attractive enough to get a good offer as-is, they can offer concessions to make the property more appealing to buyers. These concessions vary but can often include loan discount points, help on closing costs, credit for needed repairs, and paid insurance to cover any potential pitfalls.
In every contract, there will be contingency clauses that act as conditions that need to be met in order for the completion of the sale. These include the home appraisal as well as financial requirements and timeframes. If the contingencies are not met, the buyer can opt-out of the home sale without losing their earnest money deposit.
A conventional sale is a home sale in which there is no remaining mortgage (the property is free and clear) or the remaining mortgage is less what the homeowner could sell their property for. A conventional sale is typically a smoother process than a nonconventional sale like a foreclosure, bankruptcy, probate, or short sale.
Days on market (DOM)
Days on market or DOM refers to the number of days a property has been on the broker’s multiple listing service or “MLS” until the date that the seller signs a purchase agreement with a prospective buyer.
Average days on market is a metric that is used to determine how competitive a local market might be. A lower average days on market would favor sellers, while a higher average days on market would favor buyers.
A deed is a signed legal document that grants access to a property or asset, provided that the buyer meets a certain number of conditions.
A due diligence timeframe might be available in a purchase agreement to buy real estate and is typically given to the buyer to research the property. Due diligence may include these three main items:
- Physical inspections
- Financial review
- Legal & loan review
A buyer may have the opportunity to renegotiate or cancel the agreement within a specific timeframe based on the inspections.
Earnest money deposit (EMD)
Once a seller accepts a buyer’s offer on a property, the buyer makes a deposit to put a financial claim on it. This is called earnest money and it is typically one to three percent of the overall contract price. The point of earnest money is to protect the seller from the buyer walking away even though the contract has been agreed upon. If one of the contingencies in the contract is not met, however, the buyer can back out of the contract without losing their earnest money.
In terms of a real estate transaction, escrow is usually meant to be a third party who acts as an unbiased control on the process to make sure both parties remain honest and accountable. This is often in the form of holding onto financial deposits and necessary documents. The escrow ensures that contracts are signed, funds are disbursed properly, and the title or deed is transferred properly.
Homeowners association (HOA)
A homeowner’s association, or HOA, is an organization that governs and enforces rules for planned communities, subdivisions, or a condominium building. When you purchase a property located within an HOA community, you agree to become a member of that HOA and pay dues, typically known as HOA fees. If you do not pay your HOA fees, the HOA can file liens and/or foreclose on your property.
Both the seller and the buyer have a good reason to get their own inspection of any property. In either case, a licensed inspector will visit the property and create a report that outlines its condition as well as any necessary repairs in order to meet the requirements of the contract. A buyer will do an inspection as part of the contingencies in order to make sure the home is being sold in the condition it has been presented to be. Based on the results of the inspection, the buyer can ask the seller to cover repair costs, reduce the sale price based on needed repairs, or walk away from the transaction.
The inspection contingency is a clause sometimes included in a purchase agreement that allows the buyer a specified period of time to perform any necessary inspections.
The loan contingency is a clause sometimes included in a purchase agreement that allows the buyer to back out of buying the property and retain their earnest money deposit or EMD.
Multiple Listing Service (MLS)
The MLS is a database that allows real estate agents and brokers the ability to update information about properties that are for sale in a specific area. When a property is listed, a real estate agent uploads the property into the local MLS. Buyer’s agents often review properties on the MLS to send to their clients as well as run comparable sales on what has previously sold.
When a buyer decides that they want to purchase a home or property, they make a formal offer to do so. The offer can be at the list price or it can be below or above it, depending on market conditions and the possibility of other buyers. If the seller accepts the offer, it becomes the purchase contract. However, the seller can also make a counteroffer or reject the offer outright.
A preliminary report is a report that indicates any issues that may affect the seller from providing a clear title report. It shows history, liens, and/or easements. The title company gathers this report by reviewing previous property records.
This report is required in order to obtain a title insurance policy. Most lenders require a title insurance policy in order to “secure” their loan. In most cases, this is an expense that the seller covers.
Probate is a legal process in which a will is reviewed the verify its authenticity or the general administering of a deceased person’s will or the estate of a deceased person without a will. If there is no will and property involved, the probate court would authorize an estate attorney, or another representative, to sell the property.
The probate process is typically more complicated and can take more time to sell.
Purchase and sale agreement
A purchase and sale agreement, or PSA, is a written contract that outlines the terms of the sale of property between a buyer and seller.
Real estate agent
If you’re buying or selling a house on the open market, you’re probably going to be dealing with real estate agents. But it’s good to understand the different kinds. There’s the buyer’s agent, who represents the person or people trying to buy the property, and the listing agent, who represents the party selling the home or property. It’s possible that either or both parties will forgo dealing with an agent but unlikely. One agent should never represent both parties in a real estate transaction.
Real estate investor
For various reasons, some sellers don’t want to list their property on the open market. Or they need to sell their home quickly because of relocation or lifestyle change. A real estate investor (or direct home buyer) will purchase property for cash without the need for inspections, agent commissions, or listing fees.
A seller may offer incentives to potential buyers in order to reduce the cost of buying the property. Seller concessions can range from paying a certain amount at closing towards the buyer’s closing costs to throwing in a piece of furniture the buyer liked. Concessions are negotiable between the buyer and seller.
A short sale is a process in which the homeowner sells their property for less than what is owed on the mortgage. All of the sale proceeds go to the lender and the lender agrees to forgive the difference or get a deficiency judgment. In some states, the difference must legally be forgiven.
Title & title insurance
The title is the document that provides evidence as to who is the lawful owner of a property. Title insurance protects the owner of the property and any lender on that property from loss or damage that could otherwise be experienced through liens or defects to the property. Unlike many insurances that protect against what can happen, title insurance protects the current owner from anything that may have happened previously. Every title insurance policy has its own terms and conditions.
A title company makes sure that the title to a piece of real estate is legitimate and free of any liens, judgments, or any other issue that may cloud the title. The title company will work to clear any necessary issues so that they can issue title insurance. Some states use title companies while others use real estate attorney’s offices. Most title companies do have a real estate attorney on staff.