Glossary
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1031 Exchange
A transaction that allows you to defer capital gains taxes on profit realized for the sale of an asset such as real estate when that profit is reinvested in a “like kind exchange”: real estate for real estate. Both the old property and the new property must be held for investment purposes and not be personal residences. The tax code also states that any proceeds must be reinvested within 180 days after the sale and that the new property must be identified in 45 days.
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A
Appraisal
An assessment of your home’s current market value according to a licensed professional (an appraiser). Mortgage companies require a current appraisal as part of the loan-approval process.
To determine its value, the appraiser visits your house and considers factors such as
- the physical condition
- comparable houses in the neighborhood (based on average dollar per square foot)
- how much it would cost to rebuild the home
B
Bid
The offer that a buyer makes to a seller to purchase his or her property. The details of the offer are in the terms of the contract to purchase. When multiple buyers are interested in the same property, bidding is a competitive process where the seller evaluates each offer to select the one that best meets his or her needs.
Buyer’s agent (buyer broker)
A real estate agent who exclusively represents the buyer’s interests in a transaction. The buyer’s agent represents and advocates for the buyer; in return the buyer works exclusively with that real estate agent for a specified period of time. This relationship is outlined in a signed buyer-representation agreement.
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C
Capital gains tax
A tax paid on profits from the sale of an asset that was purchased at a lower price. Capital gains are either short-term (if the purchase and sale occur in one year or less) or long-term (for transactions that take longer than a year).
Closing
See Settlement.
Closing costs
The miscellaneous expenses the buyer and seller pay when a real estate deal closes. These costs include the realtor’s commission, mortgage-related fees, the attorney’s settlement charges, transfer taxes, appraisal fees, recording fees, and title insurance.
Contract to purchase
A document the buyer initiates that lays out his or her offer to purchase a property. The contract details the purchase price and the conditions of the transaction. The seller, accepting the terms of the contract, finalizes the sale of a home.
Contract presentation
The meeting where the buyer’s representative presents his or her client’s offer to the seller and his or her agent. The presentation outlines the terms of the contract. The buyer does not attend this presentation because fair-housing laws prohibit the seller from making a decision based on age, race, sex, nationality, or other non-material factors that a seller could determine by meeting the buyer.
Contract terms
The conditions, beyond the purchase price, of the real estate transaction as outlined in the contract to purchase. Terms are flexible variables that outline who does what, when, where, and how (for example, when the buyer will take possession of the home and what repairs will be done beforehand).
Terms can make a buyer’s offer more appealing to a seller—even if the price offered is lower than other bids. For example, sellers prefer buyers who are offering to pay cash or who have a strong financial position because there is less of a chance that the deal will fall through because of financing problems. A settlement date that meets the seller’s needs may make an offer more attractive. Sellers prefer less rigorous inspection requirements that decrease the likelihood of finding expensive problems. The contract terms do not covey some of the home’s nicer items (such as new curtains or a Sub-Zero refrigerator) to the buyer (that is, the seller gets to keep them).
Counter offer
A response to an offer occurs when either party in a real estate transaction alters the contract’s terms before the final signing. Typically, the counter offer is the seller’s response to the buyer’s initial offer.
Credit score
An indicator lenders use to determine how likely someone is to pay as agreed to on a loan or credit card. Lenders use information from an application and a credit report to determine if the borrower will make his or her payments in the future.
Credit scores are derived from a computerized model based on a large sample of credit profiles compared over time. A credit score takes into account
- the length of the borrower’s credit history
- the relationship between outstanding debt and available credit
- credit inquiries
- whether the borrower has any delinquencies, collection accounts, judgments, or bankruptcies
D
Down payment
The portion of the purchase price that the buyer pays in cash and does not finance with a mortgage. The larger a down payment, the less a buyer needs to borrow and the smaller the mortgage payments will be.
Down payments may be as small as three percent of the purchase price. But lenders often view mortgages with larger down payments as more secure because more of the owner’s money is invested in the property.
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E
Earnest money deposit
A down payment, usually 3 percent of the purchase price, that the buyer deposits into an escrow account as a sign of good faith. The deposit is made when the contract to purchase is presented to the seller. It demonstrates that the buyer intends to purchase the seller’s property. The deposit is credited to the buyer at closing or is returned if the contract is voided.
Escrow account
A separate, neutral account a real estate broker establishes to hold documents and funds involved in a real estate transaction until all conditions of a sale are met.
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F
Financing
Borrowing money to buy a house.
Foreclosure
A legal process in which a lender takes the title or forces the sale of a property as a result of the borrower’s failure to comply with the terms and conditions of the mortgage. Properties that are in preforeclosure or foreclosure typically can be purchased by investors for below market value.
FSBO (for sale by owner)
The selling of a property without representation by a licensed real estate agent.
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H
Home-owner's insurance
Insurance for the loss or damage to property caused by fire, tornado, flood, or other disaster.
Home inspector
A licensed expert who inspects a property for defects. The home inspector provides the buyer with a home-operating manual, which outlines the proper operation, maintenance, and repair needs of the systems in the home.
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I
Inspections
Inspections evaluate the physical condition and financial value of a property. This information is important to the buyer and the lender. Inspections and tests throughout the buying and selling process include
- a home inspection—a check for defects in the home’s interior and exterior structure and major systems, such as plumbing, electrical, heating, air conditioning, and appliances (it also may include a lead paint and radon test)
- appraisal—a professional evaluation of the property’s value (for the lender)
- title search—a review of court documents to establish ownership
Interest rate
The sum, expressed as a percentage, that a lender charges a borrower for using its money to finance a home. Interest payments on most home loans are tax deductible.
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L
Lead paint
Lead is a metal found in older homes that poses a health risk, particularly to children. Lead was used in paint (up until 1978), gasoline, and water pipes. If you have lead in your home you can follow lead abatement procedures to avoid or minimize the health risks
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Letter of pre-approval
A document from a lender that says a buyer is pre-approved for a loan up to a specific dollar amount (see pre-approval).
Lien
A claim laid by a person or company on the property of another, as security for money owed (such as for unpaid services or back taxes). All liens must be satisfied before a house can be sold. To find outstanding liens, a title search is conducted. If no liens are found, the seller is given a certificate of clear title.
Buyers, however, must purchase title insurance to protect themselves from liens not found in the title search. Title insurance is a one-time fee, usually around $3.50 per $1,000 of the home’s value.
Listing agreement
An agreement between a seller and a real estate agent outlining the timeframe and conditions under which the property will be made available for sale. Listing a property means placing it on the real estate market.
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M
Mortgage
A legal contract a buyer signs to promise that he or she will pay back the money he or she borrows to buy a new home, plus interest. The mortgage specifies the loan's term (the number of years the borrower has to repay it), the interest rate, and other costs, like taxes and insurance.
The home is the collateral for the loan; the mortgage document gives the lender a legal claim against it if the borrower defaults on the loan's terms. If the borrower doesn't pay his or her mortgage, the lender can take the property and sell it to cover the debt.
There are many types of mortgages, with different terms to suit different situations. During a pre-qualification interview with a lender, borrowers can ask questions and explore their options.
Two common types of mortgages are - Fixed-rate mortgages-the interest rate does not change during the loan; typically these come in 15-, 20-, and 30-year terms - Adjustable-rate mortgages (ARM)- the interest rate varies; it may increase or decrease based on market interest rates.
Multiple Listing Service (MLS)
An organization that collects, compiles, and distributes data about all of the homes in an area for sale through real estate agents. Although MLS data may be sold to real estate websites, the MLS is not open to the general public. MLS's are local or regional.
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O
Offer
The proposal that a buyer makes to a seller to purchase his or her property. The details of the offer are in the terms of the contract to purchase. An offer can be accepted, rejected, or countered. Also called a bid.
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P
Pre-approval
Pre-approval is the process of a buyer securing a guaranteed mortgage approval before he or she finds the property he or she wants to purchase. Pre-approval strengthens the buyer's bargaining position and eliminates a lot of the stress involved in buying a new home because much of the paperwork is done up front.
To be pre-approved a lender will look at the buyer's credit score, debts, and assets. Then it will issue a pre-approval letter that guarantees it will grant the buyer a loan for a specified amount. There's one catch though: final disbursement of the loan is subject to terms the lender outlines (usually including an appraisal and review of the sales contract). If the property does not meet the lender's guidelines, the buyer will need good negotiation skills and creative thinking. But don't worry: Kelly and her associates will guide you through this unlikely scenario.
Finally, pre-approval demonstrates that a buyer has a strong financial position, giving him or her a competitive advantage in the bidding process. Pre-approval also allows the buyer to construct an offer with contract terms that meet the seller's needs. (Do not confuse pre-approval with pre-qualification.)
Preforeclosure
The period between when the lender formally notifies the borrower that the property will be sold at auction and the actual auction that transfers the title to another party or back to the lender. Some investors prospect for preforeclosed properties.
Pre-qualification
Pre-qualification is a verbal, non-verified interview with a lender to determine how much a buyer can borrow. This discussion is the best time for a buyer to ask the lender questions to determine the best loan options.
During pre-qualification the lender will perform a cursory check of a borrower's credit, asset, and debt status, usually in less than an hour.
Though pre-qualification gives any offers a buyer makes an added stamp of approval and may lead to a full pre-approval, final approval takes more time and there is no guarantee that a buyer will be approved for a mortgage.
Purchase price
The final price for which a property is bought and sold.
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R
Radon test
A test to determine the amount of radon gas in a home. Radon is a toxic, odorless, and radioactive gas that comes from the earth and rock beneath a home, well water, and building materials. It seeps into homes through basement drains, sump pumps, or cracks in the foundation. Radon is a common occurrence: usually it moves up through the soil and escapes harmlessly into the atmosphere.
Radon is only hazardous in insufficiently ventilated homes where it can accumulate and be inhaled for long periods of time, contributing to lung cancer.
Radon became an issue in the mid-1970s with the construction of energy-efficient homes that did a better job of heating and cooling but also retained radon gases. The solution to high radon levels in a home is to install or upgrade the ventilation system.
Learn more about radon at www.epa.gov/iaq/radon/radonqa1.html.
Return on investment (ROI)
The ratio of money gained or lost in a venture relative to the amount of money invested. For example, if an investor spends $500,000 to purchase a house and sells it later for a profit of $50,000, his or her ROI was 10 percent ($50,000/$500,000 = 10 percent). When calculating ROI for real estate, one must factor in all of the costs and taxes involved, not just the purchase and sale prices.
Right of Redemption
A borrower's right to redeem property that was taken at foreclosure. The borrower has a limited amount of time to exercise the right and must make full payment of any outstanding debt including interest, fees, and any other costs.
ROI does not reflect how long an investment was held. In the previous example, the investor's ROI was 10 percent, regardless of whether he or she owned the property for six months or six years.
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S
Settlement
The process where all parties in a real estate transaction (the buyer, seller, agents, and settlement attorney) meet to complete the financial dealings and contractual arrangements. At settlement all debts are paid, adjustments made, money disbursed, and a deed is prepared in the new owner's name. Also called closing.
Settlement company
The organization that conducts the closing. The settlement company coordinates the final mortgage details with the lender, performs a title search, notifies the government of the transaction, and ensures that all parties sign in the right places.
Staging
Preparing a home to be put on the market for sale. Preparations may include a thorough cleaning, organizing and removing clutter, painting, replacing old fixtures, replacing the carpet, and exterior landscaping.
Strategies
Proven models and systems which apply to marketing, negotiating, prospecting, tracking and counseling. These specific criteria, developed and designed by The Kelly Domaille Team, are used to quickly and effectively meet buyer and seller needs.
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T
Tax incentives
Local tax rebates or reductions that a buyer receives for purchasing a home. For example, first-time home buyers in Minnesota may receive an $8,000 tax credit.
Title
The legal document establishing ownership of a piece of real estate.
Title search
A check of the public records to determine that the seller is indeed the legal owner of the property and that there are no liens against it.
Title company
A company that performs and insures title searches.
Title defect
Anything wrong with a title that has not been recorded with the city building department or the county recorder's office.
Title insurance
Insurance that protects a property owner against liens or title defects. Lenders require that buyers purchase title insurance, a one-time fee of approximately $3.50 per $1,000 of the home's value.
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W
Walk through
The buyer's final physical inspection of the property just prior to settlement to make sure it is in the same condition as when the contract was written.
