Real Estate Terms Defined – Part 3

Real Estate Terms Defined: Part 3

As we have said before, every industry has its own jargon, and real estate is no exception. Living in the South Bay, we have all heard the saying, “Location, location, location”, and we have a decent sense of what that means. But what about due diligence, or seller concessions, or CMA? Real estate lingo can add layers of confusion to an already convoluted process. Having a basic understanding of important real estate concepts will give you peace of mind now and could save you a fortune in the future.

We have compiled some of the most, commonly used terms that you are likely to encounter. Whether you are buying in Manhattan Beach, selling in Hermosa Beach, or just plain curious, the following real estate glossary is part 3 of a three-part handy reference guide for anyone entering the real estate market.

(Click Here for Part 1 or Here for Part 2)

Blind Offer

When a buyer makes an offer on a property they have not seen, even when it was possible to see it, that offer is considered a “blind offer”. It is, most commonly, used in a highly competitive area and/or circumstance, as an attempt to be first and win quickly.

CMA or Comparative Market Analysis

A Comparative Market Analysis, or CMA, is a report that is compiled and used in determining a home’s value based on the recent sales of similar real estate in the immediate area. Real estate agents and brokers create CMA reports to help sellers set listing prices for their homes and, less commonly, to help buyers make competitive offers.

Conventional Sale

A conventional sale is when the property is owned outright (has no mortgage remaining) or the owner owes less on their mortgage than what the market indicates the owner could sell their property for. Such conventional sales are often smoother transactions than non-conventional sales, such as foreclosures, probate related sales, and short sales.

Closing

Closing or Closed is when the home sale is considered final, which typically includes all parties’ signatures on all required documents, all monies conveyed, and when a lender is involved, full lender’s approval. For some markets across the nation, recording the deed with the county clerk’s office is the ultimate and final step of closing. Once all these items are completed, then a buyer’s access to the property is provided and they are considered the new homeowner.

Closing Costs

Closing costs are an assortment of fees, including fees charged by the lender, the title company, attorneys, insurance companies, taxing authorities, homeowner’s associations, real estate agents, and other closing settlement-related companies. These closing costs are typically paid at the time of closing a real estate transaction.

DOM or Days on Market

DOM is defined as the number of days from the date on which the property is listed for sale on the local real estate brokers’ multiple listing service (MLS) to the date when the seller has signed a contract for the sale of the property with the buyer.

Debt to Income Ratios

Debt-to-income or DTI ratio is a number used by mortgage lenders which is determined by the total of your debt and expenses, plus your monthly housing payment, divided by your gross monthly income, and multiplied by 100. This helps lenders determine affordability based on their available loan programs and allows them to estimate how much you can afford to pay monthly for a mortgage. There is, what some call a “28/36 rule”. Lenders typically look for borrowers who pay 28 percent, or less, of their total monthly income on housing, and less than 36 percent of their income on debt payments. If either percentage is on the higher side, and you want to buy a home, you might need to adjust your budget or look for a special loan program.

Due Diligence

In a real estate contract, due diligence is a period of time that might be available for a  buyer to fully examine a property, often by hiring experts to inspect the property, to perform tests, etc., so that they may make an educated decision on whether they would like to proceed with the purchase of the property.

Equity

This is the investment a homeowner has in their home. To calculate equity, take the market value of the home and subtract any mortgages or liens against the property. The amount leftover is the amount of equity you have in the home. For example, if you buy a home worth $250,000 for $240,000, you gain what is known as instant equity, because there is a $10,000 difference between the value and the cost.

HOA or Homeowner’s Association

A homeowner’s association is a private association that manages a planned community or condominiums. When you purchase a property that is managed by an HOA, you agree to abide by the HOA’s rules and pay its monthly or annual HOA dues. If you fail to pay and/or comply, they could file a lien against the property and/or foreclose on the property.

Loan Contingency

A loan contingency is a clause or addendum (also known as a mortgage contingency) in an offer contract that allows a buyer to back out of a deal and keep their deposit if they are unable to secure a mortgage with specified terms during a fixed period of time.

NHD or Natural Hazard Disclosure

This is a report required by most states that discloses if a property is in an area that is at a higher risk for natural hazards. The report is typically paid for by the seller and given to the buyer during escrow. The following natural hazard zones are usually covered in an NHD report:

Special flood hazard area

Area of potential flooding

Extremely high fire hazard severity zone

Wildland area that may contain substantial forest fire risk and hazards

Earthquake fault zone

Seismic hazard zone

Prelim or Preliminary Title Report

A preliminary report reveals details such as ownership history, liens, easements, and any other issues with a title that need to be dealt with by the seller to deliver a free and clear property to the buyer. The title company gathers this report by searching existing property records at the county recorder’s office as it is required by the title company to issue a title insurance policy which is required by most lenders for loan approval.

Probate Sale

A probate sale happens when a homeowner dies without writing a will or leaving their property to someone specific. In such situations, the probate court would authorize an estate attorney, or another representative, to hire a real estate agent to sell the home. The total process will usually be a bit more complicated and therefore will take more time than a conventional sale.

Proof of Funds

When you make an offer, sellers will require you to submit proof of funds. If you are buying a house with a mortgage, it shows them that you have the cash available for your down payment and closing costs. If you are paying all cash, your proof of funds shows you have the money. The following documents qualify as proof of funds:

Original or online bank statements with bank letterhead

A copy of a money market account balance with the bank’s logo or letterhead

Certified financial statements, such as an income or cash flow statement that has been signed off on by an accountant

An open equity line of credit

REO or Real Estate Owned

Real estate owned is a designation given to properties that are owned by a lender due to an unsuccessful foreclosure sale at auction. REO properties can sometimes present an opportunity for a buyer to purchase a property for below market value as most banks would prefer to reinvest the proceeds, rather than waste time marketing the property for an extended period. Additionally, the bank will often market the property “as-is” meaning they are unwilling to make any repairs to the property, which can make financing tricky.

Rent Back

Rent back, or leaseback refers to an arrangement whereby the buyer, who is now the new homeowner, agrees to allow the seller, the now-tenant, to stay in the house beyond the close of escrow. The terms are negotiated prior to the situation occurring and will often involve a lease deposit, a daily rental rate, and a length of time allowable. The rate can sometimes be determined by looking at the new homeowner’s monthly out-of-pocket for the mortgage as well as the possible inconvenience this may cause them in delaying their own move, all factoring into a daily rate.

Seller Concessions

Sellers may offer concessions to incentivize buyers to purchase the home or sweeten the deal. Said concessions are often a contribution towards the buyer’s closing costs with certain limitations and approval by the buyer’s lender. This ultimately leaves more money in a buyer’s pocket when all is said and done.

Short Sale

In a short sale, the property is being sold for less than the debt secured by the property. Short sales will require the approval of the seller’s lender(s) as the proceeds of the sale will be just “short” of the amount owed. Most lenders’ processes of approving short sales are long and drawn out, requiring more time to close than a traditional sale.

Trust Sale

A trust sale means that the home is being sold by a trustee of a living trust – and not a private party. Often this is because the original homeowner has passed away or has placed their assets in a living trust. The trustee may not be as emotionally attached to the property as a traditional owner, which could sometimes translate to them accepting a less attractive offer as the trustee may prefer to offload the property.

For more Real Estate Terms, please refer to this Real Estate Dictionary.