Real Estate Terms & Definitions
Koehler Real Estate, LLC provides buyers and sellers with easy to understand real estate terms and definitions. Most real estate professionals employ this real estate language in their everyday use. It is important for buyers and sellers to have a good understanding of these real estate and mortgage terms. This additional knowledge will provide buyers and sellers a smoother process when buying or selling a home or ranch land in Texas.
Agreement of sale – A legal contract between the buyer and the seller of a property. The full terms and conditions of the sale are disclosed, including the sale price and the settlement date. Depending upon the State where the agreement is issued, this document can serve as a land contract or a purchase agreement.
Appraisal – An opinion by a third party to determine the value of a subject property based on condition, location and recent sales data or comparable market analysis.
As-Is – A clause which alerts the buyer they are purchasing a home in its existing condition with no expectation of repairs being completed.
Assessment – An additional cost usually associated with a Homeowners Association (HOA) for common area maintenance, road repairs, building maintenance, and infrastructure within the community.
Bank Owned Homes – The bank or lender foreclosed on the property through a Trustee Sale and now has full ownership of the home. In essence, foreclosure, bank owned homes, and Real Estate Owned (REO) are synonymous with one another.
Cancellation clause – A provision in a real estate contract that sets forth the conditions that one or both parties to the real estate contract may utilize to terminate the contract. The clause provides specific details about what constitutes the right to terminate the agreement and names any penalties that may be incurred in the event that the contract is cancelled.
Closing of Escrow – The final act in a real estate transaction where the title of the property transfers from seller to buyer.
Comparable Market Analysis (CMA) – The most common method of determining the current value of a home based on condition, location and recent sales data.
Contingency – A clause in a real estate contract that requires the completion of certain acts before the parties are obligated to perform. An example would be a Home Inspection contingency or financing contingency.
Contract or Offer – An offer is made by the buyer. It becomes a contract once accepted by all parties to the transaction. A contract for the sale of real property must be in writing to be enforceable.
Covenants, Conditions and Restrictions (CC & R’s) – A document that dictates uses and restrictions to a property and is provided by the Homeowners Association.
Earnest Money – A deposit or partial payment by the buyer as a demonstration of good faith that he or she is serious about purchasing a home or property. If the buyer fails to meet the contract terms, the earnest money is forfeited. A Title or Escrow Company normally holds earnest monies.
Escrow account – A separate account set up by the lender or escrow agent so that the lender can meet certain financial obligations related to the mortgage on behalf of the borrower. The borrower contributes to the escrow account monthly, as a portion of the mortgage payment is set aside for this account. Expenses funded by the escrow account include homeowners insurance and property taxes.
Fair market value – The amount that a willing and able buyer would pay for a property based on current market conditions and comparable properties.
Fixtures – Items which are permanently affixed to the home. An example might be an oven, dishwasher or built-in entertainment center.
Foreclosure – A Foreclosure is a legal proceeding in which the Mortgage Company (Bank or Lender) terminates their relationship with the homeowner after the homeowner has defaulted on the original terms of the Deed of Trust. The ownership of the home then reverts back to the Mortgage Company. In Arizona real estate, this is known as a non-judicial foreclosure. Once the property is owned by the Mortgage Company, they will attempt to sell the home or parcel of land in the future. The term foreclosure is also referred to as Real Estate Owned (REO) homes or Bank Owned homes.
Home equity – The fair market value of a home, less any unpaid mortgage balance or liens against it. Equity increases over time as the mortgage is paid down and the property value appreciates. It is the portion of a home’s value that the borrower actually owns. For example, if a home’s fair market value is $250,000 and a mortgagor owes $175,000 on the mortgage, the homeowner has $75,000 in home equity.
Home inspection – An objective review by a licensed third party to determine the condition of a home.
Homeowners association (HOA) – An entity which oversees the community and enforces deed restrictions and the rules and regulations set forth.
Homeowners insurance – Also referred to as hazard insurance, this policy covers the homeowner and lender against loss or damage to the property.
Homestead exemption – An exemption which allows a homeowner protection up to $150,000 in equity against creditors trying to force a sale for collection of debt not associated with the property.
Home warranty – A type of annual insurance policy that covers specific home items that might not be covered by homeowners insurance such as appliances, plumbing, electrical or pool items.
Lessee (Tenant) – A person who leases the property.
Lessor (Landlord) – A person who grants a lease.
Loan Modification – The lender, bank, or Mortgage Company who holds the note on the loan agrees to modify the original terms of the loan. An example might be a reduction of the interest rate or changing the length of the loan from 30 years to 40 years. One of the main requirements to qualify for a loan modification is to prove to the lender you have a “hardship”. If the lender agrees to modify the loan, they seldom will reduce the principal balance of the original note.
Pre-Foreclosure – A pre-foreclosure occurs when the homeowner is at least 90 days late on their mortgage payment and have been given a Notice of Default by their Mortgage Company. This creates a window of time for the homeowner to bring the loan current, successfully complete a short sale, or have the home sold at a Trustee Sale. The Trustee Sale is an auction typically conducted on the courthouse steps.
Property tax – An ad valorem (tax) levy imposed by state or local government authorities on real estate. A governmental entity requires an appraisal of the value of the property and the tax is assessed in proportion to the determined value.
Property tax deduction – An allowance in the U.S. tax code whereby the federal government allows homeowners to subtract out property tax expense from their income before calculating their income tax.
Property value – Estimated value of a home based on the results of a recent appraisal, comparable home prices in the neighborhood and current market conditions.
Real Estate Settlement Procedures Act (RESPA) – A federal statute, designed to protect consumers, ordering disclosure of specific estimated settlement costs in the sale of a home or residential property, which a federally insured lender intends to finance. Lenders are required by law to disclose this information once after the loan application has been submitted and again prior to or at the time of the closing.
Realtor® – A real estate agent who is a member of the National Association of Realtors and subscribes to a strict Code of Ethics.
Short Sale – In Real Estate, a short sale home is one where the homeowner owes more than the property is currently worth. The homeowner could have one, two, or even three mortgages on the home. The seller or homeowner must make arrangements with their Mortgage Company or companies to accept less than what is owed on the property if the seller decides to sell.
Title – Also known as a “deed”. A title is a legal term that confirms ownership of real property and an owner’s right to claim the property. It is recorded and held on file in a county recorder’s office.
Title Company – A business entity that acts as a neutral or third party to a real estate transaction. They conduct a thorough examination of real property titles. They report these findings for the purposes of ensuring that the title is legally free and clear of liens and encumbrances. The title company also provides title insurance to protect the property owner’s future losses caused by such situations as unknown title defects or prior claims against the property.
Title Insurance – A policy that indemnifies the lender and the homeowner against title defects. It also insures any possible claims against the property title that were not found in the title search.
Title search – An in-depth review of the public records and court actions involving a real property title. It ensures that the seller has the legal right to sell and transfer ownership of the property. A title search reveals the names of owners in the chain of title and other applicable information including any encumbrances, liens, and claims that may affect its ownership. These can include any unpaid claims, liens, unknown heirs, and overdue special assessments.
Trustee – A neutral party who is entrusted with the legal title to a property to administrate it on behalf of another party.
Trustee Sale – A Trustee Sale is an auction open to the public. It is held by the trustee, who acts as a third party on behalf of the lender. The lender is also known as the beneficiary. The lender prepares a credit bid, also referred to as the opening bid. Trustee Sales occur several times throughout any given day. They have specific restrictions and rules that must be followed to the letter of the law, to avoid legal ramifications set forth by the trustee.