As a first-time homebuyer, navigating the real estate purchase process can be a bit intimidating. This is especially true since there is a significant number of real estate terms that you may not have encountered before.
By reviewing some common real estate terminology, you can prepare yourself for many of the purchase-related conversations that lie ahead. If you aren’t sure where to begin, here are some real estate terms you should know.
Real Estate Terms You Should Know
If you’re in a competitive market where bidding wars for properties are common, one of the real estate phrases you might encounter is “backup offer.” In the simplest sense, a backup offer is a contract between a buyer and seller, with the buyer agreeing to move forward with a home purchase if the primary contract ends.
Backup offers are legally binding, which can be challenging for buyers. It’s a formal commitment to pursue a sale if the first offer falls through for any reason. However, it can contain any traditional contingencies that you would see in other offers.
When submitting a backup offer, there’s no guarantee that you’ll have a chance to buy the home. If the primary contract moves forward and that buyer closes, the property is theirs. You’ll only get an opportunity to make the purchase if the first buyer or seller doesn’t complete that purchase.
For example, if the buyer has an inspection-related contingency in the contract and the inspection reveals something they prefer not to deal with, the buyer may terminate the agreement. If that occurs, the buyer with the backup offer will have a chance to make the purchase.
A broker is a real estate professional that assists with property-related transactions. Along with being able to perform the duties of a real estate agent – helping people with the purchase and sale of properties – brokers can work independently or hire other real estate professionals to work for them.
In some cases, brokers oversee sales going through agents associated with their office, even if they previously hadn’t worked directly with the buyer or seller. They lend their expertise to the transaction portion of the process, ensuring that all goes smoothly.
A contingency is a condition listed within a contract, outlining a scenario relating to the sale that may alter the timeline or lead to a contract termination. For example, many real estate deals have inspection-related contingencies. With those, the buyer may assert their right to back out of the purchase should the inspection reveal an issue they deem a dealbreaker.
Buyers may also stipulate that a purchase will only move forward if they can obtain a mortgage with a favorable rate. In some cases, buyers who are selling their current home may list their house’s sale as a contingency, stating that they won’t complete the purchase until that property sells.
Other kinds of contingent offers are also allowed. As long as the request is legal and both parties agree, nearly any condition could be applied to the sale.
Another one of the real estate phrases that buyers don’t usually encounter until they prepare an offer is “earnest money.” When a buyer is asked for earnest money, it’s not unlike requesting a deposit. Earnest money lets the seller know that the buyer is serious enough about their offer to commit funds.
Generally, the amount of earnest money provided is no more than 2 percent of the price in the offer. If the sale completes, the earnest money is applied to the sale, usually as part of the down payment. The money is typically returned to the buyer if the sale doesn’t move forward based on an agreed-upon contingency.
However, there are situations where the seller may keep the funds even if the purchase doesn’t go through, such as terminating the contract for a reason not outlined as a contingency. Usually, state law outlines when the seller keeping the funds is permitted, so it’s wise for sellers to review local regulations in advance or speak with their agent about the issue.
Encroachment is a property-related descriptive word that you may see if the property you’re considering either extends into a neighboring property or is extended into by an adjacent property. A prime example of an encroachment is when a fence that’s supposed to be directly on a property line is installed just a bit off that mark. When that happens, one neighbor ends up with slightly more usable land than they should while the other gets a bit less.
Any encroachments relating to a property should be noted on property surveys associated with the sale. That way, it’s formally recognized that one property is encroaching into the other.
When it comes to financial real estate vocabulary, “escrow” is a must-know. Escrow is a neutral service that holds any sale-related funds while the purchase process is underway. The money is only provided to the buyer, seller’s agent, or another entity once the contract is completed. Until that happens, the escrow service safeguards the cash, protecting the financial interest of the buyer and seller while the deal could still fall through.
When a sale is listed as “pending,” it means that the buyer has placed an offer and a seller accepted it, but the transaction isn’t finalized. Usually, a property remains pending while certain steps are completed, such as arranging for inspections and appraisals and completing the mortgage approval process for the buyer.
Other buyers can’t swoop in and purchase the property during the pending phase. However, there’s still a chance the sale won’t complete. As a result, buyers may attempt to place backup offers during this time or monitor the property’s status to see if the deal falls through.
“Pending” is commonly used in real estate, including beyond the sale process. It has a place among the real estate advertising words, particularly in ads where real estate agents or companies are advertising their success.
When it comes to real estate descriptive words that buyers need to know, “short sale” is a big one. If a property is listed as a short sale, it means that it’s selling for less than what the seller owes on the associated mortgage, home equity line of credit, or another housing-secured debt. Essentially, the money from the sale is “short” of what’s owed.
The main reason that buyers need to be aware of short sales is that pursuing one of these properties often takes longer than a traditional sale. Along with the seller accepting an offer, the seller’s lender also has to approve it. Additionally, the seller’s lender is more engaged in the rest of the process, lengthening the timeline for completion.
The term ‘under contract’ is similar to pending. It means a seller accepted an offer, but the sale isn’t fully complete.
Usually, properties are listed as under contract while various contingencies are met. If the contingencies are handled, and the sale moves forward, the property may remain in this status until closing occurs. At that point, it transitions to sold.
However, if any contingencies trigger a contract termination, the sale might not complete. If so, the property may become an active listing once more.