7 terms every homebuyer should know
Any homebuyer will encounter a range of new jargon. We demystify it.
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When buying a home, understanding your contract is one of the most important protections you have to ensure you make an informed decision.
As with everything else about real estate, sales contracts or purchase agreements vary from state to state – and even by real-estate company, in some places. Variations in regulations place even greater emphasis on working with professionals who have local knowledge. (Bing: What's the best way to establish credit?)
While the terms used may change from place to place, seven common terms are particularly important for you to understand.
1. Buyer cost sheet. This sheet is not part of the purchase contract, but it's still important.
A property purchase agreement can range from a few pages to a dozen or more, depending on your location and the complexity of the transaction. Buyers need to focus closely on the buyer cost sheet, sometimes called "cash to close."
The buyer cost sheet, typically generated by your lender but sometimes given to you by a real-estate agent, should include everything you will be responsible for paying when you buy a home.
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Items included on a buyer cost sheet may include:
- Inspection fees.
- Appraisal fee.
- Transfer fees.
- Down payment.
- Closing costs.
- Prepaid items such as prorated property taxes, homeowner's insurance and homeowner association dues.
Steve Yeager, an assistant manager with Weichert Realtors in Upland, Calif., says, "Some of those costs, especially the closing costs, may be paid by the seller after negotiations take place, but buyers need to have the entire cost of the transaction laid out for them to make sure they have the funds to buy the home."
2. Commission authorization. Commissions for both the listing agent and your buyers agent are negotiable and are generally paid from the proceeds of the sale by the seller.
3. Contingency. A contingency is a clause in a contract that sets the conditions under which the contract can be voided and the deposit returned to the buyer. Morgan Knull, an associate broker with Re/Max Gateway in Washington, D.C., says the most common contingencies are for home financing and a home inspection.
"In the Washington area, contracts also have a contingency based on the review of condominium or homeowner association documents so that buyers can cancel the contract if they are unhappy with the information in the documents," Knull says.
Tony Geraci, a broker and owner of Century 21 HomeStar in Highland Heights, Ohio, says buyers typically have 30 days after the contract is agreed on to have a signed financing agreement in place from a lender. Home inspections usually must take place within seven business days in Ohio, and any cancellation of the contract or negotiations must take place within three days after the inspection.
Contingencies are negotiable. So if you believe you need more time for an inspection or to obtain financing, you can write that into your offer.
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4. Disclosure/disclaimer. Rules vary from state to state about what homeowners need to disclose to potential buyers, but most states require sellers to complete a form that tells buyers what they know about their property.
"In California, sellers must disclose anything that affects the 'value and desirability' of the property," says Yeager, who adds, "California is known as the 'nanny state.'"
California sellers must disclose information such as whether they live:
- In an area prone to fires.
- On an earthquake fault zone.
- Within hearing of an airport.
- In an area with a flood hazard.
Geraci says that in Ohio, only sellers who live in the property must disclose anything they know that could affect the buyers' decision to buy. "Estate sales and investors are not required to disclose what they know," Geraci says. "But I always tell all sellers they should share everything they know with buyers."
5. Earnest-money deposit. Buyers usually attach a check for their earnest-money deposit to their offer. The check is put into escrow once the contract has been approved by all parties and is used as part of the down payment at settlement.
"The size of the deposit varies according to the size of the down payment, the price point of the property, the neighborhood and local expectations," Knull says.
6. Escrow. Escrow is handled by a title company, an escrow company, an attorney or a real-estate broker, depending on local practices. An escrow account includes the buyer's deposit and all the financial portions of the purchase transaction before, during and after the settlement.
"The escrow company will pay off all the liens on the property after settlement and will record the transaction at the local courthouse or county office," Geraci says.
The term escrow also refers to prepaid amounts for homeowners insurance and property taxes that you pay with your mortgage bill each month. Your lender will keep these funds in an escrow account until the bills are due.
7. Good-faith estimate. Like the buyer cost sheet, the good-faith estimate is not part of the purchase contract, but is still important.
"The good-faith estimate has a twofold purpose," Knull says. "It gives buyers a snapshot of their estimated costs for closing services, the down payment and prepaid items like homeowners association dues, homeowners insurance and property taxes. In addition, buyers can use the estimate to hold their lenders to the amount promised in certain categories of costs."
Geraci stresses the importance of buyers looking at the good-faith estimate as soon as possible so they understand how much they will need at closing. "Some buyers may see that estimate and realize they need to save more before they can buy a home," Geraci says.
Realtors do not get an portion of any inspection fee. By Law Realtors must offer 3 inspectors to chose from but suggest you research yours. Termite inspection usually is done by the Seller and provide certificate prior to closing but in many cases my client want there own termite inspector-good idea actually. Realtors must also divulge any Bonus Commission, many don't. I solve that problem and give any bonus money to my clients to assist them with extra closing costs.
Having been a Realtor for over 15 years, we always hear the negative comments about our profession, all we do is show houses and make tons of money. Right!
The general public does not realize that our commission is paid by the sellers; we split our commission with our broker in charge of the company we work for, we do not get paid one cent till we close on the property; we pay our own expenses....advertising, real estate dues, monthly fees, gas and maintence on our cars, added insurance on our vehicle because we have clients in our cars(huge liability if you are in a wreck), continuing education, errors and omission insurance and the list goes on! We are really under paid and make less an hour than most people do.
Not only is the industry changing daily, new federal regulations and lending laws also change and we have to be aware of all the laws to help buyer/sellers. We need to have attorneys, inspectors, lenders and banks that we have relationship with and trust to send our clients to for legal advice.
If a person calls on one of my listing to see it and has not taken the time to talk with a lender go even see if they are qualified to purchase ( oh...I did have a foreclosure this year;(can't purchase till 3-5 years when it was charged off ) I just started a new career ( have to be in a new career for more than 1 year); I will not waste my time to show them either. My time is to valuable and if someone who "just wants to look" will not due their part, they can call someone else.... and that FSBO that did not know the laws and sold their house saving them selves a $8,000 Realtor fee, I hope you did everything correct and documented everything and nothing comes back to haunt you in a lawsuit years down the road.
I am lost for word as to some realtor asking to get paid a portion of the inspection fee, which I know is illegal, realtor get their commission on sales, albeit it may have been split amongst a number of agents and broker. As a florida licensed Home Inspector I told one of this clowns ( NOT ALL BROKERS AND AGENTS) to take a hike, I feel like reporting this agent to the authority in florida but held back. If any agents are doing this please stop before you will have no license to toy with
Selling houses for a huge fee is nothing more than robbing a citizen.
The world of realtors selling house is a huge ripe off. In this day and age no one should have to pay these fees to sell their house. Selling house house should take place at the county court house along with your banker. To give a any realty company 7% of the equity in your home is not right.
What a great article for all home buyers no matter what state you live in. Laws are different state to state and you should always consult a local Real Estate Attorney. I give my buyers copies of all documents that they will be signing when purchase real property, this gives them a chance to read over, show it to their attorney or if they have any questions for me before we make that big step on making an offer.
I love the cost to close, I do this for buyers but not in a format, just as we go over the process I go over what to expect. I will be putting together a word document with these itemized for all my buyers.
Someone mentioned not using a Realtor because of what we charge; our paycheck (commission) is paid by the sellers, my company Re/Max Signature in Florida does not charge a transaction fee to any of our buyers or our sellers.
Happy House Hunting. It can be an great experience if you know what to expect and that can be obtained by making sure you have an Agent that is working for you.
Terry - As a broker, when buyers are "just looking, not ready to buy right now", I tell'em they need to be prequalified so that if we locate the perfect home, we need to be in a position to get it". Not ready to buy? Not prequalified? Sorry, I don't have time spend out riding around. I ain't no tour guide!
AND, the $10,000 was the Realtor's paycheck that is split witht the broker to rent and overhead. Dummy, did you think the Realtor was practicing their HOBBY?
I bet you you are the kind of person I tell to call someone else. Life's too short.
I also find I can trust her recommendation on trades-people. I won't just use who she says and she always gives me three or more people to check into. That she isn't driving business to any one person and makes sure we know what to ask and when and where to get review, permits and additional information makes her a gold mine for us.
Many people get taken, having an agent you can have this much trust in relieves huge amounts of stress and worry.
This is a good article and makes several very important points. It would be nice if all states had and used the same laws and regulations for real estate transactions but it's unlikely that will ever happen.
Bottom line is protect yourself, use a licensed, reputable Realtor. Realtors don't, won't, and shouldn't give legal advice, so an attorney may be needed for some transactions, which is exactly what they'll tell you.
Commissions are negotiated between the seller and the agent prior to signing a "listing agreement" which is in essence an employment contract between the seller and Realtor.
Contrary to what some other posts suggest; the seller typically pays all commissions and any funds collected from the buyer making an offer would be receipted as earnest money and applied to costs at closing.
Deal with professionals - they know the laws and regulations . Everyone has an opinion but not everyone has the training, experience and credentials to insure they are serving you and your best interests.