10 Real Estate Terms You Should Know

Below, find 10 real estate terms that you should know and keep an eye out in the future as I continue to add more and more.  My goal is to make these easily understandable to novices to real estate as well as to help clear up and go a little deeper on the definitions for the more knowledgeable.

Appraisal (see Inspection) – an appraisal is an opinion of the value of a property by someone who is trained and licensed as a professional appraiser.  The type of appraisal (cost, income capitalization, or sales comparison) is dependent on the type of property (owner-occupied or investment, residential or commercial, etc.).  Note that appraisals are opinions – an appraised value can differ greatly from the final sales price and the initial agreed-upon offer price is not typically informed by the appraised value.  The appraised value, however, can affect the loan which, in turn, can instigate negotiations. 

Appraisals are most commonly used in transactions in which the buyer is borrowing money.  The lender must verify that the collateral (the property) for the loan will protect the lender’s interests in the case of default.

The purpose of an appraisal and an inspection are often confused.  An appraisal (often required) is to establish value; an inspection (usually voluntary) is to give the house a once-over to make sure it’s not about to fall down around the new owner.  While appraisers will point out obvious flaws (“Hey, there’s a hole in the roof” or “Look, a nest of termites in the living room”), you probably won’t find the appraiser in the crawl space as frequently as the inspector.

Bumpable – the definition can vary regionally, usually depending on what MLS (Multiple Listing Service) area you’re in.  A Bumpable Sale in the Portland market is a house that has an accepted but contingent offer on it (see Pending), meaning that the buyers are waiting to sell their own house before they can close on the one they want to buy.  So, although there is an accepted contract, if another offer comes along, the seller is in her rights to accept it, ‘bumping’ the old buyer out of line. (There’s a bit more to it than that, but that’s it in a nutshell.)

Buy-down (Rate Buy-down, Mortgage Buy-down) – (percentage) points paid to a lender to lower the interest rate, and therefore the monthly payment, on a loan.  These points can usually be paid by either the buyer or the seller.  There are different kinds of buy-downs: some lower the rate for the entire term of the loan, some temporarily (e.g. the first two or three years, after which the full rate goes into effect for the remainder of the loan).

Concessions (Seller Concessions) – benefits afforded by a seller to a buyer to bring about a sale.  Examples would be when a seller pays some or all of the buyer’s closing costs or pays to buy down a buyer’s rate. (See Buy-down).

Contingent – requiring certain conditions be met before a sale can finalize.  Although it can refer to many required conditions – some examples would include the home inspection or approval of the buyer’s financing – when one hears about a ‘contingent offer’, it usually means that the buyer in the transaction requires his own property to sell before he can close on the property he’s buying (usually because he doesn’t have enough money without the proceeds from his own sale).

Debt-to-Income (DTI) – a definition used by lenders to calculate how much of one’s gross monthly income goes toward debt.  Debt here is usually defined by a lender as what is found on a credit report (credit cards, cars, student loans) as well as child support, alimony or other fixed monthly obligations.  Items such as groceries or utilities are not included in the ratio.  Loan programs often have guidelines for maximum debt-to-income ratios. (For more on this subject please read “What is DTI & Why do I Care?”.)

Due Diligence (Feasibility) Period – a period, usually after mutual acceptance of a purchase contract, allowing the buyer to inspect and research the property he is buying.  The terms of what is allowed in this period are subject to the contract’s terms.  As an example, a seller has accepted a developer’s offer on a piece of land.  His due diligence might include, usually at his own cost, talking to the local jurisdiction about allowable uses for this piece of land and if he’ll be required to put in sidewalks.  In addition, he is having the well inspected to make sure the water is good and the well works.  Allowable testing and inspections are usually spelled out in the contract (particularly invasive inspections), so a well inspection is probably fine while dynamiting a hillside to check the water table is probably not (unless the seller has agreed to it).

Earnest Money – earnest money is a good faith deposit paid by a property buyer, usually to a neutral 3^rd party such as an escrow company, to show that she is an earnest buyer.  If buyer does not perform on the purchase contract, she stands to forfeit this deposit to the seller.  It is, in a phrase, putting one’s money where one’s mouth is.

Inspection (see Appraisal) – inspections are part of the due diligence process when buying a home.  Typically voluntary and paid for by the buyer (not always, mind you), an inspection is the ‘kicking the tires’ on one’s potential new digs.  There are full-home inspections as well as countless types of specific inpsections, depending on how much of a worry-wart the buyer is and also what is needed in certain regions.  For example, in the Portland, Oregon area, radon and sewer line inspections are very common while termite inspections are not. But if one is looking in Florida, a termite test is probably advised.

Pending – the definition can vary regionally, usually depending on what MLS (Multiple Listing Service) area you’re in.  A Pending Sale in the Portland market is a house that has an accepted, non-contingent offer on it (see Bumpable).  There can be other conditions to the contract but none that requires the sale of real estate.

OCTOBER’S SUPER FUN BONUS WORD!

Chattel – personal property as opposed to real property. (Real property is another way to say real estate.)  In the 13^th Century, ‘chatel’ referred to all property. By the 14^th Century it had come to refer mostly to livestock. Finally, in the late 16^th Century, it came to refer specifically to cows and bulls. The meaning was essentially property/wealth that could be moved (at the time, a significant amount of people's wealth was in their livestock and cattle) versus property/wealth that could not be moved – i.e. real estate. 

Had Hemingway written a book about chattel, perhaps he would have titled it A Moveable Beast.