Buying or selling a home is an exciting yet complex process involving countless moving parts. As a buyer or seller, having a solid grasp of key real estate concepts and terminology can empower you to navigate the real estate transactions smoothly and avoid unwanted surprises. This comprehensive guide from Realoq, the leading real estate technology company, offers an in-depth look at the residential real estate transaction process and defines essential terms every buyer and seller should know.
The Basics of a Real Estate Transaction
At its core, a real estate transaction is simply the process of transferring ownership of a property from one party (the seller) to another party (the buyer). But many intricate steps occur behind the scenes to make this transfer of ownership possible. Here is a basic overview of the key phases:
- Listing the Property: The seller engages a real estate agent to market and list the property on the Multiple Listing Service (MLS). Marketing activities ramp up to generate buyer interest.
- Finding a Buyer: The listing agent markets the listing to prospective buyers. When a buyer is interested, their agent will schedule a showing.
- Making an Offer: Once a buyer decides they want to purchase the home, their agent will submit an official purchase offer detailing proposed terms like sale price, closing date, possessions date, etc. The seller can accept the offer, reject it, or counter it.
- Entering Escrow: After an offer is accepted, the buyer submits an earnest money deposit and the property enters escrow. Both parties work with professionals like lenders and inspectors to satisfy agreed-upon contingencies.
- Closing the Deal: As the closing date nears, the buyer and seller sign all required paperwork and funds are disbursed via the escrow/title company. Ownership officially transfers to the buyer.
Throughout this complex sequence of events, the buyer and seller encounter important real estate terminology that’s critical to understand. Below are some of the most vital terms defined.
Key Real Estate Transaction Terminology
Earnest Money Deposit (EMD)
This is a sum of money paid by the buyer and held in an escrow account to demonstrate their serious intent to purchase the property. It usually equals 1-5% of the total purchase price. The EMD gives the seller confidence the buyer is committed to the transaction. If the deal closes, it goes towards the down payment and closing costs.
Down Payment
The down payment is the portion of the total purchase price that the buyer pays upfront in cash. Conventional loans typically require 10-20% down. The down payment reduces the amount the buyer must finance via a mortgage loan.
Loan Amount/Mortgage Amount
This refers to the actual dollar amount the buyer borrows from a mortgage lender, bank, or credit union to pay for their home purchase. It lessens the down payment and covers the bulk of the purchase price. The loan amount includes the home loan principal plus interest charges.
Closing Costs
Closing costs refer to the various fees charged by different parties to process, document, and finalize the real estate transaction. They typically range from 2-5% of the total sales price. The buyer and seller customarily split these costs, though it depends on the contract terms. Examples include origination fees, appraisal fees, credit report fees, attorney/escrow fees, recording fees, etc.
Prepaids
Prepaids are upfront payments made at closing by the buyer for items like homeowner’s insurance premiums, property taxes, and mortgage interest. Since these expenses are usually paid in arrears by a homeowner, the lender requires prepayment.
Title Search Fee/Title Insurance
This covers the title company’s cost for researching public records to ensure the property title is clear and there are no claims against ownership. Title insurance also protects lenders and owners against losses/claims related to the title.
Home Inspection Fee
The home inspection assesses the current quality and condition of the home. The fee pays for a qualified home inspector to thoroughly examine the property’s structure, systems, fixtures etc. Their report informs the buyer of any material defects.
Recording Fees
This covers fees assessed by the local government to formally record the property deed and new mortgage in public archives following closing. This change in legal ownership becomes part of the public record.
Transfer Taxes
Transfer taxes are assessed by state and local governments when a property changes hands. It’s calculated and paid at closing based on the property’s sale price or assessed value. Transfer tax rates vary considerably by location.
By understanding these key terms involved in a real estate transaction, buyers and sellers can better grasp the moving parts and prepare for positive outcomes. Next let’s explore some frequently asked questions surrounding the real estate process.
Real Estate Transaction FAQs
What are closing costs and who pays them?
Closing costs encompass the various fees charged by lenders, attorneys, and other parties to process the property’s title and sales documentation. They typically range from 2-5% of the purchase price. The buyer and seller customarily divide these costs, but the contract specifies the exact split. Examples of common closing fees include origination charges, appraisal fees, credit checks, taxes, legal fees, and more.
What are property taxes and how are they paid?
Property taxes are assessed annually by local municipalities and counties to fund public services. They vary by location but typically range from 0.5% to 2% of the home’s assessed value. Property taxes are usually paid in monthly installments wrapped into the homeowner’s mortgage payment via an escrow impound account managed by the lender.
What is title insurance and why is it required?
Title insurance offers protection against losses/claims stemming from defects in the legal title ownership of a property. Both lenders and homeowners take out title insurance at closing for their own protection. The one-time premium covers the title company’s cost to thoroughly research public records to verify clean title transfer. Title insurance ensures no claims can rescind the new owner’s (or lender’s) stake in the property.
What does home inspection cover and what’s included in the fee?
A home inspection is a detailed visual examination of the property’s physical condition performed by a qualified inspector. The standard home inspection checklist covers major systems/structures like the roof, plumbing, electric, HVAC, appliances, foundation etc. The inspection fee covers the inspector’s time and production of a comprehensive written report summarizing conditions. Any recommended repairs are outlined.
What are the pros and cons of escrow vs closing attorney?
The main advantage of an escrow closing over a lawyer closing is lower fees. A neutral third-party escrow company also reduces potential conflicts. But attorney oversight provides greater legal protection, more attention to detail, and specialized expertise to resolve issues. Attorneys do typically charge higher fees however. There are good arguments for both closing avenues depending on needs and budget.
Does the earnest money deposit go towards down payment?
Yes, the buyer’s earnest money deposit (EMD) does credit toward the down payment and closing costs if the deal successfully closes. But if the buyer terminates the deal, they often forfeit this initial good faith deposit made after contract acceptance. It compensates the seller for taking their home off market pending sale.
What are the differences between title company vs insurance?
Title companies perform property title searches and handle document preparation for closing. They provide insurance as financial protection against flaws uncovered later related to legal ownership rights. Title companies sell policies underwriting risks on behalf of insurance carriers. The two services are closely interlinked but not identical despite similar names.
What’s the difference between closing disclosure vs HUD-1?
Closing Disclosure (CD) refers to the detailed final accounting of all transaction costs paid by both parties provided to borrowers per 2015 TILA-RESPA rule changes. It itemizes loan costs and all other seller/buyer expenses. The HUD-1 Settlement Statement was the previous closing cost statement format used up until October 2015 when the CD form replaced it.
Can buyer agent and seller agent work for the same broker?
Yes, it’s entirely permissible and fairly common for the listing agent representing the seller and the buyer’s agent to work for the same parent brokerage firm. There is no conflict as long as appropriate disclosures are made. Working independently under one broker supervising different sides of the transactions is standard practice.
What happens if a home inspection uncovers expensive repairs?
A buyer can cancel the contract if repairs are flagged during a buyer’s professional home inspection exceed a few percent of the property value and get EMD returned per contingencies. More often minor repairs simply get negotiated by adjusting sale terms. Costly structural issues can sink deals however.
Carefully weighing these questions and answers aids both home buyers and sellers in preparing for smooth closings.
Key Takeaways on Real Estate Transactions
- Understand essential terms like earnest money deposits, down payments, closing fees, title insurance, and transfer taxes that comprise real estate deals.
- Inspection reports and title searches help avoid unwanted surprises derailing transactions.
- Both buyers and sellers split many standard closing costs but review contracts closely.
- Escrow officers and real estate attorneys help expedite proper documentation and legal transfers.
- Asking the right questions, researching options, and vetting professionals in advance provides peace of mind.
With a solid grasp of these real estate transaction basics, the complex process feels far less intimidating. Whether you’re a seller soon listing your home or a hopeful buyer, Realoq helps simplify each step with technology and expertise. Contact us today to make your next move the right one backed by insights and innovation.
