Long before I got into real estate, I bought my first home and pretty quickly felt overwhelmed. It can be a long process with a lot of decisions and a lot of money. Since this will likely be the largest purchase you ever make, you need to enter the process informed. For that reason, I’m breaking down 10 common real estate terms that I think are important when considering a real estate purchase.
Exclusive Right to Buy
The first of our 10 common real estate terms is Exclusive Right to Buy. Once you decide on a real estate agent, this is the contract you sign to formalize that arrangement. Your agent will likely want this contract signed, and by law, the state requires this to be signed before your agent submits a contract for you. The Exclusive Right to Buy does 3 things:
1.) It creates confidentiality between you and your agent. In other words, once you’ve signed this, your agent, by law, cannot share your motivation for purchasing with anyone else (aka, the seller);
2.) It allows your agent to fill in legal contracts for you because real estate contracts are legal contracts; and,
3.) It protects the agent’s commission. This means they get the commission on any house they help you find. This commission is typically 2.8% in Denver, and is paid by the seller.
This contract essentially ties you into one agent for a set period of time, so make sure you feel comfortable with the agent before signing that paperwork. A word to the wise: 10% of agents do 90% of the deals in Denver, so while everyone may know a real estate agent, not everyone knows a working real estate agent.
Once you’ve found a place that you think you want, you will submit a Contract to Buy. This is also called your “offer.” This is a lengthy, somewhat overwhelming, document where you stipulate what you are willing to pay for the property, the timeline you’d like to acquire that property in, and a few other specifics. It is referred to as the “offer” until the seller accepts your contract and signs the paperwork. It then becomes “Under Contract.”
You go “Under Contract” when as the buyer, you’ve submitted an offer and the seller accepts your offer and signs the Contract to Buy. At this point, the dates stipulated in your offer become binding. Hitting these are extremely important to staying under contract. From here on out, the buyers have multiple opportunities to pull out of the contract, whereas the seller cannot terminate the contract at this point unless a deadline is missed.
Earnest money is a “deposit” on the property. The seller dictates what the earnest money will be and there is no hard and fast rule for what it looks like (So, it’s not always 5% or $5000 or some set amount. It is what they choose it be.)
A misconception about submitting earnest money is that once it’s been deposited, it cannot be recouped. While it is a way to filter for serious buyers, there are several opportunities for buyers to get their earnest money back after they have submitted it.
The inspection is a time for the buyer to find out everything that is wrong with the home. It is the responsibility of inspectors to find everything so anticipate a long, scary list when you buy a house- but know that there are grades of importance when it comes to house defects. Your inspector and your agent should be able to tell you what matters and what does not.
A note on inspection: this is where you will ask the seller to fix issues with the home. It is a negotiation and is typically the most stressful point of your home purchase (usually happens 7-10 days after you go under contract.)
The purpose of the appraisal is establish the market value of the home. The appraiser is a neutral, third-party professional who factors in different aspects of the home’s value (examples of this would be air conditioning v. no air conditioning, an extra bath v. one bathroom, proximity to schools, etc.)
If an appraisal comes back for more than you purchased the house for, you have instant equity. If the appraisal comes back for less than what you purchased the house for, you may need to negotiate with the seller.
This is the final phase of purchasing a house. It usually takes place at a title company and lasts approximately an hour. The buyer signs a lot of forms (mortgage pay schedule, mortgage terms, past aliases used, tax expectations, water bill expectations, etc.) Sometimes both parties will be at closing, and sometimes they do them at different times. And, yes, closings can be done remotely. At the end of the closing, you own the house.
“Short-term rentals” is an umbrella term used for sites like Airbnb and VRBO. A short-term rental is a rental for under 30 days. Different cities have different laws around short-term rentals, so it’s important to find out what your local laws are before moving forward with a short-term rental.
A long-term rental is a rental for 31 days or more. These types of rentals are usually legal in most places in the United States. These tend to be more of a tenant/landlord situation.
iBuyers are a term you’ll hear a lot about in the future. They refer to automated real estate apps that are entering the market. These apps can buy and sell properties. Zillow is the most popular example of an iBuyer at the moment. Right now, using an iBuyer is still more expensive than using an agent. Many have buried costs that equal about 7% of the commission and work mostly with sellers at this point. While we don’t think they are a good deal now, in the future they’ll likely iron out the fees and may change the face of real estate.
Whoooo… That was a lot. Hopefully this information has helped you understand the 10 most common real estate terms. If you need clarification, have questions on any of these topics, or are looking for an agent, I’m happy to speak to you. You can find me at email@example.com. Thanks!
Erin Spradlin and James Carlson have been teaching at Colorado Free University since 2018 and 2016 respectively. You can check out one of their upcoming Graffiti Tours and be on the look out for their next free Detailed Guide to Selling Your Home courses at CFU.
CFU offers a number of free real estate classes. Check out the list of active classes here. You do need to call us to register. (303) 399-0093 ext 0 to register.