Escrow, Title, And 8 Other Terms To Know Before Buying A House
To play the home-buying game, you need to speak the language.
Consider this your CliffsNotes to being a first-time buyer.
1. Open house: An open house is when a real estate agent puts signs up all over the neighborhood inviting strangers to come tour a house that’s listed for sale. It’s certainly fun to check out houses, but don’t fall for that bait of freshly baked cookies in the kitchen. What’s really being marketed here isn’t so much the house for sale; open houses rarely sell the house being held open. They are sometimes held so that the agent can find prospective buyers and gain them as clients. Agents want buyers who aren’t being represented by anyone in attendance.
You can definitely go to open houses, just know what is likely going to happen after you write your contact info on the sign-in sheet: Agents will follow up with you and offer to show you something that they’re certain you’ll love. You just became “their” client.
2. Active listing: A house for sale goes through different steps. When no one has made an accepted offer on it, it is considered an active listing. Others may be contemplating buying it, but it’s up for grabs until both sides sign a contract.
3. Contingencies: Contingencies are the clauses in a buyer’s offer that basically say “unless.” In other words: “I agree to pay you $500,000 for your house unless I can’t get a bank to loan me the money or if I hire an inspector and he says the house is in need of a major repair.” If you aren’t a first-time homebuyer but need to sell your existing home in order to buy the new one, that would be a contingency you’d want to add in your offer. Contingencies are your escape clauses.
4. Seeking backup: When someone else already has a signed contract on a property ― in other words, they already have an accepted offer to buy the house you just fell in love with ― many sellers’ agents will seek an additional buyer in case that first person backs out.
Your backup offer acknowledges there’s an existing offer and says you are automatically in a contract with the seller if the first buyer cancels. Sellers can sign more than one backup offer, providing they disclose the position of each party. For example, you could be in the No. 3 or No. 4 position if there are four backup offers. Ideally, you would want to be in No. 1 position, the first back-up offer.
Having a backup buyer serves a few purposes for the seller, not you. Primarily, it holds the first buyer’s feet to the fire with the unspoken message that if they try to drive the price down after the house has been inspected or if they delay in securing financing, there is someone else ― you ― ready to step up and replace them.
If you decide you want to be a backup buyer, know that you are, in essence, taking yourself out of the house-hunting business. A backup offer is legally binding once it’s signed by both parties. Make sure you really are ready and able to pay the amount you agreed upon, that you are OK with having your earnest money tied up in escrow, and that the home itself is exactly what you want. If the primary contract falls apart, you just bought yourself a house ― and if you try to get out of it, you will risk losing your good-faith deposit.
5. Multiple bidding situations: When a house is priced under market value or is simply off-the-charts perfect, there is an excellent chance that you won’t be the only one interested in buying it. This term means the seller is getting more than one offer. Your agent will tell you how to make a strong offer, but don’t go crazy. Don’t drop important contingencies. In multiple-bid situations, the one with the most cash generally wins.
6. Disclosures: These are things a seller has to tell a prospective buyer about the house, and they vary by state. Smart sellers err on the side of caution and disclose everything, since nobody wants a buyer to come back later with a lawsuit for not being told that the basement flooded last year and there is now a mold problem.
As a buyer, take the time to actually read the list of disclosures yourself. It isn’t good enough to have your agent give you the highlights or say she sees “nothing major.” This is one of the forms you absolutely need to read before you sign.
7. Escrow: Once you and the seller have a signed contract, you enter the phase of the home-buying process known as escrow. An escrow officer is a neutral third party who makes sure that everything that was agreed upon in the contract is fulfilled by the deadlines. Escrow costs are generally split by both sides. A house isn’t considered “sold” until escrow is closed.
8. Inspections: Every sensible buyer in escrow hires a professional home inspector to go over the house with a fine-tooth comb. You can accompany the inspector and learn a whole bunch about your house in the process. Expect to pay a few hundred dollars or more. And yes, if the inspection shows something that causes you to withdraw from escrow, that’s money you won’t see again. Still, it must be done. Your very-handy uncle may be a great guy and offer to do your inspection for free, but unless he’s a licensed home inspector, offer him profuse thanks and find someone who is.
9. Title: Just like a car, a house has a record of ownership. It’s called the title, and what is written on this piece of paper is of paramount importance. How you hold title will determine what happens to the property in case you die. Title is the legal way of saying you own a right to something. In real estate, it means that you have the rights to use that property. It may be a partial interest in the property or it may be the full interest. However, because you have title, you can access the land and potentially modify it as you see fit. Title also means that you can transfer that interest or portion that you own to others ― you just can’t transfer more of it than you own.
10. Property deed: Most people wrongly assume that property deeds and titles are the same thing.
Deeds are actually the legal documents that transfer title from one person to another when a home is sold or transferred in an inheritance or gift. To be valid, they must be a written document, according to the Statute of Frauds. Deeds must be recorded in the courthouse or assessor’s office to make them fully binding in most states.