When someone enters the real estate market for the first time, whether as a buyer or seller, there might be a steep learning curve when it comes to learning and understanding relevant industry vocabulary. Although real estate made its way into cocktail conversation years ago, new buyers and sellers would be wise to familiarize themselves with more than just the basics since so many of these terms and phrases are connected to financially consequential decisions.
[Related:The Most Common Questions Buyers Ask Real Estate Brokers]
1. Real Property
Real property is a common technical term for “real estate” that is transferred from owner to owner by written deeds. For many of us, it could mean a house or a condominium, but the definition includes land, any infrastructure on that land, the air above it and riparian rights below. Real property can be owned by an individual, a group of people, a corporation or trust, and it includes tangible real property and intangible real property. Anything that can be removed from the land without damaging the property is not considered real property.
— Tangible real property — physical interest in land and the structures on it. This includes structures like buildings, whether residential or commercial.
— Intangible real property — legal interest in land.
2. Condominiums are Real Property
If someone owns a condominium, they own the four walls, the space within and an undivided interest in the common elements (hallways, equipment, ducts and air shafts, outdoor areas, etc.). Owners must comply with the rules set forth by the condo board as well as zoning regulations, often mostly pertaining to construction and renting. An owner can use it as a primary residence, a vacation home and/or an investment property. They can finance it or refinance it, co-own it with people who aren’t their spouses or own it in a corporate entity or trust.
3.But NYC Co-ops Are Not
If someone owns a co-operative apartment in New York City, where I am based, they don’t actually own real property, but shares of stock in a corporation that owns the building and land. Each apartment is allocated shares on the basis of unit size, floor number, etc. If a tenant shareholder wants to sell their shares (and the related unit), consent is required by the co-op’s board of directors, in the form of “board approval.”
A co-op owner likely has more rules pertaining to ownership than a condo or house owner, including but not limited to subletting restrictions, financing rules or limits, and guidelines around ownership (such as co-purchasing, gifting, buying/owning in a corporate entity). While the corporation owns real property, a unit owner in a co-op does not, and when they buy or sell the co-op apartment, they are selling their shares of stock, which might be classified differently in the eyes of the government or a lender.
4. HOA
HOA stands for homeowners’ association, and it is the governing body for a group of homes within a designated community. The HOA board consists of elected residents tasked with setting rules that improve and maintain the values of the homes in the community, as well as the living experience of the association members. The HOA collects monthly dues or fees, which pay for structural upkeep and salaried staff. Additionally, an HOA’s covenants, conditions and restrictions (CC&Rs) describe what owners can and can’t do with their homes. “These communities often have rules, maintenance standards and architectural review boards,” says Kathryn Kramer, a real estate agent with Howard Hanna Real Estate Services in Norfolk, Virginia. “It’s very important for a buyer to consider if the regulations and dues are in line with their expectations.” Depending on the size and location of an individual home within the designated community, the dues or fees might vary. This is common for gated communities, as well as condo complexes.
What Might This Mean in the Real World?
In a gated community, the HOA fees could go toward the upkeep of common areas and amenities, like a pool, fitness center, tennis courts or lounges, as well as the salaries of security guards and maintenance staff. In NYC high-rises, for example, the HOA fees, known in a co-op as “maintenance” and in a condo as “common charges,” would go toward the salaries of doormen and janitors, as well as the costs of certain pooled utilities like water and gas.
Since the CC&Rs lay out what owners can and can’t do with their homes, it pays to review these before purchasing. “I once had a client looking for a townhome with a hot tub on the roof,” said Michael Rachlis, a real estate agent at Compass’ Sunset Strip office in West Hollywood, CA. “There were many townhouses with the right space, but most of their CC&Rs firmly prohibited roof hot tubs because they were either not approved for the structure of the building or due to possible liability. By reviewing the CC&Rs ahead of time, we saved time by avoiding properties that would not allow roof spas.”
An HOA also sets rules about decorum and behavior for residents within common areas and will mediate disputes among neighbors if complaints are brought regarding noise, construction or damage.
5. Curb Appeal
When buyers are looking at houses, the first things they see from the street are the façade of the home and the front yard. This is known as curb appeal. Sellers and their agents should try to maximize curb appeal because this is a buyer’s first impression. If the house is newly painted and the landscaping is attractive, this sets the tone for a buyer’s visit before they even step inside. Conversely, if the lawn is wild, a dead tree sits in a cracked driveway and shutters are falling off broken windows, this home is lacking in curb appeal and many potential buyers might not even come.
What Might This Mean in the Real World?
If you are planning to sell your house, it might make sense to take photos and list it during the spring or early summer, when the light is bright, the lawn is green and lush, and your home looks its best from the sidewalk. This is when curb appeal is likely at its best. If the leaves are dead, the paint is cracked from dry air and the weather is likely to be cold and wet, this might not be the best time for a potential buyer to fall in love with what you’re selling. Savvy buyers might purposely go house hunting when the weather is cold and wet, thinking they’ll have less competition.
[READ: Improve Your Curb Appeal: 6 Projects You Can Tackle in a Weekend]
6. Due Diligence
Real estate is a big purchase. As with any big allocation of funds, it makes sense to do your homework. This includes not only evaluating all aspects of the property and understanding its position among the comps but also ordering inspections and exploring financing options. This is called due diligence. Buyers should conduct their own due diligence, as well as engage brokers, lawyers, lenders and/or inspectors so they understand all risks involved and feel comfortable proceeding with the purchase.
“Due diligence exists because, while a home might look great on a casual walkthrough, there could be hidden issues or deferred maintenance that need to be addressed,” says Rachlis. “A good real estate agent should help call attention to any issues that may inhibit a client from enjoying the house. This could be pointing out that the property is in a flight path next to the airport, for example, or that zoning restrictions on height might make it impossible to build a second story.”
What Might This Mean in the Real World?
Sometimes the due diligence process can turn up information that might save a client from buying real estate that could prove more costly than anticipated.
“I once represented a client who fell in love with a house, but after reviewing city records and obtaining a geological survey, it was likely that a retaining wall at the end of the property was beginning to fail,” Rachlis says. “Estimates predicted it would cost over $200,000 to reconstruct, and this risk-averse client did not have the budget. Even though they really liked the home, they knew they had to walk away from the deal due to valuable information obtained through due diligence.”
7. Concessions
In a negotiation, one party might add some concessions to make a deal more attractive to the other party. If maintaining a high contract price is a priority for the seller, throwing in concessions may encourage the buyer to offer a higher deal price. Concessions generally have to have some monetary value. In NYC new development, for example, developers have been known to pay a buyer’s closing costs or even offer a “decorating credit” at the closing table if the buyer agrees to a higher contract price. Another scenario might be if a seller needs the proceeds out of the old house quickly but the buyer isn’t ready to move in. The buyer might offer the seller a sale-leaseback, also known as a post-closing holdover, where the seller rents the home back from the buyer after they become the new owner.
What Might This Mean in the Real World?
If two parties are close to making a deal, but refusing to budge on the price, concessions might make the deal possible. “I’ve had deals where a seller offered to pay a buyer’s HOA fees for a certain period of time or even pay points to buy down a rate,” says Kramer. “Often these contract terms may be as important as the price of the home, so it is of utmost importance to ascertain the priorities of the other party to craft the strongest deal.”
A good real estate agent will know how best to use various concessions to help their clients and make the deal happen, since sometimes the price isn’t the only negotiable term of a deal.
[Read: The Buyer and Seller Guide to a Real Estate Bidding War.]
8. Home Inspection
As part of the due diligence process before buying a home, it is prudent to order a home inspection, wherein a hired specialist will examine all aspects of a structure, including its systems, foundation, plumbing, roof and more. The inspector’s report enables a buyer to better understand any issues, whether structural, systemic, related to pest infestation and the like, empowering them to make a wise decision about whether to proceed with the purchase. Given the financial magnitude of purchasing real estate, mitigating various risks with additional information can help a buyer make educated choices about proceeding.
What Might This Mean in the Real World?
If too many red flags emerge from an inspection, that beautiful home might not be financially wise, especially for buyers on a limited budget.
9. Down Payment
When purchasing a home, the down payment is a sum of money the buyer pays at closing as a percentage of the contract price. “It’s their contribution towards the purchase price of the property,” says Kramer. The down payment is a percentage of the purchase price, with the remainder being the amount of the mortgage. A larger down payment means the buyer will need to borrow less money from a lender, which may affect the interest rate, mortgage insurance and other terms.
What Might This Mean in the Real World?
If a home costs $1,000,000, you don’t have to come up with a million bucks now. Depending on how much money you can put down as your down payment, along with other factors like your credit rating, income and debts, a lender will work with you to find a mortgage product that makes sense. “It is crucial to work with a lender that understands the different loan programs,” Kramer says, “so that you get the best mortgage product available to you.”
10. Appraisal
An appraisal is a report conducted by a third party, presenting an opinion of a property’s value. When a buyer is financing (or refinancing) a purchase, the lender needs some assurance that the price is in line with market value in order to protect itself. An appraiser is a licensed professional and in their report, will describe the property, utilize data from present and recent comps, and report on the neighborhood in how it relates to value. An appraisal is required if a buyer is getting a mortgage.
What Might This Mean in the Real World?
“Not only does an appraisal report protect the bank, but it also protects the borrower from over-investing in a particular property,” says Kramer. The bank will likely make a loan based on the appraised value of the property, not on the contract price, so the buyer and seller hope the appraisal report will support the price they negotiated. “In a competitive market, guaranteeing the sales price against a low appraisal by bringing extra cash at closing is a powerful tool to increase the competitiveness of an offer,” Kramer says.
11. Appreciation
Most people hope the value of their acquired assets will increase. Some look to make a quick profit, but most property owners usually hope for an increase in value over time — commonly called appreciation. Real estate traditionally has provided owners with a highly stable asset with good appreciation and possible revenue over time. There have certainly been periodic market fluctuations depending on many factors like local or global economics and changing supply and demand or interest rates. Maintaining and enhancing value requires careful planning. Capital improvements to the property, like smart upgrades or renovation projects, as well as regular upkeep and maintenance, will contribute to a property’s value and appreciation. Conversely, a weak housing market, a neglected or worsening neighborhood, and a cheap or aging renovation will hurt a property’s appreciation or contribute to its depreciation.
What Might This Mean in the Real World?
A smart buyer should rely on expert advice by working closely with an experienced and knowledgeable real estate agent who can provide a continuing stream of comparative market data and have other professionals ready for support, such as attorneys, contractors and mortgage lenders.
Your Best Weapon
Information is power, especially when taking on risks. If a buyer or seller is ready to enter the real estate market, it makes sense to learn the industry lingo and surround yourself with professionals who can explain every aspect of the process. As always, a good real estate agent can be one of your best weapons to navigate any housing market.
More from U.S. News
What Buyers Can Learn From Home Stagers to Make Small Spaces Look Bigger
How Does Buying a House As-Is Work?
Florida’s Condo Crisis: Why Condo Sales are Plummeting
11 Real Estate Terms That Every Buyer And Seller Should Know originally appeared on usnews.com
