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Real Estate

I often get questions about what real estate specific terms mean. Real estate is its own world and I thought it would help to dedicate this blog post to Arizona residential real estate specific terms:

Appraisal: A residential real estate appraisal is a professional third-party statement of opinion of what a house is worth. The role of the appraiser is to provide an independent and impartial analysis of real property. Lenders typically require appraisals as a condition to financing to ensure they will not be loaning more than a specified percentage of the home value (for example, the loan-to-value ratio may not exceed 97% for VA loans, 95% for FHA loans, and 80% for conventional loans in order to get out of PMI). As agent for a seller, I ensure that the appraiser is fully informed and knows why we priced a house the way we did (historical significance of the neighborhood as is frequent in central Tucson, expansive updates etc.). The Arizona residential real estate purchase contract has an “appraisal contingency” clause. If the house does not appraise, the buyer may cancel the contract and get its earnest money back. If the buyer elects to move forward (and has the means to do so), the buyer may need to pay the difference. Sometimes sellers can agree to lower the list price to the appraised price, but in a hot market sellers are more likely to require the buyers waive their appraisal contingency at the onset, and pay the difference if the house does not appraise.

Closing: The closing process is the last step of a real estate transaction. On this date, which is the date the deed is recorded, the property is transferred from the seller to the buyer.

Closing costs: These costs can amount to 2-5% of the home's purchase price. Examples of closing costs include appraisal fees, escrow fees and the premium for the owner’s and loan title policies. These costs are disclosed on the settlement statement.

Deed: A deed is a the legal documents pursuant to which title to an asset is conveyed (transferred) from the seller (as grantor) to the buyer (grantee). There are different types of deeds that convey real estate, such as warranty deeds, quitclaim deeds and beneficiary deeds.   In warranty deeds, the conveyance also includes a promise that the grantor will warrant and defend the title against any claims.  Quitclaim deeds are used to release a person's interest in an asset without stating the nature of their interest or rights. The grantor could be a legal owner or not, and makes no promises. Beneficiary deeds effect the conveyance automatically upon death of the grantor.  Deeds must be properly recorded with the applicable county recorder’s office for the property owner to be able to further convey it or finance it.

Down payment: A down payment is the total amount of cash that the buyer pays at closing. VA loans have minimum down payments requirements of 3%, FHA loans have minimum down payments requirements of 5%. Conventional loans for primary residences or investors come with minimum down payment requirements of at least 10%-25%.

Due diligence period: The Arizona residential purchase contract by default includes a 10 calendar day due diligence (or inspection) period, but the time period can be changed by the parties during contract negotiations.  Once the buyer and seller are under contract, the buyer may perform all the property inspections they wish. If the buyer cancels the contract for any valid reason before the end of the period, they are entitled to get their earnest money deposit back.

Earnest money deposit: This deposit is usually around 1-2% of the purchase price (but the amount greatly varies and this is something I discuss with my buyers), and is deposited by the buyer with the title company in trust when the contract is first entered into. It constitutes “consideration” for the contract and is meant to show the seller that the buyer is serious about the transaction. While it is fully refundable during the due diligence period (10 days is standard in Arizona), it becomes non-refundable past it, unless one of the contract contingencies is not satisfied.

Escrow: This account is opened when a third party (in Arizona, a title company) holds an earnest money check from the buyer until the transaction is completed. Then these funds are sent to the seller.

Home inspection: The home inspection is one of the inspections that may be ordered during the due diligence period. It is performed by a certified inspector to identify a property's condition. Inspectors will include information about the foundation's stability, the condition of a home's roof, and the state of any major home systems in their report. The home inspector may recommend that additional parties specializing in certain aspects of the home (roof, HVAC, windows, mold) be brought in, to the extent they were not engaged at the onset. Typically, in addition to the home inspection, I recommend at a minimum a termite inspection and roof inspection. HVAC inspection, sewer scope, window inspection and mold inspection may be warranted as well, but buyers should feel free to order any and all inspections they decide. It is their inspection period.

Mortgage or deed of trust: This is the document which secures the promissory note. It is recorded in the official records of the applicable county to provide constructive public notice. The property serves as collateral. If the buyer defaults under the promissory note, the lender can foreclose and take the property. In Arizona we use deeds of trust. Technically these have 3 parties: the trustor (owner/borrower), the beneficiary (lender), and the trustee. The trustee holds the property in trust for the benefit of the lender. If the trustor defaults under the deed of trust, following statutorily-required procedures, there can be a trustee’s sale pursuant to which the property will be conveyed to the highest bidder.

Promissory Note. The promissory note is the instrument executed by the buyer to the order of the lender, pursuant to which the buyer (as borrower) agrees to re-pay the loan to the lender over time, typically in a series of regular payments that are divided into principal and interest. The promissory note is typically secured by a mortgage or, in Arizona, a deed of trust.

Pre-qualification letter:  The Arizona residential real estate purchase contract requires that a pre-qualification letter from the buyer’s lender be submitted at the time of offer. This is different from a pre-approval letter, and way more detailed.  This requirement does not exist in all States, and many times I find myself arguing with out-of-state lenders who do not understand the difference. This is why I always recommend to get prequalified before starting the home buying process.  In addition to being required in order to make an offer, we want to make sure that your lender is on board; also, why spend time looking at houses if there is a risk you may not be able to obtain the necessary loan amount? As part of the pre-qualification process, the lender will check your credit history and income, verify all information, and determine if the purchase needs to be contingent on the sale of an existing home.

Title Insurance. As a buyer, you will be the named insured of the homeowner’s policy of title insurance at closing. If there is a loan on the property, the lender will be the named insured of the loan policy of title insurance. Title insurance, unlike other types of insurance, does not cover risks that may happen in the future (for example – health insurance covers you in the event you were to need medications or a hospital stay in the future). Instead, they cover for risks as of the closing date and time only. To illustrate this, title insurance covers the insured for loss in the event the property does not have legal access. If the property had legal access on the closing date but loses it a week later…you are not covered. You are only covered if you find out that ON the closing date, the property did not have legal access.

With these terms and definitions in hand, you should be better prepared to buy or sell a home. If you have questions about any of these terms or want an overview of what the process looks like for your specific situation, please reach out anytime.