Besides all the technical jargon and legal terms, real estate involves more than a few concepts that are pretty confusing for most people. And this presents a problem for both buyers and sellers. If you don’t understand the concepts, you don’t really know what you’re getting into, and the chances of your getting less than a good deal increase dramatically. To help you out, then, here are some frequently misunderstood real estate concepts for buyers and sellers inChicago explained.
Prequalification vs. Pre-approval
One of the real estate concepts that cause quite a bit of confusion (as well as financial disappointment) for buyers and sellers in Chicago is that of prequalification vs. pre-approval.
Here’s a quick rundown of prequalification and pre-approval . . .
“When you get prequalified for a loan, a lender takes a quick look at your financial situation based on your income, debt, and assets that you submitted on your application, then tells you the mortgage amount you would most likely qualify for. While you might receive a letter called a ‘Pre-Approval,’ the language in the letter tells your real estate agent and the sellers that additional verification is still required in order for you to get the loan.”
Pre-approval, however, is different in that you have to provide more information and documentation, and, as a result, it is a stronger assurance of whether and how much you can borrow to buy a house.
For approval, “you have to complete an official application and provide documentation related to your income and assets so the lender can perform an extensive examination of your financial background. They’ll also pull your credit rating. Once complete, the pre-approval letter will tell you the exact mortgage amount for which you qualify. . . . A true pre-approval letter is an actual commitment to the loan that identifies the loan file has been reviewed and approved by the loan underwriter. This means the only condition to the loan is finding a property that will be approved.”
The advantage of pre-approval over prequalification is that it allows you to be perceived as a serious buyer and will give you more negotiating leverage.
Agent Commission Payment
Another of the frequently misunderstood real estate concepts involves the payment of the agent commission(s). Here’s how it typically works . . .
“[T]he commission that the listing (seller’s) agent receives is paid by the seller in that it’s taken out of the total amount you, the buyer, pay for the home. So if you’re purchasing a $300,000 home, the listing agent’s commission comes out of that amount, and then the selling agent splits the commission with your buyer’s agent. This is only the most standard set up though and rates are negotiable.”
If you want to find out more about this, contact a Chicago agent at 773.233.2301.
Valuation, Appraisal, and Assessment
This one is definitely one of the misunderstood real estate concepts: the difference between valuation, appraisal, and assessment.
- Market valuation – This is an estimate (though fairly accurate) of what a home will sell for in its current state and is known as fair market value. Most commonly, this valuation is arrived at when your agent performs a comparative market analysis.
- Appraised value – This is “the amount an appraiser values the home at. The lender will use this amount to determine how much money can be borrowed and under what terms.
- Assessed value – The is “the worth of a home as determined by a tax assessor.” It is primarily used to calculate and levy property tax (and often comes into play at closing).
Earnest Money Deposit
The earnest money deposit is also usually among the frequently misunderstood real estate concepts.
Earnest money is fairly straightforward. It is simply a good-faith deposit representing “a buyer’s good faith in entering into an offer to purchase a property.” It signifies that a buyer is serious and actually has skin in the game.
The confusion surrounding earnest money involves the question of whether it is refundable. It’s often believed that “earnest money is [is] always refundable. This misunderstanding can lead to an unpleasant financial situation and even litigation if a buyer terminates a contract. . . . [E]arnest money provisions have a propensity for litigation, [but] depending on how the contract is written, earnest money can be refundable. . .. The executed offer will dictate what happens to the earnest money upon the termination of the contract. It is important to understand what the offer says before signing it.”
Again, for a fuller explanation of earnest money, consult a Chicago agent at 773.233.2301.
Closing Costs
Closing costs have always caused more than a little confusion. But it remains one of the real estate concepts you really need to get a handle on and understand.
Closing is the very last step in the home buying/selling process – the terminus of the transaction. And, as the name suggests, there are certain costs involved.
The“three kinds of costs associated with closing [are] lender fees, prepaid expenses like taxes and insurance on the property, and settlement costs. These costs can differ depending on the loan product, the lender, and the title company you choose.”
Typically, the buyer pays most of the closing costs, but “the seller might pay some of the fees.” In addition, some of the fees “might be discounted if you’re a first-time homebuyer. Your lender might also agree to finance some or even all of your closing costs so that rather than paying them upfront in cash, you can pay them out over time.”
Understand More About Real Estate Concepts
This should help you move toward an understanding of these concepts, but it remains a fairly brief treatment of some complex matters. If you really want to understand these real estate concepts and others to ensure a successful purchase or sale, contact us today at 773.233.2301.