Welcome to the Glossary!

Scroll through or choose an alphabetical section below! You can also return to the top with the little arrow in the bottom right.

Appraisal

An appraisal is a valuation of a property by a professional appraiser. If you're getting a mortgage, your lender will usually require an appraisal to ensure that the property is worth what you're paying (and what they're lending). An appraisal usually happens once inspection issues are resolved.

Appraisal Gap

An appraisal gap refers to the difference between appraised value and the contracted purchase price. If you're offering over list price (common in Denver's market), you'll likely need to offer some amount of coverage.

Since the lender will only lend up to the appraised value, there could be a discrepancy between that number and the purchase price you've offered. Offering to cover that gap provides the seller with extra assurance that a low appraisal will be less likely to crash the deal (and can help your offer rise to the top of the pile)!

Example: a house is listed at $525,000. You offer $550,000. The seller wants to know that even if the appraisal values the house at (or closer to) list price, you will still be able to purchase the property at $550,000. You could offer $25,000 worth of appraisal gap coverage (if you are able to!). You could also offer an amount less than the full difference, still signaling that you are a serious buyer and are willing to cover as much as you can if needed.

This number is both hypothetical and real. You should not over to cover more than you can actually afford to cover in cash - but you may not actually need it.

Closing

Closing refers to a buyer or seller signing all of the documentation to transfer ownership of the property in question, and the transfer of funds occurs to complete the transaction. Closing is generally the end of the contract period, when ownership of the property officially transfers from seller to buyer. It is also usually the date that the buyer takes possession of the property, unless there is a Post-Closing Occupancy Agreement.

Closings can be done with both parties in the same room, or separately, with buyer and seller signing at different times. Closings are usually held at the offices of the title company that handled the transaction.

You can expect to sign lots of documents at your closing, and it usually takes 1-2 hours.

Closing Costs

Closing costs are the fees and expenses associated with closing. These can include taxes, HOA dues and transfer fees, property insurance premiums and reserves, loan processing and closing fees, the cost of appraisal, title insurance, and others.

A common estimate of closing costs is 2-5% of the purchase price, but your actual costs will vary based on the loan, the property, and whether you are the seller or the buyer!

Contract

In a real estate transaction, “contract” usually refers to the Contract to Buy and Sell Real Estate, the main instrument of a transaction. When we discuss “writing an offer”, this is the contract we are referring to. You can look at a blank Contract to Buy and Sell (residential) here.

Contract can also refer to an agency agreement, a document that establishes a relationship between a buyer or seller and the agent that is working with or representing them. These are the Exclusive Right to Sell Listing Contract (for sellers) and the Exclusive Right to Buy Listing Contract (for buyers). If you have any questions about these contracts, contact me - I’m happy to review them with you!

Down Payment

A down payment is the money in a real estate transaction that is provided in cash, i.e. not financed. The higher the down payment, the lower the amount to be financed, and the lower your monthly payment.

Buyers often think they need to make a down payment of 20% of the purchase price - this is a myth! If you put less than 20% down, you will have a PMI (private mortgage insurance) payment on top of your mortgage payment each month. But you shouldn’t avoid buying a home just because you don’t have 20% to put down! The opportunity to build equity is there even if you put 5% down - especially in a market where we’ve seen lots of appreciation (like Denver).

Even if you do have 20%, but it would empty your savings, it may still make more sense to lower your down payment amount and have that PMI payment each month. Once you’ve gained enough equity in your home (whether by paying down your mortgage, through appreciation, or a combination), the PMI goes away. If you’re at 20% equity, you can refinance and drop the PMI, or it will automatically go away once you hit 22%. If you have more questions about this, it’s a great idea to talk with a lender - I have some great ones. Contact me for a recommendation!

Down Payment Assistance (DPA)

Down Payment Assistance programs provide exactly that - assistance with a down payment. This assistance can come in the form of a second mortgage or a grant, and may be zero-interest, deferrable, or forgiveable with certain terms and requirements. In Denver, CHFA is one provider of DPA, but there are others. Your lender can go through your options - contact me for a lender recommendation!

Due Diligence

Due diligence refers to two things: 1) the work and attention that a buyer puts into learning information about the property they are purchasing (as in “doing one’s due diligence”); or 2) a set of documents and related deadlines in the contract period.

As to the first: as a buyer, you want to take every opportunity to learn what you can about the property you are purchasing. This includes hiring an inspector, reviewing the inspection report, seller’s property disclosure, and title documentation, securing property insurance that is acceptable to you, and potentially doing your own research into school districts or any other details that may be important to you.

Due Diligence documents are a category of materials that the buyer requests from the seller in the Contract to Buy and Sell Real Estate. I usually ask for any permits, blueprints, invoices, past inspection reports, manuals, etc that the seller has in their possession, as well as information on any existing leases. The reality of these documents can vary - I’ve had seen everything from a single stack of appliance manuals to blueprints and permits going back 20 years.

Earnest Money

Earnest money is a good faith deposit that is submitted by the buyer shortly after a seller accepts their offer. Earnest money is usually due within 3 business days of mutual execution of the contract (MEC), meaning that both buyer and seller have signed.

Earnest money is usually betwen 1-3% of the purchase price, though that amount is determined by the seller. That amount is also a minimum - a buyer can offer a larger earnest money amount as a potential incentive in a competitive offer situation. Earnest money is applied to a buyer’s down payment at closing.

Earnest money is usually held by the title company handling the transaction, though sometimes it is held by the listing agent’s brokerage. If a buyer terminates the contract within the appropriate deadlines and in good faith, they are entitled to the return of their earnest money. On the other hand, if a buyer terminates in bad faith or outside of the bounds of the contract, the seller may be able to keep the earnest money.

Escalation Clause

This is a clause in a contract that states that if the seller receives an offer with a higher price than this offer, the buyer will beat that offer. For example, if a buyer offers $525,000, but could go up to $540,000 if needed, they could offer to beat any verified offer by $1000, up to $540,000.

These clauses can be useful, but can also complicate things; listing agents may ask for no escalation clauses and instead for buyers to simply bring their "highest and best."

HOA

A homeowner’s association, or HOA, is the governing body of a common interest community (abbreviated CIC in real estate contracts). HOAs usually have monthly, quarterly, or yearly dues that cover a certain amount of community benefits. These can be community amenities, like a pool or clubhouse; common utilities like water, sewer, or trash; and/or maintenance items of common areas, like landscaping, roof, or snow removal.

HOAs will often have rules or covenants that residents must abide by. These can include the condition of the yard or exterior of the home, placement of trash cans, vehicles, or decorations, or even the paint color of the home.

If a buyer is under contract to purchase a home that is in a common interest community, they will receive the HOA’s documentation, including bylaws, covenants, information about dues/fees, financial statements on reserves and special assessments, and more. It is the buyer’s responsibility to review these documents! If the buyer finds anything that may affect their willingness to purchase the property, they can ask for more information or, ultimately, terminate the transaction based on those findings.

HOA fees with a real estate transaction can include a fee for a status letter (a statement from the HOA showing any money due, any special assessments, etc) or a record change fee or ownership transfer fee. If there are any special assessments that have been levied prior to closing, they will usually be the responsibility of the seller (check with your agent and check your contract to make sure).

Inspection

Inspection is your opportunity to examine every aspect of the house you're purchasing! An inspector will look at all of the systems and features of the home and give you a report with their findings.

An inspection in the Denver area can range from $600-$900 depending on what they are including - radon, sewer scope, etc.

Using that report, we will create a list of items that you are asking the seller to fix (an Inspection Objection - see below). The seller may agree to all or some of the fixes, or offer a credit to cover certain items.

Inspection Objection & Resolution

An inspection objection is submitted by the buyer to the seller and lists the items the buyer is asking the seller to fix. (You can take a look at a blank Inspection Objection here. Only the buyer signs this document.) After we receive the inspection report, we discuss the findings and decide what we want to ask the seller to handle. You may have limited your inspection objection scope in your offer - perhaps only objecting to health, safety, and structural items. We will go over what’s important to ask for, and what is less concerning. This is where a lot of the negotiation happens!

If the parties are unable to come to an agreement re: what the seller will fix, the buyer can terminate the contract and get their earnest money back (only out the cost of the inspection).

If the inspection turns up some big issue that you don’t even want to deal with (or ask the seller to fix), the buyer also has the option to terminate before submitting an inspection objection.

If a seller doesn’t want to deal with an inspection item themselves, they may offer a credit or concession to cover the cost of the buyer having it done. Buyer and seller will need to agree on an appropriate amount, and that amount will be applied to the buyer’s closing costs and prepaids at closing. Note that this is a credit out of proceeds - the seller is not handing the buyer cash, but the buyer gets to bring less cash to closing.

Inspection Resolution refers to the document that memorializes the agreement between buyer and seller. Once the parties have agreed on terms, both buyer and seller sign. Inspection Resolution survives closing - meaning that if an item is not repaired before closing, it is still the seller’s responsibility to address, even after closing. You can see a blank Inspection Resolution here.

If you have questions about inspections, check out my friends at Alpine Building Performance (one of my preferred inspection companies)! They have resources including showing checklists, homeowner maintenance suggestions, and preferred vendor lists.

Post-Closing Occupancy Agreement (PCOA)

Also called a rent-back, a Post-Closing Occupancy Agreement (PCOA) is a contract that establishes a landlord/tenant relationship between buyer and seller after closing.

A seller may need a rent-back to allow them time to move out or to find and close on a replacement property. Offering a requested rent-back free of charge is a great way to sweeten your offer!

The PCOA outlines the amount of time that the seller will remain in the home, whether they need to carry renter’s insurance (you always want this!), if there is a security deposit and if so, in what amount, and who will pay for what utilities during the rental term.

A PCOA must be for a period of 60 days or less - otherwise, it is viewed as an invesment property and not owner-occupied, resulting in different lending terms.

Radon

Radon is an odorless, colorless gas that is naturally occurring in the soil and can be present in high levels in Colorado. Radon is the second leading cause of lung cancer behind smoking, and the main cause of lung cancer among non-smokers.

You should ALWAYS test for radon when you are buying a home! Most home inspectors can add that service to your general inspection. A radon test usually takes 48 hours, and the testing device is placed on the lowest habitable level of the home.

If the test results are over 4.0 pCi/L (picocuries per liter), mitigation is recommended. The good news is that radon mitigation is relatively inexpensive (usually between $800-$1200) and quick to install. Even if a home has a radon mitigation system already installed, you’ll still want to test radon levels - the system may not be working as effectively as it should, and radon levels can still be high.

Radon is widely accepted as a health and safety concern, so even if a buyer has limited their inspection objection to health, safety, and structural issues, sellers will generally either agree to install mitigation or credit the buyer the cost of installing mitigation.

Check out Alpine Building Performance’s blog on radon for more information!

Title

Title is a common term in real estate transactions - it generally refers to how and by whom a property is owned. If you’re discussing how something appears in title, or how to take title, it is referring to how and by whom the property is owned, or how a new buyer intends to take ownership.

It can also refer to the title company that is handling the transaction.

Title Commitment

A title commitment is the title company’s commitment to provide the buyer and lender with title insurance, along with any requirements for and exceptions to that insurance.

Title Insurance

Title insurance protects the buyer (and lender) against any defects in the title. Check out this great resource from First American Title explaining title insurance!

Under Contract

You are under contract once the seller has signed and accepted the buyer's offer. The contract being fully signed is referred to as Mutual Execution of Contract, abbreviated “MEC”. Some deadlines often refer to MEC, including the Earnest Money deadline (usually 3 days after MEC). If a buyer submits their offer on January 18, but the seller doesn’t sign and accept until January 19, the latter date is the MEC and any MEC-dependent deadlines are calculated from then.

While under contract (the contract period between acceptance and closing), the buyer and seller have some responsibilities. The buyer must conduct their due diligence, including an inspection and review of title, HOA, and any other documentation or disclosures. The seller must allow the buyer and/or their representatives to access the property for inspections, appraisal, and walkthrough, and provide disclosures to the best of their knowledge. Both parties must come to agreement regarding the buyer’s inspection objection items.

The contract period is commonly around 30 days; depending on the buyer and their lender (or if the buyer is paying all cash), or the seller’s preference, this can be shorter or longer. A cash transaction will often move more quickly, since there is no loan to be processed or approved. Sometimes a seller will request a specific closing date to match up with a deadline on their end.