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Say What? Real Estate Terms (Part 2)

Closing

Closing (also referred to as completion, escrow, or settlement) is the final step in executing a real estate transaction.  The closing date is set during the negotiation phase, and is usually several weeks or months after the offer is accepted by all parties. On the closing date, the ownership of the property is transferred to the buyer. In most jurisdictions, ownership is officially transferred when a deed from the seller is delivered to the buyer.

Earnest Money

Earnest money is typically part of an offer, but not always.  It’s a partial payment (deposit) demonstrating commitment in a contractual relationship. The remainder of the payment is due on the closing date. The seller keeps the earnest money if the buyer fails to make timely payment in full (or if there is another contractual breach of the agreement).

Closing Costs

These are fees associated with closing on a real estate transaction and usually range from 1% to 4% of the home sale price, depending upon the source of funds. A buyer and seller both have fees that they are responsible for paying at closing, but normally the seller pays far fewer closing costs. What a buyer and seller each pay depends on which part of the state the property and/or the locality where the closing takes place, if a buyer has a mortgage loan or is paying cash, and how the sale agreement was structured. Tennessee does not have any state income tax, but it certainly makes up for it with three different state-specific closing costs that you will have to deal with when transacting real estate.  In general, the more expensive a home sale is, the more the closing costs for the buyer because of the need to pay certain “pre-paid” items such as 3 to 12 months’ worth of property tax and home insurance.

Title Insurance

Title insurance protects both real estate owners and lenders against loss or damage occurring from liens, encumbrances, or defects in the title, or actual ownership of, a property.  Unlike traditional insurance, which protects against future events, title insurance protects against claims for past occurrences. Such claims include property ownership by another person (such as Native American grounds), fraud or forgery of the title documents, outstanding lawsuits, liens against the property, etc.

Appraisal

A professional determination of the value of the subject home. A professional appraiser — who should be a qualified, unbiased specialist in real estate appraisals, with expertise in the local geographic area — makes an estimate by examining the property, looking at the initial purchase price, and comparing it with recent sales of similar property. A bank or other lender will require the appraisal in order to determine the worth of the house for lending purposes. Unfortunately, the lender may refuse to fund the loan if the appraisal comes in lower than the loan amount. In this situation, if the buyer can typically pay the difference in the appraised value and to the sale price to appease the lender; it this is not possible, the sale will likely fall through.