David Sidoni breaks down all the vocabulary you will need to comprehend when you make the leap to dump your rent and become a homeowner. Today, he goes over some terms starting with the letter “S.”
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First Time Home Buyer Terms and Definitions from A-Z – “S” Part 1
The Glossary Of Term You Need To Know When Buying Your First Home
It is time to get deep into the S words that you need to know when you are trying to figure out this whole how to buy a home thing. Let’s go.
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If you are reading this on drop day, it is probably going to be before Halloween 2022, and things are getting spooky out there in real estate. That is going to be the S word for the next couple of months as we finish up the year 2022. As always, I would like to remind you of the headlines that you read about the housing market over the next little while. They are designed so that good headlines are written for the sellers. When you see headlines that are bad, that is good for you.
First-time home buyers should think of themselves as new buyers on Wall Street with nothing already in the market. All the headlines that you want to see are things that are going bad because bad means things are going down, and that is bad for the people who already have money in the market but not bad for you. You are on the sidelines waiting to jump in. The news reports, like my boys at Run-DMC, say, “It is not bad, meaning bad. It is bad, meaning good.”
Securities
Let’s get into the S words. The first one is Securities. While alphabetically, it’s not first. I thought I would bring it up to the top since we were talking about Wall Street. Securities are financial forms that show the holder owns a share or shares of a company or stock, or it has loaned money to a company or a government organization. That is a bond.
Sale-Leaseback
Why am I telling you this? MBS, or Mortgage-Backed Securities, is what killed the housing market back in the early 2000s, but thankfully, that is behind us. Watch The Big Short if you don’t know what I’m talking about. The Next S is a sale-leaseback. I have already talked about this before, and in case some of you are not regular readers, I will explain to you that this is commonly referred to as a lease back or rent back, but some old-time real estate people are going to call it a sale leaseback. It is when you buy the place, and you lease it back to the seller for a specific period of time so they can stay in the home after the official sale. There are more details on that in L and I, and R is for Rent back.
Second Mortgage
The next S is the Second Mortgage. Your original loan on your home is called a first mortgage or sometimes referred to as a first. All subsequent loans after that get a number to designate them in their pecking order. A second mortgage is sometimes called a junior lien. That is the loan you take out on your house. The way it works is that you are technically using your home as collateral while you still have another loan that is secured by your house.
A home equity line of credit or a home equity loan are examples of a second mortgage. One of the other terms you might hear when people are talking about real estate on the high finance side is a secondary mortgage market. It’s not anything that you do, but something that the boys on Wall Street do. Watch the movie The Big Short for details.
Secured Loan
Another term you might hear is a secured loan. Any loan that is backed by property such as a house, a car, or jewelry, depending on the market, you may be able to get a loan using your home to secure it, being a second secured loan. In more recent times, using your home purely as collateral to up the amount of loan that you can get, they are not doing that so much anymore.
You need to be able to be approved like you were when you bought your first home. You have to show that you can pay for the payment on your loan that you have on the house and that you still have enough income left over to pay for the new loan that you want, like a home equity line of credit, even though you have the loan as collateral. Don’t think that the collateral, the home is enough for you to get another loan.
Security Interest
Our next S is the Security Interest. These are a whole lot of these big fancy terms the banks like to use with security and all that stuff. The security interest is something that you need to know because that is what lets the lender be able to foreclose if you don’t pay back the money that you borrowed. As I mentioned before, if you ever get in trouble, the time to call your bank or your lender is immediately right when you miss your first payment.
Use this as a guide. Remember this. If your bank charges you a late fee, like, let’s say, on the 15th day of the month, it is not even going to hit your credit until you go full 30 days late on your payment. I suggest that you call on the 16th day. Who knows? Maybe you can negotiate that the late fee doesn’t happen because you can come up with some sob story.
Once that first 30 day hits and you show a late on your credit and those past dues start piling up, it gets harder to get a deal with your bank. If you talk to them early, you can work it out using something called mitigation. I hope nothing ever bad happens to you, but if you have ever, remember, and this will stick in the back of your mind, always call the bank early. I have seen many people that get a little behind. They get scared and get embarrassed. They call me, and sometimes it is too late for me to save their home from foreclosure.
I’m excited about our next S word and I’m not supposed to be because I’m a real estate person and all about the seller. Our next one is called Seller Concessions. If you were even thinking about buying a home in 2020, 2021, or most of 2022, this term, the seller concession wasn’t even an option. Conceding no way sellers were not doing that. Fortunately, I have been around for a long time, and I know exactly how these work because I have been in markets where seller concessions were the norm.
Seller Concessions
The way it works is that seller concessions are credited money to you. There are clauses that are negotiated either with the initial offer or sometime within the contract. It gets the seller to pay you a credit that you usually put toward your closing costs. Before you get into the deal, you have already got your closing costs all set up. If the seller is going to pay for it, that means extra money in your pocket.
As the market starts to shift a little bit, sellers might offer concessions to incentivize buyers to purchase the home. There might have to do things to sweeten the deal, and it’s usually a contribution towards the buyer’s closing costs. Sometimes be aware that depending on the loan product that you use, there are certain limitations and approvals that need to happen to use the credit for closing costs. Fortunately for you, they are pretty good on most of them, 3% and some of them are even up to 6% of the purchase price.
Ultimately, any concession that you get leaves more money in your pocket. As with all negotiations, the seller can reject your concessions. They can do whatever they want, or they could send you a counteroffer and change the concessions, whether it is monetarily or when they give it to you. You never know. There is no rule about how negotiations work in real estate.
[bctt tweet=”There is no rule about how negotiations work in real estate. Unless a seller blatantly discriminates against you, there are zero limitations to what they can ask for or reject.” via=”no”]
There can be standard presumptions based on the market conditions and the specific sale of a specific property. I might have some guesses on how a normal person would work and would do the deal but as always, remember, unless a seller is blatantly discriminating against you, there are zero limitations to what that one seller can ask for, to what that one seller can reject even when it feels like you’re giving them the world and it is for no good reason at all. This is a one-off sale, with one seller selling one home at one time. If they want to be a total jackass, they can be. All they have to do is decide to put up a huge hard negotiation. If you don’t want to do it, your option is to walk away from the sale.
However, if you have a solid team that represents you, real advocates in your corner, most of the time, and I say that hesitantly, you can get a gauge on the situation, and you can know what you can ask for and what you can hope to get accepted, assuming that they are normal. Fortunately for you, as we wrap up 2022, you are still going to be in that one-off situation. You never know what the seller is going to do. At the end of 2022 and heading into 2023, you are going to hear a lot more sellers going to be willing to make some concessions.
Secured Debt
Our next S word is Secured Debt. Google says that secured debt is one that is tied to a specific piece of property, such as a house. The property called collateral guarantees repayment of the debt. If you don’t pay it, the creditor can take the property back, ala foreclosure. Secured debt is fancy jargon for, “That is your home loan. It is a secured debt.” You don’t own your car until you pay it off. Check your registration. It is like the title on your car, your pink slip. Take a look at it. It says, “Bank of whatever.” It doesn’t have your name.
Seller’s Agent
The next S is the Seller’s Agent. Why would I feel the need to explain such a simple term to you? Normally, the person who represents the buyer is called the buyer’s agent. The person who represents the seller is called the listing agent. Sometimes people call them the seller’s agent. It is the guy selling a home. He lists with you. You are the seller’s agent because real estate is run by a bunch of archaic dinosaurs in some states or provinces.
In my state, California, the person representing the seller is officially called the listing agent on some documents. The person representing the buyer on documents is called the selling agent. The agent that represents a buyer in some situations is called the selling agent on many formal documents. That is why I decided to explain what seems like a simple definition to you. If you are asking me, “Why?” I don’t know. It is real estate, and it is stupid.
Seller’s Disclosures
The next s is the Seller’s Disclosures. This is a big one when you are buying a home. This goes under the whole inspection category. This is the should I buy it? Should I not buy it? Google is going to tell you that the seller’s disclosures are a group of disclosures by the seller with all the information on the property, which could affect a buyer’s decision to buy the property. All of which comes to us to the best of the seller’s knowledge. Did you catch the end of that? That’s the important part.
When it comes to real estate, most lawsuits are when the buyer wants to sue the seller. It usually revolves around the buyer saying, “You should have disclosed X, Y, and Z.” It is something that the buyer found out later after living in the house that they think is going to bring the value down of the home, or it’s going to cause them some problems.
The sellers are routinely protected by that one little phrase in that clause, “To the best of their knowledge.” The phrase was originally put in place to protect sellers from hardcore care buyers who would complain about anything. The people that sign on the dotted line and close the deal. As soon as it is closed, they want to start whining and start trying to get as much money back as they can and sue because you gave me a bad deal.
In reality, you, as the buyer, have the right to disclosures. Unless it’s something extraordinarily obvious, that was maliciously hidden, and it wasn’t something that you, as the buyer, should have discovered in your own due diligence when you were inspecting the property before you bought it. The seller can use that little phrase to the best of their knowledge, and they can say, “We are not architects, geologists, electricians, plumbers, or contractors.”
It was to the best of their knowledge, and they didn’t intentionally hide anything. That’s the hardcore truth bomb about disclosures. You’re supposed to be protected in any real estate transaction, but the bottom line is that if you want something done, you better do it yourself. Don’t put your faith in the seller’s disclosures.
In theory, the whole disclosure thing is better to protect the buyer before the sale because the seller is supposed to indicate which items are not specific to the property itself but also potentially related to the enjoyment of the property. They are supposed to tell you about all of it, like if they are going to talk about property line disputes, pest problems, knowledge of major construction in the area, or the fact that the guy across the street has a rave every Thursday night.
Sometimes there are military bases and noise. They have to disclose to you if it’s in the pathway of an airport. If you’re right on the runway and the airplanes come over your head, you are a moron if you haven’t figured that out on your own. You got Google Satellite. You should be hanging out at the front of the house. There are all kinds of things that can be happening. If you go to the house once, you are never going to know.
In a mutually amicable deal, the seller should disclose all these different things to you, but their legal liability needs to be proven with absolute certainty that what they did was neglectful in not telling you. It was a neglectful omission that they didn’t disclose. Do a thorough inspection. Not just with an inspector, one time going to the house, but inspect everything and inspect it on your own. Drive the property at night, drive it during rush hours. If you are near a school, drive it during school hours to see what the traffic looks like and investigate the neighborhood thoroughly on weekdays and weekends.
One of the biggest mistakes I see people make is that they get so enamored with the HGTV-ness of the upgrades in the home. They are spending way too much time looking at the ship lab. They don’t realize that the home might not be in the neighborhood that is going to work for them. Whether they could handle a nastier neighborhood and maybe they should spend a little less money, or they wanted a more upgraded neighborhood. Anything inside the house is changeable, but the neighborhood is not changeable. You have no control over the outside forces of what is going to be around the house.
[bctt tweet=”One of the biggest mistakes people make is they get so enamored with the upgrades in the home and spend way too much time looking at the ship lab, but don’t realize that the home might not be in the neighborhood that’s going to work for them.” via=”no”]
Seller Financing
Our next S is Seller Financing. This is another term that the Boomers, your grandparents, and your crazy Uncle Eddie are going to tell you all about. Seller financing is a thing, but here is the way it works. Seller financing is buying a home using the seller as your lender instead of a bank or a lender. It is also called a seller take back or owner financing.
Seller financing, seller take back, and owner financing. This falls under the same category for me as for sale by owner. Let’s take a good step back on this. I have learned this the hard way by working with a lot of my buyers, but I have also learned it by watching real estate for several years. Let’s think about it. Why would a seller want to be the bank in the situation, or why would the seller want to sell the home without realtors? Who does that help and why?
In both these situations, the seller is the main person who benefits. You lose the opportunity to have an advocate protecting you, either a lender or a realtor. In the For Sale By Owner, also known as FSBO, the seller wants to save money. When you sell a home, you have to pay 6%, 7%, to 8% out to the realtors and the escrow entitlement. They don’t want to pay for that. They want to save money and not pay a realtor. You have no one protecting you in the deal.
In a seller financing deal, usually what happens is the seller doesn’t want to get all the cash in one lump sum, which would happen if you went and got a loan the regular way. They want you to give them enough cash so that they don’t have to pay taxes and collect your money monthly as they become lenders. Think about both those situations for a moment. Who do they benefit? Are you sure that you are getting the best deal when the seller is asking for the transaction to be conducted in this manner?
I started this by telling you that S was a scary word, and there is going to be some scary stuff going on in real estate. That last little definition was pretty ominous. I got a lot more S words, but I’m going to wrap it up right now. I got more S’s than I care to do at this moment. This is going to be another two-parter. Rate review, share the episode, find everything you need in HowToBuyAHome.com and keep on learning. You can do this.
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Important Links
- First Time Home Buyers Terms And Definitions From A-Z – “J, K & L” – past episode
- First Time Home Buyers Terms And Definitions from A-Z – “I” – past episode
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