Across Utah and around the country, real estate markets are hotter than ever. Home prices are soaring while buyers desperately try to convince sellers to choose their offer over dozens of others.

As you’ve watched the news and heard stories, you’ve likely heard some unfamiliar terms and industry jargon. This article explains some of those terms and why they’re significant in today’s market.

Contingency

When making a real estate offer, a buyer may choose to make their purchase contingent on certain things.

For example, the buyer may require that the house receive good marks on the home inspection and evaluations. Or the buyer may say the house must appraise for a certain amount. Many buyers also make the transaction dependent on their ability to get a mortgage.

Should sellers agree to the specified conditions, buyers have the right to cancel the contract within a certain time frame and get their earnest money back.

In this market, however, contingencies are becoming less common. As buyers compete for a limited number of houses for sale, some are choosing to waive the typical contingencies for inspections, financing and appraisal to make their offers more attractive.

If you’re a buyer thinking about waiving these rights, make sure to be very careful because you risk forfeiting your earnest money deposit should you need to back out of the contract.

Nonrefundable earnest money

When making a real estate offer, a buyer submits an earnest money deposit. If the deal goes through, the money is credited to the buyer at closing. If the buyer fails to meet the contract provisions and the deal falls through, the money goes to the seller.

If the usual contingencies are included in the contract, buyers may have their earnest money returned if they back out for reasons related to inspections, financing or appraisal.

In this market, however, some buyers are giving up the right to get their earnest money back if they cancel. This is referred to as nonrefundable earnest money, and some buyers are using this strategy to make their offers more enticing to sellers.

If you decide to use nonrefundable earnest money, be cautious and understand the risks. As an example, buyers who make earnest money nonrefundable at contract acceptance will lose their deposit if they back out for any reason — even if there are problems with the house or the property does not appraise for the purchase price.

Escalation clause

When making an offer in a hot market, some buyers may use an escalation clause to let the seller know they are willing to pay more than the highest offer the seller receives. An escalation clause shows the amount the buyer is currently offering and how much the buyer will escalate their offer if another higher offer is received.

When using an escalation clause, you must be careful to use clear language to specify the maximum price you will pay for the property as well as what factors will trigger the escalation.

Leaseback

Another buyer strategy is to offer to lease the home back to the seller after closing. This is called a short-term leaseback.

This is appealing because it may make it easier for sellers to coordinate the timing of buying another home. It also helps sellers avoid the hassle of moving into a rental before moving into their new home.

A leaseback agreement should, like any other rental agreement, clearly specify the rights and obligations of both parties, including how long the seller may stay, responsibilities for repairs and damage, and the payment of utilities.

To learn more about real estate terminology and strategies for navigating this market, contact a local Realtor. Find a directory of Northern Wasatch Realtors at NWAOR.com.

Shauna Ray is president of the Northern Wasatch Association of Realtors.

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