Let’s talk about terminology, Here are 4 terms we hear nearly everyday in a Real Estate office. Just for fun, they all begin with the letter “E.” Here they are: Earnest money, escrow, equity, and equity erosion.
Earnest money: In some locations this is the same as the term “binder.” It is also a part of the total down payment. So using a simple example, one could have a total deposit of $20,000.00. They could elect to put up half of that, $10.000. and that would be their Earnest Money deposit. Here’s where it gets a little tricky. To make a contract binding there is a minimum amount that one can use for an earnest money deposit. Right? Wrong, you don’t even need a dollar. You could literally offer love and affection as this important part of the negotiation but there is a problem with this line of thinking. It is best illustrated by Oscar Wilde’s classic play, “The Importance of Being Earnest. ” A lot of people think they should put in a small amount to demonstrate their good faith. How goofy is that? Who is more earnest; The person offering $2500. or the person offering $10,000.00 Quite often when offers come in with terms that are very close, the deciding factor comes down to who’s the most Earnest. Don’t underestimate the power of a strong earnest money deposit.
Escrow: On the west coast they talk about the “close of escrow.” On the east coast they say “when the contract closes.” Escrow also refers to the special account that is set up during the contract period to which the earnest money is deposited. It is managed by a special agent who acts as a fiduciary and they are called the escrow agent. Typically, in 716 land the escrow agent will be the Real Estate firm who is acting as the Listing agency. Other parties who might act in this capacity might include the seller’s attorney.
Equity: The simplest definition is how much of your own money you actually have in the property, minus any mortgages or liens. So if you buy a $100,000.00 house and you put 20% down, you would have $20,000 in equity. So let’s take this same house, and the market gives you a 25% appreciation rate the first year. (This would be huge and you should be a happy camper.) Why? Because you have your original $20.000 plus the $25000. in appreciation, so you now have $45,000. in equity, as well. This would be awesome for you. You must be a seriously savvy Real Estate investor.
Equity Erosion: We may remember the term erosion from your Earth Science class in high school. This is what occurs to soil, as water over a period of time (perhaps millenia) gets scraped away and you have less land (soil) than you had in the first place. One’s equity can get reduced or eroded too. If a neighborhood takes a reversal (i.e., the Love Canal in Niagara County back in the 80’s), or if you have failed to maintain the property, you could see your value (equity) go down.
As a side note, in inflationary times like today, no one is expecting to see equity erosion. The good news is if you own Real Estate NOW, you will see a rise in value dramatically since historically Real Estate is one of the absolutely safest things to own in an inflationary economy. I can state this from personal experience because the last time we had serious inflation, I made a killing.
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“Hey, I wrote the book on Real Estate, literally.”
Author Brendan J. Cunningham is a New York Licensed Associate Real Estate Broker, lead of the Platinum Team at HusVar Real Estate, as well as an accomplished writer, Shakespearean trained professional actor, and podcaster.
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