The real estate business is a vast, exciting, and often times intimidating world.
Whether you’re a developer, selling a home, in the process of buying a home, a realtor or just looking to learn about the real estate business, an exciting challenge awaits. Real estate transaction happen all around you, all the time. When a commercial brokerage company leases up space at a local strip mall or a the owner of a building rents an office space, it’s a real estate transaction. If a bank lends money to a business to expand its distribution facilities and office space, it’s still a real estate transaction. With the most common of all, when a family buys a new home or sells it, it’s still takes part in the real estate industry. Consumers of real estate services also include landlords, investors and tenants.
Whether you realize it or not, nearly everyone, is involved in a real estate transaction. This all contributes to billions of dollars every year in the US alone which means BIG BUSINESS.. .
Specialties in Real Estate
There are many real estate professionals involved in the real estate business. From property management, real estate brokerage, financing, education, to subdivision and development, there are many specialties in the real estate business. So as in any industry, real estate professionals need to have the basic knowledge of the work carried out by other specialists within the industry. Checkout these brief descriptions of some specialties before we progress further..
Brokerage
There are many buyers and sellers in the world of real estate, but who brings them together?!..
Brokerage in the real estate context, is just the business of bringing people together in a real estate transaction. So, the brokerage company acts as a the middleman between two or more people. These folks are usually just negotiating the sale, purchase, or rental of property. Anyone performing brokerage must be licensed, which is required by state law. While some states enforced a single license, most still carry the two license categories, which are brokers and salespersons. These licenses require different experience, education and testing qualifications.
Brokers can act as an agent who is affiliated with the firm or as the firm’s designated broker. So, a designated broker is the one who’s usually in charge of the brokerage office. Also, you as the designated broker enter into agreements with both the buyer and seller. These agreements are typically in the form of contracts. This is all while being responsible for the salespersons or brokers (licensees) affiliated with the office. So these salespersons and/or brokers (affiliate licensees) are usually employees or independent contractors of the firm.
Appraisal in the Real Estate Business
Sometimes you need someone to give you an idea of what your property’s worth. Well an appraisal does just that.
Its the process, of estimating a property’s value. Basically, an appraisal is an appraiser’s opinion on what the value is. So to reach their value, they follow established methods and at the end they give their opinion. Bankers generally need you to get an appraisal by an appraiser licensed by the state. Even though a broker might have some knowledge of the valuation process.
Property Management
So, you have a property, but don’t want to manage it.. Pay a property manager to do it for you.
You got it, a property manager is a person hire to maintain and manage property on behalf of the owner. Basically, the manager’s responsible for protecting the owner’s investment and maximizing the profits.
In the technical sense, the manager is considered an agent of the property owner. This initiates the fiduciary duties as established by the state law. Fiduciary duties are care, obedience, accounting, loyalty and disclosure.
Every property has a range of responsibilities for a manager, which are stated in a management agreement. This is where the manager’s authority and compensation are outlined as well. Most states require the property manager to have a real estate or property manager’s license.
Financing in the Real Estate Business
So, you have a property in mind that you want to buy.. But need a little help, to close the deal.. Well financing can be an option to close that gap.
Financing, is a business which provides you the funds for purchasing and development of real estate. The thing is, in real estate, your property is used to back the financing. So this is called collateral and it’s done through a mortgage or deed of trust. Remember, real estate is big business and complex so there are various of financing type firms out there. The range includes commercial banks to real estate investment trusts to savings associations and mortgage banks.
By the way, if you need some tips on when to get a personal loan, I got you covered here: When to get a Personal Loan?!..
Insurance in the Real Estate Business
So, you locked down your property, but want to minimize your risk, right? Well, you got to get some insurance to handle that..
As a property owner, you buy insurance to minimize your risks and lessen your worries. Side not, why not get involved in selling insurance as a broker? And open up your own insurance brokerage?? That just requires a specific state insurance license.
But back to the topic at hand, buying insurance transfers financial risks to the insurance company. If you’re a real estate agent, you got to encourage your buyers to get the process start early. This is because the buyer’s credit score could affect the availability and the cost. The lower the credit score, the more often the borrowers file for silly maintenance claims as stated by the insurance industry.
Even lenders, require that properties used as collateral be insured. Not just for fire and lightning, but also for flooding if a special flood hazard area. For those who own and occupy their property, then the homeowner’s policy is your best bet. This provides coverage for the building, it’s contents, liability and more.
Real estate agents, you need to refrain from giving insurance advice. You need to encourage buyers and sellers to ask their insurance agents about special situations.
Homeowner Insurance Policies
Check these following policies available for owner-occupants:
- HO-1 basic for homeowner policy – Covers the damage caused by fire, lightning, hail, etc..
- HO-2 broad form homeowner policy – This includes more comprehensive coverage than the HO-1. It’s usually available for second homes.
- HO-3 special form homeowner policy – The HO-3 traditionally offers the most coverage for the most reasonable price. Replacement costs can vary and can include limits to the amount covered. Your personal liability can also be expanded here too.
- HO-6 condominium policy – Whatever you own as the condo owner within a condominium, then the HO-6 covers them.
Tenant Insurance Policies
Now if you own rental properties, that presents its own issues in the real estate business. For the most part, owners can usually insure what they own. Which means, a landlord can’t even insure a tenant’s personal belongings.
Check these following policies available for tenant’s:
- HO-4 renter’s insurance – Well this is similar to the HO-3, but it just doesn’t cover the real property owned by someone else.
- Rental home or landlord’s policy – The landlord’s policy is the reverse of HO-4, but covers little personal property.
Flood Insurance
Flooding can happen anywhere, along inland and coastal areas. So encourage your buyers to get flood insurance, if you’re a real estate agent. Remember! Homeowner’s insurance doesn’t cover any flooding!
Subdivision and Development
If you got a large piece of land, why not split it up? That leaves you with many more opportunities like possibly selling some and developing others.
When you split a single property into smaller parcels, it’s known as subdivision in the real estate business. When you build a structure on top of the land, the structure itself is called an improvement. So, when you construct improvements on land, then it’s called development.
If I had a large piece of land, I would subdivide it, then develop a few houses on each. After that.. Sell them all and make a KILLING..
Professional Organizations
Many real estate professions have organizations associated that serve their specialty. For brokerages, you have the National Association of REALTORS® (NAR). This is the largest one with state, regional and local associations. This adds a sense of prestige to your brokerage, because of the code of ethics it adheres to. You don’t need one to operate as a salesperson or broker though.
Here are the NAR Code of ethics here for you reference: REALTORS Code of Ethics.
Types of Real Estate in the Real Estate Business
As I said, a few times already, I’m going to say it again.. The real estate business is vast, which means it’s not short on variety. Even for property types. Let’s highlight the most common:
- Residential – This includes all property used for single and multi-family housing. Whether in urban, suburban and rural locations.
- Commercial – This is business property. This includes office space, shopping centers, stores, theaters and hotels. Check out some important terms in this sector here: Important Terms.
- Industrial – These typically include factories, warehouses, and power plants.
- Agricultural – The real estate that falls in this category usually includes farms, timberland, ranches etc..
- Special Purpose – The special type properties of churches, schools, cemeteries etc.. usually fall in here.
Real Estate Markets
What if you want to buy or sell your property? Well, usually if you want to buy or sell something, you head to a marketplace. But in the real estate business, there is no set location.. When you really think about it, the real estate market is really a group of submarkets. Submarkets definitely can be defined in a number of ways, and is really up to you and how you understand the market.
I mean, you can defined a submarket strictly by property type, like if its residential, commercial, agricultural etc.. Or you can defined a submarket, by the geographical level as well. What I mean is, if properties at a specific national, regional or neighborhood level are being analyzed.
We can even break down a market to a sales market, which involves the transfer of title and ownership rights. Or even the rental market, which involves the leasing of space for temporary amount of time.
Let’s go a little further..
Economic Principles
Real estate markets are in essence, local markets. Literally meaning that each geographic area has different types of real estate and conditions, that can drive up prices. Which means you’ve probably heard that old saying, “Location, location, location!”. We got to understand something about real estate: a parcel of real estate cannot be moved, is never really like another parcel and its value is impacted by surrounding land uses.
Which all means one thing.. It’s really only specific supply and specific demand for real estate in that area that ultimately determines the price of real estate in that area.
Seller’s Market in the Real Estate Business
Any time you hear “seller’s market” for any asset, it usually means the demand for the product exceeds the supply for the product. The effect of that being an increase in price, which make it an IDEAL situation for you to sell and run off with your money!
The thing about the real estate business is that, when there’s a shortage in supply, it will take some time to get more product to market and satisfy this demand. That situation creates a seller’s market. Development and construction are kind of lengthy, but when there’s demand it gives the developers to build.
Buyer’s Market in the Real Estate Business
So every time you hear “buyer’s markets” by default it only means, the supply for the product exceeds the demand for it. When you have overbuilding in a market, then the creates a situation of falling prices. You don’t necessarily have to overbuild to see demand fall, there can be a population shift, or even employment conditions that will cause demand for space to drop as well.
Factors that Affect Supply
The United States is currently facing some housing crises in many of it’s major cities, with many causes usually being the same things. We’re talking the shortage of skilled labor, building materials, financial markets and governmental controls usually have a negative impact of the development side.
When I say, negative impact I’m talking the influences of taxes, zoning, high interest rates etc.. The Fed can increase its rates which in turn will increase interest rates for us. But the government can provide incentives for development, like a tax abatement or low cost for government owned land.
Factors that Affect Demand
Now, what factors affect the demand for real estate? Usually population, demographics, employment even the wage levels.
With population, the growing and declining of an area’s population usually has an affect on demand for housing and commercial space. The growing and decline of a population could even be linked to economic reasons as well cause of the increase or decrease of jobs. Changes in taste for amenities could contribute to population shifts or even quality of schools.
When we talk demographics, we’re analyzing family size, the ratio of adults to children, the number of retirees, family income, lifestyle etc.. This is such a wide range of consumer tastes and preferences that you need to be aware of in the real estate business,
If a majority of the population is hurting financially, you won’t find many home buyers even possibly renters as well. So if I’m a landlord and I know that my city’s in hard economic times then, I’m expecting a more difficult time in renting my space.
Closing
Hey, it’s a business that offers a little bit everything. Whether you’re into designing, construction, engineering, selling, finance or even the legal matters of real estate, you got something that’ll challenge and definitely keep you entertained. The sky’s really just the limit for you, one day you may have one property and then ten years from now, you’re closing on your 500 unit apartment complex. Or now you’re the Architect for a small house and tomorrow the lead Architect for the world’s tallest building. The real estate business affects everyone, in many ways, so it’s most definitely a smart choice to know the ins & outs of the industry..
Thanks for reading!
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