What is Real Estate

What is Real Estate? ● Real Estate is the single largest component of wealth in our society making up over 25% of the US GDP ● Real Estate is the largest asset category in a typical US household (over 20%) ● Housing debts can account for more than 60% of total household debt ● Real Estate includes three elements ○ Land; ○ Improvements made to land; ○ Rights to use them. ● Land refers to not only the surface of the earth, but also the soil (and what’s underneath) and the air above. ● Land comes with three rights: ○ Subsurface rights - the right to drill or dig below the surface; ○ Surface rights - the rights to use the surface; ○ Air rights - the right to use the air space above the surface. ● Air rights are limited to what can be reasonably built (can’t block air traffic) ● Asset (property) - has value and holds future value ● Fixtures - an object (or building) that was once personal property but gets attached to the land. ○ Example: Wall-to-wall carpet getting installed on the wall of a building ● A fixture is property of the land owner and when that land is sold, it is included with the property. ● Texas criteria for fixtures: ○ The method of annexation to the real estate (attachment) ○ The fitness or adaptation to a particular use of the premises (specifically made for that property) ○ The intention of the parties (agreement between the seller and buyer as to what is a fixture) ● Of the three rules, preference is given to the intention of the party ● An important exception to fixtures are trade fixtures ● Tenant-owned trade fixtures do not become property of the landlord. ● An example of this is IKEA leasing the building to be used for business, the shelves and other accomedites that IKEA installs and uses in the building do not become property of the landowner. ● While a trade fixture is not a part of the real estate, it should be removed in a timely manner and not damage the real estate when being removed. Real Estate as a Profession ● Real Estate Broker - can be used to help a seller find a buyer for their real estate ● Real Estate Appraiser - finds the estimated value of the real estate ● Title Insurance - insurance to ensure the seller actually owns the land and the buyer isn’t buying someone else’s land ● Lawyers ● Mortgage Financing ● Real Estate Development - create buildings or fixtures on real estate ● Property Management Services - management of an apartment complex (Example) ● Urban Planning - government that plans how the urban cities are set up and establishes zoning Home Ownership ● ● ● ● ● ● ● ● ● ● ● ● ● ● One of the most important parts of the “American Dream” Satisfies the basic need for shelter Sense of security and stability Symbol of maturity, freedom, and financial success Emotional Attachments - personal space layered with memories and emotions Motivates us to be more hardworking, loving, and caring Benefits - Use and enjoyment, possession and control (make changes, buy, sell, abandon, gift, leasing), tax benefits. Costs - Down payment, mortgage, property tax, insurance, maintenance, and repairs. Conventional down payment amount is 20% and you mortgage the rest LTV Ratio - Loan-to-value ratio ( loan amount / Value of home ) Mortgages have a lower interest rate since you are putting something up for collateral Why get a mortgage? ○ Affordability ○ Financial Leverage ○ Diversification (having money in multiple places) ○ Tax Benefits How to calculate the monthly payment (based on a $500,000 loan with 3% interest rate for 30 years) ○ Calculator entries ■ Clear memory (2nd -> reset -> enter) ■ N - Number of Payments (360) ■ I/Y (Interest Rate/Years) - Periodic Interest Rate (0.25) ■ PV - Present Value (500,000) ■ CPT -> PMT ■ ANS = -$2,108.02 Amortization Schedule - gives you the following four pieces for each month: ○ Payment ○ Interest ○ Amortization ○ Outstanding Balance Real Estate Brokerage and Listing Agreement ● What do real estate agents do? ○ Help bring buyers and sellers together ○ Facilitate leasing by bringing landlords and tenants together ○ Some serve as property managers (collect rent and fix maintenance) ○ Earn a commission (often paid by seller) (Usually a 6% commission rate paid by the seller) (6% gets split between both sides agents) ● Law of Agency - gives a broker the right to act for a principal in trying to buy or sell a property. ○ The principal is the person who empowers another to act as their representative (buyer or seller) ○ The agent is the person who is empowered to act (broker) ○ Third Parties - other people or entities involved (potential buyers) ● Three types of agencies ○ Special Agent - Can act for the principal in a specific transaction ○ General Agent - Can act for the principal within a specific business ○ Universal Agent - Can act for the principal in all matter ● Establishing the agency relationship ○ Written Agreement (Listing Agreement) - always preferred ■ Establish agents authority and obligations ■ Establish the principal’s obligations to the agent ○ Implied Authority - custom in the industry ■ It is impossible for a listing agreement to expressly cover all possibilities ■ Agents can follow custom in the industry unless prohibited ○ Ostensible authority (apparent authority) - by the act of conduct of the principal ■ The principal gives a responsible third party reason to believe another person is his or her agent ○ Agency by ratification - by the outcome ■ If an agent (without signing a listing agreement) secures a contract on behalf of the principal, and the principal subsequently agrees to it ● When you are acting as an agent, there are two sets of duties that you must fulfill ○ Fiduciary Duties to the principal ■ Confidentiality - obey confidential information about the principal ■ Obedience - follow instructions of the principal to the legal limit ■ Accounting - Keep the principal informed on financial aspects ■ Loyalty - put the interests of the principal first ■ Disclosure - be honest and open with the principal, disclose information ● ● ● ● ● ■ Skill and Care - represents the principal's interests to the best of their ability ○ Duties to the third parties (customers) ■ Treat 3rd parties with honesty, integrity, and fairness ■ Take proper care of deposits and offers ■ No misrepresentation ■ Verify information before providing it ■ Avoid puffing (making statements that are non factual or extravagant) Disclosures to third parties (Texas Real Estate License Act) ○ Who you represent (not the name, but the body you represent) ○ How you’re getting paid, and by whom ○ Any interest you hold on the property (owner, etc.) ○ Latent structural defect (anything major wrong with the property) ○ Municipality utility districts, lead paint, mandatory HOA memberships, tax rollbacks, etc. Nondisclosures ○ Whether the previous or current occupant had a sexually transmitted disease ○ Death occured on the property by: natural causes, suicide, or accident unrelated to the condition of the property ○ Information about registered sex offenders Traditional Brokerage ○ Selling agent has fiduciary duties to the listing agent Buyer Brokerage ○ Buyer agent owes fiduciary duties to the buyer ○ Must be established by a contract ○ Have to drop the sub-agency through MLS (if you don’t drop the sub agency, the agent becomes a sub agent of the listing agent and would have fiduciary duties to them) Dual Agency ○ One agent represents more than one principal ○ Listing/buyer agent owes fiduciary duties to the buyer and seller ○ Texas limits the dual agency due to conflict of interest ○ The brokerage firm can represent both principals, but there have to be separate agents assigned to each with an intermediary who negotiates the transaction between parties ○ If it is the same agent for both sides, they: ■ May not disclose reservation price of either buyer or seller ■ May not disclose any confidential information ■ Treat both sides fairly and not favor either side ■ May not provide opinion or advice to either side ● Listing Agreement ○ A real estate listing is a contract between a property owner (the seller) and the real estate broker ○ The listing agreement establishes the rights and obligations of both parties ■ Seller ● Make the property available for sell (list price and period) ● Commission (% of sale) ■ Broker ● Promise to make a reasonable effort to find a buyer ● Fiduciary duties to the seller ○ Contains: ■ Description of the property, the price, and the term at which the broker is instructed to find a buyer ■ The promise of broker to make a reasonable effort ■ Listing period and the agreement to give the broker exclusive and irrevocable rights to sell the property ■ Commission ■ Type of listing ■ “Ready, willing, and able” buyer ■ Borderline Situation (prevents the broker from not being paid if negotiations are happening when the listing agreement expires) ■ Access to the property for signs and showings ■ Refer all inquiries regarding the availability of the property to the broker ○ Broker Commission ■ Negotiable ■ Typical: ● 5% - 7% for houses, Commonly 6% ● 6% - 10% for farms, ranches, and vacant land ● 1% - 4% for high value properties ○ Target Net Price - how much do I get after paying the commission ■ Gross Price ● Target net price / 1 - commission rate (%) ○ Types of Listings ■ Exclusive right to sale - the listing broker gets the commission no matter who sells the listing ■ Exclusive Agency - the listing broker will not get the commission if the owner sells the property ■ Open Listing - whoever sells the property gets the commission ■ Net Listing ● The seller states the price he or she wants from the deal, and the agent gets paid anything above that price as the commission ● Example: Seller wants just 600,000 but the property sells for 700,000 so the broker will keep 100,000 ● Texas allows net listing, but is prohibited in many other states ○ “Ready, willing, and able” buyer ■ A buyer who is ready to buy at the sellers price and terms, and who has the financial capacity to do so ■ This is different from “no sale, no commission” ■ Protects the broker from arbitrary refusal to sell without reasonable cause or in bad faith