Valuation Process and Financial Aspects of Real Estate - Coursework Example

? Running head: Real E Principles 4th April Introduction Real e refers to the land and any structure that is installed on it. In addition, it covers residential property and businesses that can be sold by the property owners or through realtors. Major aspects that are of great importance during determination of the value or a real estate include minerals, water and crops. This paper will address major topics that are related to real estates that include Ethics in Real Estate, Legal Aspects of Real Estate, Financial Aspects of Real Estate, Real Estate and the Economy, and the Real Estate Valuation Process. Ethics in real estate One of the greatest obstacles that affect the growth of real estate industry is lack of ethics. This is based on the fact that most of the real estate buyers are not aware of the intention and operations of the realtors. In their efforts to get adequate information regarding the problems facing the real estate industry, most governments involve real estate institutes. However, most of these institutes are made up of real estate agents who are focused at exploiting consumers in their efforts to maximize profits (William and Donald, 1995). To ensure ethics are upheld during the transaction between the realtors and the property owners or buyers, National Association of Realtors has specified code of ethics that all its members are under obligation to follow. This course has widened my knowledge on how to uphold ethics during my future assignment as a real estate agent when dealing with my clients, public as well as other members of National Association of Realtors. Duties to clients Articles 1 to 9 of the National Association of Realtors code of ethics, regulates the way the real agents relate with their clients (William and Donald, 1995). For example, article 1 requires that besides treating all the parties honestly and fairly, agents should not at any time underrate the interest of their clients. This implies that agents should provide correct market value of the property to owners and the buyers. In addition, these articles depicts that real agents must present themselves to the clients through a written document. In the same way, agents must keep special accounts to hold deposits on behalf of the clients. Duties to the public Articles 10 of the National Association of Realtors code of ethics forbids agents from discriminating their clients on the basis of color, sex, religion, race or nationality. Other key aspects that are dealt with by articles 10 to 14 depicts that agents should not provide services that they are not competent in, contacting a lawyer in cases the agency has no authority to practice law and avoiding misleading advertisements. Duties to other members National Association of Realtors code of ethics depicts that agents should not make untrue statements about their competitors. In addition, it forbids agents from transacting business with clients who are exclusively owned by other agents. Legal Aspects of Real Estate Based on the fact that real estate covers immovable properties, minerals, bushes, water among others, real estate and property law covers wide range of aspects. It is worth noting that different countries have put in place various regulation that seek to control the operations of agencies and transfer of property. As a result of the inconsistency of the property laws, initiating legal procedure has become a complex practice that calls for proper coordination among all the stakeholders. This course has exposed me to major issues that are covered by real estate and property laws include purchasing of property, landlord issues, transfer of movable and immovable property, settlements of claims, property development, foreclosures, land use and zoning, home loans among others. This section discusses major aspects of property and real estate law adopted by various countries. Property and Real Estate Law adopted by US Real Property, Trust and Estate Law Sections Real Property, Trust and Estate Law Section are comprised of over 30,000 lawyers who oversee the legal aspects of property transfer and use. Major duty of the three sections is controlling legal aspects related to disposal of property, taxation, ownership and property development. Fair Housing Act Having being implemented in 1968, the Fair Housing Act is focused at protecting tenants from discrimination from landlords and sellers. According to this act, the background of a dweller should not hinder him or her from accessing houses. Home affordable modification program In order to protect the home owners from foreclosures and assist them to get relief, the US government under the leadership of President Obama initiated the Financial Stability Plan. Other aims of the plan are to stabilize the housing market and address the crisis that affects the US housing industry. Financial Aspects of Real Estate The recent economic downturn that affected many countries in the world led to decreased purchasing power of most home buyers. In order to address this macroeconomic crisis, the US government initiated a number of mortgage help programs. To qualify for a mortgage help programs that meets the needs of an individual, the government has given mandate to Housing and Urban Development (HUD) approved counselor to help the members of the public (Labaton and Weisman, 2008). In addition, HUD-approved housing counseling agencies assist individuals to avoid foreclosure. As future real estate investors, I have been exposed to key government mortgage help programs through this course as discussed below. Freddie Mac Freddie Mac was established in 1970 with the main aim of expanding US housing market. The key role of this program is to buy a large number of mortgages and sells them to the willing buyers in an open market. In this way, the money supply for lending to mortgagors is increased thus resulting to a higher demand for homes. In order to mitigate the mortgage crisis that affected the US economy in 2007, Fabozzi and Modigliani (1992) argues that the government sponsored enterprises (GSEs) that include Federal Home Loan Banks, Freddie Mac and Fannie Mae initiated affordable home acquisition methods such as the mortgage credit and the 30-year fixed-rate that required a little down payment. Freddie Mae Being one of well known government sponsored enterprises; Freddie Mae was established in 1938. The major role of Freddie Mae is to expand mortgage market. This role in undertaken by allowing lenders to reinvest in the assets acquired through mortgage thus increasing the number of lenders in the secondary mortgage market. Another notable role of Freddie Mae is to buy loans from legal mortgage sellers in exchange of mortgage-backed securities or in form of cash (Fabozzi and Modigliani, 1992). Real Estate Investment Trusts Real Estate Investment Trusts (REIT) is a tax designation for organizations that focused at expanding their real estate investment (David, 2011). The major responsibility of REITs is to reduce the amount of corporate tax. As a result, 90% of the taxable income collected by REITs is given to investors. In this way, more homes are established thus meeting the high demand of homes in the US and other market. Based on the significant role that REITs plays in developing house industry, they have been adopted in various countries that include Bulgaria, Finland, US, India, Nigeria, United Kingdom, Hong Kong among others. Real Estate and the Economy Just like any other market, real estate market is comprised of supply and demand sides. Demand side of the market is made up of owners, user and renter while the supply side consists of renovators and developers. One of the major factors that determine the demand for housing is demographic. However, the demand of housing and other forms of real estates depends on the availability of credit, income level of the buyers, prices of the real estates and investor’s preferences. The major demographic factors that determine the demand for housing are population growth and size. This implies that as the as the global population increases the demand for houses and other real estate increases (Labaton and Weisman, 2008). One of the major aspects that I have gained from this course is on real estate demand and supply. As the demand for real estates increase, government authorities must come with strategies to initiate a matching supply. Major determinants of supply include technology of production, prices of the properties available as well as the costs of the inputs (Kimberly, 2012). It is imperative for ministries of national planning to ensure that adequate number of real estates is established to meet the increasing global demand. This can be undertaken using a function Q=f (L, N, M). Where Q stands for quantity of house established, L represents amount of land utilized, N stands for labor used and M represent amount of other inputs (Kimberly, 2012). Major implications of expanding real estate investment are that it increases employment in the construction sites, establishment of more agencies and increased government revenue. Kimberly (2012) notes that if the real estates sales reduce, it results to a reduction of real estate prices. This leads to the reduction of the value of homes owed by the residents thus resulting to the reduction of the amount of loans that homeowners can get from financial institutions. This implies that it is vital for government to adopt policies to streamline the real estate market. This is a major macroeconomic strategy that the US government has implemented resulting to real estate contributing 10% of the United States GDP (Kimberly, 2012). Real Estate Valuation Process From this course I have realized that Real Estate Valuation Process is significant especially during the sale or transfer of a property. It is through this process that a valuer and the owner identify the value of the premises. The stages below should be followed during the valuation process. Definition of problem This entails the definition of the valuation problem by the owner’s agent or the estate surveyor. Before starting the process, it is vital for the valuers to define the purpose of valuation, date of valuation, the location of the premises as well as date of submitting the valuation report. Planning This includes defining the scope and the amount of tasks undertaken by a valuer. Other issues covered by the plan include supply and demand factors, property market, sources of the appropriate data as well as the valuation method to be adopted. Investigation This is the third stage that encompasses inspecting all the properties to be valued, identifying and noting the condition of the property and the level of repairs undertaken on the property (Bonbright, 1937). Gathering of appropriate data To get the appropriate data during evaluation, it is vital for the valuers to search for authoritative and valid data. Such data can be obtained from owners or the contactors. This is followed by a continuous data verification process to ensure that only factual information is considered. Analysis of the collected data This involves analyzing the collected data. It is only through an intensive analysis of the data that valuers can determine the value of the premise and make an ultimate conclusion. Valuation methods Investment method Investment method is applied in identifying the value of commercial property. It entails converting the income flow of the property to capital sum. This implies that income generating ability of a property determines the total value of the property. The formula below is used under investment method of valuation. Value = Rent * Years Purchase (Bonbright, 1937). Comparative method This method is mostly used during the valuation of residential buildings. It entails comparison of the capital values of the properties that are not occupied. To get a fair comparison, it is vital for valuers to keenly identify the dissimilarity that exist between the capital values depicted by the properties. Residual method Residual method is applied when a real estate has the capability to develop or redevelop. Key aspect of this method is that it is done by individuals who buy residential properties with a belief that if more funds are spent on modernizing or improving the property then its value will be increased. The equation below is applied under residual method of evaluation Residual value = Total value of the completed property-Total costs of developing or modernizing including the profits gained by the developer (Bonbright, 1937). . Conclusion From the above discussion, it is clear that real estate investors, agencies and property owners should have adequate knowledge on the various aspects that relate real estate. For instance, through understanding of the ethics that relate to real estates, a positive relationship between agencies and their clients will be enhanced thus avoiding the extra costs of litigation during settling of claims. In the same way, it is essential for governments to provide adequate mortgage information so as to guide investors during their decision making process. As a result, this will ensure proper investments that propel economic growth. The role of valuers is another aspect that real estate investors cannot overlook when disposing or purchasing properties. As discussed above, key valuation methods include investment method, comparative method and residual method. References Bonbright, C. (1937). The valuation of Property. New York: MC Graw Hill. David, D. (2011) REIT Investing, Canadian Style. New York: Macmillan Publishers. Fabozzi, J., Modigliani, F. (1992), Mortgage and Mortgage-backed Securities Markets. London: Harvard Business School Press. Kimberly A. (2012). How Does Real Estate Affect the U.S. Economy? Available from http://useconomy.about.com/od/grossdomesticproduct/f/Real_estate_faq.htm Labaton, S and Weisman, R. (2008). U.S. Weighs Takeover of Two Mortgage Giants. New York: MC Graw Hill. William H and Donald L. (1995). Real Estates Ethics, Good Ethics = Good Business. New York: CarolL. Luitjens. Read More