The Real Estate Industry - Assignment Example

Real E The real e industry has experienced significant changes in recent years and that the ways in which participants in the market establish business relationships and the aspects of the real estate transaction continue to grow and evolve. It is, hence, imperative for both the real estate broker and the individuals who want to buy properties to keep tabs on these changes and the movements of the industry as a whole. An understanding of the real estate dynamics, trends, techniques and practices is helpful in reaching specific real estate goals. This paper will explore these variables and in the process outline the basics and the background necessary to develop sound decision-making in real-estate transactions. Background The real estate industry is a large and influential sector of the US economy, employing millions of people nationwide. The book, Real Estate Principles, underscored this fact: Several million real estate transactions take place in the United States every year, representing billions of dollars in economic activity. Statistics concerning real estate are among the data economists use to evaluate the health of the economy. (p. 2) The sector includes not only real estate brokers and agents, but also property managers, relocation specialists, real estate investment counselors, real estate appraisers, home inspectors, title company employees, escrow agents, and real estate developers. This industry is closely linked to the construction and financing industries. Although real estate activity has a national economic impact, the real estate business is essentially a local business, dealing with property in a particular area or neighborhood. According to Wade Gaddy and Robert Hart (2003), “each geographic area has different types of real estate and different conditions that drive prices. This relates back to the old adage of ‘location’ being important; a parcel of real estate cannot be moved, is never exactly like another parcel, and its value is impacted by surrounding land uses.” (p. 5) Two main branches make up the real estate industry – residential and commercial real estates. In most places, residential sales account for a large share of real estate activity that is why there are real estate agents who work exclusively in these types of transactions. The typical transaction characterizing the sale of a residential property follows this process: Someone who owns a home and wants to sell it (a seller) transfers ownership of the property to someone who wants to buy it (a buyer) at an agreed price. Ownership is transferred by means of a deed, a legal document that the seller gives to the buyer. Real Estate Financing The real estate market almost always requires some form of financing in the real estate transaction. This is because few people have the cash in hand in order to buy a house or any real estate property. That is why real estate licensees are faced by the challenge of maintaining a working knowledge of the financing techniques. Technically, financing is the business of providing funds for the purchase and development of real estate. What distinguishes it from other forms of financing is that it involves pledged collateral for the repayment of the land through a mortgage or trust deed. According to Galaty, Allaway and Kyle (2002), the real estate financing market has the following three basic components: Government influences, primarily the Federal Reserve System as well as the Home Loan Bank System and the Office of the Thrift Supervision. The primary mortgage market The secondary mortgage market. (p. 236) Many different entities are involved in the process of loaning money to real estate owners and these include commercial banks, savings associations, real estate investment trusts, and mortgage banking and mortgage brokerage companies. The Federal Reserve System plays a significant role in the financing arena in terms of the maintenance of sound credit conditions, in helping counteract inflationary and deflationary trends and lastly, by helping create a favorable economic client. Brokerage Another important element in the whole real estate transaction is the existence of brokers and salespersons who serve as an intermediary, helping to arrange the purchase of sale of goods, services, or other commodities on behalf of others. To illustrate: A stockbroker helps an investor buy and sell corporate stocks and what’s more, does it considerably better by surpassing its expectations. Every state requires real estate brokers and salespeople to be licensed. Therefore, knowledge of the state’s real estate license law is pivotal to the understanding of the legal authorities and responsibilities of brokers and salespeople. Gaddy and Hart (2003) wrote that the purposes of such statutes are to: First, protect the public from dishonest or incompetent brokers and salespeople; second, prescribe standards and qualifications for the licensing of brokers and salespeople; and finally, maintain high standards in the real estate profession. (p. 166) An important part of the real estate brokerage is the law of agency, which controls the complex interrelationships of duties, rights, and liabilities among three people: the principal, the agent, and the third party with whom the agent deals. (p. 166) A broker is compensated through the real estate state which generally takes the form of commission, which is a percentage of the real estate’s selling price or an agreed-upon fee. Finally, a broker is considered to have earned a commission when he or she procures a buyer who is ready, willing, and able to buy under the seller’s terms. At present, a growing number of real estate brokerage companies are affiliated with franchises, wherein many of the great general operations of a real estate brokerage are regulated by state laws including the real state license law. In addition, state and federal antitrust laws prohibit brokers from conspiring to fix prices or allocate customers to markets. Techniques Since there are numerous participants in the whole real-estate transactions, each has its own respective set of techniques in terms of the addressing the movements and changes in trends in the industry. Robert Irwin (2002) listed several that could help individual brokers lead a bright future in the real estate industry. For these individuals and the agency they serve, he suggested that concentrating efforts and spending more time buying than selling and preparing to lose deals, among others techniques can guarantee success. I quote one of his main points: In real estate, as in most other fields, knowledge is king. If you have more knowledge than others, you’ll be able to discern true bargains and avoid pitfalls while others go astray. And, of course, the way to gain that knowledge is to study hard and focus your attention. (p. 108) Industry wise, attempts at streamlining the real estate transaction process led to the growing popularity of e-commerce or the integration of the Internet to real-estate methods. In the real estate lending area, for example, automated techniques were rapidly being adopted by most existing lenders, when taking the initiative from new e-commerce entrants. Hossein Bidgoli (2004) offered us an interesting insight in this regard: The traditional firms will have to continue to innovate and adopt new electronic techniques to sustain their dominance… In the areas of real estate appraisal and construction project management, the existing industries may be too slow to adopt the new electronic techniques, and thus are in danger of losing their market share. (p. 199) What this particular trend highlight is that existing industry consists largely of very small firms, often just individuals for whom it is not feasible to adopt the new techniques. But technology is seen to dominate the changes and the dynamism of the real estate industry. The impact cannot be underestimated: For one, costs have been lowered by shortening the real-estate transaction cycle. Whatever the details are, in this regard, the fundamental point here is that the real estate markets will be most likely influenced by firms that can create value at the intersection of real estate and Internet technology. For instance, over the past 20 years the availability of data to investors on property has improved enormously. This claim is echoed by Sarah Sayce (2006) who pointed out that the increased flow of reliably sourced data, combined with an increasing availability of computer-based statistical software, has enabled investors to access and apply statistical techniques. (p. 297) Indeed, it is now possible to undertake relatively sophisticated modeling techniques in respect to market movements, rental levels and yields, to produce better cross-media comparison in ways that were previously unavailable. References Bidgoli, H. (2004). The Internet Encyclopedia. John Wiley and Sons. Galaty, F., Allaway, W., and Kyle, R. (2002). Modern Real Estate Practice. Dearborn Real Estate Education. Gaddy, W. and Hart, R. (2003). Real Estate Fundamentals. Dearborn Real Estate Education. Irwin, R. (2002). How to Get Started in Real Estate Investing. McGraw-Hill Professional. "Rockwell Publishing." (2005). Real Estate Principles. Rockwell Publishing. Sayce, S. (2006). Real Estate Appraisal: From Value to Worth. Blackwell Publishing. Read More