Chapter 1 (The Real Estate Business) Flashcards
The Real Estate Business
The industry or occupation whose activities involve real property transactions handled by a licensed real estate professionals.
Today a real estate licensee is paid to handle other people’s properties because the licensee is a professional who provides specialized service and expertise in at least five areas:
- Details of property transfer.
A competent real estate practitioner must know the economic and legal intricacies associated with transfers of title, property taxes, financing, and local zoning ordinances. Real estate practitioners must be intimately familiar with the real estate purchase and sale contract used in their locale, and they must be able to complete the form competently.
- Knowledge of market conditions.
No market is ever completely static. Property values are affected by changing market conditions. Changes in market conditions are due to changes in income tax laws, building moratoriums, and fluctuations in supply and demand. These price changes must be taken into consideration when preparing a comparative market analysis (CMA) for buyers and sellers. CMAs are prepared by real estate licensees to help buyers and sellers make informed decisions on pricing a property (CMAs are discussed later in this unit).
- Knowledge of how to market real estate or businesses.
To be successful, licensees must know how to market real estate and/or businesses. The sale presentation most effective when working with a physician who is relocating to a new city may be completely different from the approach used to assist the owner of an expanding gourmet coffee bar in choosing an additional location.
- Knowledge of how to analyze buyer’s needs.
Successful real estate professionals know how to analyze a buyer’s needs, wants, and financial capabilities in order to help meet their goals. Good listening skills will allow the real estate professional to help the buyer focus on priorities when considering alternative properties, as well as assisting with finding the right mortgage professional.
- Knowledge of laws that pertain to real estate.
It is critical that real estate professionals understand and apply the many laws that impact real estate. For example, regarding financing and applying for mortgage loans, laws such as the Real Estate Settlement Procedures Act (RESPA), Equal Credit Opportunity Act (ECOA), and the Truth in Lending Act (TILA) are important. Knowledge and compliance with fair housing laws are also extremely important when working with the public.
Real estate professionals must also understand and comply with Florida’s real estate licensing laws, including regulations pertaining to brokerage relationships. Each of these laws will be discussed in detail later in this course.
Real Estate Brokerage
That part of the real estate business that is concerned with bringing together buyers and sellers, owners and renters, and completing real estate transactions.
Follow-Up
What a sales associate does for buyers and sellers after the sale (closing) to promote customer loyalty.
10 Steps to a Real Estate Transaction
- Prospect for sellers, and list properties and businesses.
- Market listing and prospect for buyers.
- Buyer qualification.
- Offer, negotiation process, and signed sale contract.
- Loan application and RESPA disclosures.
•Post-Contract Activities
- Credit evaluation.
- Property appraisal.
- Property survey.
- Loan Approval and Title Search.
•Title Closing
- • Buyer signs mortgage and note.
• Seller signs deed. - Deed and mortgage are recorded.
- Follow-up.
Step 1. The process begins by prospecting for sellers. The sales associate develops and presents listing presentations based on market research presented in a CMA. The presentation also includes estimating the seller’s net proceeds and the listing agreement.
Step 2. Once the real estate sales associate has acquired the listing on behalf of the broker, it is time to prospect for buyers. The sales associate prepares flyers and newspaper advertisements, lists the property in the multiple listing services (MLS), and conducts open houses. During this period, the sales associate shows the property to potential buyers.
Step 3. Key to a successful sale is making sure the prospective buyer has sufficient income, a good credit history, and sufficient longevity in the workforce to be able to purchase the listed property. This process is called buyer qualification.
Step 4. A qualified buyer will make an offer. The sales associate presents the offer and facilitates the negotiation process, which culminates in a signed contract for sale and purchase of the listed property.
Step 5. Most often, the buyer must apply for a loan to purchase the property. The buyer receives RESPA disclosures at the time of loan application or within three business days.
Step 6. At this stage, post-contract activities include the lender’s credit evaluation of the buyer and ordering an appraisal and survey of the property.
Step 7. If the buyer has sufficient income and a good credit score, the lender will likely approve the loan application. At this stage, the lender will order a title search on the property.
Step 8. The sales associate typically attends the title closing. At this stage, the buyer signs the mortgage and promissory note. The seller signs the deed conveying the property to the buyer.
Step 9. The deed and mortgage are recorded.
Step 10. The sales associate should contact the buyers and sellers within a reasonable time after the closing. One of the best ways to ensure satisfied buyers and sellers is through follow-up .
The follow-up is important to all aspects of sales in real estate because it results in a good reputation, future referrals, and word-of-mouth advertising.
Residential
Residential real estate is defined in the Florida license law to mean four or fewer residential units, vacant land zoned for four or fewer residential units, or agricultural property of 10 or fewer acres.
Commercial
Improved residential property of more than four units, retail stores, office buildings, and shopping centers, are examples of income-producing commercial properties.
Five Major Sales Specialties
- Residential
Chapter 475, F.S., defines residential real estate as 4 or fewer residential units, vacant land zoned for 4 or fewer residential units, or agricultural property of 10 or fewer acres.
Residential sales associates should acquire a thorough understanding of the strengths and weaknesses of the neighborhoods in the areas in which they specialize (farm). To be successful, residential specialists need to know the best access routes and locations of schools, shopping facilities, and recreation facilities. They must be able to explain property taxes, homestead exemptions, restrictive covenants, and approximate utility costs in the area. One of the more important aspects of residential sales is knowing how to help prospective buyers obtain financing. Most real estate licensees specialize in the sale and purchase of owner-occupied residential property.
- Commercial
To provide competent service to investors, real estate professionals who specialize in commercial sales need expertise regarding income-producing properties, investment analysis, and the various techniques for increasing after-tax cash flow. Improved residential property of more than four units, retail stores, office buildings, and shopping centers are examples of income-producing commercial properties. Contacts with financial institutions and mortgage lenders are important to facilitate commercial transactions.
- Industrial
The industrial sales associate deals in three types of properties:
(1) sites in industrial parks or subdivisions,
(2) redeveloped industrial parcels in central areas, and
(3) industrial acreage.
Sales associates of industrial real estate must have technical knowledge of the needs of different industries, such as transportation requirements, including access to railroad or airport transportation; industrial construction features, such as steel versus concrete block construction; and local land-use restrictions affecting industrial properties.
With the increase in technological industries, more and more industrial brokers are finding it rewarding to develop and sell beautifully landscaped and well-conceived industrial subdivisions. Almost every large city in Florida has experienced the development of industrial parks.
- Agricultural
Agricultural property is defined in Chapter 475, F.S., to mean agricultural property of more than 10 acres.
Professionals who specialize in the sale of farms and agricultural land must be familiar with the operation of farms and the economic problems associated with the various types of farming.
One of the licensee’s most important skills is the ability to communicate with farmers.
Sales associates who are effective in dealing with farm operators are knowledgeable about farm operations and the federal programs affecting farm operations.
- Businesses
Real estate licensees who engage in the sale, purchase, or lease of businesses are called business brokers.
This real estate activity is sometimes called business opportunity brokerage.
Business opportunity brokerage involves the sale or lease of an existing business, including the sale of tangible and intangible assets.
In most states, if real property is an asset of the business, a real estate broker’s license is required to sell the business.
There is a presumption in Florida law that businesses will have some sort of real property involved, either land and physical improvements, such as a building or a long-term lease.
For this reason, in Florida, an active current real estate license is required to sell or lease business opportunities.
Many brokers and sales associates prefer to select one specific portion of a city and become an expert in that particular portion, called a farm area.
Licensees get to know almost every lot, house, and business in their farm areas. Farming involves maintaining data on each property, including when it was built, the sale history, typical marketing time, assessed value, the amount of property taxes, and so forth.
Real estate professionals meet the people in the area and make it known that they specialize in that section of town.
The farm area soon begins to produce a harvest in the form of listings and sales.
Licensees create a reputation for expertise through hard work.
When residents in the farm area move or decide to sell, they call on the area expert who knows what value their property will bring in the current market.
Sales and Leasing
Sales is the most prevalent and most well-known component of real estate brokerage.
Owing to its annual dollar volume, real estate sales has been called the lifeblood of the brokerage business.
Some brokers prefer to specialize in residential property.
Others specialize in commercial, industrial, or agricultural property, or only in business brokerage.
Furthermore, a real estate professional might specialize exclusively in new residential construction, medical office space, or food service businesses.
Regardless of the type of property handled, sale transactions are critical to the success of a real estate firm.
Property Management
Real estate activity devoted to leasing, managing, marketing, and overall maintenance of property for others.
Property management is a professional service conducted by a person or company hired to maintain and manage property on behalf of property owners.
The scope of the work the property manager performs is spelled out in the management agreement.
Property management typically involves leasing, managing, marketing, and maintenance of property.
Property management is much more involved than being a rental agent.
((A RENTAL AGENT is a person who, for a fee, acts as an intermediary between a person seeking to lease a housing accommodation and a property owner seeking to acquire a lease for a housing accommodation. Rental agents who are paid on a transaction basis must be licensed real estate agents. Salaried employees who work in an on-site rental office in a leasing capacity are exempt from a real estate license, provided they are not paid on a transactional basis.))
Rental agents typically find a tenant for property and collect a fee. Property managers continue to manage the property once a tenant is secured.
*A property manager is the local representative of the property’s owner. The property manager is responsible for maintaining the property and managing the expenses.
The property manager’s primary task is to protect the owner’s investment and to maximize the return on the investment, thereby producing the greatest possible net income over the longest possible time.
Many investors desiring to participate in the growth of income-producing property have become absentee owners.
An absentee owner is a property owner who does not reside on the property and who often relies on a professional property manager to manage the investment.
The field of property management has experienced rapid growth and specialization, primarily because of the increase in absentee ownership.
As agents of absentee owners, property managers are typically responsible for rent collection, improving tenant relations, and advertising and merchandising the space. Investors normally hire qualified property managers because the investors have neither the time nor the desire to become involved in the complexities of property management.
Property managers are compensated in a number of ways. Some work for a guaranteed base amount plus a small percentage of effective gross income (total income collected after taking into account vacancies).
The method of compensation is detailed in the management agreement.
Appraising
Appraisal is the process of estimating the value of real property.
It is an OPINION given by a skilled appraiser that concludes with an estimate of the property’s worth.
Appraising is considered to be an art, not a science, because although the appraisal process involves mathematical calculations, and published tables and charts of the appraising trade, appraisers also use their own judgment when appraising real property.
- Real estate brokers and sales associates may appraise real property for compensation (certain exceptions exist).
- However, they may not represent themselves as state-certified, registered trainee, or licensed appraisers unless they also hold those licenses and certifications.
Florida law requires appraisers and real estate brokers and sales associates to abide by the Uniform Standards of Professional Appraisal Practice (USPAP) when conducting appraisals of real property.
The USPAP is a set of guidelines (standards of practice) to follow when providing appraisal services.
*A real estate licensee who fails to abide by the USPAP when conducting appraisal services may be subject to disciplinary proceedings and sanctions.
The Florida Real Estate Appraisal Board (FREAB) regulates state-certified, licensed, and registered trainee appraisers.
A state-certified or licensed appraiser must prepare an appraisal that involves a federally related transaction.
An appraiser carefully analyzes past sales, computes the cost to reproduce a structure, and determines the worth of future income that a property might produce.
These calculations are important not only to buyers and sellers but also to mortgage lenders and insurance companies.
Various levels of government also use appraisers to arrive at a value for properties condemned in order to build roads, highways, and expressways.
Individual investors have learned the value of obtaining an appraisal before investing.
Appraisers charge a fee based on the time and difficulty of the work.
*Appraisers are not paid a commission, in order to reduce the possibility of a conflict of interest.
If an appraiser were to be paid a percentage of the appraised value, the temptation to exaggerate the value might prove irresistible.
The USPAP’s ethics rule states that it is unethical for an appraiser to accept compensation that is contingent on the value of the property.
Comparative Market Analysis and Broker’s Price Opinion
Sellers often ask real estate brokers and sales associates what a buyer is likely to pay for their properties.
Real estate licensees may help potential sellers determine an asking price by preparing a comparative market analysis (CMA).
Also, sales associates and brokers prepare CMAs for buyers to help them make informed decisions when offering to purchase real property.
CMAs are developed by collecting information concerning real estate activity in the area, including recent sales of similar properties, properties currently offered for sale, and recently expired listings.
A CMA is a marketing tool and may not be referred to or be represented as an appraisal.
Licensees may charge a fee or otherwise be compensated for preparing a CMA, either as a part of or in addition to the normal sale commission.
However, licensees typically prepare CMAs for sellers for free as a courtesy to the sellers and to solicit new business.
A broker’s price opinion (BPO) is a written opinion of the value of real property.
*Florida real estate licensees are allowed to prepare and charge for BPOs provided the BPO is not called an appraisal.
Price opinions are often requested by relocation companies and lenders involved in short sales of distressed properties (a short sale produces less money than is owed the lender; the lender releases its mortgage so that the property can be sold free and clear to the new purchaser).
*A licensed or certified appraiser must conduct an appraisal when the valuation assignment involves originating a federally related mortgage loan.
Sales associates may perform BPOs only at the direction and under the control and management of the associate’s employing broker.
If a sales associate or broker associate performs a BPO, the compensation must be paid to the broker and not directly to the sales associate or broker associate who prepared the BPO.
*The USPAP standards of practice do not apply to brokers, broker associates, and sales associates who, in the ordinary course of business, perform CMAs or broker price opinions.
Financing
If sales are the lifeblood of real estate, financing can be regarded as the lifeblood of real estate sales.
Most purchases are financed.
Knowledge of how to arrange financing and how to solve financing problems is essential to success in real estate.
The licensee who can demonstrate how a prospective buyer can afford to buy has a tremendous advantage over the individual who only can show houses.
- A real estate licensee who does not also hold a Florida mortgage loan originator license may not operate as a mortgage loan originator.
- A real estate licensee also may not accept a referral fee from a lender without also being licensed as a mortgage loan originator.
Counseling
Real estate counselors provide advice to individuals and firms regarding the purchase and use of real estate investments.
A counselor is typically paid a flat fee.
Because few people have the education, experience in real estate, knowledge of investing, and tested judgment required to be a qualified counselor, they are few in number.
Our expanding economy, the increasing complexity of problems associated with real estate, and the need for professional counseling services all indicate that counseling will grow as a real estate specialty.
The services of counselors are already in demand by developers, investors, corporations, and large-scale buyers and sellers.
Development and Construction
Development and construction involve dividing larger parcels of land into lots, constructing roads and other off-site improvements, and then constructing buildings on the developed lots.
There are three general phases of development and construction:
- Land acquisition and pre-development.
Developers and builders acquire raw land and then prepare the site for construction. They must carefully study zoning and land-use plans to determine what type of development is permissible.
During this phase, the developer seeks approval for the proposed project from the local municipality. The developer incurs costs for engineering plans, attorney fees, surveys, and application fees.
- Subdividing and development.
Subdividing is the process of converting parcels of land into smaller units or lots. Development is the process of improving raw land so that it can be put to productive use.
- Construction.
Licensed contractors construct buildings on the prepared site.
Before work can begin, most local governments require that developers submit a subdivision plat map of a new development for review by the applicable government planning board (commission).
- A subdivision plat map is an engineer’s plan for land use superimposed on a map of the land to be developed.
- SUBDIVISION PLAT MAP:
A plan of a tract of subdivided land that is submitted by the developer to the government planning agency showing the size and location of individual lots, planned amenities, streets, and utilities.
The subdivision plat map indicates the proposed size and location of individual building lots, streets, and public utilities, including water and sewer lines, and other clarifying information.
The developer is responsible for improving the raw land with paved streets, curbs, storm drains, and so forth. The building lots are sold to the public.
Typically, the streets, curbs, and other public area improvements are dedicated to the local city or county.
*Dedication is the gift of land by an owner, in this case a developer, to a government body for a public use.
A valid dedication of land from the owner to the municipality requires both an offer to dedicate (donate) the land and an acceptance by the municipality.
To accomplish this, the developer typically indicates on the plat map that the streets, sidewalks, park areas, and other improvements that will not be sold to private individuals will be dedicated to the local municipality.
Plat approval and recording of the plat into the public records serves as an acceptance of the dedicated streets and public areas and obligates the local government to maintain them once they are installed.
County subdivision ordinances, in effect, have combined subdividing the land into individual lots with the development phase to provide greater protection to the public.
Restrictive Covenants and Deed Restrictions
Developers of residential subdivisions typically record in the public records restrictive covenants that affect the ENTIRE subdivision.
- Restrictive Covenants
Restrictive Covenants affect how the land can be used and establish criteria such as minimum square footage, type of construction, architectural design, and so forth, to ensure that homes built there conform to the neighborhood.
*Developers use restrictive covenants to ensure that no homes will be built that might decrease the value of neighboring properties.
People sometimes use the terms restrictive covenants and deed restrictions interchangeably.
However, deed restrictions refer to a single parcel of land, whereas restrictive covenants concern entire subdivisions.
Restrictive covenants impose limitations on the use of land in an entire subdivision.
- Examples of restrictive covenants that may affect a particular subdivision control such things as the minimum allowable square footage, whether the garage doors may face the street, or whether recreational vehicles and boats may be parked within view of the street.
2. Deed Restrictions
Deed restrictions are placed by an owner who has created a restriction on future owners of the parcel of real estate.
*A deed restriction, for example, may prevent future landowners from selling alcoholic beverages on the site.
