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LCAR Unit 13 - The Real Estate Business - 14th Edition
1. The Real Estate School
U N I T 1 3
THE REAL ESTATE BUSINESS
1
Page 211
2. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Brokerage (Unit 14) â A Broker is a person or company licensed to
buy, sell, exchange, or lease real property for others and charge a
fee for these services
2
Page 212
3. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Real Estate Salesperson â Licensee employed by or associated with
the Broker
⢠Conducts brokerage
activities on behalf of
or for the broker
⢠NOTE: Acquiring a PA
license only entitles agent
to sell real estate in PA
3
Page 212
4. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Licensee â A person who has
satisfied the requirements set forth
by a licensing agency or state
legislation
⢠Real Estate Licensing and Registration Act and the State Real
Estate Commissionâs Rules and Regulations govern how
licensees provide real estate services
4
Page 212
5. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Appraisal (Unit 20) â The process of estimating a propertyâs market
value based on established methods and the appraiserâs
professional judgment
⢠Appraisers must be licensed or certified
for many federally related transactions
⢠Appraisers must be certified by the
State Board of Certified Appraisers
5
Page 212
6. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Property Management (Unit 22) â A company or person hired to
maintain and manage property on behalf of an owner
⢠Responsibility to protect the
ownerâs investment and
maximize the return on
investment
6
Page 213
7. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Financing (Unit 11 & 19) â The business of providing funds to make real
estate transactions possible
7
Page 213
8. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Subdivision and Development (Unit 2) â Independent processes that
usually occur separately
⢠Subdivision â The splitting of a
single property into small parcels
⢠Development â The construction
of improvements on the land
8
Page 213
9. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Home Inspection â An analytical report of a visual survey of a
propertyâs structure, systems, and site conditions
9
Page 213
10. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Home Inspection (contâd)
⢠Frequently a contingency in an agreement of sale
⢠Home Inspection Law (2001) requires that
home inspectors be members of a national
trade association with requirements of a
minimum of 100 home inspections, passing
an exam, and continuing education courses
10
Page 213
11. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Counseling â Providing clients with competent independent advice
based on sound professional judgment
⢠Real estate Counselors
must be licensed real
estate brokers
11
Page 214
12. REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠Education â State licensing laws establish the minimum
educational requirements for obtaining and keeping a real estate
license
12
Page 214
13. ⢠Professional Organizations â Many serve the real estate business
⢠National Association of REALTORSÂŽ (NAR) â Largest trade
association that serves real estate licensees
13
Page 214-215
⢠Sponsor affiliated organizations that offer
professional designations
⢠Members subscribe to a code of ethics
REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
14. ⢠Affiliated institutes, societies, and councils:
14
Page 215
REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
15. ⢠NAR Code of Ethics is revised every
year
⢠REALTORSŽ are responsible for knowing
the documentâs content
⢠âI didnât know that was a violationâ is
not an excuse
15
REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
16. ⢠NAR Code
16
REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
⢠There is no such thing as a licensed
REALTORÂŽ
⢠A license is only issued by the State
17. 17
Page 215
Residential Commercial Mixed-Use
Special-Purpose Agricultural Industrial
⢠Six categories of real
property
⢠General real estate
services involving all six
categories are rarely
performed by most
firms
REAL ESTATE: A BUSINESS OF MANY
SPECIALIZATIONS
18. THE REAL ESTATE MARKET
18
Page 216
⢠The function of a market is to provide a setting in
which Supply and Demand can establish market value
19. THE REAL ESTATE MARKET
⢠Supply â The available number of
properties in the market at a certain
price
⢠Demand â The number of Buyers who
desire the property and who have the
financial ability to acquire the property
19
Page 216
20. THE REAL ESTATE MARKET
Supply increases &
Demand remains stable
Prices go DOWN
20
Page 216
Demand increases &
Supply remains stable
Prices go UP
21. THE REAL ESTATE MARKET
Supply decreases &
Demand remains stable
Prices go UP
21
Page 216
Demand decreases &
Supply remains stable
Prices go DOWN
22. THE REAL ESTATE MARKET
22
Page 216
Less than
5 months
Greater than
7 months
Between
5-7 months
23. HOUSING INVENTORY LEVELS
23
SOURCE: National Association of REALTORSÂŽ
9.5
8.5
7.5
6.5
5.5
4.5
3.5
2.5
Jan
2011
Jan
2012
1.5
Jan
2013
Jan
2014
Jan
2015
Jan
2016
Jan
2017
Jan
2018
Jan
2019
Jan
2020
Jan
2021
Jan
2022
Jan
2023
Neutral Market
Sellerâs Market
(Prices increase)
Buyerâs Market
(Prices decrease)
24. THE REAL ESTATE MARKET
⢠Two characteristics of real estate govern the way the market reacts
to the pressures of supply and demand:
⢠Uniqueness â No two parcels are exactly alike
⢠Immobility â Property cannot be relocated
24
Page 216-217
25. THE REAL ESTATE MARKET
⢠Factors Affecting Supply:
⢠Labor Force & Construction Costs â Increases or decreases affect
number of properties on the market
⢠High taxes or construction fees
discourage development
⢠These additional costs are passed
on to Buyers/Tenants causing
market to slow
25
Page 217
26. THE REAL ESTATE MARKET
⢠Factors Affecting Supply (contâd):
⢠Government Controls and Fiscal Policies â Monetary policies
can have a substantial impact on the market
⢠The Federal Reserve (Fed)
establishes interest rates
⢠FHA/Ginnie Mae affect the
amount of money available
to lenders
26
Page 217-218
27. THE REAL ESTATE MARKET
27
SOURCE: Freddie Mac
Current Interest Rate
6.60%*
* March 18, 2023
8.86%
12.70%
8.12%
6.27%
4.09%
Average Interest Rate Over the Last 50 Years
1970s 1980s 1990s 2000s 2010s
28. THE REAL ESTATE MARKET
⢠Factors Affecting Demand:
⢠Population â As population increases or decreases, so does
demand for housing
28
Page 218
29. THE REAL ESTATE MARKET
⢠Lancaster County Population Growth
29
Geographic Area Pennsylvania Lancaster County
2010 Population 12,702,379 519,445
2022 Population 13,062,074* 559,692*
Increase in Population 359,695 40,247
Percentage Increase in
Population
2.83% (US Rank: 43 of 50) 7.75% (PA Rank: 7 0f 67)
* Projected
SOURCE: United States Census Data
30. THE REAL ESTATE MARKET
⢠Factors Affecting Demand (contâd):
⢠Demographics â Family size, ratio of
adults to children, ages of children,
number of retirees, family income,
lifestyle, single-parents, and empty-
nesters
30
Page 218
31. THE REAL ESTATE MARKET
⢠Factors Affecting Demand (contâd):
⢠Employment and Wage Levels â Decisions about whether to buy
or rent and how much to spend on housing are closely related to
income and employment
31
Page 218-219
32. HOME OWNERSHIP
⢠People buy their homes for psychological as well as financial
reasons
⢠Home is an investment that can appreciate and provide tax
incentives
⢠Home also provides pride,
security, and a sense of
belonging
32
Page 219
33. HOME OWNERSHIP
33
SOURCE: National Association of REALTORSÂŽ 2021
Homeowner Renter
$8,000
$300,000
Homeownerâs
Net Worth is
Almost
40X
Greater Than
Renterâs
35. HOME OWNERSHIP
⢠Types of Housing â Different forms of housing respond to the
demands of a diverse marketplace
35
Page 219-220
⢠Apartment Complexes
⢠Condominium
⢠Cooperative
⢠Planned Unit Developments (Master
Planned Communities)
⢠Converted-use Properties
⢠Retirement Communities
⢠Mixed-use Developments
⢠Manufactured Housing
⢠Modular Homes
36. HOME OWNERSHIP
⢠Housing Affordability â Factors to consider when making a
decision to purchase rather than rent:
⢠Length of stay in an area
⢠Financial situation
⢠Housing affordability
⢠Mortgage interest rates
⢠Tax consequences
36
Page 220-221
37. HOME OWNERSHIP
⢠Mortgage Terms â Mortgage terms and payment plans are two of
the biggest factors when deciding whether to own or rent a home
37
Page 221
38. HOME OWNERSHIP
⢠Ownership Expenses and Ability to Pay
⢠Owners should budget for utilities, trash removal, and
maintenance and repairs
⢠Monthly mortgage payments are made up of:
⢠P rincipal
⢠I nterest
⢠T axes
⢠I nsurance
38
Page 221
39. HOME OWNERSHIP
⢠Ownership Expenses and Ability to Pay (contâd)
39
Page 221
Gross Income
Housing Ratio
28% Mortgage Payment
Gross Income
Total Debt Ratio
36%
Mortgage Payment
Car Payment
Student Loan
Alimony/Child Support
Credit Cards
40. HOME OWNERSHIP
⢠Ownership Expenses and Ability to Pay (contâd)
⢠Housing and Total Debt Ratios can also depend on:
⢠Work history
⢠Type of loan
⢠Credit history
⢠Number of dependents
40
Page 221
41. HOME OWNERSHIP
⢠Investment Considerations â There are several financial
advantages to owning real estate:
⢠Propertyâs value increases
⢠Build-up of equity (paid-off
share of the property held
free of any mortgage)
⢠Income tax deductions
41
Page 222
42. HOME OWNERSHIP
⢠Tax Benefits â The government encourages home ownership by
allowing homeowners certain income tax advantages
42
Page 222
43. HOME OWNERSHIP
⢠Tax Benefits (contâd)
⢠Capital Gains â The difference between the original cost of the
property and what it sells for today, minus certain expenses
⢠Exemption may be used repeatedly
⢠Must be the primary residence for at least two of the past five
years
43
Page 222
44. HOME OWNERSHIP
⢠Tax Benefits (contâd)
⢠Capital Gains (contâd)
⢠Taxpayers who file singly:
$250,000 exclusion
⢠Taxpayers who file jointly:
$500,000 exclusion
NOTE: The exclusions listed above are for 2023 â these numbers are different than what is in the book
44
Page 222
45. HOME OWNERSHIP
⢠Tax Benefits (contâd)
⢠2023 Capital Gains Rates
45
Page 222
Long-Term Capital
Gains Tax Rate
Single Filers (Taxable
Income)
Married Filing Jointly Heads of Household Married Filing
Separately
0% $0-$44,625 $0-$89,250 $0-$59,750 $0-$44,625
15% $44,625-$492,300 $89,251-$553,850 $59,751-$523,050 $44,626-$276,900
20% Over $492,300 Over $553,850 Over $523,050 Over $276,900
SOURCE: Internal Revenue Service
46. HOME OWNERSHIP
⢠Equity vs. Capital Gain
46
Page 222
Sales Price
$400,000
Mortgage Amount
$200,000
Equity
$200,000
Original Price
$100,000
Capital Gain
$300,000
47. HOME OWNERSHIP
⢠Tax Benefits (contâd)
⢠IRA Withdrawal for down payment on home is allowed
⢠Must be a 1st time
homebuyer
⢠Limit on withdrawal
of $10,000
⢠Must be used within
120 days
47
Page 222
48. HOME OWNERSHIP
⢠Tax Benefits (contâd)
⢠Homeowners may deduct the following from their gross income:
⢠Mortgage interest payments on 1st and 2nd mortgages*
⢠Real estate taxes*
⢠Loan origination fees
48
Page 223
⢠Discount points
⢠Prepayment penalties
* Certain limits apply
49. HOME OWNERSHIP
⢠Homeownersâ Insurance â Lenders usually require that
homeowners obtain insurance when the loan is secured by a
property
49
Page 223
50. HOME OWNERSHIP
⢠Coverage and Claims
⢠The most common policy is called a basic form
50
Page 223
⢠Fire or lightning
⢠Glass breakage
⢠Windstorm or hail
⢠Explosion
⢠Riot or civil commotion
⢠Damage from aircraft
⢠Damage from vehicles
⢠Damage from smoke
⢠Vandalism and mischief
⢠Theft
⢠Loss of property removed from
premises
51. HOME OWNERSHIP
⢠Coverage and Claims (contâd)
⢠A broad form policy is also available
51
Page 224
⢠Falling objects
⢠Ice, snow, sleet damage
⢠Collapse of building
⢠Damage to hot water heater
⢠Leakage from plumbing or
heating/AC systems
⢠Freezing of plumbing or heating/AC
systems
⢠Damage to appliances, fixtures,
and wiring from short circuits
52. HOME OWNERSHIP
⢠Coverage and Claims (contâd)
⢠Apartment and Condominium policies provide fire and
windstorm, theft, and public liability coverage for injuries and
damage sustained within the unit
52
Page 224
53. HOME OWNERSHIP
⢠Coverage and Claims (contâd)
⢠Coinsurance Clause â Requires
owner to maintain insurance
equal to a specified percentage
of the replacement cost of the
dwelling
53
Page 224
54. HOME OWNERSHIP
⢠Comprehensive Loss Underwriting Exchange (CLUE Report) â
Database of consumer claims history that enables insurance
companies to access prior claims information in the underwriting
and rating process
⢠Five years of claims history
⢠Premium based on condition of
the property and buyerâs
insurance financial score
54
Page 224-225
55. HOME OWNERSHIP
⢠Flood insurance is always a separate policy and only covers
damage due to flooding
⢠The Federal Emergency Management Agency (FEMA) administers
the National Flood Insurance Program (NFIP)
55
Page 225
56. HOME OWNERSHIP
⢠Special Flood Hazard Areas (SFHAs) â Flood prone areas are
identified based on flood history and location
⢠Federally related loans require flood insurance
56
Page 225
57. HOME OWNERSHIP
⢠Special Flood Hazard Areas (SFHAs) (contâd)
⢠Elevation Certificate â Supplied
by a licensed surveyor, engineer,
or architect that shows
compliance with community
floodplain regulations and
determines appropriate flood
insurance rates
57
Page 225
60. HOME OWNERSHIP
60
Flood Insurance Rates
⢠As of April 1, 2022, almost 4 million policyholders will see increased rates
⢠About 200,000 of them will face sharp increases
⢠3.6 million will see moderate rate increases
⢠Adjustments will happen as policyholders renew their coverage
Question to Ponder: Should the
government be involved with
insuring flood prone properties?
61. HOME OWNERSHIP
⢠Special Flood Hazard Areas (SFHAs) (contâd)
⢠Flood â A general and temporary condition of partial or
complete inundation of two or more acres of normally dry land
or two or more properties
⢠Physical damage to a building or personal property âdirectlyâ
caused by a flood
61
Page 226
62. HOME OWNERSHIP
⢠Advance Purchase
Required â Cannot
buy flood insurance
coverage based on
weather forecasts
62
Page 226
63. HOME OWNERSHIP
⢠Mine Subsidence Insurance (MSI) limits coverage
to damage to the structure
⢠Surrounding site and
personal property is
not covered
63
Page 226