How does Real Estate Work – An end to end Analysis

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Is it a good investment?

Do you want to begin building wealth from the start? Then real estate is the option you should go for as it generates an ongoing passive income and hence proves to be a great investment option. It proves to be a good long term investment option in case the value of real estate increases over time.

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About

Real estate refers to the profession of buying, selling or renting the real estate i.e. land, buildings or houses. There are four types of real estate:

  1. Residential real estate: this includes both new construction and resale homes which consists of single family homes, condominiums, duplexes, triple-deckers, co-ops, townhouses, houseboats, and tents.
  2. Commercial real estate: this is inclusive of shopping centers and strip malls, medical and educational buildings, hotels and offices.
  3. Industrial real estate: it constitutes manufacturing buildings, warehouses, and property.
  4. Land: this is inclusive of vacant land, working farms, reclaimed sites and ranches.

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How does the real estate industry work?

This activity of buying, selling and renting, properties and houses do not get fulfilled without the brokers and agents.

Real estate broker or realtor is a person who is accredited to negotiate and arrange transactions that include writing contracts for listing and purchasing homes. While a real estate agent is the one who works under a broker and negotiates and arranges the buying and selling in real estate transactions. The agents assist homeowners, businessmen and investors buy and sell all kinds of properties and land and can be further classified into buyers and sellers agents.

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Sellers’ agents help in finding suitable buyers. They price the property, using comparative listings of recently sold properties known as ‘comps’. They assist in negotiations with the buyer helping to get the highest price possible.

Buyers’ agents provide similar services to the home purchaser. They know the local market and help in finding the most suitable property by comparing the prices called ‘doing comps’. They negotiate and point out why the seller should accept a lower price. They facilitate the legalities of the process, including title search, inspection, and financing.

Passive real estate investments that involve working with a Real Estate Investment Trust (REIT)which is when a group of investors pools their money to buy large real estates investments, such as malls, skyscrapers, or many single-family homes is most common and safe way of investing besides buy and holds, fix and flips, and Airbnb investment properties.

 Real estate transaction is a process whereby rights in a real estate is transferred between two or more parties, e.g. in case of a conveyance, the seller and the buyer. It can often be quite complicated because of the complexity of the property rights being transferred, the amount of money being exchanged, and government regulations. The transactions include subdivisions, mortgaging, and conveyance.

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The sale of a house in the United States or Canada might involve some or all of the following steps:

  • Hiring of a realtor the seller and handle the logistics of the advertising and sale.
  • A buyer might get involved in a variety of ways: from seeing advertisements in the media, seeing signs outside a property, or contacting a real estate agent to see a property.
  • A buyer may engage the services of a real estate broker to represent themselves and handle the logistics of finding suitable properties.
  • Advertising the price and property details with a Multiple Listing Service, newspaper or poster in the real estate office.
  • Private showings or general open house for interested buyers or buyers’ real estate agents.
  • Interested buyers may get pre-approval for a mortgage of a certain amount from a bank.
  • Preparation of a written offer to purchase by a real estate agent on behalf of the buyer done on pre-printed and legally-approved forms provided by the real estate broker’s office. An agent representing the buyer will advise the client as to the value of including specific possibility clauses such as time to obtain a mortgage commitment or to arrange for inspections.
  • Upon acceptance of the sales contract, the buyer opens an escrow that commonly includes a signed agreement between the two parties and an earnest money payment check which accompanies the offer, and which is generally not deposited until all parties are in agreement. The escrow deposited next leads the seller to more property disclosures, inspections, and conditions removal.

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  • Submission of offers by interested buyers: Multiple offers may result in bidding, with the best offer being awarded the sale. There may be a negotiation between the buyer and seller over the final price, or possibly the rejection of the offer by the seller.
  • When the seller refuses to negotiate with any buyer with a bid that is lower than the initial asking price, the situation is known as a holdout.
  • After acceptance of a particular offer, a real estate contract is formally approved by all parties. It creates a short interim period (typically no more than 30 days, often much less) to allow the buyer to thoroughly inspect the property.
  • Depending upon the jurisdiction and traditional practice, a title search is ordered from a third party settlement or an escrow company, pending the final settlement.
  • An Appraisal is commissioned by the buyer or seller to determine the value of the building and land.
  • If any defects are discovered during the inspection of the contingency paragraphs, the buyer may ask that they are repaired, ask that the sale price is lowered, or choose not to purchase the property.
  • The closing of the sale ends the escrow period and completes the transfer of ownership to the buyer. At this time a number of closing costs or the fees paid that is paid at the closing of the transaction are paid by the buyer or seller.
  • In case a real estate broker is used in the transaction, closing is the time that payment is made to the brokers involved.

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The principle of “As much segmentation as necessary, as little complexity as possible”, applies in real estate investment since it is the largest single investment a person deals in and hence accurate information is a necessity. It produces income and appreciates it and requires ongoing management.

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