Welcome to Residential Real Estate!

Residential Real Estate is the corner stone to the American Economy, after all, everyone needs a place to live. This leaves opportunities to improve lifestyles and find the right property for the right person. The most important aspect of residential real estate is understanding that each property is unique. When searching for property, the main concerns will be terms, condition and location.

This course will teach you the various ways you can profit from the recent real estate boom. The course consists of easy-to-follow training videos that offer practical, actionable advice with step-by-step instructions specifically focused on the accession of residential real estate. You will learn the exact steps you need to take to find, analyze, and close your first deal!

Included in this course are several important skills need to be a successful real estate professional, including:

• Prospect for Listings
• Market Listings
• Pre-Qualify Leads
• Work with Buyers
• Find Properties
• Analyze Potential Properties
• Secure Financing
• Transaction Due Diligence
• Contracts and Disclosures
• Legal Compliance

The course is taught by Robert Crawford, a seasoned Los Angeles Real Estate Broker. This course is NOT theoretical. Robert uses several of his recent deals to illustrate the process. Go in-depth with the financial and practical aspects of residential real estate. There is also a large focus on the common pitfalls and warning signs to watch for before acquiring a property.

By the end of this course you will not only have the blueprint for successfully finding and evaluating property but also understand the benefits of residential real estate and the process to help your clients.

Residential Overview

The real estate market is a beast.

Yet, it’s the cornerstone of the modern world. It’s the roof over your head. The grocery store you visit every week. Real estate affects your pocketbook and your health. It can be your savior or it can mean your demise.

At its core, the real estate market is quite simple. However, the nuances of a successful transaction can be uniquely complex. Each transaction is its own story based on concepts like comparable sales, market value and offer terms.

If you can stomach the risk, real estate can bring true financial security. It can produce wealth for generations. With proper planning and execution, real estate can set you free from the shackles of money. It can reward you with a hedge against inflation; offer a monthly income and an outstanding inheritance potential for your family.

Even with all the benefits, there are still people that have lost a great deal by making amateur mistakes. Many homeowners are not aware of their current home value and how their equity position has changed as their home increased in value.

Fortunately, households with negative equity has decreased by about 21.5% year-over-year. Almost 23% of Americans believe their home is in a negative equity position when, in reality, only 8% of homes are upside down. 

Indeed, the same study continued to state that upwards of 74% of Americans have substantial home equity. This is in contrast to the 37% who believe otherwise. Given the financial importance of home equity, this translates into 37% of Americans missing the opportunity to leverage their equity (wisely of course). Knowledge regarding the accurate analysis of your home equity can help you upgrade or comfortably downsize your home (or current mortgage).

It’s understandable that many homeowners are skittish when it comes to the real estate market. The 2008 fiasco left an indelible mark in all financial sectors but particularly in real estate. Keep this in mind if you are on the fence about tapping into your home equity: even the smallest appreciation of homes, say 5%, would put close to a million home owners into positive equity.

Four Phases of the Real Estate Cycle

A once-famous economist by the name of Henry George wrote a theory of economic booms and crashes in his work, Progress and Poverty. The theory is now taught in the world’s best real estate schools, including Harvard, Stanford and Princeton.

Henry George identified the root cause of the speculative rise in real estate prices, which cuts into the earnings of labor and capital.

He began to notice that real estate values rise at a faster rate than general economic growth because of two unavoidable facts:

1. Land is not produced. Its supply is fixed.
2. Land is needed for all production and lifestyles.

As we have seen, this creates a tendency for real estate rents and mortgage payments to take an ever-greater share of a family’s budget.

The power of land to destabilize the economy gets much easier to understand when we realize that land value forms a majority of the collateral security for large bank loans.

In the run-up to the “Crash of 2008,” a huge portion of the overall debt was secured by owner-occupied real estate. In many cases, a family’s home was their only form of savings and they expected the real estate’s appreciated value to ultimately provide for their retirement. Real estate values were steadily increasing and land seemed like a very sound investment.

Buyers borrowed extra money to build large, expensive homes and many homeowners borrowed still more money against their home equity, hoping to enjoy their appreciating land values now and later.

The problem is that real estate, like all assets, has a cycle of appreciation and depreciation. The key is understanding the cycle and how to buy low and sell high.

The Phases of the Real Estate Cycle:

• Phase 1 – Recovery
• Phase 2 – Expansion
• Phase 3 – Excess
• Phase 4 – Recession

The four phases of the Real Estate Cycle have played out for at least the last 100 years in the United States. Although the timing for each phase is slightly different, the overall growing and retracting pattern play out again and again.

Phase 1 – Recovery

The first phase of the real estate cycle generally occurs after a decline in the market. This is when the price of land and real estate is at its lowest point in the cycle but is steadily increasing.

As the downtrend of the market begins to stabilize, recovery invites investors into the marketplace at considerably lower prices.

Vacancy rates across all real estate asset classes, such as office buildings, retail malls and single-family homes begin to decrease. Companies start to expand and families move into previously vacant homes.

This phase of the cycle is the best time to purchase real estate assets with a more favorable rent-to-buy ratio and an expected increase in equity value in the coming years.

Phase 2 – Expansion

The second phase of the real estate market cycle is based on expansion. This is the period that sees rapidly increasing prices as demand begins to outpace supply.

The transition from recovery to expansion occurs when real estate buyers and investors have absorbed the excess inventory. As the supply continues to shrink, prices begin to climb rapidly as the market starts to favor sellers instead of buyers.

In recent years, this phase is generally associated with lower interest rates, allowing more money to flow into the real estate markets. For the investors that got into the market during phase one, this is where their profits begin to show.

Since many real estate expenses are fixed (except taxes in most states), this leads to a dramatic increase in revenues and profits. Increased profits attract more investors, which in turn allow new developments of vacant land and redevelopment of existing properties to begin.

Although this new demand triggers construction in hopes of increasing the supply, the lengthy process generally takes months or years to add new homes to the market. By the time meaningful amounts of new housing inventory have hit the market, the overall market expansion has been steadily rising without the benefit of new supply.

During this time occupancy rates, rents and asset prices have been increasing. The cycle begins to reach a point in which rent and price growth is accelerating. This causes many investors and buyers to adjust their forecast to reflect the accelerated growth rate.

Buyers, believing the price is justified by predicting continued growth, begin to overpay for real estate assets in contrast to current market conditions. This part of the cycle is generally referred to as a housing bubble. 

Phase 3 – Excess Supply

During the second phase we noted a shortage of supply in real estate inventory in relation to buyer demand. This caused an increase in prices of real estate assets and related rents.

The third phase begins to take effect once we see an increase in real estate absorption rates. In plain English, this means that houses begin to sit on the market longer. This is considered to be an increase in unsold inventory in the market due to peak prices and new supplies.

This can begin to occur for many reasons including peak prices, increases in mortgage interest rates and new supplies of real estate inventory. The increase in inventory may be due to age demographics as well as older generations tend to downsize to prolong their retirement savings and cash-out of their real estate investments while prices are high.

These factors combine to form a point where home prices no longer rise and begin to decrease as market demand flattens and supply increases.

Phase 4 – Recession

The final phase of the long-term Real Estate Cycle is a transition from excessive supply to a downturn in prices. The major indicators for this phase are declining occupancy rates, increased mortgage delinquencies and lowering absorption rates.

During this phase of the cycle, new construction comes to a halt in fear of declining prices, but projects that started during phase three will begin to hit the market, adding to the supply and worsening the decline.

In general, rising interest rates are a macroeconomic trend that causes issues during the recession phase. This occurs due to the rapid increase in prices throughout the economy that accompanied the expansion in the earlier phases.

The rapid growth in prices, also known as inflation, will sooner or later cause the private central bank known as the Federal Reserve to fight inflation by incrementally increasing interest rates.

The increase in interest rates has a direct effect on owner-occupied homebuyers and investors alike. This is due to the purchasing power of mortgage-backed financing. On average, a one percent increase in a 30-year fixed mortgage will equal around a 10 percent decline in purchasing power. This means homeowners will only be able to afford homes of lesser value, adding to the lowering prices due to excessive supply.

Lower occupancy, a higher market supply and plummeting prices; all of these factors combine to feed a downward spiral that leaves poorly-timed investors and over-leveraged homeowners in the dust.

The downturn in the real estate market has an enormous impact on the economy as a whole, which, in turn, pushes the housing market down further.

The most interesting aspect of the Real Estate Cycle is the consistency of the trends. Economist Homer Hoyt studied the broader US housing market going back to the year 1800 and discovered that the Real Estate Cycle has a fairly reliable 18-year rhythm.

Hoyt’s findings included just two exceptions: World War II, and the mid-cycle peak created by the Federal Reserve’s doubling of interest rates in 1979.

Residential Terminology

Real estate is a complex legal market.

The benefit of understanding the vocabulary used during a transaction is critical. The law binds two agreements together with unique terms and legal definitions.

I thought it would be important to include a comprehensive glossary because understanding the terminology is the first step to being successful in a real estate transaction. Certain terms are commonly used by real estate brokers and will inevitably be used when you try to sell a home.

This glossary has terms and definitions in plain English. There are many abbreviations used in real estate listings as well as specific terminology that are used in different markets.

Adjustable Rate Mortgage (ARM): The interest rate is tied to a financial index allowing the monthly mortgage payments go up or down in fixed periods of time.

Absorption Rate: The rate at which homes sell in a localized market during a given time period is called the Absorption Rate. The absorption rate is a calculation based on dividing the number of homes sales in a month by the number of available homes for sale.

Active Listing: When a property is listed for sale in the MLS, it is given a status of “Active” to indicate that the seller is currently marketing the home and soliciting offers from buyers.

Acquisition: Purchasing and taking possession of an asset.

Ad Valorem: “According to value.” This is a tax imposed on the value of property, which is typically based on the local government’s valuation of property. Generally referred to as property tax.

Annual Percentage Rate (APR): The percent of interest that will be charged on a home loan. This is the cost of borrowing money, expressed in the form of an annual accrual of interest.

Appraisal: A report highlighting the estimated value of the property completed by a qualified third party. This is typically done for the benefit of the buyer to ensure the property is worth what they are paying.

Appreciation: The increased value of an asset.

As-Is Condition: The acceptance by the buyer to purchase the property in the existing condition of the premises at the time the purchase agreement is executed.

Association Fee/HOA Fee: In addition to a mortgage, certain housing communities such as townhomes have a monthly fee associated with maintaining the common areas and amenities.

Balloon Mortgage: A long-term mortgage loan that starts small but has a large payment due at maturity.

Bankrupt: A legal condition of an entity, either an individual, partnership or corporation, who are unable to repay its debts as they are, or become, due.

Building Code: The various laws set forth by the ruling municipality as to the end use of a certain piece of property and guidelines for design, materials and type of improvements allowed.

Certificate of Occupancy: A document presented by a local government agency or building department certifying that the property is in a condition suitable for use.

Closing: This is the final meeting, where the buyer and seller sign the necessary paperwork; complete the transaction and release/take possession of the property. Usually the representing agents and attorneys attend.

Closing Costs: The buyer and seller have expenses associated with the transaction other than that of the actual cost of the home. For example, the buyer has a variety of fees due for obtaining a new loan and the seller must pay commission to both agents.

Closing Disclosure: A form that provides the final details about the mortgage loan. It includes loan terms, projected monthly payments and how much the extra fees will be.

Collateral: Something of value (in this case your home) that is held to ensure repayment of a mortgage or loan.

Commission: A percent of the sale price of the home that is paid to agents. The seller usually pays commission to both the buyer and listing agent.

Comparable Properties: Homes in the area of interest that have recently sold and have similar features.

Contingencies: Conditions that must be met in order to close the transactions. Contingencies are typically tied to a date, referred to as a deadline. If the contingency is not satisfied, the contract may be canceled.

Counter-offer: The response from a seller or buyer in regards to the terms of the offer.

Debt-to-Income Ratio: A lender will look at a borrowers debt versus income to determine the amount of loan they are eligible for and if they can repay their debt plus the home loan.

Deed: A legal instrument transferring title to real property from the seller to the buyer upon the sale of such property

Deed in Lieu of Foreclosure: A deed given by a borrower to a lender to satisfy a mortgage debt and avoid an official foreclosure.

Deed of Trust: An instrument used in many states in place of a mortgage by which real property is transferred to a trustee by the borrower, in favor of the lender, to secure repayment of debt.

Default: A failure to perform a legal or contractual duty.

Depreciation: An accounting practice that subtracts the cost of a capital asset over its estimated useful life expectancy or the value of the real property caused by deterioration or obsolescence.

Disposition: The action of distributing, selling or transferring real property to another person or entity.

Down Payment: A percent of the cost of the property that is paid up front as a part of the mortgage.

Dual Agency: Two licensed real estate brokers co-operate to represent the property owner in marketing and selling a real estate asset.

Earnest Money: The deposit made from the buyer to the seller when submitting an offer. This deposit is typically held in trust by a third party. Upon closing, the money will generally be applied to the down payment or closing cost.

Easement: A legal right of use over property or portion of a property. Easements can be created by grant, reservation, agreement, prescription or legal decrees.

Economic Rent: The market rental value of a property at a given point in time, even though the actual rent may be different.

Escrow: This term has multiple meanings; a third party typically holds earnest money until closing in “escrow.” In can also be referred to as the time period from when the contract is written and accepted by the seller to when the home sale actually closes.

Estoppel Certificate: A signed statement certifying that certain statements or fact are correct as of the date of the statement and can be relied upon by a third party.

Escrow Agreement: A written agreement made between the parties to a contract and an escrow agent. The escrow agreement sets forth the basic obligations of the parties, describes the monies (or other assets) to be deposited in escrow and instructs the escrow officers on the time frame and contingencies involved with the transaction.

Equity: The fair market value of an asset less any outstanding indebtedness or other encumbrances.

Exclusive Agency Listing: A written agreement between a real estate broker and a property owner in which the owner promises to pay a fee or commission to the broker if specified real property is sold during the listing period.

Fair Market Value: The sales price at which a buyer is willing to pay a seller with both having a reasonable knowledge of the relevant property facts.

FHA: A mortgage that is financed through a private lender and insured by the Federal Housing Administration, often requiring a lower down payment and income to qualify.

Fixed Rate: The interest rate will remain the same for the entire life of the mortgage.

Force Majeure: A force that cannot be controlled by parties to a contract and presents parties from executing the provisions of the contract. This includes acts of God such as a flood, earth quake or hurricane and acts of man such as riots, fire and war.

Foreclosure: A procedure by which the mortgagee either takes title to or forces the sale of the mortgagor’s property to satisfy a debt.

General Contractor: The main contractor responsible for the construction and coordination until the completion of the project. A General Contractor may hire subcontractors, such as plumbers and electricians, to help with the completion of the project.

General Partner: A member of a partnership who has authority to bind the partnership to obligations, agreements and debts. See also “Limited Partnership.”

Grant: To transfer an interest in real property by deed or another legal instrument.

Grantee: The receiver of the grant.

Grantor: The giver of the grant.

Guarantor: The entity that guarantees a debt or other agreement.

Guarantee: A formal promise or assurance that certain conditions will be fulfilled.

Highest and Best Use: The use of land or buildings, which will bring the greatest economic return over a given time.

Home Equity Line of Credit: A loan or line of credit that is determined based on the equity or homes value after subtracting the loans owed.

Home Inspection: The process in which a professional inspects the seller’s home for issues that are not openly apparent and then creates a report for the buyer to review.

Home Protection Plan: An annual service that covers the cost of repairs or replacements to items covered in the plan, usually items like stoves, washer/dryers, etc.

Hybrid Loans: A loan that starts with a fixed rate period and then converts to an adjustable rate.

Indirect Costs: Development costs, other than material and labor costs, which are directly related to the construction of improvements, including administrative and office expenses, commissions, architectural, engineering and financing costs.

Lease: A legal agreement in writing , whereby the owner of real property, the lessor or landlord, gives the right of possession to another entity, the lessee or tenant, for a specified period of time and terms.

Legal Description: A geographical description identifying a parcel of land by government survey, metes and bounds or lot numbers of a recorded plat including a description of any portion thereof that is subject to an easement or reservation.

Legal Owner: The legal owner has title to the property recorded in the official records.

Letter of Attornment: A letter from the grantor to a tenant, stating that the property has been sold and directing rent to be paid to the grantee, otherwise known as the buyer.

Lot: A parcel of land, generally referring to a part of a subdivision of a block.

Lot Size: The size in square feet of a parcel of land that is commonly referred to as a lot.

Low Rise: A building with fewer than four stories above ground level.

Market Value: The highest price a buyer would be willing to pay in a competitive and open market with all facts being disclosed.

Mechanic’s Lien: A claim created by state statutes for the purpose of securing priority payment of debts lefts from the work performed and material costs in constructing, repairing or improving a property.

Mortgage: A written debt instrument creating an interest in real property as security for the repayment of a debt.

Mortgage Insurance: Insurance written in connection with a mortgage loan that protects the lender in the event the borrower cannot repay their loan. This is usually not required if the borrower has 20% or more for the down payment.

Mortgage Note: A promise to pay a sum of money at a standard interest rate during a specific term, secured by a mortgage.

Multiple Listing Service (MLS): A member only service to list real estate properties that are available for sale. These are the most reliable sources to receive up-to-date listing information.

Occupancy Rate: The ratio of rented real estate units compared to vacant real estate units.

Pay-Per-Click: A measurement of digital advertising that charges for each action taken by a user interacting with your ad.

Pay-Per-View: A measurement of digital advertising that charges for each impression made by the end user in viewing your advertisement on their screen.

Plat Map: A map of a specific area which shows the boundaries of individual parcels of land.

Pre-Approval: The process in which a buyer must provide a mortgage professional the appropriate information on income, debts and assets that will be used to make the initial loan decision.

Pre-Qualification: Once approved for a loan, this is the process in which the maximum sale price, loan amount, and month payments are calculated for the borrow. This is not a loan approval, however, it is useful to know before searching for a home.

Price Elasticity: Economics dictates that supply and demand are a function of price.

Principal: The underlining amount of the loan that is borrowed.

Property Condition: The overall condition of the property for sale including but not limited to the design, layout, foundation, roof, electrical system and air conditioning systems.

Property Inspection: A professional examination and due diligence of the condition of the property including sewer systems, roofing, foundation, electrical system, plumbing and other possible defects that may affect the livability and value of the property.

Property Taxes: These are the taxes that are enforced by the city, town, county and state government entities. These taxes are included in the total monthly mortgage payments and are held in escrow by the lender.

Real Property: Land and anything affixed to the land, including buildings, fences, plumbing and heating fixtures or other items not considered personal property.

Rehab: An extensive renovation of a building or project, which is intended to improve the value and condition of the land and structures

Rent: Revenue in the form of a fee paid, generally periodically (i.e. monthly or yearly,) for the use of any real property, land, buildings and equipment.

REO (Real Estate Owned): Real estate owned properties or foreclosed properties currently held by a financial institution such as the bank that made the loan to the previous owner.

Residential Listing Agreement: A document negotiated and signed between the homeowner(s) and the representing real estate broker that outlines the terms and conditions of selling the property including price, commission, marketing, disclosures and time frame of listing a property for sale.

Reverse Mortgage: This is specifically for seniors and it allows them to convert the equity in their home to cash.

Second Mortgage: A mortgage on real property that ranks below a first mortgage in legal priority.

Short Sale: A situation when the seller’s lender is willing to accept an offer and allows the sale to be completed for an amount less than the mortgage amount owed by the seller.

Site Analysis: The study of a parcel of land which is meant to determine its suitability for a particular use.

Site Plan: A detailed plan, which depicts the location of improvements on a parcel of land, which also contains all the information required by the zoning ordinance.

Specific Performance: A required action compelling one of the parties to carry out the provisions of the executed contract.

Tankless Water Heater: A system that delivers hot water at a preset temperature when needed but without requiring the storage of water. The approach reduces or eliminates energy standby losses.

Tax Base: This is specifically for seniors, and it allows them to convert the equity in their home to cash.

Tax Lien: A statutory lien, giving the state or municipality priority in a sale for nonpayment of property taxes.

Tax Roll: A record containing the public details of all parcels of land within a county, the names of the owners, assessed values and yearly tax amount are contained within the information.

Tenant: An entity who retains possession and permission to use real property according to an executed lease agreement.

Time is of the Essence: Means that performance by one party within the period specified in the contract is essential to comply with the agreement.

Title: A legal document proving current and proper ownership of the property. Also referred to as a Title Deed, this document highlights the history of property ownership and transfers.

Title Insurance: A policy issued by a title company, which insures against loss resulting from defects of title to a specifically described parcel of real property and enforcement of liens against the title after the transaction is completed.

Living Trust: A legal arrangement in which one or more people manage the trust assets. You can use the trust to easily pass on a property if the current trustee passes away.

Underwriting: The process in which the potential homebuyer is evaluated for their financial ability to obtain and repay a loan, normally consisting of a credit check and appraisal of the property.

Under Construction: When construction has started but the Certificate of Occupancy has not yet been issued.

Under Contract: A property for which the seller has accepted the buyer’s offer to purchase and has opened escrow is referred to as being “under contract.”

Unencumbered: Describes title to property that is free of liens and any other encumbrances. Also known as “Free and Clear.”

Wood Destroying Pest Inspection: A professional inspection of the property to uncover any signs of pest, mold and termite damage.

Xeriscaping: A Method of landscaping that promotes water conservation.

Vacancy Rate: The percentage of available units for rent in commercial and investment property.

VA Loan: Loans that are given to Americans who have served in the armed forces. They are administered by the Department of Veteran Affairs.

Zoning Ordinance: Specific laws and regulations, generally at the city or county level, that controls the use of land and improvements of each land parcel.

 

Find Residential Real Estate

Real Estate can make a family wealthy or poor. That is why is important to understand the financial risks and benefits of each transaction. This begins by evaluating the property and then looking at the income and expenses to be expected.