AMPLE REAL ESTATE PRACT ICE IN NORTH CAROLINA MODERN NINTH EDITION

Transcription

1 MODERN REAL ESTATE PRACT ICE IN NORTH CAROLINA NINTH EDITION Fillmore W. Galaty Wellington J. Allaway Robert C. Kyle Deborah H. Long, Contributing Author

2 MODERN REAL ESTATE PRACT ICE IN NORTH CAROLINA NINTH EDITION Fillmore W. Galaty Wellington J. Allaway Robert C. Kyle Deborah H. Long, Contributing Author

3 This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. President: Dr. Andrew Temte Executive Director, Real Estate Education: Melissa Kleeman-Moy Development Editor: Rosita Hernandez MODERN REAL ESTATE PRACTICE IN NORTH CAROLINA NINTH EDITION 2017 Kaplan, Inc. Published by DF Institute, Inc., d/b/a Dearborn Real Estate Education 332 Front St. S., Suite 501 La Crosse, WI All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher. Printed in the United States of America ISBN:

4 Contents Preface ix Acknowledgments xi UNIT 1 Basic Real Estate Concepts 1 Introduction 1 General Characteristics of Real Estate 2 General Concepts of Land Use and Investment 6 The Scope of the Real Estate Business 8 The Real Estate Market 11 Related Websites 14 Key Point Review 15 Unit Quiz 17 UNIT 2 Property Ownership and Interests 19 The Concept of Property 20 Estates in Real Property 28 Ownership of Real Property 34 Trusts 41 Related Websites 42 Key Point Review 43 Unit Quiz 47 UNIT 3 Encumbrances on Real Property 50 Encumbrances on Real Property 51 Property Taxation 58 Math Concepts 61 Key Point Review 63 Unit Quiz 66 UNIT 4 Property Description 68 Describing Land 68 Methods of Describing Real Estate 69 Preparation and Use of a Survey 76 Math Concepts 77 Related Website 78 Key Point Review 78 Unit Quiz 79 iii

5 iv Contents UNIT 5 Transfer of Title to Real Property 83 Methods of Transferring Title 84 Title and Public Records 99 Title Assurance 101 Math Concepts 106 Related Website 107 Key Point Review 107 Unit Quiz 110 UNIT 6 Land-Use Controls 112 Introduction 113 Public Land-Use Controls 113 The Master Plan 114 Zoning and Subdivision Regulations 114 Interstate Land Sales Full Disclosure Act 124 Privately Imposed Land-Use Controls 126 Responsibilities of Real Estate Brokers 127 Related Websites 129 Key Point Review 129 Unit Quiz 131 UNIT 7 Real Estate Brokerage and the Law of Agency 134 Introduction to Brokerage and Agency 135 The Law of Agency 137 General Agency Definitions 138 Agent s Responsibilities to Principal 139 Duties and Liabilities of Principals 149 Classification of Agency Relationships 150 Brokerage Defined 150 Agency Relationships 154 Agency Disclosure in North Carolina 166 Nature of the Brokerage Business 176 Related Websites 178 Key Point Review 179 Unit Quiz 182 UNIT 8 Agency Contracts 186 Agency Contracts and Practices for Working With Sellers 187 The North Carolina Residential Property Disclosure Act 228 Working With Buyers 237 Working as a Dual Agent 246 Math Concepts 247 Related Websites 248 Key Point Review 249 Unit Quiz 253

6 Contents v UNIT 9 Basic Contract Law 258 Contracts 259 Formation of a Contract 262 Broker s Authority to Prepare Documents 267 Auction Sales 268 Key Point Review 268 Unit Quiz 270 UNIT 10 Sales Contracts and Practices 272 The Sales Contract 273 NCBA/NCAR 2-T Offer to Purchase and Contract and Various Addenda 302 Submitting and Handling Offers 312 Installment Land Contract 314 Related Websites 318 Key Point Review 318 Unit Quiz 320 UNIT 11 Landlord and Tenant 324 Leasing Real Estate 325 Leasehold (Nonfreehold) Estates 325 Types of Leases 327 Lease Provisions 329 Rental Acts and Laws 333 The North Carolina Association of Realtors Residential Rental Contract 340 Math Concepts 349 Related Websites 349 Key Point Review 349 Unit Quiz 352 UNIT 12 Property Management 355 Property Management 356 Functions of the Property Manager 357 The Property Management Agreement 358 Typical Property Management Duties 367 Risk Management for Property Managers 374 Math Concepts 376 Related Websites 377 Key Point Review 377 Unit Quiz 379

7 vi Contents UNIT 13 Basic Real Estate Investment 381 Investing in Real Estate 382 The Investment 383 Net Operating Income 384 Cash Flow and Leverage 385 Forms of Business Ownership (for Investment Purposes) 387 Math Concepts 388 Related Websites 389 Key Point Review 389 Unit Quiz 391 UNIT 14 Real Estate Financing: Principles 393 Basic Mortgage Terms and Concepts 394 Security and Debt Instruments 394 Principal and Interest (Debt Service) 410 Mortgage Loan Repayment Plans 414 Math Concepts 417 Key Point Review 419 Unit Quiz 422 UNIT 15 Real Estate Financing: Practices 425 Introduction to the Real Estate Financing Market 426 The Federal Reserve System 426 The Primary and Secondary Mortgage Market 427 Types of Mortgage Loans 432 Residential Lending Practices and Procedures 441 Financing Legislation 444 Math Concepts 447 Related Websites 452 Key Point Review 453 Unit Quiz 456 UNIT 16 Basic Residential Construction 460 Introduction 461 Architectural Types and Styles 461 Foundations and Framing 461 Elements of Construction 465 HVAC 468 Government Regulation 469 Related Websites 470 Key Point Review 470 Unit Quiz 471

8 Contents vii UNIT 17 Real Property Valuation 472 Appraising 473 Value 474 The Appraisal Process 477 Approaches to Value (Appraisal Methods) 483 Reconciliation 492 The Profession of Appraising 493 Math Concepts 494 Related Websites 496 Key Point Review 496 Unit Quiz 498 UNIT 18 Federal Income Taxation of Real Property Ownership 502 Introduction 502 Tax Benefits for Homeowners 503 Tax Considerations When Selling Real Property 504 Other Tax Issues Affecting Property Ownership 505 Math Concepts 508 Related Website 511 Key Point Review 511 Unit Quiz 513 UNIT 19 Fair Housing and Ethical Practices 516 Equal Opportunity in Housing 517 North Carolina Fair Housing Act of Fair Housing Prohibited Practices 525 Sexual Harassment 528 Implications For Brokers 529 Americans With Disabilities Act 530 Equal Credit Opportunity Act 531 Professional Ethics 532 Related Websites 533 Key Point Review 533 Unit Quiz 536 UNIT 20 Environmental Issues and the Real Estate Transaction 539 Environmental Issues 540 Hazardous Substances 540 Federal and North Carolina Environmental Laws 552 Liability of Real Estate Professionals 555 Related Websites 556 Key Point Review 556 Unit Quiz 559

9 viii Contents UNIT 21 Closing the Real Estate Transaction 561 Preclosing Procedures 562 Conducting the Closing 571 RESPA Requirements 573 Preparation of Settlement Statements 599 Math Concepts 603 Related Websites 609 Key Point Review 609 Unit Quiz 611 APPENDIX A License Law and Rule Comments and Real Estate Licensing in North Carolina 614 Key Point Review 678 Appendix Quiz 683 APPENDIX B Agent Safety 687 APPENDIX C Residential Square Footage Guidelines 688 Math FAQs 717 Study Tips and Comprehensive Practice Exam 767 Glossary 783 Answer Key 808 Index 822

10 Preface FEATURES Since its first printing in 1994, Modern Real Estate Practice in North Carolina has provided thousands of readers with valuable real estate information presented in a logical and accessible manner. Specifically tailored to North Carolina law and practice, Modern Real Estate Practice in North Carolina sets the standard for real estate textbooks, whether it is used to prepare for the licensing examination, for a college or university program, or simply for personal knowledge. Real estate students and instructors alike will appreciate the following features: Learning objectives for each unit identify the concepts and information that the reader should be able to identify, describe, explain, or distinguish after reading the unit. Key terms appear at the beginning of each unit. This feature allows the reader to know what vocabulary words will be important while reading the unit and helps with study and review. Margin notes draw attention to important vocabulary, concepts, and study tips. The margin notes help readers more easily move through the text and locate issues for review, and they serve as memory prompts for more efficient and effective study. North Carolina icons identify procedures in North Carolina that are especially noteworthy. These may be cases in which North Carolina law prescribes specific procedures or situations in which North Carolina law differs from laws enacted elsewhere. Very important point (VIP) icons identify critical details that are frequently tested on final tests and licensing exams. (Math Concepts and Math FAQs should also be considered VIPs.) In Practice scenarios help illustrate how issues like fair housing, agency, and brokerage affect real estate professionals and real estate transactions. Forms of the most important state-specific and federal documents commonly used in North Carolina real estate practice are included for your reference. (Forms are subject to change.) Key point reviews follow the material in the unit and provide readers with a quick review tool of the most essential content covered in each unit. Unit quiz and sample exam questions feature many fact-pattern problems that encourage readers to not just memorize but understand and apply information, which are important test-taking and exam-preparation skills. Math FAQs help readers apply the basic math principles that real estate professionals use when working with clients or customers. Study tips and a comprehensive practice examination help readers prepare for, take, and pass the real estate licensing exam. ix

11 x Preface FEATURES OF THIS EDITION Legislative updates throughout the units and questions and answers reflect the latest North Carolina Real Estate License Law and Commission Rules changes. New topics include the Mineral and Oil and Gas Rights Mandatory Disclosure Statement, Truth-in-Lending/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) Rules, the role of the Consumer Financial Protection Bureau, and more. Content updates include expanded coverage of agency relationships, revised contract forms and/or passages, and updates to finance settlement practices. Units have also been reorganized to conform with the NCREC syllabus and for ease of use. Forms of the most important state-specific and federal documents commonly used in North Carolina real estate practice are placed at appropriate discussion points within the text. Unit quiz and sample exam questions reflect the current economic climate. Websites are updated and placed at the end of each unit for easy reference. One thing, however, has stayed the same. As in all previous editions, the goal of Modern Real Estate Practice in North Carolina is to help you understand the dynamics of the real estate industry and prepare you for the licensing exam. In this edition, we have met that challenge, providing you with the critical information you need to pass the real estate examination, buy or sell property, or establish a real estate career.

12 Acknowledgments CONTRIBUTING AUTHOR The publishers would like to thank Deborah H. Long of Chapel Hill, North Carolina, who served as contributing author for the Modern Real Estate Practice in North Carolina Ninth Edition. Deborah has written more than 20 real estate textbooks and courses during her decades-long career as a real estate educator. Deborah is a recipient of the North Carolina Educator of the Year award and has received the North Carolina Real Estate Educators Association (NCREEA) award for Program of the Year three times. She has also held the highly respected Distinguished Real Estate Educator (DREI) designation for excellence in classroom instruction and has earned the Graduate REALTOR Institute (GRI), Certified Residential Specialist (CRS), Certified Residential Broker (CRB), and Certified Distance Education Instructor (CDEI) designations. Deborah earned her doctorate in adult education and teaches prelicensing and postlicensing courses for Fonville Morisey s Center for Real Estate Education in Durham and Raleigh, North Carolina, as well as continuing education courses around the country. Deborah acknowledges the influence on her career as a real estate educator of her immigrant parents and their quest for the American dream of homeownership, the support of her husband and daughter, the assistance of her teaching colleagues, and the unending curiosity and zeal for learning of her real estate students. REVIEWERS The authors wish to thank the following individuals for their input in the development of this book: Deborah B. Carpenter, DREI, North Carolina Real Estate Commission Education and Examination Officer Sarah W. Lawing, J.Y. Monk Real Estate Training Center Each new edition of Modern Real Estate Practice in North Carolina builds on earlier editions. The authors wish to thank the following individuals for their input in the development of the previous editions: Stephen L. Fussell, senior consumer protection officer, North Carolina Real Estate Commission Sherry Steele, Kaplan Professional Schools, Colorado Larry A. Outlaw, former director of education and licensing, North Carolina Real Estate Commission Patricia A. Moylan, legal education officer, North Carolina Real Estate Commissioner Deborah H. Long, DREI, EdD, Fonville Morisey Center for Real Estate Studies xi

13 1U NIT Basic Real Estate Concepts LEARNING OBJECTIVES After successfully completing this unit, you will be able to KEY TERMS distinguish between land, real property, and personal property, and the physical and economic characteristics of real property; describe the concept of land use and development, including highest and best use and the advantages and disadvantages of real estate investments; identify the various careers and areas of real estate specializations and the professional organizations that support them; and explain the operation of supply and demand in the real estate market. broker business cycles chattel demand hereditaments heterogeneity highest and best use land market nonhomogeneity nonprovisional broker personal property personalty provisional broker real estate real property situs supply tenements INTRODUCTION It is important that real estate students understand the basic characteristics of real estate, how real estate is used, and the real estate market. This unit presents those fundamental concepts and lays the foundation for the exciting and challenging study of real estate practice. 1

14 2 Modern Real Estate Practice in North Carolina Ninth Edition GENERAL CHARACTERISTICS OF REAL ESTATE LEARNING OBJECTIVE After successfully completing this topic, you will be able to distinguish between land, real property, and personal property, and the physical and economic characteristics of real property. VIP There are two major classifications of property: real property and personal property. The distinction between these two types of property is an important one. Real property is defined as the land, everything that is permanently attached to the land, and everything that is appurtenant to (or goes with) the land. Personal property, or personalty, is considered to be all property that does not fit the definition of real property. The primary characteristic of personal property is movability. Items of personal property, also referred to as chattels, include such tangibles as furniture, clothing, money, bonds, and bank accounts. In other words, a chattel is an item of movable personal property. Land, Real Estate, and Real Property The words land, real estate, and real property are often used interchangeably. However, for a full understanding of the nature of real estate and the laws that affect it, brokers need to be aware of subtle yet important differences in meaning. VIP Land Land is defined as the earth s surface extending downward to the center of the earth and upward to infinity, including things permanently attached by nature, such as trees and water (see Figure 1.1). Land includes the minerals and substances below the earth s surface together with the airspace above the land up to infinity. The surface, subsurface, and airspace can be owned separately as surface rights, subsurface rights, and air rights and can be severed by separate conveyance. A specific tract of land is commonly referred to as a parcel. FIGURE 1.1: Land, Real Estate, and Real Property Air Rights Physical Improvements Surface Rights Subsurface Rights The Bundle of Rights Land Real Estate Real Property Earth s surface to the center of the earth and the airspace above the land, including the trees and water Land plus permanent human-made additions Real estate plus bundle of legal rights

15 Unit 1 Basic Real Estate Concepts 3 VIP Real estate Real estate, or realty, is defined as land at, above, and below the earth s surface, including all things permanently attached to it, whether natural or artificial (see Figure 1.1). The term real estate is therefore somewhat broader than the term land and includes not only the physical components of the land provided by nature but also all human-made permanent improvements on and to the land. Land is referred to as improved when streets, utilities, sewers, and other improvements are brought to the land, making the land suitable for building. VIP Real property Real property is defined as the land itself, the improvements thereon, and the interests, benefits, and rights inherent in the ownership of real estate (see Figure 1.1). The broader term real property includes the physical surface of the land, what lies below it, what lies above it, and what is permanently attached to it, as well as all the rights of ownership that are usually referred to as the bundle of legal rights, including the right to possession and use, the right to exclude others, the right to profit from the land, and the right to dispose of or encumber the land. Sometimes attorneys use the phrase land, tenements, and hereditaments in real estate documents instruments. This expression describes all the rights capable of being owned and enjoyed. In the context of this expression, land is the soil and everything natural under it and attached to it, and the air above it. Tenements are any structures attached to the land, and hereditaments are any interests in real estate capable of being inherited. IN PRACTICE When people talk about buying or selling houses, office buildings, land, and the like, they usually call these things real estate. For all practical purposes, the term is synonymous with real property, as defined here. Therefore, in everyday usage, real estate, or realty, includes the legal rights of ownership specified in the definition of real property. Physical and Economic Characteristics of Real Property Seven characteristics define the nature of real property and affect its use. These characteristics fall into two broad categories: physical characteristics and economic characteristics (see Figure 1.2).

16 4 Modern Real Estate Practice in North Carolina Ninth Edition FIGURE 1.2: Characteristics of Real Estate Real Estate Economic Characteristics Scarcity Physical Characteristics Immobility Location Indestructibility Improvements Uniqueness Permanence of Investment Three Physical Characteristics of Real Estate 1. Immobility 2. Indestructibility 3. Uniqueness Physical characteristics Land has three physical characteristics that set it apart from other commodities: immobility, indestructibility, and uniqueness. Immobility It is true that some of the substances of land are removable and that topography can be changed, but the geographic location of any given parcel of land can never be changed. Because land is immobile, the rights to use land are more easily regulated than are other forms of property use. Indestructibility Land is durable and indestructible (or permanent). The permanence of land, coupled with the long-term nature of the improvements placed on it, has tended to stabilize investments in land. However, while land is indestructible, the improvements on it depreciate and can become obsolete, thereby reducing values perhaps drastically. (Depreciation should not be confused with the fact that a given location can become undesirable economically, creating a decrease in market value as a result.) Uniqueness No two parcels of land are ever exactly the same. Although they may share substantial similarity, all parcels differ geographically. The uniqueness of land is also referred to as its nonhomogeneity or heterogeneity. In fact, it is the uniqueness of each parcel of land that gives rise to the remedy of specific performance for the breach of a real estate contract. Under the doctrine of specific performance, the party harmed by the breach of a real estate contract can ask a judge to force the breaching party to carry out the terms of the contract rather than ordering the breaching party to pay monetary damages. Because each parcel

17 Unit 1 Basic Real Estate Concepts 5 Scarcity Location Improvements Permanence of Investment of land is unique, monetary damages cannot compensate the damaged party for the loss of that particular parcel. Economic characteristics The following basic economic characteristics of land are the factors that influence its value as an investment: scarcity, location, improvements, and permanence of investment. Scarcity Although land is not thought of as a rare commodity, its total supply is fixed. Even though a considerable amount of land in the United States is still not used or inhabited, the supply of land in a given location (i.e., ocean front) or of a particular quality may be limited, creating increased demand for that specific land. Because no more land can be produced, the increasing use of land has a positive impact on value. American humorist Will Rogers once said, Buy land. They ain t making no more of the stuff. Location (area preferences) Area preference, sometimes called location, refers to people s choices and tastes regarding a given area. Location is one of the most important economic characteristics of land. Situs is a related term regarding location that takes into consideration social factors in addition to economic factors. Improvements Any addition or change to land or a building that affects the property s value is referred to as an improvement. Improvements of a private nature, such as the house, fencing, et cetera, are referred to as improvements on the land, whereas improvements of a public nature, such as sidewalks, sewer systems, curbing, et cetera, are referred to as improvements to the land. Additions or alterations to the property that are merely repairs or replacements may not be considered to be improvements. Brokers should be aware that the term improved land has two meanings. If buildings are constructed on the land, the buildings can be considered improvements. If the land has been prepared for development, such as with grading, installation of utilities, et cetera, the land may be referred to as improved land. Building an improvement on one parcel of land affects the value and utilization of neighboring tracts and can have a direct bearing on whole communities. For example, improving a parcel by constructing a shopping center or selecting it as the site for a nuclear power plant can directly influence a large area. Such land improvements can influence not only other parcels and other communities favorably or unfavorably, they may affect the use, value, and price of the land. Permanence of investment Once land is improved, the total capital and labor used to build the improvement represents a large fixed investment. Although even a well-built structure can be torn down to make way for a newer building or another use of the land, improvements to the land such as drainage, electricity, and water and sewer systems remain because they generally cannot be dismantled or removed economically. The owner has no way to transfer the investment to another parcel of land. The return on such investments, therefore, tends to be long-term and relatively stable. This permanence generally makes improved real estate unsuitable for short-term, rapid-turnover investing. A disadvantage of owning real estate is that it lacks liquidity.

18 6 Modern Real Estate Practice in North Carolina Ninth Edition GENERAL CONCEPTS OF LAND USE AND INVESTMENT LEARNING OBJECTIVE After successfully completing this topic, you will be able to describe the concept of land use and development, including highest and best use and the advantages and disadvantages of real estate investments. The various characteristics of a parcel of real estate affect its desirability for a specific use. For example, contour and elevation of the parcel and availability of transportation and natural resources, such as water, all affect the use that can be made of a property, and the way in which a property is used has a dramatic impact on the value of that property. Highest and Best Use The highest and best use is the use that will give the owners the greatest actual return on their investment. Extensive studies are often prepared to determine whether a property is being properly utilized. For example, a highest-and-best-use study may show that a parking lot in a busy downtown area or a farm surrounded by urbanized land is not the current highest and best use of the property. If a property can be put to its highest and best use, its value will be maximized. For example, if the highest and best use of a piece of property is as a high-rise office building rather than as a parking lot, changing its use accordingly will increase its value and also will give the owners the highest return on their investment. Although a property can have only one highest and best use at any given time, the highest and best use can change. Because of changes in socioeconomic conditions, a property s highest and best use may be a retail shopping center today but a large apartment complex five years from now. IN PRACTICE Visitors to the Raleigh-Durham area may remember the Triangle Motel that sat right in the middle of the Raleigh-Durham airport (RDU) for more than 30 years. Eventually, the airport authority decided that the highest and best use of the acreage in the center of the terminals would be a multistory parking deck. The Triangle Motel was demolished in 2000 and replaced with a $40 million terminal area parking garage, adding a total of 2,700 new parking spaces between Terminals A and C. Land-Use Controls The potential uses of real property are limited by various land-use controls. Property owners cannot simply decide to tear down their single-family home and replace it with a convenience store. Chances are they would be violating a landuse law. The regulation of land use is accomplished through both public and private land-use controls, discussed in Unit 6. Real Estate as an Investment Real estate, no matter what its use, is virtually always considered an investment. Customers often expect a real estate broker to act as an investment counselor. Though brokers should possess a basic knowledge of real estate investment, they should always refer a potential real estate investor to a competent accountant, lawyer, or investment specialist who can give expert advice regarding the investor s specific interest or objective.

19 Unit 1 Basic Real Estate Concepts 7 Real estate practitioners can deal with customers on a basic level, and real estate brokers should possess a rudimentary knowledge of real estate investment. Such knowledge begins with a brief examination of the traditional advantages and disadvantages of investing in real estate, as discussed in Unit 13. Advantages of real estate investment Historically, well-located and fairlypriced real estate investments have shown a good rate of return, often higher than the prevailing interest rate charged by mortgage lenders. Theoretically, this means that an investor can use the leverage of borrowed money to finance a real estate purchase and feel relatively sure that, if held long enough, the asset will yield more money than it costs to finance the purchase. It should be remembered that part of the return must make up for the value lost by a depreciating asset, such as a building. Most real estate values tend to keep pace with the rate of inflation. Such an inflation hedge provides the prudent real estate investor with relative assurance that if the purchasing power of the dollar decreases, the value of the investor s assets will increase to offset the inflationary effects. In addition, real estate entrepreneurs may enjoy various tax advantages, which are discussed in more detail in Unit 13. Disadvantages of real estate investment Unlike stocks and bonds, real estate is not a liquid asset. This means that an investor may not be able to sell real estate quickly without taking a loss. Contrast this with the investor in stocks listed on the New York Stock Exchange who needs only to call a stockbroker to liquidate assets when funds are needed quickly. Even though a real estate investor may raise a limited amount of cash by refinancing the property, that property is usually listed with a real estate broker, and the investor may have to sell at a substantially lower price than full market value to facilitate a quick sale. In addition, it is difficult to invest in real estate without some degree of expert advice. Investment decisions must be based on a careful study of all the facts in a given situation, reinforced by a broad and thorough knowledge of real estate and the manner in which it affects and is affected by the marketplace the human element. Unsophisticated investors should seek legal and tax counsel before making any real estate investments. Rarely can a real estate investor sit idly by and watch the invested money grow. Management decisions must be made. For example, should the investor manage the property personally or would it be preferable to hire a professional property manager? How much rent should be charged? How should repairs and tenant grievances be handled? Is sweat equity (physical improvements accomplished by the investor personally) required to make the asset profitable? Finally, and most important, a high degree of risk often is involved in real estate investment. There is always the possibility that an investor s property will decrease in value during the period it is held or that it will fail to generate sufficient income to make it profitable. External influences beyond the investor s control may come into play in negative or positive ways, affecting the value of the investment.

20 8 Modern Real Estate Practice in North Carolina Ninth Edition THE SCOPE OF THE REAL ESTATE BUSINESS LEARNING OBJECTIVE After successfully completing this topic, you will be able to identify the various careers and areas of real estate specializations and the professional organizations that support them. Billions of dollars worth of real estate is sold each year in the United States. Adding to this great volume of sales are rental collections by real estate management firms, appraisals of properties ranging from vacant land to modern office and apartment buildings, and the lending of money through mortgage loans on real estate. Millions of people depend on some aspect of the real estate business for their livelihood. As the technical aspects of real estate activities become more complex, real estate offices require an increasing number of people properly trained to handle such transactions. Many professionals and business organizations, such as lawyers, architects, surveyors, accountants and tax specialists, banks, trust companies, and abstract and title insurance companies also depend on the real estate specialist. Real Estate: A Business of Many Specializations Despite the size and complexity of the real estate business, many people think of it as being comprised of only brokers. Actually, today s real estate industry employs millions of knowledgeable individuals who are well trained in specialty areas such as appraisal, property management, financing, development, counseling, and education. Each of these areas is a business unto itself, but every real estate professional must have a basic knowledge of these specializations to be successful. Real estate brokerage The business of bringing together people interested in completing a real estate transaction is called brokerage. Usually, the broker negotiates the sale, purchase, or rental of property on behalf of others for a fee or commission. The commission, generally a percentage of the amount of the transaction, is usually paid by the seller in a sales transaction or by the owner in a rental transaction (although it can be paid by any party). Brokerage is further discussed in Unit 7. In North Carolina An individual or entity must have a real estate license if the following three elements are present: 1. Real estate services are provided. 2. The services are provided for others. 3. The services are compensated transactionally (on a commission or bonus basis). North Carolina s real estate license law (G.S. 93A-1 & 2) stipulates that a person must be licensed as a real estate broker if he or she lists or offers to list; sells or offers to sell; buys or offers to buy; auctions or offers to auction; negotiates the purchase, sale, or exchange of; leases or offers to lease; or rents or offers to rent any real estate for others for compensation or the promise of compensation. Real estate sales professionals in North Carolina usually begin their career in apprenticeship roles as provisional brokers. If provisional brokers engage in any of these activities, they must be under the supervision of a real estate broker-in-charge. Once provisional brokers complete certain education requirements, they are called brokers (or nonprovisional brokers). (See Appendix A). Appraisal The process of estimating the value of a parcel of real estate is appraisal. Although brokers must have some understanding of valuation as part of their training, qualified appraisers are generally employed when property is financed or is sold by court order. The appraiser must have sound judgment, experience, a detailed knowledge of the methods of valuation, and licensure as an appraiser. Appraisal is covered in Unit 17.

21 Unit 1 Basic Real Estate Concepts 9 Property management Someone who handles the operations of a property for its owner is involved in property management. The property manager may be responsible for soliciting tenants, collecting rents, altering or constructing new space for tenants, ordering repairs, and generally maintaining the property. The manager s basic responsibility is to protect the owner s investment and maximize the owner s return on the investment. Property management is discussed in Unit 12. Financing The business of providing the funds necessary to complete real estate transactions is called financing. Most transactions are financed by means of a loan secured by a mortgage or deed of trust by which the property is pledged as security for the eventual payment of the loan. This and other methods of real estate financing are examined in Unit 14 and Unit 15. Property development This specialty includes the work of developers, or subdividers, who purchase raw land, divide it into lots, build roads, and install sewer systems. Property development also includes the skills of architects and builders, who improve the building lots with houses and other buildings and sell the improved real estate, either themselves or through brokerage firms. Property development is discussed in Unit 6. House construction is discussed in Unit 16. Counseling Providing competent independent advice and guidance on a variety of real estate problems is known as counseling. A counselor attempts to furnish the client with direction in choosing alternative courses of action. Increasing the client s knowledge is every counselor s function in rendering services. Education Education is the provision of information to both the real estate practitioner and the consumer. Colleges, universities, private schools, and trade organizations conduct courses and seminars on all aspects of the business, from the principles of the prelicensing program to the technical aspects of tax and exchange law. Other areas Many other specialties and professionals are also part of the real estate business. Practitioners associated with mortgage banking firms and those who negotiate mortgages for banks and savings associations are examples of professionals associated with these other areas of specialty. Members of corporate real estate departments as well as officials and employees of government agencies such as zoning boards and assessing offices are further examples. Professional organizations The real estate business has many trade organizations, the largest being the National Association of REALTORS (NAR). Organized in 1908, NAR sponsors various affiliated organizations that offer professional designations to brokers and others who complete required courses (see Figure 1.3). NAR, along with the state and local boards, serves the interests of its members by keeping them informed of developments in their fields, publicizing the services of its members, improving standards and practices, and recommending or taking positions on public legislation or regulations affecting the operations of members and member firms.

22 10 Modern Real Estate Practice in North Carolina Ninth Edition FIGURE 1.3: National Association of REALTORS Institutes and Sample Professional Designations Institute National Association of REALTORS (NAR) American Society of Real Estate Counselors (ASREC) Commercial Investment Real Estate Institute (CIREI) Institute of Real Estate Management (IREM) REALTORS Land Institute (RLI) Society of Industrial and Office REALTORS (SIOR) Women s Council of REALTORS (WCR) Designation(s) Graduate REALTORS Institute (GRI) Certified International Property Specialist (CIPS) Accredited Buyer Representative (ABR ) The Counselors of Real Estate (CRE) Certified Commercial Investment Member (CCIM) Accredited Management Organization (AMO ) Accredited Resident Manager (ARM ) Certified Property Manager (CPM ) Accredited Land Consultant (ALC) Specialist in Industrial and Office Real Estate (SIOR) Leadership Training Graduate (LTG) The majority of local real estate associations throughout the United States and Canada are affiliated with NAR. Members of the North Carolina Association of REALTORS (NCAR) and affiliated local boards subscribe to the association s strict Code of Ethics and are entitled to be known as REALTORS or REALTOR-ASSOCIATES. The term REALTORS is a registered trademark. North Carolina has approximately 80,000 real estate licenses of which 35,000 are REALTORS. Thus, all REALTORS are brokers, but not all brokers are REAL- TORS. Do not confuse NCAR with the North Carolina Real Estate Commission (NCREC), which is the regulatory licensing agency of the state. Among the many other professional associations is the National Association of Real Estate Brokers (NAREB), whose members also subscribe to a code of ethics. Members of NAREB are known as Realtists. Uses of Real Property Five Categories of Real Property 1. Residential 2. Commercial 3. Industrial 4. Agricultural 5. Special-purpose Just as there are many areas of specialization within the real estate industry, there are many different types of property in which to specialize. According to its use, real estate can generally be classified into one of the following five categories: 1. Residential all property used for housing, from acreage to small city lots, both single-family and multifamily, in urban, suburban, and rural areas 2. Commercial business property, including offices, shopping centers, stores, theaters, hotels, and parking facilities 3. Industrial warehouses, factories, land in industrial districts, and power plants 4. Agricultural farms, timberland, ranches, and orchards 5. Special-purpose churches, schools, cemeteries, and government-held lands The market for each of these types of properties can be further subdivided into the sales market, which involves the transfer of title, and the rental market, which involves the transfer of space on a rental basis.

23 Unit 1 Basic Real Estate Concepts 11 IN PRACTICE Although in theory a real estate broker or firm can perform all the services listed above and handle all five classes of property, this is rarely done, except in small towns. Most real estate firms tend to specialize to some degree, especially in urban areas. In some cases, a real estate broker may perform only one service for one type of property. Residential property brokers and industrial property managers are two examples of such specialization. THE REAL ESTATE MARKET LEARNING OBJECTIVE After successfully completing this topic, you will be able to explain the operation of supply and demand in the real estate market. In literal terms, a market is a place where goods are bought and sold, where value for those goods is established, and where it is advantageous for buyers and sellers to trade. The function of the market is to facilitate this exchange by providing a setting in which the supply and demand forces of the economy can establish market value. The real estate market is a free market and is local in nature. Supply and Demand When supply increases and demand remains stable, prices go down. When demand increases and supply remains stable, prices go up. The economic forces of supply and demand continually interact in the market to establish and maintain price levels. Essentially, when supply increases, prices drop as more producers compete for buyers; when demand increases, prices rise as more buyers compete for the product. Production slows or stops during a period of oversupply. When the market cannot meet the demand, production increases to take advantage of demand. Supply and demand are balanced at what is called the point of equilibrium. FOR EX Here s how one broker describes market forces: In my 17 years in real estate, I ve seen supply and demand in action many times. When a car maker relocated its factory to my region a few years back, hundreds of people wanted to buy the few higher-bracket houses for sale at the time. Those sellers were able to ask ridiculously high prices for their properties, and two houses actually sold for more than the asking prices! On the other hand, when the naval base closed and 2,000 civilian jobs were transferred to other parts of the country, it seemed like every other house in town was for sale. We were practically giving houses away to the few people who were buying. Supply and demand in the real estate market Characteristics of goods in the marketplace determine how quickly the forces of supply and demand will be able to achieve equilibrium. Such characteristics are the degree of standardization of the product, the mobility and financial stability of the product, and the mobility of the parties (buyer and seller). Real estate is not a standardized product; no two parcels can ever be exactly alike. Each parcel of real estate is unique because it has its own geographic location. Because real estate is fixed in nature (immobile), it cannot be moved from area to area to satisfy the pressures of supply and demand. Property buyers are also generally limited in their mobility retirees are a major exception in regard to residences. For these reasons, the real estate business has tended toward local markets, where firms can maintain detailed familiarity with market conditions and

24 12 Modern Real Estate Practice in North Carolina Ninth Edition available units. The increasing mobility of the population, the growing impact of new technologies in communication, and data handling have resulted in the geographic expansion of real estate firms. Where standardization and mobility are relatively great, the forces of supply and demand balance relatively quickly. But because of real estate s characteristics of uniqueness and immobility, the real estate market is generally relatively slow to adjust. To a certain extent, the product can be removed from the market (as when a home offered for resale is withdrawn); yet an oversupply of product usually results in a lowering of price levels. Because development and construction of real estate take a considerable period of time from conception to completion, increases in demand also may not be met immediately. Building may occur in uneven spurts of activity owing to such factors. Factors affecting supply Factors that tend to affect supply in the real estate market include the labor force, construction costs, government controls, and monetary or financial policies. Labor force and construction costs A shortage of labor in the skilled building trades, an increase in the cost of building materials, or a scarcity of materials tends to decrease the amount of housing built or increase its cost. The impact of the labor force on price levels depends on the extent to which higher costs can be passed on to the buyer or renter in the form of higher purchase prices or rents. Technological advances that result in lower-priced materials and more efficient means of construction may tend to counteract some price increases. Government controls and financial policies. The government s monetary policy can have a substantial impact on the real estate market. The Federal Reserve Board (the Fed) establishes a discount rate of interest for the money it lends to commercial banks. That discount rate has direct impact on the interest rates the banks charge to borrowers, which in turn plays a significant part in people s ability to buy homes. The Federal Housing Administration (FHA) and the Government National Mortgage Association Ginnie Mae) can also affect the amount of money available to lenders for mortgage loans. In 2008, America s greatest challenge became the uncertainty of the financial institutions. Until then, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation Freddie Mac), which were private companies under congressional charter, had been the driving force of monies to provide loans to low-, moderate-, and middle-income families. Failed judgments in buying mortgages on the secondary market and irregular accounting practices contributed to the unpredictable and chaotic real estate market in This resulted in the federal government taking over Freddie Mac and Fannie Mae by placing them into conservatorship. In 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act created the Consumer Financial Protection Bureau (CFPB). The CFPB consolidates most federal consumer financial protection authority in one place. The consumer bureau is focused on one goal: watching out for American consumers in the market for consumer financial products and services. Most recently, beginning in 2015, the CFPB has implemented new rules which affect settlement practices across the United States (See Unit 21.).

25 Unit 1 Basic Real Estate Concepts 13 Virtually any government action has some effect on the real estate market. For instance, federal environmental regulations may increase or decrease the supply and value of land in a local market. Real estate taxation is one of the primary sources of revenue for local governments. Policies on taxation of real estate can have either positive or negative effects. High taxes may deter investors. On the other hand, tax incentives can attract new businesses and industries. Of course, along with these enterprises come increased employment and expanded residential real estate markets. At the local level, real estate taxation is one of the primary sources of revenue for government. Policies on taxation of real estate can have either positive or negative effects. Tax incentives have been one way for communities to attract new businesses and industries to their areas. And, of course, along with these enterprises come increased employment and expanded residential real estate markets. Local governments also can affect market operations and the development and construction of real estate by applying land-use controls. Building codes and zoning ordinances are used by communities to control the use of land. Real estate values and markets are thereby stabilized. Community amenities for example, churches, schools, and parks and efficient government policies are influential factors affecting the real estate market. Local governments can negatively influence development by imposing excessive fees or overly restrictive zoning and building codes. Factors affecting demand Factors that tend to affect demand in the real estate market include population, demographics, and employment and wage levels. Population Because shelter (whether in the form of owned or rented property) is a basic human need, the general need for housing grows as the population grows. Even though the total population of the country may continue to increase, growth is not uniform. Some areas grow faster than others, and some do not grow at all. Some places have become modern-day ghost towns, where the exhaustion of natural resources or the termination of an industrial operation has resulted in a mass exodus. Demographics Not only population but the makeup of that population demographics affects demand. Family size and the ratio of adults to children; the number of people moving into assisted care facilities and retirement communities; the effect of doubling up, where two or more families use one housing unit; and the changing number of single-parent households all contribute to the amount and type of housing needed. Also pertinent are the number of young people who would prefer to rent or own their own residences but for economic reasons, have roommates or remain in their parents homes. Employment and wage levels Home ownership and rental decisions are closely related to the ability to pay. Employment opportunities and wage levels in a small community can be affected drastically by decisions made by major employers in the area. Individuals involved in the real estate market in such communities must keep well informed about the business plans of local employers. To estimate how changes in wage levels will affect people s decisions concerning real estate, it is also important to look for trends in how individual income is likely to be used. General trends in the economy (availability of mortgage money,

26 14 Modern Real Estate Practice in North Carolina Ninth Edition interest rates, rate of inflation, et cetera) will influence an individual s spending decisions. Business cycles The upward and downward fluctuations in business activity are called business cycles. Although business cycles often seem to recur within a certain number of years, they are actually caused primarily by forces such as population growth, taxes, interest rates, wars, and oil embargoes. A business cycle can generally be characterized by four stages: expansion, recession, depression, and revival. The movements of a cycle are usually gradual and indistinct. The real estate cycle As stated earlier, the real estate market is slow in adjusting to variations in supply and demand. Because one factor of a real estate cycle is building activity, the time lag between the demand for units and the completion of those units causes real estate cycles to peak after the rest of the economy does and take longer to recover from depressed periods than do other economic sectors. The local character of the real estate market creates many local conditions that may not correspond to the general movement of a real estate cycle. Governmental anticyclical efforts Ever since the Great Depression of the 1930s, the federal government has attempted to establish fiscal and monetary policies to prevent extreme fluctuations in the business cycle. By increasing government spending during times of recession and taking money out of circulation through taxation and control of lending institutions during times of inflation and expansion, the government attempts to promote steady, gradual economic growth. RELATED WEBSITES Building Owners and Managers Association International: Certified Commercial Investment Member Institute: Institute of Real Estate Management: National Association of Exclusive Buyers Agents: National Association of Independent Fee Appraisers: National Association of REALTORS : National Association of Real Estate Brokers: North Carolina Association of REALTORS : North Carolina Real Estate Commission: Real Estate Buyer s Agent Council: Real Estate Educators Association: REALTORS Land Institute: Society of Industrial and Office REALTORS : The Counselors of Real Estate: Women s Council of REALTORS :

27 Unit 1 Basic Real Estate Concepts 15 KEY POINT REVIEW Land is the earth s surface, extends downward to the center of the earth with subsurface rights, and stretches upward to infinity with air rights. Real estate includes land at, above, and below the earth s surface, and all things permanently attached to the land, both natural and man-made. Real property includes interests, benefits, and rights that are automatically included in the ownership of land and real estate. The characteristics of real estate include the following: Physical Immobility Indestructibility Uniqueness Economic Scarcity Location (most important) Improvements Permanence of investment Real estate brokerage is the business of bringing people together in a real estate transaction conducted by a broker (or nonprovisional broker) who is a person or company licensed to list, lease, buy, exchange, auction, negotiate, or sell real property for others for compensation and who may be the agent of buyer, seller, or both, or a provisional broker who conducts brokerage activities but must operate under the supervision of a broker-in-charge until he or she completes certain education requirements. (In other jurisdictions, real estate licensees may be characterized as salespersons or by other terms and may have operated under the supervision of principal brokers or other supervisory brokers during their initial years of brokerage experience.) Appraisal is the process of estimating a property s value (typically market value) that is based on established methods and an appraiser s professional judgment and is regulated by the following: Licensing or certification is required for many federally-related transactions. North Carolina requires separate licensing or certification for appraisals. Property management is conducted by a property manager, a person or company hired to maintain and manage property on behalf of its owner, whose scope of work depends on a management agreement, and basic responsibility is to protect owner s investment while maximizing the owner s financial return.

28 16 Modern Real Estate Practice in North Carolina Ninth Edition Financing is the business of providing the funds that make real estate transactions possible through mortgage or deed of trust loans secured by the property, and commercial banks, savings associations, mortgage bankers, and mortgage brokerage companies. Property development involves splitting a single property into smaller parcels (subdividing) and constructing improvements on the land (development). Counseling involves independent advice based on sound professional judgment. Education provides real estate information to practitioners and consumers alike. Types of real property include the following: Residential single-family and multifamily Commercial office space, shopping centers, stores, theaters, hotels, parking facilities Industrial warehouses, factories, land in industrial districts, power plants Agricultural farms, timberland, ranches, orchards Special-purpose schools, places of worship, cemeteries, government-held property The real estate market reflects principles of supply and demand, influenced by the uniqueness and immobility of parcels of real estate so that when the supply increases and demand remains stable, prices go down; and when demand increases and supply remains stable, prices go up. The factors affecting the supply of real estate include the following: Labor force availability Construction and material costs Government controls environmental restrictions, land use, building codes, zoning Government financial policies that impact interest rates and the money supply The factors affecting the demand for real estate include the following: Population some areas grow faster than others; some decline Demographics family size, lifestyles, niche marketing Employment and wage levels influence housing affordability

29 UNIT QUIZ 1. Which of the following BEST defines real estate? a. Land and the air above it b. Land and the buildings permanently affixed to it c. Land and all things permanently affixed to it d. Land and the mineral rights in the land 2. Which of the following is NOT a physical characteristic of land? a. Indestructibility b. Scarcity c. Immobility d. Uniqueness 3. In North Carolina, the term provisional broker refers to a. a REALTOR. b. a licensee who must operate under the supervision of a broker-in-charge. c. a licensee who must focus on a specialty area of real estate. d. an individual who has invested in real estate. 4. Situs refers to a. view from the property. b. improvements made to the building site. c. societal factors that are related to the location. d. immobility of real estate. 5. Which of the following is NOT an economic characteristic of real estate? a. Indestructibility b. Scarcity c. Permanence of improvement d. Location 6. Which of the following physical and economic factors would a land developer take into consideration when determining the optimum use of a parcel of land? a. Transportation b. Available natural resources c. Contour and elevation d. All of these 7. A theater or hotel would be classified under the real estate category of a. residential. b. commercial. c. agricultural. d. industrial. 8. The demand for real estate is influenced by the a. number of real estate brokers in the area. b. ethnic makeup of neighborhoods. c. wage levels and employment opportunities in the area. d. price of new homes being built in the area versus the price of existing homes. 9. The designation REALTOR refers to I. any licensed real estate broker. II. an active member of the National Association of REALTORS. a. I only b. II only c. Both I and II d. Neither I nor II 10. Which of the following statements is/are TRUE of business cycles? I. Business cycles involve periods of expansion, recession, depression, and revival. II. The real estate business cycle is quicker to recover from depressed times than other business sectors. a. I only b. II only c. Both I and II d. Neither I nor II 11. All of the following factors tend to affect supply EXCEPT a. the labor force. b. construction costs. c. government controls. d. demographics. 17

30 12. Real estate can be a poor investment if a. the inflation rate is high. b. the investor plans to hold the investment for a long time. c. the investor needs ready cash. d. land values are appreciating in the area. 13. In general, when the supply of a certain commodity increases, prices a. tend to rise. b. tend to drop. c. tend to stabilize. d. can no longer be established. 14. In general terms, a market refers to which of the following? a. Place where goods are standardized for sale b. Amount of goods available at a given price c. Quality of goods available to the public d. Place where the value of goods is established 15. The demand for real estate in a particular community is LEAST affected by a. population. b. wage levels. c. employment. d. international trade. 16. The real estate market is considered local in character for all the following reasons EXCEPT a. land is fixed or immobile. b. consumers generally invest in real estate that is near their home or work. c. local controls can have a significant impact on the market. d. most people eagerly visit and invest in real estate in distant areas. 17. Highest and best use of real estate will a. maximize the property s value. b. stay constant throughout time. c. always be the property s current use. d. not be affected by local economic trends. 18. A major manufacturer of automobiles announces that it will relocate one of its factories, along with 2,000 employees, to a small town. What effect will this announcement MOST likely have on the small town s housing market? a. Houses will likely become less expensive as a result of the announcement. b. Houses will likely become more expensive as a result of the announcement. c. Because the announcement involves an issue of demographics, not of supply and demand, housing prices will stay the same. d. The announcement involves an industrial property; residential housing will not be affected. 19. A buyer is interested in a house that fits most of her needs, but it is located in a busy area where she is not sure she wants to live. Her concern about the property s location is called a. physical deterioration. b. area preference. c. permanence of investment. d. immobility. 20. A professional estimate of a property s market value, based on established methods and using trained judgment, is performed by a a. real estate appraiser. b. real estate broker. c. real estate counselor. d. home inspector. 18

31 MODERN REAL ESTATE PRACT ICE IN NORTH CAROLINA NINTH EDITION FEATURES: Completely refreshed to better reflect today s market needs, including coverage of updated and new legislative changes New topics include the Mineral and Oil and Gas Rights Mandatory Disclosure Statement; Truth-in-Lending/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) Rules; the role of the Consumer Financial Protection Bureau, and more Expanded coverage of agency relationships Essential North Carolina-specific laws, topics, and forms are presented throughout the book Learning objectives, key terms, and margin notes highlight key concepts throughout each unit Key point reviews are a quick review tool of the most essential content covered in each unit End-of-unit quiz questions assess retention of key concepts Thorough overview of math concepts, including easyto-access math formulas on the inside front and back covers, highlight the most important principles Study tips and comprehensive practice examination help prepare, take, and pass the real estate licensing exam Complete your real estate education and ensure your success with these additional titles from Dearborn Real Estate Education: North Carolina Exam Review QBank Guide to Passing the AMP Real Estate Exam Questions & Answers to Help You Pass the Real Estate Exam Modern Real Estate Practice Flashcard and Study Tools App The Language of Real Estate Mastering Real Estate Math Before Hitting Send: Power Writing Skills for Real Estate Agents Power Real Estate s & Letters Up and Running in 30 Days: A Proven Plan for Financial Success in Real Estate 332 Front Street South, Suite 501, La Crosse, WI For comments or queries about this product, please us at contentinquiries@dearborn.com.