Real Estate PCE Topic 1: The Economics and Real Estate Management Overview

Timing of escrow (trust) account deposits

3 business days. Every broker who receives items requiring deposit into escrow must deposit them by the end of the third business day following receipt of the item to be deposited

Can sales associates have escrow accounts?

Sales associates are not allowed to have escrow accounts. They must deliver it to their employing broker by the end of the next business day following receipt

Interest bearing escrow accounts

The broker may, but is not required to, place escrow funds into an interest-bearing account. If the broker does this, they must have the written permission of the parties and must designate who will receive the interest and when it must be disbursed. The escrow account must be an insured account in a depository located and doing business in Florida

Disbursing escrow money when there are conflicting demands

The broker must provide written notice to the Commission if they have received conflicting demands from the parties or they have good faith doubt as to which person is entitled to the funds. This notice must be provided to the commission within 15 business days of the last party’s demand or good faith doubt about the disbursement

(Sales associates must inform their broker immediately if there is a disbursement conflict and the broker must institute specified settlement procedures (called escape procedures) within 30 business days of the last party’s demand or good faith doubt about the disbursement)

In the case of escape procedures being required when the parties act in bad faith to deprive the broker of their commission, the broker must institute one of the following":

-Request that the Commission issue an escrow disbursement order (EDO) determining who is entitled to the escrowed property

-With the consent of all parties, submit the matter to arbitration

-By interpleader or otherwise, seek adjudication of the matter by a court

-With the written consent of all parties, submit the matter to mediation. The mediation may be conducted by DBPR or another entity, but must be successfully completed within 90 days following the last demand. Otherwise, the licensee shall promptly employ one of the other escape procedures

EDO notice timelines when rendered unnecessary

If the broker requested an EDO and the dispute is subsequently settled (or goes to court before the EDO is issued), the broker must notify the Commission within 10 business days of such event

If the broker institutes a settlement procedure other than a request for an EDO, they must notify the Commission in writing about which procedure is being used to settle the dispute. The broker must provide such notice within 30 business days of the last party’s demand or good faith doubt about the disbursement. (This 30 business day timeline is also instituted if the broker requested an EDO and the Commission notifies the broker that an EDO will not be issued. The broker must write to the Commission notifying them of what other procedure will be initiated)

Monthly reconciliation statements

Once monthly, a broker must make a written reconciliation containing specific information required by the Commission. The broker must review, sign, and date the monthly statement-reconciliation. Whenever the broker’s trust liability and the bank balances do not agree, the reconciliation must contain an explanation for the difference(s) and any corrective action taken inreference to shortages or overages of funds in the account(s)

30 monthly reconciliation rule

If there is an escrow error where there is no shortage of funds and such errors pose no significant threat to economically harm the public, the broker has 30 days from the date the last reconciliation was performed to fix the error

Exception to the no commingling rule regarding broker escrow accounts

A broker must place up to $1,000 of personal or brokerage funds in each sales escrow account, and may place up to $5,000 of personal or brokerage funds in each property management escrow account

A title insurance agency, or any officer, director, employee, or certain independent contractor associated with it, who converts or missappropriates escrow or trust funds commits:

-A first-degree misdemeanor if the amount is $300 or less

-A third-degree felony if the amount is more than $300 but less then $20,000

-A second-degree felony if the amount is $20,000 or more but less than $100,000

-A first-degree felony if the amount is $100,000 or more

All land has three physical characteristics that influence value:

-Immobility: How a property cannot be moved from one geographical location to another

-Indestructibility: States that land cannot be destroyed. The concept of indestructibility is the legal basis for neither insuring land nor being able to depreciate it. Its value may be destroyed by changing conditions, but land exists forever

-Uniqueness: States that every parcel of real property is distinct and this is the legal basis for specific performance lawsuits, or lawsuits that seek to force the sale of land as agreed upon in a valid contract where the seller refuses to carry through with the sale as promised

Real estate as an economic indicator

Real estate is considered a leading economic indicator of the health of a community or county. Leading indicators are measurable factors that change before the economy follows a particular trend

High foreclosure rates, mortgage defaults, and late payments typically reflect economic stress

Social impact of home ownership

Homeownership can have a positive social impact on communities. Areas with higher homeownership rates often experience grater neighborhood stability and property maintenance, which support property values. As property values increase, homeowners may build equity, which can improve financial opportuinities

Impact of supply and demand on real estate prices

Over-supply leads to lower prices whereas under-supply leads to higher prices

Improvements

Additions made to land that are intended to enhance its value. Improvements include houses and commercial buildings, as well as sewers, sidewalks, and fences. Not all improvements enhance value, and some improvements may be restricted by government or neighborhood associations

Assemblage

Combining two or more contiguous parcels of real estate into a single parcel under the same ownership, increasing its overall value. Any increase in value resulting from assemblage is known as plottage

Area preference (situs)

Area preference (aka situs) refers to a person’s preference for one location over another. It is often identified as the most important economic characteristic of land

Licensees must know the local market

It is important for real estate professionals to stay informed about broader economic trends, including interest rates, national home price trends, housing starts, and other key economic indicators that influence real estate markets. Local factors like employment levels, population growth, zoning changes, and inventory levels can significantly influence market conditions and may differ greatly from national trends

Vacancy rates

Refers to the percentage of available housing units that are unoccupied at a given time. It is a key indicator of supply and demand in a real estate market. When there is an undersupply of houses, vacancy rates tend to be low and prices typically rise due to increased competition

When a buyer makes an earnest money deposit, until what point does the buyer have a right to demand the deposit be returned?

Until the seller has a legal right to the deposit

Real estate recovery fund

Established to reimburse anyone who suffered monetary damages in a transaction due to the actions of a licensee. It may reimburse a licensee who is ordered to pay monetary damages solely as a result of the licensee’s compliance with an EDO. The fund is funded through fees assessed at the time of license issuance and renewal. The assessment is $3.50 for brokers and $1.50 for sales associates

Limitations on recovery of funds

Claimants must be qualified to recover funds, a person is not qualified to make a claim for recovery from the Fund if such person:

-Is the spouse of the judgment debtor (licensee), or is the personal representative of such spouse

-Is a licensee who acted as a single agent or transaction broker in the transaction

-Has a claim based on a transaction in which the licensee was the owner of the subject property, the licensee was acting on his own account (not on behalf of anyone else), or the licensee was not acting as a broker or sales associate

-Has a claim based on a transaction in which the licensee did not have an active license at the time

-Has a court judgement against a real estate brokerage firm (instead of a licensed individual)

A claimant is eligible to seek recovery from the Fund if:

-The claimant has received a final judgement in a Florida Court against a licensee, wherein the case was based on a real estate transaction

-The claim is made within 2 years form when the violation was or should have been discovered. In no event can a claim be made more than 4 years after the date of the alleged action

-The claimant has already obtained a writ of execution for the judgement, and has an affidavit showing that the licensee’s assets cannot be fount or the amount obtained after selling the licensee’s assets was insufficient

-The claimant has a valid reason for being unable to produce such documents, the person must show that after all reasonable action, they discovered no assets (or insufficient assets) to satisfy the judgment

-The claimant is not otherwise unqualified to make a claim for recovery and has demonstrated that the final judgment is not an appeal or, if so, that the appellate proceedings have concluded

Any person who meets all of the prescribed condition to recover funds from the Recovery Fund may apply to the commission for the payment from the Real Estate Recovery Fund:

-An amount equal to the unsatisfied portion of the person’s court judgment or $50,000, whichever is less

-An amount equal to the judgment against the broker or sales associate or $50,000, whichever is less

(If there are multiple claims related to a single transaction, the amount paid to all claimants may not exceed $50,000 total and if there are multiple claims against a licensee across multiple transaction, the amount paid to all claimants may not exceed $150,000 total)

Licensee consequences for claims made to the recovery fund

If a claim is paid to satisfy the judgment against a licensee, that person’s license is automatically suspended upon the date of payment from the Fund. The license may not be reinstated until the licensee repays the Fund in full, plus interest

Leverage

Act of using borrowed funds to finance an investment (as in a mortgage). The more borrowed funds used, the more “highly leveraged” an investor is (low down payment and high LTV). The investor hopes to realize a profit over the initial purchase price and the cost of borrowing funds

Appreciation

Increase in the worth or value of property

Equity

The amount financed by the investor’s own capital, through cash or other asset transfers

Liquidity

An estimated measure of the ease with which one may convert an asset into cash. Liquid assets are assets that can be converted into cash quickly and easily. Gold is an example of a liquid asset, whereas real estate is traditionally a long-term investment (non-liquid asset)

Tax shelter

Real estate can be considered a tax shelter as it can be exempt from capital gains taxes

Gross rent multiplier (GRM)

A rule of thumb to evaluate an investment. To calculate the GRM, you divide the total price of the property by the gross rent. The lower the GRM, the better the investment return because the developer gets more rent for each dollar of value

The effective gross income (EGI)

The gross income minus the vacancy rate. The investor must also take into account the expenses of running the property, such as maintenance, utilities, taxes, insurance, advertising, and management costs, and the cost to replace items. Net income is the effective gross income minus expenses

Capitalization rate (cap rate)

How the investor compares the potential Net Income from a particular real estate investment with the net income that could be generated by other rental properties or investments. The cap rate is the net income divided by the total price of the property. If the investor finds another property with a higher cap rate, they might go for the one with a higher return

Cash on cash return/cash flow

Expressed as a percentage of the before-tax cash flow divided by the amount of cash invested. It does not take into account whether the investor's tax situation could influence the desirability of the investment, any anticipated appreciation (or depreciation) of the property itself, or any other underlying risks associated with the property

Market risk

Changes in the market may decrease the value of an investment property, which in turn reduces any equity or liquidity the property might have had when the market was strong

Business risk

When a business is the investment property any change in the business (profits, demand, location, etc.) could decrease the value of the investment

Purchasing power risk

A decrease in the value of the national currency will in turn decrease the value of an investment property and will also decrease the amount of property that can be bought

Financial risk

Changes in the interest rates can have an impact on investment property, the higher the interest rates the lowed demand there will be for the property and the property will be more costly to maintain