Unit 1: Basic Real Estate Concepts

Objective 1: Distinguish between land, real property, and personal property, and the physical and economic characteristics of real property.

• Land:

  • Defined as the earth's surface extending downward to the center of the earth and upward to infinity, including permanent natural objects.

  • Includes Surface Rights, Subsurface Rights, and Air Rights.

• Real Estate:

  • Defined as Land at, above, and below the Earth’s surface.

  • PLUS all things permanently attached to it, whether natural or artificial.

• Real Property:

  • Defined as the interests, benefits, and rights that are automatically included in the ownership of land and real estate.

  • It is the interests, benefits and rights that are automatically included in the ownership of land and real estate.

  • Often referred to as the Bundle of Rights, which typically includes:

    • Possession

    • Control

    • Enjoyment

    • Exclusion

    • Disposition

• Associated Terms:

  • Tenements: Any structures attached to the land.

  • Hereditaments: Any interest in real estate that can be passed to heirs.

• Characteristics of Real Property:

  • Physical Characteristics:

    • Immobility: Land cannot be moved.

    • Indestructibility: Land is considered durable and permanent.

    • Uniqueness (also called Heterogeneity or non-homogeneity): No two properties are alike. This serves as the basis for the doctrine of specific performance.

  • Economic Characteristics: Often remembered by the acronym SLIP (Scarcity, Location, Improvements, Permanence of investment).

    • Scarcity: Although the total supply of land is not in short supply globally, it is finite. Land of a particular quality or location may be very limited.

    • Location (Area Preference or Situs): Society’s choices of one area or site over another. This is considered the most important economic characteristic.

      • Example/Application: A property owner in Raleigh, NC, who bought a house in 2003 for $120,000, recently sold it for $850,000 to a developer looking to expand a mixed-use concept across the street. This significant increase in value is attributed to the location.

    • Improvements: An addition or change to land that can affect both the improved parcel and surrounding parcels, either favorably or unfavorably.

      • Improvements “on the land” are typically private in nature, such as buildings or fences.

      • Improvements “to the land” are typically public in nature, such as sidewalks, sewers, or curbing.

    • Permanence of investment: Improvements are considered to create fixed, long-term investments that cannot be transferred to another parcel.

Objective 2: Describe the concept of land use and development, including highest and best use and the advantages and disadvantages of real estate investments.

• Land Use and Investment: Real estate can be viewed from the perspective of how the land is used and its potential as an investment.

• Highest and Best Use:

  • This refers to the most profitable single use for a property.

  • A property can only have one highest and best use at a time, but this use can change over the lifetime of the property.

  • Highest and best use can be influenced by factors such as public controls and private controls (though these controls are not detailed in the provided excerpts).

• Real Estate as an Investment: There are both advantages and disadvantages.

  • Advantages:

    • Appreciation: The property may increase in value over time.

    • Tax Advantages: Can include Depreciation, potential for tax-free vs tax-deferred gains, and other deductions (mentioned as being discussed in Chapter 19).

    • Rental Income: Potential to earn income from tenants.

  • Disadvantages:

    • Not a liquid asset: Difficult to quickly convert to cash compared to other investments.

    • Difficult to invest without expert advice: Requires specialized knowledge.

    • Management decisions must be made: Requires ongoing involvement.

    • Often involves a High degree of risk.

Objective 3: Identify the various careers and areas of real estate specializations and the professional organizations that support them.

• Areas of Real Estate Specializations: The business of real estate offers many specializations.

  • Real estate brokerage: Bringing people together in a real estate transaction, including licensee responsibilities to customers and clients. (Discussed in detail in Unit 7).

  • Appraisal: Estimating the value of real property. (Discussed in detail in Unit 17).

  • Property management: Managing real estate to protect the owner’s investment and maximize return. (Discussed in detail in Unit 12).

  • Financing: Arranging for or providing funds for real estate transactions. (Discussed in detail in Units 14 and 15).

  • Property development: Splitting large parcels into smaller ones and constructing improvements. (Development discussed in Unit 6; House construction discussed in Unit 16).

  • Counseling: Providing clients with competent and independent information and advice for investment decisions.

  • Education: Providing real estate education opportunities to practitioners and consumers.

  • Other areas: Includes expertise required in the practice of law, corporations with extensive land holdings, and government agencies.

• Professional Organizations:

  • National Association of REALTORS® (NAR): A trade organization. (See Figure 1.3 - not provided). Website: http://www.realtor.org/.

  • North Carolina Association of Realtors®: Associated with NAR. Website: http://www.ncrealtors.org/index.cfm.

  • Most other local real estate associations are also associated with NAR.

  • Important Distinction: All Realtors® are licensees, but not all licensees are Realtors®. This indicates that 'Realtor®' is a specific membership designation within a professional organization (NAR and its state/local affiliates), not synonymous with holding a real estate license.

• Uses of Real Estate: Real estate can be categorized by its use:

  • Residential: Property used for housing, both single-family and multifamily.

  • Commercial: Business property.

  • Industrial: Warehouses and factories.

  • Agricultural: Farms, orchards, and ranches.

  • Special-purpose: Churches, schools, and government-held lands.

Objective 4: Explain the operation of supply and demand in the real estate market.

• Supply and Demand: This is the main economic force that sets prices for products.

• Law of Demand: If all other factors remain equal, the higher the price of a good, the less people will demandthat good.

• Law of Supply: The higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

• Equilibrium: Occurs when supply and demand are equal. At the given price, suppliers are selling all they produced, and consumers are getting all they are demanding.

• Supply and Demand Relationship in Real Estate:

  • Prices will generally drop as supply increases relative to demand (this is a buyers’ market).

  • Prices will generally rise as demand increases relative to supply (this is a sellers’ market).

• Unique Aspect of the Real Estate Market: Real estate is unique and immobile. This can make the real estate market relatively slow to adjust to variations in supply and demand. This slow adjustment is part of the real estate cycle.

• Factors Affecting Supply:

  • Labor force

  • Construction costs

  • Government controls

  • Financial policies

• Factors Affecting Demand:

  • Population

  • Demographics (the make-up of the population including mobility, financial stability, and size and nature of family unit).

  • Employment and wage levels (where and how money is spent, and perceived job security).

• Related Economic Concepts:

  • Business cycles: Upward and downward fluctuations in business activity, generally consisting of four stages: expansion, recession, depression, and revival.

  • Governmental anticyclical efforts: The federal government attempts to establish policies to prevent extreme fluctuations in the business cycle.

Additional Notes:

• Math: There is math on the exam, typically 10% to 15%. It is described as simple math, requiring knowledge of formulas. Calculators can be used.

• Vocabulary: Vocabulary is very important. Pay attention to terms, especially distinctions like "OR" versus "EE" (though these specific terms are not defined in the provided excerpts).