real estate characteristics
marketing tool
A CMA is also an important marketing tool. A savvy agent will show up to a listing appointment with a CMA in hand, ready to show a potential client what the market says about their home. This demonstrates that you are a data-driven agent willing to put in the work to win for your clients.
sunset act
A Sunset Act is a Texas law that requires a commission, called the Sunset Commission, to evaluate every state agency every 12 years. They're looking to see whether or not the agency remains necessary and effective. If the committee finds that an agency is no longer serving its purpose, it can advise that the committee be abolished, or "sunsetted." The Sunset Act aims to reduce waste and redundancy in the Texas government by eliminating agencies that are no longer useful or effective. The Texas Real Estate Commission has been reviewed several times since its inception under this act and has received approval each time.
how a BPO works
A sales agent will be contacted by a lender or an internet company that is working on behalf of a lender. The agent will be asked to visit a property and take some pictures of the exterior of the home, as well as shots taken from down the street. If you're taking these pictures, whatever you do, do not contact the people who currently live in the home. The lender may also require exterior photos of houses in the area that have been recently sold and some that are currently on the market. The license holder will then fill out a form and attach the pictures. The form will help give a bottom line on what the property is worth.
seller's market
A seller's market is a market condition in which the number of properties for sale does not meet the demand (number of people looking to buy). The pricing and negotiations of a transaction are often in favor of the seller in this type of market (hence the name), but this is not the case in 100% of situations.
Transfer of Ownership
An additional feature of real estate is that the ownership can be transferred without transferring the property to another location. When personal property is purchased, the new owner usually takes the item with them. In real estate, land can be bought without being moved - the "possession" of the property still changes hands.
What Is an Appraisal?
An appraisal is an impartial, qualified appraiser's opinion of the value of a specific property on a specific date, supported by relevant market information. I say "opinion" because there is no single, absolute number that everyone would agree on if I pointed to a house and asked, "How much is this worth?" Even a group of qualified appraisers could potentially come to different answers when asked to appraise a home. An appraisal is a very educated and data-driven approach to finding the market value of a property, but it's an opinion nonetheless. The opinion is informed by current research, past experience and knowledge, and good old-fashioned judgment.
comparative market analysis
An important part of what a real estate agent does for their clients — buyers or sellers — is to prepare a comparative market analysis. A CMA is a report that compares the prices of sold homes that are similar to the subject property. CMAs are NOT the same thing as appraisals, but they are prepared in a similar way. An agent uses comps to estimate a current market value for a property. Good comps are properties within a quarter-mile of the subject property; with similar bedrooms, bathrooms, and square footage; sold within the last six months. But again, comparative market analysis ≠ appraisal.
Slope and Transportation
Another factor that could determine the benefit of using a specific property for a certain purpose may be the slope of the land. Transportation could be important, as well! How easy would it be for customers and employees to get to the location? How hard would it be to get raw materials needed for the product created on the property? These are just a couple of the questions that may come up when considering the unique nature of each individual property.
Person in Possession
Another interesting real estate feature is that the person in possession of the property may not be the owner of the property. One example of this is a tenant living in and using a property even though they do not own that property.
Reconciliation
Appraisers may use a combination of more than one approach to value. During reconciliation, the appraiser will compare estimates they made based on the cost approach, sales comparison approach, and/or income capitalization approach. Since different methods will yield different results for the same property, the appraiser will reconcile these differences and come to a single number. There's no magic formula for reconciliation - it's a judgment that the appraiser gets to make.
all about sales price
As far as pricing goes, it's important to remember that the sales price is far more important than the listing price. The common misconception sellers have is that they can list higher and just adjust the price downward if they need to, thinking the worst case is they'll just get market value. However, this is often not the case for two reasons: The longer a property is on the market, the more likely buyers are to perceive a "defect" in the property (i.e., Why hasn't it sold yet?), which cools them off on the property. A savvy buyer's agent will see multiple price adjustments on the property's history and get really aggressive in asking for more concessions, which could result in the seller getting even less from their adjusted price than they anticipated.
immobility
Because you can't move land. It's immobile. When a buyer purchases personal property, they can move it to a new location — wherever their little buyer heart desires. When a buyer purchases land, however, they must go to the land. They cannot move the land to where they are.
Joining NAR
Brokers are not mandated to join the National Association of REALTORS® (NAR) to sell real estate. Joining is a choice. However, if a broker joins NAR, they have to agree that all of their associated agents will also become members. Once an agent joins NAR they also become a member of the Texas Association of REALTORS® (TAR) and a local Association of REALTORS® of the broker's choice. Most local associations also offer Multiple Listing Service (MLS) membership to brokers and their agents.
REALTORS® Land Institute (RLI)
But Ace! What about groups and organizations for license holders who sell farms and ranches? Good point, Macy. When selling a ranch with water, mineral rights, and possibly livestock, it is important that sales agents are trained on how to work this portion of the real estate market. These license holders have an organization called REALTORS® Land Institute (RLI). Their series of courses will allow someone to receive the designation ALC (Accredited Land Consultant).
What Is the Value of a Piece of Property?
Determining the value of a piece of property may sound straightforward: What's it worth? But actually, finding the answer is not so simple. Different people will assign different values to any piece of property: A buyer's agent will prepare a report called a comparative market analysis, estimating what they think the value of the property is based on recent similar sales. An appraiser will make an official valuation based on what they think the current market value of the property is. A tax assessor will assign an assessed value based on the rules around tax assessment in the municipality. A buyer will make an offer for a property based on what they're willing and able to pay. So who is right? Everybody, and nobody. Ultimately, a property is worth what someone will pay for it, a value that changes over time. But each of these valuation methods provides useful information for a specific purpose.
Non-homogeneous
Every parcel of land is unique. There is no parcel of land that is exactly the same as another parcel of land. Even two nearly identical lots in a subdivision differ in their position on the Earth. This means that every piece of land is different in some way, making it non-homogenous (this is also referred to as heterogeneity). (different)
what license holders must do
First, let's cover what license holders MUST do: Keep their license up to date if it is in active status Keep their continuing education requirements up to date Stay current on all fees to the Texas Real Estate Commission Only practice real estate under the sponsorship of an active broker Always disclose agency relationships to customers and other license holders Provide customers with the Information About Brokerage Services form when required Be fair and honest with all parties, whether customer or client Perform fiduciary duties for clients Disclose if a license holder or relative is involved in the transaction Note: A client has an agency relationship with you or your broker, while a customer is any other party in the transaction that doesn't have an agency relationship with you. While we're here, a party is a person involved in a contract for sale, lease, or agency. We'll get into all of this more later on.
buyer's agents
For a buyer's agent, a CMA will help your client figure out what to offer on a house they're interested in. It's not in a buyer's best interest to make an offer significantly higher than the value assigned by a CMA. Not only would they be over-paying for a home, if they need a loan, the bank's appraiser would probably appraise the home at a lower value than the asking price. When this happens, the lender will not usually approve the loan.
Which choice describes "rubber hits the road" education that meets the education requirements for license renewal?
Graduate, REALTOR® Institute (GRI) is made up of three 30-hour courses that are required for first-time license holders prior to renewing their license two years after they received their license.
your job as a real estate agent
Here's where you come in: it is the real estate agent's job to let the owner know what is actually practical. That is why it is wise to bring a comparative market analysis (CMA) to a listing appointment with a potential client. A CMA will allow you to show the property owner a relatively objective estimation of their property's current market value. If the agent cannot get the owner into a realistic pricing range, then the sales agent may need to walk away without taking the listing. For most new license holders, that lesson usually takes at least a year to learn (but hopefully not for YOU, my Aceable Agent!). Here's how it usually plays out: an overpriced listing will sit on the market with very few showings, prompting the seller to call the listing agent repeatedly, asking why the home hasn't sold yet. Then the listing expires and another sales agent becomes the listing agent. Sigh. The circle of (overpriced) life.
buyer's market
However, in a buyer's market, there is relatively low demand for real estate in the area. A buyer's market is the condition of having fewer buyers than the supply of homes for sale in the area. In a buyer's market, a buyer may be more likely to negotiate a lower price or even get the seller to pay the buyer's closing costs. Yay buyer! A license holder should always know what type of market they are in and be ready to negotiate in the proper way for the client.
why do a CMA?
If lenders only care about the appraisal, why do agents need to do their own research to create a CMA? First of all, a CMA is one of the ways a seller's agent determines an asking price for a property. We'll talk a bit more about pricing strategy later in this chapter.
Illiquidity
If you owned property that appraised at $250,000, given the right amount of time you would probably be able to sell it for that amount. However, if I told you that you HAD to sell the property by end of day tomorrow, you'd have to drop the price significantly to get someone to commit that quickly. It takes time to convert property into cash, and to rush the process, you would likely have to drop the price (and lose value). That is because property is relatively illiquid.
working with appraisers
If you're the seller's agent, make every effort to at least provide the appraiser with your CMA/comps when they arrive to conduct the appraisal. It will show that you've done your homework, and often it prevents large discrepancies from occurring. Of course, the appraiser can fully ignore the CMA, but many times they take it into account. Many agents will at least leave the CMA in prominent view for the appraiser to find while conducting their appraisal. At the end of the day, like a CMA, an appraisal is an opinion, and a good agent understands this.
Appraisals
If you've ever bought or sold a home, you know that getting the appraisal report is actually one of the most exciting (nerve-wracking?) steps in the whole process. It has the power to kill a deal. The buyer, seller, and lender are all hoping for certain numbers and are generally powerless to change the outcome. Appraisal is an art and a science that tries to get opinion closer to fact.
the law
In 1939, Texas passed the Real Estate Dealer's License Act (which would later become known as the Texas Real Estate Licensing Act, our good friend TRELA). This was notable in that it was the first legislation requiring sales agents to be licensed. The enforcement and oversight of the Act was initially handled by the Texas Secretary of State. In 1949, the Texas Legislature established the Texas Real Estate Commission to assume enforcement responsibilities of the Act — which it does to this very day.
Belonging to More Than One MLS
In Texas, to belong to the local MLS, the REALTOR® must belong to some board in Texas. Then they can join as many Multiple Listing Services as would be advantageous. For example, it may not be helpful for an MLS member in Houston to also join the local board in Lubbock. On the other hand, in the Dallas Metroplex, there may be a need to join more than one MLS system. But remember, the REALTOR® must belong to at least one board in Texas. Most license holders do not join more than one board, but they could. Many join more than one MLS.
What Professional Organizations DO
In general, they provide additional education and guidance to real estate professionals. Easy enough, right?
dont say REDUCTION
In this case, hopefully the second agent will be able to recognize and pinpoint why the property did not sell and get a price adjustment on the marketing price. It is important to note that this act is called a price adjustment and NOT a price reduction. (Be clear!) The word "reduction" carries too many emotions for the seller, and they are less likely to want to work with an agent that uses that word. So don't say reduction!
One way land is special and different from personal property is that it has three unique physical characteristics. They are:
Indestructibility, or durability Immobility Non-homogeneity
legal updates
It's worth noting the current educational requirements for the first renewal of a real estate agent's license are not limited to those three 30-hour courses. Two four-hour courses called Legal Update I and Legal Update II are also required.
indestructible
Land is pretty tough to destroy. In fact, it's indestructible. No matter what humans or nature may try to do to a plot of land, it will still be there afterward. Land can be trashed, flooded, or burned to a crisp, but the land will still exist. Land may: Go under water 🌊 Become a crater 🌑 Have improvements added to it (like houses) 🏠 But whatever happens, the land will still be there. It's... indestructible, remember? And that's something you can't say for personal property.
Certifiably Certified
Many of the organizations made up of real estate license holders offer courses that lead to some type of designation or certification. When the student finishes the courses and joins the organization, then they have some additional letters they can put at the end of their name on their business cards to indicate to the public that they have taken specialized education courses. 🎓 Most people from the public have no idea what the letters mean, but they recognize that this agent has done something above what the other sales agents have done.
The Role of Professional Organizations
Many sales agents join an organization or two to take advantage of the educational opportunities that the different groups offer. Some of the groups are created to help educate the members who are specialists in a particular area of real estate. Professional organizations don't handle real estate licensing, lawmaking, or disputes. Their role in the industry is to provide education and guidance that benefits their members.
Other Specialist Organizations
NAR offers the highest number of designations and certifications in the field. But there are other organizations that offer specialized certificates or other learning opportunities: Council of Real Estate Brokers Managers - CRB - Certified Real Estate Brokerage Manager Council of Residential Specialists - CRS - Certified Residential Specialist Council of Residential Specialists - CRE - Counselors of Real Estate Green Resource Council - Green Designation Institute of Real Estate Management (IREM) has several designations that are available to property managers. Society of Industrial and Office REALTORS® - SIOR SRES Council - SRES - Seniors Real Estate Specialist One of the groups that need special recognition and/or explanation is the Women's Council of REALTORS® - WCR. Members do not have to be women to join. (This is considered to be one of the most prominent organizations in real estate.)
what license holders cannot do
Now, for what a license holder CANNOT do: Commit fraud or misrepresentation Practice without a real estate license or a sponsoring broker Fail to inform TREC of a convicted felony Fail to notify TREC of address or email change Fail to do any of the items under what a license holder must do
the real estate cycle
Okay, now that you know the three ways that appraisers value properties, let's talk about how an agent finds an asking price for a property. The first thing they will take into consideration is whether the local market is currently favoring buyers or sellers. Whether the market is advantageous for buyers or sellers is closely related to the greater economy (nationally and locally) and where we are in the real estate cycle. Real estate is cyclical, and the phases include recession, recovery, expansion, and hyper supply. You'll learn more about this cycle in the Real Estate Finance course.
brokers associates
On the other hand, a broker can work independently and does not require any sponsorship to practice real estate within the confines of the law. A broker can be sponsored by another broker. In this case, they are referred to as broker associates. Sales agents or broker associates can work as an employee or as an independent contractor; most commonly, license holders are independent contractors. Consequently, the licensing processes for a broker and a sales agent are different. Broker license eligibility requirements are greater and require at least four years of experience.
why GRI
One of the reasons for the popularity of the designation GRI is that the current educational requirement for first-time license holders is that they must take three 30-hour courses prior to renewing their license two years after they first received it. GRI just happens to be made up of three 30-hour courses. The best part of GRI is that the courses are structured for what can be referred to as "rubber hits the road" education. In other words, the topics covered in these courses are just what the beginner sales agent needs. 👍
overpricing
Overpricing is one of the most common reasons that a property doesn't sell. That's because many sellers think their property is much more valuable than any other in the neighborhood. A natural thought, but not necessarily the most fruitful to cling to in a real estate transaction.
section 1101.557
Section 1101.557 is all about the minimum level of service a Texas broker can offer their sellers. First, it officially defines an agent as: (a) A broker who represents a party in a real estate transaction or who lists real estate for sale under an exclusive agreement for a party is that party's agent. Any broker that meets that definition of an agent (someone who represents a party in a transaction or who lists real estate for sale under an exclusive agreement) has to follow certain rules. They can't ask another broker to directly or indirectly represent a person who already has signed a representation agreement with another broker. They must tell their client if they receive information related to the real estate transaction they've been hired to do. This generally translates to a requirement to present all offers. A broker can deliver an offer to another broker's client if the representing broker is okay with it, and if a copy of the offer is sent to the representing broker.
sometimes, its smart to UNDERprice
So, instead of overpricing, some savvy sellers agents — particularly in seller's markets — will advise their clients to list at a price just below the CMA's suggested value. This can create a bidding war or multiple offer situation due to the increased buyer traffic early on in the listing period. So, in a lot of cases, the seller could get far more money by listing the home for less than if they had overpriced the listing from the start.
MLS services
Some local associations also offer MLS services to non-members of the association as long as the non-member agrees to follow all of the same rules as REALTOR® members and to disclose in all advertising that they are not a member of NAR.
Fees for professional organizations
Some of these groups have an annual fee that must be paid to continue using the letters that come with the designation. The funds that are received each year help the group to send out monthly newsletters to the membership. The group will also organize special events or conferences for its members.
The National Association of REALTORS®
The National Association of REALTORS® (NAR) is the largest trade association in the United States. The title of REALTOR® can only be used by those who are members of the National Association of REALTORS®. There is a common misconception people have about the label "realtor." The term technically ONLY refers to people who are members of NAR. You can be a licensed real estate agent or broker without joining NAR, but to be a called a REALTOR®, you have to be a member.
ethics updates
The National Association of REALTORS® Code of Ethics is reviewed and updated annually. TRELA is reviewed and updated every two years when the Texas Legislature meets. The Code of Ethics and TRELA guide real estate agents to do the right thing every day.
TREC's authority
The Real Estate License Act provides that the Commission is granted the authority to enforce all the statutes contained in the Act, and adopt and enforce new rules. Licensed real estate professionals and licensed real estate inspectors are responsible for adhering to the Texas Real Estate License Act and abiding by the rules of the Texas Real Estate Commission (TREC). Licensed Real Estate Appraisers are regulated by the Texas Appraiser Licensing and Certification Board. The recently-updated rules of the Texas Real Estate Commission provide for some additional authority of the: Commission Requirements for licensure Practices, procedures, and responsibilities of licensed brokers and sales agents
TREC
The Texas Legislature created the Texas Real Estate Commission (TREC). TREC has two main functions: To enforce all real estate-related statutes in the Texas Occupations Code, Chapter 1101 and 1102, also referred to as The Texas Real Estate License Act (TRELA) To adopt and enforce new rules governing the practice of real estate, as needed to administer the law and protect the public
using comps
The appraiser analyzes how much these comparable properties have sold for and accounts for the differences in the properties. Then, from this study, the appraiser estimates the subject property's market value.
GRI
The designation of Graduate, REALTOR® Institute (GRI) is held by more residential sales agents in Texas than any other designation. For those who have multiple designations, this one is usually the first one that they receive.
Portion of the Property
The final feature of real estate is that someone other than the owner may have the right to use a portion of the property because of an easement that has been granted. I'll explain easements in greater detail later in the course, but essentially an easement is the right to use or cross someone else's land for a specific purpose. The most common example of this feature is the easement that a utility company has so they are able to go onto someone else's land to repair or replace a piece of equipment.
Not Actually Technically a BROKER'S Price Opinion
The person doing a BPO does NOT have to be a broker. However, the action must be performed by someone with a real estate license. Some companies have a policy against agents doing a BPO due to the potential liability and the low fees that lenders are willing to pay to have them done.
sales comparison approach (an agents go to approach because it is used by real estate agents when they prepare comparative market analyses (CMAs) for their clients
The second valuation method we'll learn about is the sales comparison approach, also known as the direct sales comparison approach or market data approach. This approach bases its valuation on the local real estate market. The appraiser is concerned with local market demand for the property. Appraisers rely heavily upon the sales comparison approach for appraising owner-occupied residential properties and vacant land. So, when reconciling the appraised value, the greatest weight is given to the sales comparison approach when the property is an owner-occupied home.
TRELA
The state legislature of Texas passed the Texas Real Estate License Act (TRELA) to protect the public from brokers and sales agents who were dishonest. The law ensures that high standards of ethics and practice are maintained in the real estate industry. It also protects brokers from unfair activities by their competition. There are rules that license holders must follow that pertain to obtaining, and later maintaining, a real estate license. The rules list the penalties for violations of the License Act. The more a license holder, whether a sales agent or broker, understands about TREC Rules and the License Act, the less they have to worry about when it comes to keeping their license active. In essence, TRELA: Empowers the Texas Real Estate Commission to enforce the Real Estate License Act and to make and enforce new rules Requires that those persons who perform any real estate acts as defined in Sec. 1101.002 (to sell, exchange, negotiate, auction, or deal in real estate), in expectation of compensation, must obtain a state license During sessions of the Texas legislature, sections of the Act may be amended to establish the requirements for acquiring a real estate license. The Act may also be amended to establish a broker's accountability to clients and the public for acts performed by the broker or the sales agents they sponsor.
why does a lender want a BPO?
There are two different reasons why a lender would want a BPO performed: 1. The people in the home have asked to refinance the home and the lender does not want to pay for a full appraisal, but they do want to have some assurance that the home is valued at or above what the loan will be. 2. The people in the house are about to be foreclosed on and the lender wants an inexpensive estimate of value.
Scarcity
There aren't too many land factories out there (zero, to be exact). So if a city suddenly grows in popularity and more people want to live near its downtown, not everyone will be able to. There are only a finite number of parcels of land that are close to the downtown area. Scarcity is the economic characteristic that informs the economic principle of supply and demand. The supply of land will never increase, but the demand for land will increase as the population grows. And this is because land is scarce.
Professional Associations
There is a large group of professional associations that are built around real estate. Some of them are created for real estate agents themselves, while others are for people who work with and around real estate transactions. Here's a look at some of them: American Institute of Architects American Planning Association Appraisal Institute Asian Real Estate Association of America Building Owners and Managers Association International International Council of Shopping Centers National Association of Exclusive Buyer Agents National Association of Hispanic Real Estate Professionals National Association of Home Builders National Association of Real Estate Brokers National Association of REALTORS® Texas Apartment Association Texas Association of Mortgage Professionals Texas Association of Real Estate Inspectors Texas Association of REALTORS® Texas Land Title Association Texas Mortgage Bankers Association Texas Real Estate Teachers Association Women in Mortgage Banking
What Professional Organizations Do NOT Do
These professional organizations are NOT to be confused with law-making legislative and regulatory bodies, such as the Texas Real Estate Commission (TREC). They are instead private organizations, and while they have no law-making abilities, they do have influence on the industry. Professional organizations: Do NOT issue real estate licenses or handle licensing requirements Do NOT regulate the industry Do NOT ensure compliance with state or federal laws Do NOT handle disputes that arise between brokers and clients
Finding Comps
To perform an appraisal using the sales comparison approach, an appraiser will collect data from recent sales of similar properties (known as comparables, or comps) to the property being appraised (the subject property). Lenders usually require the appraiser to find at least three comparables. The comparables should have a number of similar features: amenities, square footage, number of rooms, and location. It's alright if the comps have slightly different features, but the closer, the better
broker responsibility
Under the provisions of TREC Rules §535.2 (Broker Responsibility), a broker is required to notify a sponsored sales agent in writing of the scope of the sales agent's authorized activities under the Act. Unless such scope is limited or revoked in writing, a broker is responsible for the authorized acts of the broker's sales agents, but the broker is not required to supervise the sales agents directly. If a broker permits a sponsored sales agent to conduct activities beyond the scope explicitly authorized by the broker, those are acts for which the broker is responsible.
why appraisals matter to lenders
Whatever the method used to find the appraised value, getting an appraisal is an important step in most real estate sales. Usually a lender will require that the property appraises for at least the sales price outlined in the contract. This is often one of the final hurdles to clear in order to get lender approval. Most lenders are keenly interested in whether the appraisal supports the intended purchase price. They want to know that they are not entering a bad deal in the event they get stuck with the property.
NAR Standard of Practice 11-1
When REALTORS® prepare opinions of real property value or price (like a comparative market analysis), other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, such opinions shall include the: Identification of the subject property Date prepared Defined value or price Limiting conditions, including statements of purpose(s) and intended user(s) Disclosure of whether and when a physical inspection of the property's interior was conducted Any conflicts of interest Any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants Basis for the opinion, including applicable market data If the opinion is not an appraisal, a statement to that effect (Amended 1-01)
real property
When you're talking about real estate PLUS the bundle of rights that come with ownership of it
what license holders should do
While these aren't "musts," they are "shoulds," and they represent behaviors that have saved more than one license holder's bacon in the past: Quote the source of any information you share Give that information in writing or, at least, back up verbal statements in writing
income approach
a method of estimating the value of a property by applying a rate of return to the net income it produces
Cost to replace
a method of estimating the value of a property by determining how much it would cost to replace the building or other improvements, minus the cost of depreciation, plus the value of the land itself
sales comparison approach
a property appraisal method that estimates value by comparing the subject property to the sales prices of similar properties in the same market area
personal property
describes items that can easily be removed from the land, while real property is the land, improvements, and bundle of rights. A house is real property. A desk inside the house is personal property.
Perceived Value
each tract has is another feature of real estate. Once again, the value may be determined by the use of the land. But value is also decided by the location of the property. Land at the end of a dirt road in a rural county will have value to someone, but there's a good chance it's not worth as much as a downtown building in a city.
real estate
is made up of the land AND any natural or human-made improvements attached to it (such as buildings, crops, roads, etc.).
land
is the actual piece of the earth, including anything below the surface of the land and the air above it.
When an appraisal report is not available, which of the following provides the BEST data for setting a listing price?
the price willing buyers have recently paid for similar properties in the area