CERTIFIED
BEST REAL ESTATE NOTES
1
,FNCE 424: REAL ESTATE FINANCE AND INVESTMENT
INTRODUCTION:
The Nature Real Estate
Real estate:
RE is property. Property refers to anything that can be owned or possessed. Property can be (1)
a tangible asset, e.g., a building, or (2) an intangible asset, e.g., a lease agreement.
We use the term “real estate” in 3 ways: (1) we use it to refer to tangible assets, e.g., lands and
buildings, (2) we use it to denote the bundle of rights that give the owner of the rights to use
tangible assets, and (3) we use it to refer to the real estate industry or business activities.
RE as tangible assets
RE can be defined as the land and its permanent improvements. Land may include (a) the
surface of the earth, (b) rights to air space above the land up to a certain height, (c) rights to the
subsurface down to the center of the earth and to the minerals contained therein, and (d) the
improvements to the land, e.g., walkways and water drainage systems. The improvements on
the land, e.g., buildings, fences, and decks, are also parts of real estate.
RE as a bundle of rights
The bundle of rights is the services (benefits) that RE provides its users. For example, RE
provides owners with the rights to shelter, security, privacy, doing business, etc.
RE as an industry: career
The industry has a variety of professions: (1) brokerage, (2) leasing and property management,
(3) appraisal, (4) consulting and advising, (5) property development, (6) construction, (7)
financing, mortgage, and securitization, (8) investment, and (9) governmental planning,
taxation, and regulation.
Real Estate Finance Terminology
Real –The word real comes from the word realty which for centuries has been used to mean
land and all things that are permanently attached (immovable structures like Buildings and
other structures)
Personality-Include all movable things like automobiles, stocks of shares and bank accounts
Estate- Means all that a person owns including realty and personality. It is term that denotes
2
,possessory or potentially possessory interest to occupy and use ( sell, use lease or even exclude
others from using) the property during the period in possession.
Real Estate-is a term used to refer to the Physical land and improvements constructed on it
including pavements, fencing and lighting plus others. All things attached to land are included
in the definition of the term. The ownership rights associated with the real estate is referred to
as the real property.
Property Rights-Is an expression that refers to the rights of a person to possession, use,
enjoyment and disposal of his or her property. The holder of the interest in real estate enjoys
some rights or degree of control or use , and to the extent that value can be ascertained, interest
may be sold, bought ,or use it as a collateral for a loan. One need not be the owner of a
particular parcel of real estate to have rights to some of its benefits. A Lesse ‘Person who
leases’ land may have a right of possession and exclusive use of property for the period of the
lease. For this rights the lessee pays rentals for the term of the lease. Similarly, lender, or
mortgagee, has rights to repossess or bring about the sale of property if the
borrower(Mortgagor) defaults on the mortgage loan.The lender is said to possess a secured
interest on the property.
Real Estate Markets
Real estate markets participants are:
• Owner/User - These people are both owners as well as tenants. They purchase houses or
commercial property as an investment and also to live in or utilize as a business
• Owner - These people are pure investors. They do not consume the real estate that they
purchase. Typically they rent out or lease the property to someone else.
• Renter - These people are pure consumers.
• Developers - These people prepare raw land for building which results in new product for
the market.
• Renovators - These people supply refurbished buildings to the market.
• Facilitators - This includes banks, Real Estate Brokers lawyers, and others that facilitate
the purchase and sale of real estate.
The owner/user, owner, and renter comprise the demand side of the market, while the
developers and renovators comprise the supply side. In order to apply simple supply and
demand analysis to real estate markets a number of modifications need to be made to
3
, standard microeconomic assumptions and procedures. In particular, the unique characteristics
of the real estate market must be accommodated.
Characteristics of Real Estate market include:
a) Durability - Real estate is durable.
A building can last for decades or even centuries, and the land underneath it is practically
indestructible. Because of this, real estate markets are modeled as a stock/flow market. About
98% of supply consists of the stock of existing houses, while about 2% consists of the flow of
new development. The stock of real estate supply in any period is determined by the existing
stock in the previous period, the rate of deterioration of the existing stock, the rate of
renovation of the existing stock, and the flow of new development in the current period. The
effect of real estate market adjustments tend to be mitigated by the relatively large stock of
existing buildings.
b) Heterogeneous
Every piece of real estate is unique, in terms of its location, the building, and it’s financing.
This makes pricing difficult, increases search costs, creates information asymmetry and
greatly restricts substitutability. To get around this problem, economists define supply in
terms of service units, i.e. any physical unit can be deconstructed into the services that it
provides. Housing stock depreciates making it qualitatively different from a new building.
The market equilibrating process operates across multiple quality levels. Further, the real
estate market is typically divided into residential, commercial, and industrial segments. It can
be further divided into subcategories like recreational, income generating, area,
historical/protected, etc.
c) High Transaction costs
Buying and/or moving into a home costs much more than most types of transactions. These
costs include search costs, real estate fees, moving costs, legal fees, land transfer taxes, and
deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of
the purchase price. But these costs vary from country to country.
d) Long time delays
The market adjustment process is subject to time delays due to the length of time it takes to
finance, design, and construct new supply, and also due to the relatively slow rate of change
of demand. Because of these lags there is a great potential for disequilibrium in the short run.
Adjustment mechanisms tend to be slow, relative to more fluid markets.
4
BEST REAL ESTATE NOTES
1
,FNCE 424: REAL ESTATE FINANCE AND INVESTMENT
INTRODUCTION:
The Nature Real Estate
Real estate:
RE is property. Property refers to anything that can be owned or possessed. Property can be (1)
a tangible asset, e.g., a building, or (2) an intangible asset, e.g., a lease agreement.
We use the term “real estate” in 3 ways: (1) we use it to refer to tangible assets, e.g., lands and
buildings, (2) we use it to denote the bundle of rights that give the owner of the rights to use
tangible assets, and (3) we use it to refer to the real estate industry or business activities.
RE as tangible assets
RE can be defined as the land and its permanent improvements. Land may include (a) the
surface of the earth, (b) rights to air space above the land up to a certain height, (c) rights to the
subsurface down to the center of the earth and to the minerals contained therein, and (d) the
improvements to the land, e.g., walkways and water drainage systems. The improvements on
the land, e.g., buildings, fences, and decks, are also parts of real estate.
RE as a bundle of rights
The bundle of rights is the services (benefits) that RE provides its users. For example, RE
provides owners with the rights to shelter, security, privacy, doing business, etc.
RE as an industry: career
The industry has a variety of professions: (1) brokerage, (2) leasing and property management,
(3) appraisal, (4) consulting and advising, (5) property development, (6) construction, (7)
financing, mortgage, and securitization, (8) investment, and (9) governmental planning,
taxation, and regulation.
Real Estate Finance Terminology
Real –The word real comes from the word realty which for centuries has been used to mean
land and all things that are permanently attached (immovable structures like Buildings and
other structures)
Personality-Include all movable things like automobiles, stocks of shares and bank accounts
Estate- Means all that a person owns including realty and personality. It is term that denotes
2
,possessory or potentially possessory interest to occupy and use ( sell, use lease or even exclude
others from using) the property during the period in possession.
Real Estate-is a term used to refer to the Physical land and improvements constructed on it
including pavements, fencing and lighting plus others. All things attached to land are included
in the definition of the term. The ownership rights associated with the real estate is referred to
as the real property.
Property Rights-Is an expression that refers to the rights of a person to possession, use,
enjoyment and disposal of his or her property. The holder of the interest in real estate enjoys
some rights or degree of control or use , and to the extent that value can be ascertained, interest
may be sold, bought ,or use it as a collateral for a loan. One need not be the owner of a
particular parcel of real estate to have rights to some of its benefits. A Lesse ‘Person who
leases’ land may have a right of possession and exclusive use of property for the period of the
lease. For this rights the lessee pays rentals for the term of the lease. Similarly, lender, or
mortgagee, has rights to repossess or bring about the sale of property if the
borrower(Mortgagor) defaults on the mortgage loan.The lender is said to possess a secured
interest on the property.
Real Estate Markets
Real estate markets participants are:
• Owner/User - These people are both owners as well as tenants. They purchase houses or
commercial property as an investment and also to live in or utilize as a business
• Owner - These people are pure investors. They do not consume the real estate that they
purchase. Typically they rent out or lease the property to someone else.
• Renter - These people are pure consumers.
• Developers - These people prepare raw land for building which results in new product for
the market.
• Renovators - These people supply refurbished buildings to the market.
• Facilitators - This includes banks, Real Estate Brokers lawyers, and others that facilitate
the purchase and sale of real estate.
The owner/user, owner, and renter comprise the demand side of the market, while the
developers and renovators comprise the supply side. In order to apply simple supply and
demand analysis to real estate markets a number of modifications need to be made to
3
, standard microeconomic assumptions and procedures. In particular, the unique characteristics
of the real estate market must be accommodated.
Characteristics of Real Estate market include:
a) Durability - Real estate is durable.
A building can last for decades or even centuries, and the land underneath it is practically
indestructible. Because of this, real estate markets are modeled as a stock/flow market. About
98% of supply consists of the stock of existing houses, while about 2% consists of the flow of
new development. The stock of real estate supply in any period is determined by the existing
stock in the previous period, the rate of deterioration of the existing stock, the rate of
renovation of the existing stock, and the flow of new development in the current period. The
effect of real estate market adjustments tend to be mitigated by the relatively large stock of
existing buildings.
b) Heterogeneous
Every piece of real estate is unique, in terms of its location, the building, and it’s financing.
This makes pricing difficult, increases search costs, creates information asymmetry and
greatly restricts substitutability. To get around this problem, economists define supply in
terms of service units, i.e. any physical unit can be deconstructed into the services that it
provides. Housing stock depreciates making it qualitatively different from a new building.
The market equilibrating process operates across multiple quality levels. Further, the real
estate market is typically divided into residential, commercial, and industrial segments. It can
be further divided into subcategories like recreational, income generating, area,
historical/protected, etc.
c) High Transaction costs
Buying and/or moving into a home costs much more than most types of transactions. These
costs include search costs, real estate fees, moving costs, legal fees, land transfer taxes, and
deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of
the purchase price. But these costs vary from country to country.
d) Long time delays
The market adjustment process is subject to time delays due to the length of time it takes to
finance, design, and construct new supply, and also due to the relatively slow rate of change
of demand. Because of these lags there is a great potential for disequilibrium in the short run.
Adjustment mechanisms tend to be slow, relative to more fluid markets.
4
