Real estate Essay

Introduction

Real estate is a term that refers to land itself or property that is fixed permanently to land. The latter category may entail buildings and any other immovable structures on specific locations. More often than not, most people tend to replace the term real estate with real property as they both refer to the smear things. It should be noted that in law, there is a sharp distinction between personal property and real property in that the former is attached to a person such as clothing, furniture or money. (Mifflin, 2008) However, real property refers to land and those things affixed to it. In all cases, assets considered in real estate are immovable.

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Structure of this industry- markets, products, components, manufacturing processes and technologies that define the industry

The real estate industry has tremendously evolved over the past few years. This is largely because of the growth f private property ownership. This has led to the development of several fields within the industry that cater to the unique characteristics of different pieces of land and they are as follows;

·                   Corporate real estate

·                   Relocation services

·                   Real estate investing

·                   Real estate marketing

·                   Property management

·                   Development

It should b note that the corporate real estate sector deal with the management of properties owned by corporation sin order to support their core businesses. This means that the latter property may not be held to generate direct income as is the case with personally held real property. Relocation services usually assist people to move from region to region or from country to country. Real estate investing generally refers to the management of investments made in real estate while real estate marketing dwells on managing sales sides of property businesses. As the name suggests, property management is the process of managing a real estate property for an owner. In line with this is the sector of development which mostly deals with the process or replacing or improving buildings.

Usually, different businesses may opt to specialize in a different type of real estate i.e. it may be commercial, industrial or residential. However, for purposes of this research, more emphasis shall be given to residential real estate. It should also be noted that construction businesses have a large connection to real estate. (Oxford Dictionary of law, 1997)

Residential real estate entails a series of legal structures. Housing tenure refers to one’s right of occupancy. These may range from condominiums, cooperatives, tenancy, squatting, housing and co-housing arrangements. In certain circumstances, it common to find residential houses that are divided base on heir connections to other neighborhoods. Most of the time, these connected houses may be under one owner who then leases them out. In other situations, the neighborhoods may be owned by different entities but there may be an agreement covering some of the essentials within that arrangement. These residential real estate properties may fall under any of the following categories; apartments (a single unit within a multi unit), multi family house (multi storey detached buildings), terraced houses (multi unit buildings on a continuous row), condominiums (resemble apartments but are owned by different individuals), others are semi detached housing, portable dwellings (a mobile boat, tents, movable home that has wheels) and single family detached homes.

Sizes of houses in the residential real estate sector may either be described in the basis of the living space under consideration i.e. on the square feet or they may be described on the basis of their respective rooms. (Kunz, 2007)

There are a series of products on offer within the residential real estate sector as this is often a service given by real estate agents. One of the most common one is a financial instrument known as a mortgage loan. In most circumstances, the process of buying or improving land can be done through the use of mortgage loans. The latter term refers to loans that are based on the very property being acquired as collateral. Banks are at a position of making such loan offers at certain set rates. However, in the event the property borrower does not have the ability to meet his or her payments, then chances are that the property may be foreclosed. Foreclosure refers to the process of taking back the property by the lender (bank) and then selling it to recover the money that had been lost. Usually, investors are at a position where they can choose to purchase a piece of property that is still in its pre construction phase hence putting themselves at a position where they pay lower for the mortgage scheme.

Historical revolution of the industry

The term real estate has been in use ever since the year 1666. At that time, land was the most valuable asset hence coining of the term real estate. The medieval era in history strongly upheld the importance of land ownership and was even the driving force for development of common law. In certain scenarios, real may refer to the issue of royalty as is the case in Latin or Spanish. At that time, peasants were required to pay taxes on property that belonged to the King or property that was royal hence emanation of the term.

In the past, the real estate sector was a highly opaque. This implied that it was rather difficult to attract investors into the sector. In fact at that time, this industry was treated with suspicion as it differed from traditional definitions of profit making industries. In this regard, it was service driven and this made it very difficult for people to trust.

However, in the nineteen nineties, the industry began embracing technology and more and more people began gaining information about it. Besides that, its systems and mechanisms became clearer to more people and this pulled investors into the industry. In fact, the level of transparency was what made people get interested because it was marketed in such a manner that people could sell whatever the market was looking for.

It should be noted that in the past, the real estate sector was seen as an exclusive reserve for local developers. However, this perception began changing as more and more people began entering into the industry/ there are also other indications that the real estate industry has plummeted over the past few years and this was largely because there are foreign offices that have been set up by US real estate companies.

It should also be noted that in the past, most real estate dealings focused on public companies. However, this meant that such companies could not take advantage of the higher values that may be prevalent in private markets. In fact, most of the time the public markets tend to be well behind their counterparts in private markets owing to the fact that in public markets, only appraised values are given consideration yet in most circumstances; those apprised values are based on the previous year’s sales. The latter characteristic was common in the early to mid nineteen nineties. However, with most people catching up with technology, private companies became more prevalent. (Woodall & Brobeck, 2006)

The latter periods (late nineties to the early 200s i.e. until 2006) saw an increase in interest rates within the residential real estate sector. In fact, this industry became one of the fastest growing industries in the country. However, with time, there came a need to provide borrowers with other mechanisms of entering into the sector and hence the increased success of the hedge fund factor. Prior to the mortgage crisis that his this industry hard, experts began giving warning signs that the sector would not last if there was excessive reliance on hedge funds. They argued that the level of liquidity within such an industry was likely to dry up very quickly and this could occur unpredictable hence the subsequent cases in 2007 to date.

Key success factors and sources of competitive advantage

The nature of competition within the real estate sector is such that companies may compete on the basis of series of dimensions. First of all, they may compete on the basis of service provision. Competitors have different ways in which they can provide assistance to their consumers. In certain scenarios, it is often common to find that there may be MLS searches that the real; estate company offers its clientele. Additionally, it is often common to find that other companies have the capacity to provide clients with access to MLS databases so as to ascertain that these clients carry out their own web searches. (Barondes & Slawson, 2005)

During the process of a particular transaction, competitors have the ability to help buyers in a series of actions. For example, they assist sellers in setting prices, they guide buyers when thinking of an offer price, they assist buyers and sellers through the numerous amount of paperwork required by lawyers, mortgage brokers and inspectors. Lastly, real estate companies usually do broker marketing in which they let the public known about the services that they offer.

All the latter activities may be carried out by one firm or not. The extent to which a firm can effectively carry out these activities will put them at a higher position within the market and is also likely to attract higher numbers of clients to the table.

Price is also another aspect that most of these real estate companies use to compete with. Primarily, some real estate companies can charge lower rebate fees or lower commission fees during a transaction thus placing them at a position of competitive advantage. It should be noted that some companies may choose to charge flat fees for a certain service or a combination of services. On the other hand, there may be others who charge a commission fee that is calculated on the actual price of the home multiplied by a certain percentage rate. Depending on what clients are looking for, this may offers them, a source of competitive advantage.

However, it should be noted that in most local markets, commission rates tend to be rather uniform; consequently, it is often necessary to consider the rate of inflation existent at that time and also to look into the dollar value at that time. Consequently, there are certain external forces that affect the way competition persists within these particular industries. However, this does no undermine the fact that market forces have a large role to play in determining prices within this highly competitive market. (Curran & Schrag, 2007)

Most real estate companies assert that the industry is largely affected by price competition. In fact, one experience company claimed that in cases where a listing attracts about three or four companies, the company that secures the contract is the one that offers lowest commission rates on the house or property under consideration. (Wood, 2008)

It should also be noted that other marketing tactics also apply within this industry. For instance it is common to find a specific company offers discounts when a client chooses to purchase more than one service from that firm. Additionally, there are others who target their poorly performing services and then offer to carry them out at discounts.

Different strategies followed in the industry. Major players and their competitive positions and strategies

It should be noted that within the real estate industry, the leading players are those ones who have managed to secure a good quality home for a buyer/seller in the shortest time possible. Firms that are able to carry out these goals are the ones which are likely to develop greater amounts of leverage within their respective markets. (Nadel, 2006)

It should be noted that in the United States, almost all residential real estate properties are listed within the Multiple Listing Service (MLS) which is a collection of real estate brokerage firms  and homes within a certain residential area. Most of the time, information about the type of more, the commission charges, location and other features require to carry out the transactions are included in this list. (Miceli et al, 2000) Buyers gain an advantage because they can access information about certain properties and locations relatively easily. On the other hand, real estate firms also gain an advantage because they have the ability to share knowledge with other firms thus placing them at an advantage. However, some companies have asserted that the MLS may sometimes be disadvantageous because commission, housing prices and others are controlled by the Service. Nonetheless, this does not undermine the fact that it minimizes the amount of time required to carry out certain transactions since communication has been properly streamlined.

Certain residential real estate companies operate through non traditional business models and these are the companies are making it in the sector. For instance, there are’;

·                                                                                 Full service discount companies

·                                                                                 Fee for service firms

·                                                                                 Virtual Office Website companies

Full service discount companies; in this kind of arrangement, the company under consideration may offer a service a price lower than the traditional rates. In other situations, this may be combined with the use of rebates to home owners in states where rebates are legal. Fee for service firms are those ones that have the ability to offer clients different services at a flat fee. Usually, this is when consumers only require the listing service. If other brokerage services are needed, then they must be purchased by the firm. Lastly, Virtual Office Companies are those ones that register their clients online and may offer the client an access to their MLS database so that they can locate the property that they may be interested in. the latter firms can charge lower commissions that traditional models. (Turtherfrod et al, 2005)

Firms that have made it in the industry, may opt to combine a number of the latter strategy, this is because its model may posses its own advantages and therefore combining them will boost and firms position. An example of such a market leader is Cushman and Wakefield. This company poses one hundred and seventy five offices al over the world. It has made a mark in real estate by combining both traditional services and non traditional ones.

Major trends of the industry and prediction of future structure of firms’ relative positions

A summary of the history of the real estate industry can be seen in the latter table. This is a summary of the percent change of median houses within the United States over the past 15 years. It should be noted that no data is available for 2008 as these are yet to analyzed

Year
Median Home Price ($)
% Change
1991
153, 925
-0.45
1992
153, 235
0.28
1993
153, 632
0.99
1994
155, 145
0.15
1995
155, 365
1.72
1996
158, 029
2.63
1997
162, 168
3.53
1998
167, 881
1.89
1999
171, 031
0.83
2000
172, 427
3.21
2001
177, 939
6.01
2002
188, 634
5.28
2003
198, 557
7.11
2004
212, 655
8.18
2005
230, 059
9.00
2006
233, 409
7.33
2007
198, 405
-12.59
(NAR, 2007)

The residential real estate, much like other real estate sectors heavily relied on hedge funds. This meant that prices within the real estate market had gone up based on assets that did not actually exists i.e. hedges and other derivatives. Consequently, estimates of possible profitability were based on superficially created markets that were not founded on solid investments. Additionally, hedge funds brought a lot of problems because there were numerous real estate loans that were floated in the market and sold to investors in secondary markets that even emanated from different parts of the world. Eventually, this led to protection of lenders who were protected in the event that the primary borrowers choose to default payments. However, this meant that there was a substantial amount of vulnerability to economic downturns and that this is exactly what happened to the industry. The market was boggled down by excessive lending and liquidity levels could not sustain this excessive lending thus leading to the crisis. (Levitt & Syverson, 2005)

Analysis of one firm in the industry

The company chooses for analysis is known as USAA Real estate Company. This company actively advices its consumers about managing properties for both tenants and property owners. Additionally, it looks into the various methodologies of implementing investment opportunities. Besides that, the latter firm is highly responsible for assisting clients to sell, buy, finance, lease or even manage assets at any one time. The following activities are carried out by this firm: strategic planning and research, asset management, suite selection, space location assistance, valuation advice, moving services and many others. (Crokett, 2008)

The company largely operates under the principle of portfolio analysis. Prior to the mortgage crisis and economic recession, the company had increased its market share to fourteen percent. This was conducted through expansion of its portfolio base into certain unconventional sectors such as resorts and hotels. By not just relying on income from residential area, then the latter company was bale to remain steady and still exists today even after the biting recession.

Additionally, this company has maintained a sound market position owing to its increased utilization of the World Wide Web. In most times, companies that gain competitive advantage are those ones that mange to communicate effectively with their clients. Through internet services, this company easily schedules its appointments, follows through on proceedings of transaction and manages to seal the deal thanks to the Internet. (Hahn et al, 2008)

Lastly, the company has taken advantage of certain business models that are in high demand toady. For instance, it has a special package known as the build to suit service in which special client’s approach the company then gets to inform the company about the kind of property that they require and this property is then built for their needs. They have also invested into co-partnering ventures with other categories of investors both within the local and international arena.

Conclusion

The real estate industry is one most volatile yet profitable industries in the country. Consequently, leading players must be highly flexible. They must be ready to embrace unconventional traditional models. They must also be in a position to understand that the best bet against the recession is through innovative technologies and effective product offerings.

References

Mifflin, H. (2008): Real estate, The American Heritage Dictionary of the English Language, 4th edtn

Oxford Dictionary of law (1997): Real Estate, 4th edtn, New York: Oxford University Press

Wood, D. (2008): The Changing Real Estate Market, Oxford University Press

Hahn, R. et al (2008): Paying less for real estate brokerage; American Enterprise Institute Brookings Joint Centre for Regulatory Studies Paper, 15, 33

Kunz, T. (2007): The residential real estate brokerage industry; Taff Report, 9, 58

NAR (2007): Home Buyer and Seller Survey Shows Rising Use of Internet Reliance in Agents, retrieved from http://www.realtor.org/press-room/

Accessed on 25th Feb 2009

Woodall, P. & Brobeck, S. (2006): State Real estate Regulation; Rout ledge

Turtherfrod etal (2005): Evidence from residential brokerage when conflicts between and gents and principals occur, financial Econ, 627

Levitt, S. & Syverson, C. (2005): Market Distortions when agents are better informed; NBER Working paper, 11053

Nadel, M. (2006): Critical assessment of the standard residential real estate broker commission, AEI joint center for regulatory studies, 23

Barondes, R. & Slawson, C. (2005): A study of real estate companies and compliance duties, ORL, 84

Miceli, T. et al, (2000): Relationship agency relationships in the real estate brokerage industry; real estate research, 30, 35

Curran, C. & Schrag, J. (2007): Does it matter whom an agent serves, 265, 269

NAR (2007): the National profile of buyers and sellers; NAR Survey 2007

Crokett, J. (2008): Competition and effectiveness; Journal of the American Real Estate and Urban Economics Association

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