Lesson 15: Real Estate Construction, Ownership, and Investment Principles of California Real Estate.
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Transcript of Lesson 15: Real Estate Construction, Ownership, and Investment Principles of California Real Estate.
Lesson 15: Lesson 15:
Real Estate Construction, Real Estate Construction, Ownership, and InvestmentOwnership, and Investment
Principles of California Real Estate
Construction
Real estate agents need to know enough about residential construction to evaluate the soundness of a house.
Construction Real estate agents need to know enough
about residential construction to evaluate the soundness of a house.
Sellers and buyers rely on an agent for a preliminary evaluation of the home they’re selling or considering buying.
Construction Real estate agents need to know enough
about residential construction to evaluate the soundness of a house.
Sellers and buyers rely on an agent for a preliminary evaluation of the home they’re selling or considering buying.
In California, agents have a legal duty to perform a visual inspection of any property they sell.
Construction When evaluating the soundness of a home,
a real estate agent should be familiar with the following aspects of residential construction:architectural styleslocal building codes and regulationsthe role of the architectplans and specificationsconstruction methods and terminology
ConstructionArchitectural styles
Architectural style is an important criterion that buyers consider.
ConstructionArchitectural styles
Architectural style is an important criterion that buyers consider.
Style can significantly affect the value of a house.
But one style isn’t inherently better than another; the value of a style depends on buyer’s personal preference.
Some styles common in California:
Ranch: one-story with low-pitched roof
Split-level: a one-story wing and a two-story wing
Modern-style: large picture windows
Bungalow: one-and-a-half stories with gabled roof
Spanish-style: tile roof and stucco exterior
Architectural StylesCalifornia homes
One-story house:least expensive to build and easiest to
maintainbut uses the land least effectively
Architectural StylesOne-story v. two-story
One-story house:least expensive to build and easiest to
maintainbut uses the land least effectively
Two-story house:less expensive per square foot than one-
story house (more living space on one foundation)
but stairs inconvenient for some buyers
Architectural StylesOne-story vs. two-story
ConstructionRole of architect
Architect hired to design a home:creates a design to meet the owner’s needs
and preferences
ConstructionRole of architect
Architect hired to design a home:creates a design to meet the owner’s needs
and preferenceshelps owner obtain government permits and
bids from contractors
ConstructionRole of architect
Architect hired to design a home:creates a design to meet the owner’s needs
and preferenceshelps owner obtain government permits and
bids from contractorsvisits work site to inspect the work and
interpret the plans; acts as owner’s representative at construction site
ConstructionRole of architect
Architect hired to design a home:creates a design to meet the owner’s needs
and preferenceshelps owner obtain government permits and
bids from contractorsvisits work site to inspect the work and
interpret the plans; acts as owner’s representative at construction site
Architect who designed a house can be the best source of information about the house.
ConstructionBuilding codes
Building codes:establish minimum standards for building
materials and construction methods
House ConstructionBuilding codes
Building codes:establish minimum standards for building
materials and construction methodsprevent unsafe and unworkmanlike
construction
House ConstructionBuilding codes
Building codes:establish minimum standards for building
materials and construction methodsprevent unsafe and unworkmanlike
constructionpromote quality and uniformity in home
building; set minimum standards of quality
ConstructionPlans and specifications
Plans: Drawings that show vertical and horizontal cross-sections of a building.Show the placement of foundations,
floors, walls, windows, wiring and fixtures.
Specifications: The text that accompanies plans, specifying construction materials and methods to be used.
Plans and specifications usually prepared by an architect, and take the form of blueprints.
Four types of plans used in the construction process:site plansfoundation plansfloor planselevations
ConstructionPlans and specifications
ConstructionWood frame construction
The most common type of home construction is wood frame building.Popular because of low cost, ease and
speed of construction.Because wood frame construction is so
common, knowing the elements of this type of construction will give real estate agents a good foundation for judging the quality of any home.
ConstructionBasic elements
Basic elements of residential construction:foundationframingexterior sheathing and sidinginterior sheathingroofingfloor coveringplumbingelectrical systemHVAC
Elements of ConstructionFoundation
Foundations are almost always made of reinforced concrete.
Elements of ConstructionFoundation
Foundations are almost always made of reinforced concrete.
Footing: The wide bottom base of the foundation wall.
Elements of ConstructionFoundation
Foundations are almost always made of reinforced concrete.
Footing: The wide bottom base of the foundation wall.
Sill plate: A board on which the wood frame rests that is bolted to the top of the foundation wall.
Framing of house sits on sill plate.
Elements of ConstructionFraming
The frame of a house is typically constructed of wooden boards and dimensional lumber.
Elements of ConstructionFraming
The frame of a house is typically constructed of wooden boards and dimensional lumber.
Framing elements include:
Joists: Parallel boards used to support the load of the floor and ceiling.
Studs: Vertical members attached to the sole plate, which is a horizontal board that rests on floor joists.
Walls serve two purposes:structural supportseparate the interior space into individual
rooms Walls that provide support are load-bearing
walls:often support a second floor or the roofrarely removed during remodeling
Elements of ConstructionFraming
Elements of ConstructionExterior sheathing
Exterior sheathing: Covering applied to the outside of the frame. Most common form is plywood panels,
four feet by eight feet long.Adds shear strength to the walls, i.e. the
capacity of a wall to resist a sideways force.
Elements of ConstructionExterior Siding
Exterior siding: Visible finish layer placed over the exterior sheathing.Should be resistant to weathering and
have aesthetic appeal. Siding may be:
wooden boardsaluminum or vinyl sidingshinglesother materials (stucco, brick, etc.)
Elements of ConstructionInterior sheathing
Interior sheathing: Covering applied to the interior of the frame, to form wall and ceiling surfaces.
Today, drywall process is most commonly used for interior sheathing. Sheetrock and wallboard are common
drywall products. Joints between panels are covered by
“taping” process.
Elements of ConstructionRoofing
The structural part of the roof is composed of the:ridge board (highest member, at the
peak of the roof)raftersplywood or boards laid perpendicular to
the rafters
Elements of ConstructionRoofing
This sheathing is covered with roofing felt and shingles, tar, tiles, wood, metal or other materials.
Flashing: Sheet metal installed around chimneys and other openings to prevent water leakage.
Styles: flat dutch gable hip mansard gable with
dormer
Elements of ConstructionRoofing
Elements of ConstructionFloor covering
The strength of the floor is provided by tongue-and-groove floor boards or plywood attached to the floor joists, which is called subflooring.The subflooring is covered with finished
flooring, e.g. carpet, tile, linoleum, hardwood, concrete, or other material.
Elements of ConstructionPlumbing
Plumbing consists of:fixtures (cast iron or pressed steel)supply pipes (galvanized steel, copper,
or plastic)drain pipes (cast iron, concrete, or
plastic)
Elements of ConstructionElectrical
Most modern electrical wiring is in the form of cable, an insulated cord containing strands of copper or aluminum wire.Cable is run through conduit, metal or
plastic piping that provides added protection.
Elements of ConstructionElectrical
The electrical cables run in circuits from a supply source (fuse box or breaker panel) to the various outlets in the home.A breaker panel is a series of circuit
breakers that automatically shut off the current in an overload situation.
Most outlets supply 110 volts of power, except for certain outlets designed for major appliances, which supply 220 volts.
Elements of ConstructionHVAC
HVAC: The heating, ventilation, and air conditioning systems in a house or other building.Provides warm, cool, or fresh air to the
rooms of a house, through galvanized sheet metal tubes called ducts.
The ducts open at various places, called registers, which can be opened and closed independently.
Elements of ConstructionHVAC
HVAC systems often have an energy-efficient ratio (EER).The higher the EER, the more efficient
the system. Insulation is important for keeping heating
and air conditioning costs low.R-value: An effectiveness rating for
insulation that measures resistance to heat transfer; higher R-value, less heat transfer and better insulation.
Construction Pest problems
Wood frame construction is vulnerable to damage from wood-eating insects, especially termites.
Pest inspection:good investment for buyeroften required by buyer’s lender or (in some
parts of California) the FHA or VAInspector will provide complete report on
structural soundness and list any defects
Construction Termite problems
Termite problems can be minimized by:chemically treating the soil under and
around the house and lumber that’s in contact with soil or foundation
inserting metal shields between the foundation and the wood frame
A pest inspection is usually ordered by the seller upon first listing a property.Unless otherwise agreed, seller usually
pays for correcting existing problems and buyer pays for preventive work.
Inspection report must be:given to property owner and anyone else
who requests a copy (such as a buyer)filed with the state Structural Pest Control
Board, where it will be kept for two years
Construction Termite problems
Construction Soil problems
Another important consideration is the quality of the soil on which the house is built.
It may be advisable for buyer to request:percolation test (measures soil’s ability to
drain water)soil engineer’s test for possible leakage
from nearby underground storage tanks
SummaryConstruction
Architectural styles Architect’s role Building codes Plans and specifications Wood frame construction Pest problems
To Rent or to Buy?
Real estate agents are often asked to discuss the pros and cons of renting versus buying.Some considerations are subjective,
such as security, pride of ownership, freedom to have pets or remodel.
Other aspects are primarily financial, and a real estate agent can evaluate these elements more objectively.
To Rent or to Buy?Advantages of renting
Advantages of renting:less financial commitment and riskgives person greater mobilitycarries fewer responsibilitiesaccess to amenities (e.g. swimming pool,
recreational facilities, tennis courts)
To Rent or to Buy?Advantages of buying
Advantages of buying:security and stabilityprivacy and freedom from restrictionslower monthly payments (eventually)investment appreciationtax advantages, such as mortgage
interest deductions
To Rent or to Buy?Comparison worksheet
Agent talking to potential buyer may want to use comparison worksheet to demonstrate the true net costs of buying versus renting.
To Rent or to Buy?Comparison worksheet
Agent talking to potential buyer may want to use comparison worksheet to demonstrate the true net costs of buying versus renting.
Worksheet shows the benefits of buying by accounting for:tax deductions, andincreasing equity.
To Rent or to Buy?Comparison worksheet
To calculate the true cost of buying:Start with the monthly payment
(including taxes and insurance).Subtract average monthly principal
amortization.Subtract tax savings from mortgage
interest and property tax deductions.Subtract average monthly appreciation.
To Rent or to Buy?Comparison worksheet
To calculate the true cost of renting:Start with the monthly rent on a
comparable property.Subtract the monthly yield on an
investment equivalent to the downpayment.
Choosing a HomeFactors to consider
Several features are important when choosing a home, both in terms of the subjective attractiveness to the buyer, but also with respect to the property’s objective value, as estimated by an appraiser.
Key factors to consider include:neighborhood characteristicshome features (design, site, age,
condition, energy efficiency, etc.)
Choosing a HomeNeighborhood considerations
Since the surrounding neighborhood has a big impact on the home’s desirability and value, careful attention should be paid to neighborhood characteristics.
Choosing a Home
Neighborhood considerations include:percentage of home ownershipconformity among propertiespresence of changing land usescondition of streets and sidewalksavailability of utilities and public servicespresence of quality schoolsavailability of social servicesneighborhood condition: stable or changing?
Choosing a Home
To evaluate the home itself, buyer should consider:site and view
Choosing a HomeEvaluating the home
To evaluate the home itself, buyer should consider:site and viewexterior appearanceplumbing and electrical systems
Choosing a HomeEvaluating the home
To evaluate the home itself, buyer should consider:site and viewexterior appearanceplumbing and electrical systemsHVACattic and/or basement
Choosing a HomeEvaluating the home
To evaluate the home itself, buyer should consider:site and viewexterior appearanceplumbing and electrical systemsHVACattic and/or basementgarage or carportenergy-efficient features
Choosing a Home To evaluate the home itself, a buyer should
consider:site and viewexterior appearanceplumbing and electrical systemsHVACattic and/or basementgarage or carportenergy-efficient featuresinterior floor plandesign deficiencies
Choosing a Home
Examples of design deficiencies that real estate agents and home buyers should be aware of include:Front door opens directly into living roomNo front hall closetBack door difficult to reachDifficult access to dining room, stairways
or basementNo eating area in kitchen
SummaryChoosing a Home
Advantages of buying Advantages of renting Comparison worksheet calculations Neighborhood considerations Evaluating the house
Investing in Real Estate
A real estate agent shouldn’t claim to be an investment counselor, but should have some familiarity with investing in real estate.An investment is an asset that’s
expected to generate a return (a profit).
Investing in Real EstateReturn on investment
A return on an investment may take various forms, including:
Interest: A fee paid to an investor for use of borrowed money.
Investing in Real EstateReturn on investment
A return on an investment may take various forms, including:
Interest: A fee paid to an investor for use of borrowed money.
Dividends: A share of earnings from a business paid to an investor.
Investing in Real EstateReturn on investment
A return on an investment may take various forms, including:
Interest: A fee paid to an investor for use of borrowed money.
Dividends: A share of earnings from a business paid to an investor.
Appreciation: An increase in the value of an asset, due to inflation or increased demand.
Investing in Real EstateTypes of investments
Investments can be divided into two general categories:ownership investments, or debt investments
Investing in Real EstateTypes of investments
Ownership investment: When an investor takes an ownership interest in an asset. Also called an equity.Examples: real estate, stocksReturn on investment usually takes form
of dividends or appreciation (or both)
Investing in Real EstateTypes of investments
Debt investment: When an investor lends money to another person or an entity.Investor lends money for a set period of
time, and receives interest for the service.Examples: government bonds, mortgage
loans, etc.
Investing in Real EstateDiversification
Investor usually try to diversify investments, by choosing a variety of different types of investments, rather than putting all money into one or two types of investments. The mix of investments, plus cash
reserves, is called a portfolio.
Investing in Real EstateInvestment characteristics
Every investment can be evaluated on the basis of three (interrelated) characteristics:liquidity (the ability to be converted into
cash quickly)safetyreturn on investment (or yield)
Highly liquid investments:are usually quite safe,but offer low yields.
Example: savings accounts
Real estate is not a liquid investment, since it can take months to sell a property.
Investing in Real EstateInvestment characteristics
Investing in Real EstateAdvantages
People invest in real estate for many reasons; the advantages of investing in real estate include:appreciationleveragecash flowtax benefits
Advantages of Investing in Real EstateAppreciation
As a property appreciates, the owner’s equity increases.Equity: The difference between a
property’s market value and the liens against it.
Advantages of Investing in Real EstateAppreciation
As a property appreciates, the owner’s equity increases.Equity: The difference between a
property’s market value and the liens against it.
Increase in equity:increases owner’s net worthcan be used as collateral for a loan (cash)
Advantages of Investing in Real EstateLeverage
Leverage: Using borrowed money to invest in an asset.
Advantages of Investing in Real EstateLeverage
Leverage: Using borrowed money to invest in an asset.
If asset appreciates, investor earns money on the money borrowed as well as on the money invested.
Advantages of Investing in Real EstateCash flow
Cash flow: The spendable income generated by an investment, after all expenses have been paid (e.g. operating costs, mortgage payments, taxes).
Advantages of Investing in Real EstateCash flow
Cash flow: The spendable income generated by an investment, after all expenses have been paid (e.g. operating costs, mortgage payments, taxes).
Income property can increase investor’s:net worth (through appreciation)income (through cash flow)
Advantages of Investing in Real EstateCash flow
Cash flow can also be increased through a sale-leaseback arrangement:Building owner sells to another investor
and then continues to lease the property from the new owner.
Seller can deduct the rent paid to lease the property as a business expense.
Advantages of Investing in Real EstateCash flow
Sale-leaseback sometimes includes a buyback agreement:Building owner will buy property back
from investor after specified period.
Advantages of Investing in Real EstateCash flow
Investors may evaluate an investment by looking at “cash on cash,” which refers to the property’s first year cash flow divided by the initial investment.This formula pinpoints the ratio between
cash invested (equity) and cash received.
Advantages of Investing in Real EstateTax benefits
The tax benefits of real estate investment include:deductions for deprecation, mortgage
interest, and operating expensesdeferring taxes with tax-free exchanges
and installment salesSee Chapter 13 for full discussion
Investing in Real EstateDisadvantages
The disadvantages of investing in real estate include:the need for expert adviceproperty management expenseslow liquidityhigh risk
Property value could go down, or income may not be enough to cover expenses
Investing in Real EstateMethods of investment
Direct investment: Purchasing real estate as an individual investor, and leasing it.
Investing in Real EstateMethods of investment
Direct investment: Purchasing real estate as an individual investor, and leasing it.
Indirect investments:real estate investment syndicates,real estate investment trusts (REITs),real estate mortgage investment conduits
(REMICs), ormortgage-backed securities (e.g. Fannie
Mae or Freddie Mac).
Investing in Real EstateTypes of property
Many investors begin by buying a single-family home or duplex.
Investing in Real EstateTypes of property
Many investors begin by buying a single-family home or duplex.
These properties are:relatively easy to sell and affordablelikely to attract stable tenantseasy to manage without a
property manager
Other types of investment properties include:apartment buildingsoffice buildingsretail propertiesindustrial propertiesvacant land
Investing in Real EstateTypes of property
Investing in Real EstateProperty management
Large properties usually require a property manager to oversee day-to-day operations.
Investing in Real EstateProperty management
Large properties usually require a property manager to oversee day-to-day operations.
Property manager’s duties may include:maintaining the propertyhandling tenant complaintscollecting rentslocating new tenantsacting as tenant/owner liaison
State law requires apartments with more than 15 units to have a resident manager living on the premises.
Investing in Real EstateProperty management
State law requires apartments with more than 15 units to have a resident manager living on the premises.
Property managers may be paid a flat fee or a commission.
The commission could be a percentage of gross receipts, of new leases, or of rent expected over the term of the lease.
Investing in Real EstateProperty management
SummaryInvesting in Real Estate
Interest Dividends Appreciation Ownership investments Debt investments Liquidity Safety Yield Leverage