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Fillmore W. Galaty, Wellington J. Allaway, and Robert C. Kyle, withKaren Stefano, Consulting Editor, and Chris Read, Contributing Editor

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Fillmore W. Galaty, Wellington J. Allaway, and Robert C. Kyle, with Karen Stefano, Consulting Editor, and Chris Read, Contributing Editor

REAL ESTATEModern

Practice in IllinoisEIGHTH EDITION

MREP_in_IL_8E.indb 1 4/28/2014 12:14:00 PM

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

President: Dr. Andrew TemteChief Learning Officer: Dr. Tim SmabyExecutive Director, Real Estate Education: Melissa Kleeman-MoyDevelopment Editor: Christopher Kugler

MODERN REAL ESTATE PRACTICE IN ILLINOIS EIGHTH EDITION©2014 Kaplan, Inc.Published by DF Institute, Inc., d/b/a Dearborn Real Estate Education332 Front St. S., Suite 501La Crosse, WI 54601

All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher.

Printed in the United States of America

ISBN: 978-1-4277-4832-4 / 1-4277-4832-2PPN: 1510-7008


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iii

Introduction ixAcknowledgments x

C H A P T E R 1

Introduction to the Real Estate Business 1Key Terms 1A Very Big Business 2Real Estate: A Business with Many Specialties 2Professional Organizations 4The Real Estate Market 5Summary 8Chapter 1 Quiz 9

C H A P T E R 2

Real Property and the Law 11Key Terms 11Land, Real Estate, and Real Property 12Ownership of Real Property 14Real Property and Personal Property 15Characteristics of Real Estate 17Laws Affecting Real Estate 18Summary 19Chapter 2 Quiz 21

C H A P T E R 3

Concepts of Home Ownership 25Key Terms 25Home Ownership 26Housing Affordability 27Homeowners Insurance 30Federal Flood Insurance Program 31Summary 32Chapter 3 Quiz 33

C H A P T E R 4

Real Estate Agency 37Key Terms 37Introduction to Real Estate Agency 38Law of Agency 38Types of Agency Relationships 52Customer-Level Services 61Summary 62Chapter 4 Quiz 64

Contents


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iv Contents

C H A P T E R 5

Real Estate Brokerage 67Key Terms 67Real Estate Brokerage 68Antitrust Laws 84Other Consumer Protection Measures 85Summary 88Chapter 5 Quiz 89

C H A P T E R 6

Brokerage Agreements 93Key Terms 93Brokerage Agreements 94Types of Listing Agreements 94The Listing Process 97The Listing Agreement 100Buyer Agency Agreements 108Qualifying Buyer Services 114The Buying Process 114Termination of Broker Employment Agreements 115Summary 117Chapter 6 Quiz 119

C H A P T E R 7

Interests in Real Estate 123Key Terms 123Limitations on the Rights of Ownership 124Governmental Powers 124Estates in Land 126Encumbrances 131Nature and Water: Rights and Restrictions 136Summary 138Chapter 7 Quiz 141

C H A P T E R 8

Forms of Real Estate Ownership 145Key Terms 145Forms of Real Estate Ownership 146Ownership in Severalty 146Co-Ownership 146Trusts 152Ownership of Real Estate by Business Organizations 154Condominiums, Cooperatives, Town Houses, and Time-Shares 156Summary 161Chapter 8 Quiz 163


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vContents

C H A P T E R 9

Legal Descriptions 167Key Terms 167Describing Land 168Methods of Describing Real Estate 168Preparing a Survey 177Measuring Elevations 178Summary 179Chapter 9 Quiz 181

C H A P T E R 10

Real Estate Taxes and Other Liens 185Key Terms 185Liens 186Real Estate Tax Liens 188Other Liens on Real Property 194Summary 198Chapter 10 Quiz 201

C H A P T E R 11

Real Estate Contracts 203Key Terms 203Contract Law 204Discharge of Contracts 209Contracts Used in the Real Estate Business 211Summary 232Chapter 11 Quiz 234

C H A P T E R 12

Transfer of Title 237Key Terms 237Title 238Voluntary Alienation 238Involuntary Alienation 246Transfer of a Deceased Person’s Property 247Summary 249Chapter 12 Quiz 251

C H A P T E R 13

Title Records 255Key Terms 255Public Records 256Proof of Ownership 260Summary 262Chapter 13 Quiz 264


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vi Contents

C H A P T E R 14

Illinois Real Estate License Law 267Key Terms 267Introduction 268Administration of the Real Estate License Act of 2000 268Obtaining and Keeping a Real Estate License 270License Categories and Requirements (225 ILCS 454/5) 273The Licensing Examination 276The Real Estate License 277License Fees 280Continuing Education 280Your Real Estate Business and the Act 282Disciplinary Provisions and Loss of License 289The Real Estate Recovery Fund 295Summary 297Chapter 14 Quiz 298

C H A P T E R 15

Real Estate Financing: Principles 301Key Terms 301Introduction 302Mortgage Law 302Security and Debt 303Promissory Notes 303Mortgage Document or Deed of Trust 306Provisions of Land Contracts and Other Owner Financing 311Foreclosure 311Summary 315Chapter 15 Quiz 317

C H A P T E R 16

Real Estate Financing: Practice 319Key Terms 319Introduction 320The Real Estate Financing Market 320Financing Techniques 324Loan Programs 328Other Financing Techniques 331Financing Legislation 334Summary 336Chapter 16 Quiz 338

C H A P T E R 17

Leases 341Key Terms 341Leases 342Leasing Real Estate 342Leasehold Estates 342Lease Agreements 345Basic Types of Leases 351Other Lease Arrangements 352


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viiContents

Discharge of Leases 353Fair Housing and Civil Rights Laws 355Lead-Based Paint 355Regulation of the Rental Industry 356Summary 357Chapter 17 Quiz 359

C H A P T E R 18

Property Management 363Key Terms 363The Property Manager 364The Management Plan and Agreement 365Property Manager’s Responsibilities 367Risk Management 372The Management Profession 374Summary 375Chapter 18 Quiz 376

C H A P T E R 19

Real Estate Appraisal 379Key Terms 379Real Estate Appraisal 380Appraising 380Value 382The Three Approaches to Value 384The Appraisal Process 392Summary 400Chapter 19 Quiz 402

C H A P T E R 20

Land-Use Controls and Property Development 405Key Terms 405Land-Use Controls 406The Comprehensive Plan 406Zoning 407Building Codes and Certificates of Occupancy 411Subdivision 411Private Land-Use Controls 413Regulation of Land Sales 414Summary 415Chapter 20 Quiz 418

C H A P T E R 21

Fair Housing and Ethical Practices 421Key Terms 421Introduction 422Equal Opportunity in Housing 422Fair Housing Act 423Fair Housing Practices 428Implications for Real Estate Licensees 432


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viii Contents

Professional Ethics 432Summary 433Chapter 21 Quiz 435

C H A P T E R 22

Environmental Issues and the Real Estate Transaction 439Key Terms 439Environmental Issues 440Hazardous Substances 440Groundwater Protection 450Underground Storage Tanks 452Waste Disposal Sites 453Brownfields 454Environmental Protection 454Liability of Real Estate Licensees 456Environmental Site Assessments 457Summary 457Chapter 22 Quiz 459

C H A P T E R 23

Closing the Real Estate Transaction 461Key Terms 461Closing the Real Estate Transaction 462Preclosing Procedures 462Conducting the Closing 466Real Estate Settlement Procedures Act (RESPA) 471Preparation of Closing Statements 478Prorations 481Sample Closing Statement 486Summary 491Chapter 23 Quiz 492

C H A P T E R 24

Real Estate Mathematics 495Key Terms 495Introduction 496Fractions, Decimals, and Percentages 496Area 497Finance Problems 499Summary 500Chapter 24 Quiz 501

Practice Illinois Real Estate Licensing Exams 503Glossary 553Answer Key 575Index 589


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Introduction

Whether you are preparing for the Illinois real estate licensing examination, ful-filling a college or university requirement, looking for specific guidance about buying a home or investment property, or simply expanding your understanding of this fascinating field, you can rely on Modern Real Estate Practice in Illinois for accurate and comprehensive information in a format that is easy to use.

■■ SPECIAL FEATURES

Illinois-Specific Content Illinois-specific laws and topics appear throughout the text for classroom and study emphasis. Where appropriate, chapter quizzes also include Illinois-specific questions. Also included are two sample licensing examinations and an Illinois-specific exam.

Key Terms Key terms appear at the beginning of each chapter. This feature not only lets you know what important vocabulary words you should look for as you read but also helps you to study and review.

Margin Notes Margin notes direct your attention to important vocabulary terms, concepts, and study tips. They help you move more easily through the text and locate issues for review, and they serve as memory prompts for more efficient and effective studying.

Summaries Chapter summaries provide you with a quick review of the most essential content covered in each chapter.

Real Estate Mathematics Chapter 24 covers real estate mathematics, com-plete with common terms and equations. As an additional time-saving reference tool, the most frequently used real estate math equations are printed inside the front and back covers of the book.

Updated and Revised Chapter Quizzes and Sample Examinations These quizzes and exams have been revised with demanding fact-pattern problems that encourage you to not just memorize but also understand and apply information—important test-taking and exam-preparation skills. The questions have been care-fully designed to follow the style and content of the most widely used testing services and to demonstrate the types of questions that you will likely encounter on state licensing exams.

Glossary The glossary contains definitions for every key term in the book.

As always, the fundamental goal of Modern Real Estate Practice in Illinois is to help you understand the dynamics of the real estate industry, providing the critical information needed to pass the licensing examination, buy or sell property, or establish a real estate career.


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Acknowledgments

Like a real estate transaction, this book is the product of teamwork and coopera-tion among professionals. We would like to express our gratitude and appreciation to the instructors and other real estate professionals whose invaluable suggestions and advice help Modern Real Estate Practice in Illinois remain the state’s leading real estate principles text. Whether they responded to instructor surveys, provided suggestions for improving the previous edition, or reviewed the manuscript for this edition, the participation of these professionals—and their willingness to share their expertise—is greatly appreciated.

■■ CONSULTING EDITOR

Karen Stefano is the co-author of Before Hitting Send: Power Writing Skills for Real Estate Agents, a how-to business writing and marketing guide targeting the unique needs of real estate professionals. She has published articles in Arizona REALTOR® Magazine, New Jersey REALTOR®, Georgia REALTOR® Magazine, California Lawyer, and elsewhere.

Karen is a JD/MBA with more than 20 years of complex litigation experience. She is also a licensed real estate broker. She received her BA from the University of California, Berkeley in 1985, a JD from the University of California, Davis in 1990, and an MBA with an emphasis in corporate finance from the University of San Diego in 2004.

■■ CONTRIBUTING EDITOR

Chris Read of CR Strategies has been training and coaching real estate agents for 30 years. She is a licensed continuing education and prelicensing instructor and has authored numerous courses and education resources. She has achieved the designations of CRB, CRS, GRI, ABRM, AHWD, CIPS, CNC, SFR, and BPOR.

Chris brings to the classroom experiences from many leadership roles with the local, state, and national REALTOR® associations, including president of the Mainstreet Organization of REALTORS®; Mainstreet broker-lawyer; chair of the Illinois Association of REALTORS® (IAR) Professional Standards, Business Issues, License Law Rewrite, Education Rules Task Force; and chair of the IAR Professional Standards, Business Issues, License Law Rewrite, Education Rules Task Force.

She chaired the National Association of REALTORS® (NAR) Conventional Finance and Lending subgroup How to Bring Private Capital Back into the Mar-ket, which resulted in policy adopted at the 2012 NAR convention. She has served on multiple listing service boards and currently serves on the Illinois Real Estate Administration and Disciplinary Board.


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xiAcknowledgments

■■ REVIEWERS

Each new edition of Modern Real Estate Practice in Illinois builds on earlier editions. The authors would like to thank the following individuals for their reviews of this and prior editions of this book:

■■ Jean Bartholomew■■ Elyse Berns■■ Maureen Cain■■ Patrick Cal■■ William Carmody■■ Sandra CeCe■■ Michael Fair■■ Ron Hardgrove■■ Richard Ives■■ Kerry Kidwell■■ Maureen LeVanti■■ Deborah Lopes■■ Vincent Lopez■■ Laurie MacDougal■■ Rose McDonald■■ Derek McNeal■■ Clarke Marquis■■ Sam Martin■■ Lynda McKay■■ Sue Miranda■■ Robert Mocella■■ Francis Patrick Murphy■■ Wayne Paprocki■■ Joyce Bea Sterling■■ Dawn Svenningsen■■ Alan Toban■■ Casey Voris■■ Barry Ward■■ Terry W. Watson■■ Mary Wezeman■■ Martha Williams


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Introduction to the Real Estate Business

■■ LEARNING OBJECTIVES When you finish reading this chapter, you will be able to

■■ identify the various career opportunities available in real estate and the professional organizations that support them;

■■ describe the five types of real property;■■ explain the operation of supply and demand in the real estate market;

and■■ distinguish the economic, political, and social factors that influence

supply and demand.

■■ KEY TERMS

brokeragemarket

real estate licenseesponsoring broker

supply and demand

1C H A P T E R


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2 Modern Real Estate Practice in Illinois Eighth Edition

■■ A VERY BIG BUSINESS

Real estate transactions take place all around us, all the time. When a commercial leasing company rents space in a shopping center or the owner of a building rents an apartment, it’s a real estate transaction. If an appraiser gives an expert opinion of the value of farmland or a bank lends money to purchase an office building, it’s a real estate transaction. Most common of all, when a family sells its old home to buy a new one or steps into the housing market for the first time, it’s a real estate transaction. Consumers of real estate services include home buyers and sellers, tenants and landlords, investors, and developers. Nearly everyone at some time is an active participant in the real estate industry.

All of this adds up to big business—complex transactions that involve billions of dollars every year.

The services of highly trained individuals are required to support these transac-tions: attorneys, bankers, appraisers, abstract and title insurance agents, archi-tects, surveyors, accountants, tax experts, home inspectors, and many others, in addition to buyers and sellers. All of these people depend on the skills, knowledge, and integrity of licensed real estate professionals.

■■ REAL ESTATE: A BUSINESS WITH MANY SPECIALTIES

Despite the size and complexity of the real estate business, many people think of it as consisting only of brokerage. Actually, the real estate industry is much broader than that. Appraisal, property management, financing, subdivision and develop-ment, home inspection, counseling, education, and auctioning are all separate businesses within the real estate field. To succeed in this complex industry, every real estate professional must have a basic understanding of these specialties.

Brokerage Brokerage is the business of bringing people together in a real estate transaction. A real estate licensee acts as a point of contact between two or more people in negotiating the sale, purchase, or rental of property. A real estate licensee may be the agent for the buyer, for the seller, or for both. The property may be residential, commercial, or industrial. Illinois license categories include broker, managing broker, and leasing agent. All licensees are employed by a sponsoring broker and conduct brokerage services on behalf of that sponsoring broker. A managing broker, who may or may not be the owner, must be designated to supervise the licensees and run the office. Leasing agents bring together tenants and prospective rental properties. The sponsoring broker is ultimately responsible for the actions of all licensees working under the umbrella of that particular firm.

Appraisal Appraisal is the process of estimating a property’s market value based on established methods and the appraiser’s professional judgment. Although real estate training will provide brokers and managing brokers some understanding of the valuation process, most lenders require that a loan package be accompa-nied by a professional appraisal performed by a licensed appraiser. The appraisal substantiates the sales price of the home and assists the lender in determining maximum loan amount. Appraisals are also used for refinancing and insurance


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3Chapter 1 Introduction to the Real Estate Business

purposes. Detailed expertise in all methods of valuation is required. In order to perform appraisals in Illinois, an appraiser license is required.

Property Management A property manager is a person or company hired to maintain and manage property on behalf of its owner. By hiring a property man-ager, the owner is relieved of many day-to-day management tasks, such as find-ing new tenants, collecting rents, altering or constructing new space for tenants, ordering repairs, and generally maintaining the property. The scope of the manag-er’s duties depends upon the terms of the property management agreement. What-ever tasks are specified, the property manager must protect the owner’s investment and maximize the owner’s return on his investment. In Illinois, property manage-ment requires a real estate license, and an individual real estate licensee must per-form property management services under the supervision of his or her sponsoring broker.

Financing Financing is the business of providing the funds that make real estate transactions possible. Most transactions are financed by means of mortgage loans or trust deed loans secured by the property. Individuals involved in financing real estate may work in commercial banks, mortgage banking, or mortgage brokerage companies. A growing number of real estate brokerage firms affiliate with mort-gage brokers to provide consumers with one-stop-shopping real estate services. Mortgage brokers and the loan officers working for them must be licensed and registered in Illinois.

Subdivision and Development Subdivision is the splitting of a single property into smaller parcels. Development involves the construction of improvements on the land. These improvements may be either on site or off site. Offsite improve-ments, such as water lines and storm sewers, are made on public lands to serve the new development. Onsite improvements are additions or enhancements within the buildings or lots being sold that increase the value of the properties within the development. Onsite improvements include roads and infrastructure or new buildings. While subdivision and development normally are related, they are independent processes that can occur separately.

Home Inspection Home inspection is a profession that allows practitioners to combine their interest in real estate with their professional skills and training in the construction trades or in engineering. Professional home inspectors conduct a thorough visual survey of a property’s structure, systems, and site conditions and prepare an analytical report that is valuable to both purchasers and homeowners. In Illinois, home inspectors must be licensed.

Professional inspections occur on other types of property as well. For example, commercial properties may undergo an environmental assessment to determine the probability of hazardous substances being present on the property. In Illinois, a home inspection license is required to perform home inspections.

Counseling Counseling involves providing clients with competent indepen-dent advice based on sound professional judgment. A real estate counselor helps clients choose among the various alternatives involved in purchasing, using, or investing in property. A counselor’s role is to furnish clients with the information needed to make informed decisions. Professional real estate counselors must have a high degree of industry expertise.


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Education Real estate education is available to both practitioners and consum-ers. Colleges and universities, private schools, and trade organizations all offer real estate courses and seminars, from the principles of a prelicensing program to the technical aspects of tax and real property exchange law. State licensing laws establish the minimum educational requirements for obtaining—and keeping—a real estate license. Continuing education requirements help ensure that licensees keep their skills and knowledge current.

Auctioning Buying or selling real estate at auction uses an open and competi-tive bidding process to transfer property. In Illinois, as in many states, auctioneers have licensing requirements.

Other Areas Many other real estate career options are available. Practitioners will find that real estate specialists are needed in a variety of business settings. Lawyers who specialize in real estate are always in demand. Large corporations with extensive land holdings often have their own real estate and property tax depart-ments. Local governments must staff both zoning boards and assessment offices.

Types of Real Property

Just as there are areas of specialization within the real estate industry, there are different types of property in which to specialize. Real estate can be classified as

■■ residential—all property used for single-family or multifamily housing, whether in urban, suburban, or rural areas;

■■ commercial—business property, including office space, shopping centers, stores, theaters, hotels, and parking facilities;

■■ industrial—warehouses, factories, and land in industrial districts;■■ agricultural—farms, timberland, ranches, and orchards; or■■ special purpose—churches, schools, cemeteries, and government-held lands.

The market for each of these types of property can be subdivided into the sales market, which involves the transfer of title and ownership rights, and the rental market, in which space is temporarily leased.

Most licensees choose to specialize in only one type of property, such as residential or commercial.

■■ PROFESSIONAL ORGANIZATIONS

Many trade organizations serve the real estate business. The largest is the National Association of REALTORS® (NAR). NAR sponsors various affiliated organiza-tions that offer professional designations to brokers, managing brokers, and other professionals who complete required courses in areas of special interest. Mem-bers subscribe to a Code of Ethics and are entitled to be called REALTORS® or REALTOR-ASSOCIATES®. You must be a member of NAR to use the term REALTOR®.

NAR has the following affiliated institutes, societies, and councils:

■■ Counselors of Real Estate (CRE)■■ Institute of Real Estate Management (IREM)

Five Categories of Real Property

1. Residential2. Commercial3. Industrial4. Agricultural5. Special purpose


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■■ REALTORS® Land Institute (RLI)■■ REALTORS® National Marketing Institute (RNMI)■■ Real Estate Buyer’s Agent Council (REBAC)■■ Certified Real Estate Brokerage Manager (CRB)■■ Certified Residential Specialist (CRS)■■ Graduate, REALTOR® Institute (GRI)■■ Council of Residential Specialists (CRS)■■ Society of Industrial and Office REALTORS® (SIOR)■■ Women’s Council of REALTORS® (WCR)

The National Association of Real Estate Brokers (NAREB), whose members are called Realtists, was formed in 1947 by African-American real estate professionals out of a need to secure the right to equal housing opportunities. Today, NAREB remains dedicated to equal housing opportunity.

The National Association of Hispanic Real Estate Professionals (NAHREP) is the largest minority trade group in the real estate industry. Its mission is to advance sustainable Hispanic homeownership by educating and empowering real estate professionals who serve Hispanic home buyers and sellers.

The Asian Real Estate Association of America (AREAA) is a nonprofit profes-sional trade organization dedicated to promoting sustainable homeownership opportunities in Asian-American communities by empowering real estate profes-sionals who serve this dynamic market.

Other professional associations include the following:

■■ American Society of Appraisers (ASA)■■ National Association of Independent Fee Appraisers (NAIFA)■■ Real Estate Educators Association (REEA) ■■ National Association of Exclusive Buyer Agents (NAEBA) ■■ Building Owners and Managers Association International (BOMA)■■ Certified Commercial Investment Managers (CCIM)■■ American Society of Home Inspectors (ASHI)

Members are expected to comply with the standards of practice and code of con-duct as set forth by each organization.

■■ THE REAL ESTATE MARKET

A market is a place where goods can be bought and sold. A market may be a specific place, such as the village square, or it may be a vast, complex, worldwide economic system for moving goods and services. In either case, the function of a market is to provide a setting in which supply and demand can establish market value, making it advantageous for buyers and sellers to trade.


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Supply and Demand

The forces of supply and demand in the market determine how prices for goods and services are set. Essentially, when supply increases and demand remains stable, prices go down; when demand increases and supply remains stable, prices go up. Greater supply means producers need to attract more buyers, so they lower prices. Greater demand means producers can raise their prices because buyers compete for the product.

Supply and Demand in the Real Estate Market Two characteristics of real estate govern the way the market reacts to the pressures of supply and demand: uniqueness and immobility. Uniqueness means that no matter how similar two par-cels of real estate may appear, they are never exactly alike. Each occupies its own unique geographic location, and two properties are never exactly the same inside. Immobility refers to the fact that property cannot be relocated to satisfy demand where supply is low, nor do buyers necessarily make relocation decisions based on greater housing supply in a certain locale. For these reasons, real estate markets are local markets. Each geographic area has different types of real estate and different conditions that drive prices.

Because of real estate’s uniqueness and immobility, the market sometimes adjusts relatively slowly to the forces of supply and demand. Although a home offered for sale can be withdrawn in response to low demand and high supply, it is much more likely that oversupply will result in a lower price. When supply is low, on the other hand, a high demand may not be met because development and construction are lengthy processes. As a result, development tends to occur in uneven spurts of activity.

Even when supply and demand can be forecast with some accuracy, natural disas-ters can disrupt market trends. Similarly, sudden changes in financial markets, unemployment, and foreclosures can dramatically disrupt a seemingly stable market.

Because some forces in these cycles are unpredictable, the best approach is to assume that “good markets don’t always last.” Skilled real estate licensees are aware of and recognize predictable indicators of the cycles so they can better assist clients in making intelligent sales and purchase decisions.

Factors that tend to affect the supply side of the real estate market’s supply and demand balance include the labor force, construction and material costs, govern-ment controls, and financial policies.

Factors Affecting Supply

Labor Force and Construction Costs A shortage of skilled labor or building materials or an increase in the cost of materials can decrease the amount of new construction. Construction permit fees and high property transfer costs can also discourage development. An attempt may be made to pass increased construction costs along to buyers and tenants in the form of higher prices and increased rents, which can further slow the market.

When supply increases and demand remains stable, prices go down. When demand increases and supply remains stable, prices go up.Price follows demand: High demand results in high prices, while low demand results in low prices.

Factors That Affect the Supply of Real Estate

■■ Labor force■■ Construction costs■■ Government controls■■ Government financial

policies


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Government Controls and Financial Policies The government’s mone-tary policy can have a substantial impact on the real estate market. The Federal Reserve establishes a discount rate of interest for the money it lends to its member banks. That rate has a direct impact on the interest rates that banks charge to bor-rowers. These interest rates play a significant part in people’s ability to buy homes. The Federal Reserve Board attempts to keep the rates at a level that will keep the market moving without leading to inflation.

Governmental agencies, such as the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), also have impact by insuring or guar-anteeing loans. They are intended to benefit the economy, the consumer, and housing purchases.

Virtually any government action has some effect on the real estate market. Even eminent domain used to “take” land for a highway project may shift the supply or value of land in a local market.

Policies on the taxation of real estate can have both significant and complex effects on the real estate market. Real estate taxation is a necessary source of revenue for local governments. High taxes may deter investors but may also be necessary to maintain continued economic growth within the community. Tax incentives can attract new business and industries. With these enterprises come increased employment and expanded residential real estate markets.

Local governments also can influence supply. Land-use controls, building codes, and zoning ordinances help shape the character of a community and control the use of land.

Factors Affecting Demand

Factors that tend to affect the demand side of the real estate market include popu-lation, demographics, and employment and wage levels.

Population Shelter is a basic human need, so the demand for housing grows with the population. Although the total population of the country continues to rise, the demand for real estate increases at a faster rate in some areas than in others. In some locations, growth has ceased altogether as the population has declined. This may be due to economic changes (e.g., high unemployment), social concerns (e.g., going green), or population changes (e.g., shifts from colder to warmer climates). The result can be a drop in demand for real estate in one area matched by an increased demand elsewhere.

Demographics Demographics is the study and description of population. The population of a community is a major factor in determining the quantity and type of housing in that community. Family size, the ratio of adults to children, the ages of children, the number of retirees, family income, lifestyle, and the growing num-ber of single-parent and empty-nester households are all demographic factors that contribute to the amount and type of housing needed.

I N P R A C T I C E “Niche marketing” refers to a subset of the market, both in the products and the people who will buy the product. The phrase may reference a spe-cific group in a specific geographical area or property category. It can also refer to the

Factors That Affect the Demand of Real Estate

■■ Population■■ Demographics■■ Employment and wage

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demographics that it is intended to impact—for example, marketing to specific demo-graphic populations such as the baby boomers (born between 1946–1964), Gen-Xers (born between 1965–1976), and millennials (born between 1977–1998), or agents fluent in Spanish and English marketing to Hispanic consumers. By understanding the various niches, real estate licensees are better able to service buyers and sellers on their purchase and sale decisions.

Employment and Wage Levels Decisions about whether to buy or rent and how much to spend on housing are closely related to income. When job opportu-nities are scarce or wage levels low, demand for real estate usually drops.

■■ SUMMARY

The real estate market depends on a variety of economic forces, such as interest rates and employment levels. To be successful, licensees must follow economic trends and anticipate where they will lead. How people use their income depends on consumer confidence. Consumer confidence is based not only on perceived job security but also on the availability of credit, the impact of inflation, and actions of the Federal Reserve Board. General trends in the economy, such as the avail-ability of mortgage money and the interest rate that must be paid to have it, will strongly influence an individual’s decision to invest in real estate.

Although brokerage is the most widely recognized real estate activity, the indus-try provides many other services. These include appraisal, property management, property development, counseling, property financing, and education. Most real estate firms specialize in only one or two of these areas; however, the highly com-plex and competitive nature of our society requires that a real estate licensee be knowledgeable in a number of fields.

Real property can be classified by its general use as residential, commercial, indus-trial, agricultural, or special purpose. Although many real estate licensees deal with more than one type of real property, they usually specialize to some degree.

A market is a place where goods and services can be bought and sold and where price levels can be established based on supply and demand. Because of its unique characteristics, real estate is usually relatively slow to adjust to the forces of supply and demand.

Real estate supply and demand is affected by many factors, including changes in population and demographics, wage and employment levels, construction costs, availability of labor, and governmental monetary policy and controls. Demand influences supply. High demand, high prices; low demand, low prices.


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1. A professional estimate of a property’s market value, based on established methods and using trained, professional judgment, is performed by a a. real estate broker.b. real estate appraiser.c. real estate counselor.d. home inspector.

2. In general, when the supply of a certain commodity increases,a. prices tend to rise.b. prices tend to drop.c. demand tends to rise.d. demand is unchanged.

3. Which of these factors tends to affect supply in the real estate market?a. Populationb. Demographicsc. Government controls and financial policiesd. Employment and wage levels

4. Which factor MOST likely influences the demand for real estate?a. Labor forceb. Construction costsc. Wage levels and employment opportunitiesd. Government financial policies

5. Property management, leasing, appraisal, financing, and development are all examples ofa. factors affecting demand.b. specializations within the real estate

industry.c. non–real estate professions.d. government regulation of the real estate

industry.

6. A REALTOR® isa. a specially licensed real estate broker.b. any real estate broker who assists buyers,

sellers, landlords, or tenants in any real estate transaction.

c. a member of the National Association of Real Estate Brokers who specializes in residential properties.

d. a real estate licensee who is a member of the National Association of REALTORS®.

7. A major manufacturer of automobiles announces that it will relocate one of its factories, along with 2,000 employees, to a small town. What effect will this announcement MOST likely have on the small town’s housing market? a. Houses will become less expensive.b. Houses will become more expensive.c. The announcement involves an issue of

demographics, not a supply and demand issue; housing prices will stay about the same.

d. The announcement involves an industrial property; residential housing will not be affected.

8. A licensee who has several years of experience in the industry decided to retire from actively marketing properties. Now this licensee helps clients choose among the various alternatives involved in purchasing, using, or investing in property. What is the licensee’s profession?a. Real estate counselorb. Real estate appraiserc. Real estate educatord. REALTOR®

9. The term REALTOR® refers toa. any real estate licensee.b. a real estate licensee specializing in

residential properties.c. a real estate educator.d. a member of the National Association of

REALTORS®.

CHAPTER 1 QUIZ


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10. Schools are considered part of which real estate classification?a. Special-purposeb. Industrialc. Commerciald. Government-held

11. When demand for a commodity decreases and supply remains the same,a. price tends to rise.b. price tends to fall.c. price is not affected.d. the market becomes stagnant.

12. The term appraisal is defined as thea. process of splitting a single property into

smaller parcels.b. method of estimating a property’s market

value based on established methods and the appraiser’s professional judgment.

c. transfer of funds in the financing of real estate transactions.

d. process of providing clients with competent independent advice.

13. The Federal Reserve Boarda. monitors the Federal Housing

Administration.b. monitors nationwide construction costs.c. establishes a discount rate of interest for the

money it lends to its member banks.d. establishes real estate appraisal standards.

14. All of these are categories of the uses of real property EXCEPTa. residential.b. developmental.c. agricultural.d. industrial.

15. All of these would affect overall demand in the real estate market EXCEPTa. population.b. demographicsc. wage levels.d. zoning ordinances.

16. All of these affect how quickly the forces of supply and demand work EXCEPTa. degree of standardization of the product.b. mobility of the product.c. degree of standardization of the product’s

price.d. mobility of the parties to the transaction.

17. A real estate professional who performs a visual survey of a property’s structure and systems and prepares an analytical report for a purchaser or an owner is acting asa. an educator.b. an appraiser.c. a property manager.d. a home inspector.

18. When the supply of a commodity decreases while demand remains the same, price tends toa. rise.b. drop.c. not be affected.d. go in the direction of supply.

19. When responsible for maintaining a client’s property and maximizing the return on the client’s investment, a real estate licensee is serving asa. a rental agent.b. a building maintenance specialists.c. a property manager.d. an investment counselor.

20. Detailed information about the age, education, behavior, and other characteristics of members of a population group is calleda. population analysis.b. demographics.c. family lifestylesd. household data.


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MODERNREAL ESTATEPRACTICE in IllinoisEIGHTH EDITION

FEATURES:

• Reflects the most recent legislative changes in Illinois, including the 2012 changes to the Real Estate License Act of 2000

• New and revised topics include housing affordability and tax benefits, fiduciary and statutory responsibilities, Illinois homestead exemptions, parts of a sales contract, foreclosures and short sales, and how to close a sale

• Essential Illinois-specific laws, topics, and forms are presented throughout the book

• Margin notes, chapter summaries, and a complete glossary of key terms illustrate and clarify key concepts

• Revised end-of-chapter quizzes assess retention of key concepts

• Updated sample exams provide 350 questions on national and Illinois-specific real estate principles and practice

Contents:

Introduction to the Real Estate BusinessReal Property and the LawConcepts of Home OwnershipReal Estate AgencyReal Estate BrokerageBrokerage AgreementsInterests in Real EstateForms of Real Estate OwnershipLegal DescriptionsReal Estate Taxes and Other LiensReal Estate ContractsTransfer of TitleTitle RecordsIllinois Real Estate License Law Real Estate Financing: Principles Real Estate Financing: PracticeLeasesProperty ManagementReal Estate AppraisalLand-Use Controls and Property DevelopmentFair Housing and Ethical PracticesEnvironmental Issues and the Real Estate TransactionClosing the Real Estate TransactionReal Estate Mathematics

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