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Real Estate - Introduction To Real Estate

( Originally Published 1911 )

Real estate is a business, not a profession. Real estate is sometimes inaccurately spoken of as a profession, but it is essentially a business. A profession applies science, art or learning to the use of others, the profit to the professor or person applying it being incidental; whereas a business is engaged in primarily for profit, and the profit is to the one engaging in the business.

A profession implies professed attainment in special knowledge. A person may engage in business with or without special knowledge and no one else is concerned with the question whether he has any knowledge of the business, because no one else is affected by the result. If he is successful the rewards are his; if he fails he bears the loss. But let him attempt to practice a profession and, if he be unskillful, others are directly affected, and the fact that his reward is diminished thereby is merely incidental to the fact that others suffer.

Ethics of the business.—But whether real estate be a business or a profession has no connection at all with the body of ethics governing it.

Every business can be conducted upon a plane ethically as high as the ideals of any profession, and the men who have been conspicuously successful in the real estate business have attained success because they have applied to their business the highest ideals of commercial fair dealing. This does not mean that there is any ethical requirement for the seller or the purchaser to give away anything which belongs to him, or for either one to disclose to the other his necessity for selling or his requirements for buying; but the bargain having been made, it is absolutely necessary that it be lived up to by both parties, according to its intent; and, if there be any doubt of the intent of the bargain as it is expressed in writing, that the spirit of the transaction be carried out rather than that the catch words of a written instrument should govern. Cases are frequent of men who to their own detriment perform the thing which they have promised to do although not legally obligated, and the bigger and more successful the man who makes the promise the more surely will it be carried out. Important obligations are often incurred upon the mere promise of a well-known man to sell an important piece of property at a definite price, although no legal and enforcible obligation exist ; and the promise is always redeemed if it is made by a man who knows the business, and it is redeemed not merely from altruistic motives, but also for purely business reasons.

Divisions of the business.—The principal divisions of the real estate business are investment, operation and agency. These differ from one another according to the aims of the persons engaging in them and the methods by which those persons expect to make their gains. To conduct either of the first two divisions of the business, investment or operation, actual money capital is required. The most important capital in the agency business is the good will of its customers, and that can be husbanded, increased and made very valuable.

Investment is the employment of capital in the acquisition of real estate or interests therein for permanent ownership or actual use of the person acquiring it.

Operation is the employment of capital in the acquisition or improvement of real estate or interests therein for commercial operations.

Agency is dealing in or with real estate on behalf of others.

Investment in real estate is generally made for either of two purposes :

(a) to derive an income,

(b) to hold for resale in expectancy of an increase in value.

Investment for income may be for one of two purposes,

(1) the derivation of rental—that is, the direct return for the use of real property for definite periods, or

(2) the obtaining of income through others upon money lent on the security of real property.

Operation.—Real estate operation may be carried on

(a) for the purchase and sale of land,

(b) for the purpose of building,

(c) for the purpose of lending money upon mortgages.

The purchase and sale of land is that branch of operation which concerns itself with dealing in land as a thing to be bought and sold for profit and loss. It may be divided into two parts :

(1) Speculation, pure and simple, by which land is bought in the hope of a rise in value and resold when that hope is either realized or known to be unfounded.

(2) Development of land, the most conspicuous part of which is the development of vacant tracts by buying them wholesale in their wild condition, making them marketable by bringing them to such a state of development as is implied by putting streets through them, pre-paring them for use and then selling them in small parcels. This is a most important and useful part of the commercial side of the real estate business, and has resulted in the development and settlement of many parts of the country.

That portion of real estate operation which concerns itself in building may be similarly divided into,

(a) Speculative building which consists in building structures primarily for sale, and not necessarily for the use of the constructor, and

(b) Building for investment which consists of the erection of structures for rental or primarily for the use of the person conducting the operation.

That form of operation which is concerned with the lending of money upon real estate security is divided into two parts,

(a) the making of permanent loans,

(b) the making of building or temporary loans.

Permanent loans are moneys lent upon mortgages at current rates of interest, the security being deemed by the lender sufficient to afford an ample margin between the amount of the loan and the actual value of the property, the sum being loaned usually for a definite time.

Building and temporary loans are moneys lent for investment in property, to aid either in putting structures upon it, repairing structures or in the development of wild tracts, the intention being that the money be repaid when the development or reconstruction is finished. Because of the greater risks in the operation and the greater necessity for supervision by the lender, there is compensation in an increased rate of interest over and above the fair value of the loan of the money. For that reason it is to the interest of the borrower that the loan be made permanent and not temporary as soon as may be.

Agency.—Agency is that branch of the real estate business which engages the attention of the greatest number of persons who are concerned with the business, and in that respect it is of prime importance. It is divided into two parts, brokerage and management.

A broker is a person who for compensation, usually proportioned to the value of the subject-matter, brings about transactions between principals.

Brokerage has two divisions according to the kinds of business which usually engage the attention of the broker.

The sales broker is a broker who devotes his time and attention to the bringing about of the sale or exchange of real property.

A loan broker is one who gives his attention to the obtaining of loans upon the security of real property.

One man may practice both branches of the business, or a specialist may devote himself to either of these branches.

Management, the second branch of agency, is the operation of deriving income and caring physically for real estate structures. It concerns itself not only with the deriving of income, but with the keeping down of expenses and the care in making expenditures. It is popularly known as "Agency."

Real estate, property and real property defined.—Real estate is a form of property. Property is the right to possess and use. Real property, a technical legal word, is the right to possess and use land for a time which may last for a life or lives or longer. All other property is, in the eyes of the law, personal property. A lease for 999 years, which is not measured by any life, but which must expire at a definite time, is less in term of time, in the eyes of the law, than a conveyance of a piece of land, the duration of which is measured by a life or by several lives.

When we speak of real property we use the words in their technical legal sense. When we speak of real estate as a commodity and as a business, it embraces the various parts of the business which engage the attention of those who follow it as a vocation, and includes interests which in the eye of the law are not real property, as for example, leases, mortgages, etc.

Every business has in view finally, commercial transactions resulting in the transfer of property of some kind; so in our study of the real estate business we have in mind the transfer of title to real property, and among the various subjects we shall consider, are the interests which there may be in land, limitations on ownership, the making of a contract, the conveyances used, the liens which may affect a piece of property—all of which have an important relation to a final commercial transaction, the transfer of title to real property.

The methods of dealing in real estate and the laws governing it are not arbitrary and were not made for the mystification of others or for the purpose of multiplying legal fees. All systems of law are expressions of two things, the historic customs of the people whom they affect, and the modification of those customs, as changes made those modifications advisable.

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