Real Estate Financing

There are several different types of loans you can get for real estate depending on what you want and who you are. The article Different Types of Real Estate Home Loans summarizes some of the most common types of loans available in today's market.

Financing real estate can be quite expensive so its very rare that real estate investors pay the entire amount of the purchase price in cash. Usually a large portion of the purchase if financed with financial instruments or debt. The amount of the purchase financed with debt is called leverage. Forbes' article Top 10 Sources of Funding entails a list of financing options for start-ups. For some more creative ways to finance real estate, this article states for other methods people use for financing.

Overview of Real Estate Financing

Some of the major players in the housing financing system include the Federal Housing Administration,  the Veterans Administration, Ginnie Mae, Fannie Mae, and Freddie Mac.

FHA: created in 1934 to restore confidence in the mortgage market system, helped establish rigorous borrowing and lending standards that reduced lenders' risk and promoted use of long term, fully amortizing loans that were more consistent with household budgets than the interest only loans that were prevalent at the time.
Veterans Administration: began to guarantee mortgage loans on a large scale as a part of the so-called GI Bill of Rights, allowed veterans to obtain mortgage loans for home purchases with little or no down payment and low interest rates.
Ginnie Mae: organized as a vehicle for providing subsidized loans to borrowers through various FHA loan programs.
Fannie Mae: created to buy mortgages from lenders and to serve as a clearinghouse for the secondary mortgage market, originally established to operate a secondary market for FHA insured loans and provide FHA insured loans to low income borrowers in remote areas.
Freddie Mac: created to operate a secondary market for conventional loans similar to the one provided by Fannie Mae and Ginnie Mar for FHA and VA mortgages.

If you're looking for a job in real estate finance, there are numerous opportunities available to you. You can work with private mortgage insurers, mortgage bankers, mortgage brokers, commercial banks, and many others. Click this link to read a brief summary of different careers in real estate finance.

One topic that arises in real estate financing is foreclosure. In this article by CNN Money, states that foreclosures fell in 62% of major markets. Many see this as a sign that the housing market is starting to stabilize. The article argues that "most of the nation's housing markets are past the worst of the foreclosure problem."  

Real Estate Appraisal

What is real estate appraisal? The following video explains what an appraisal is, why it is important,  and how it is done.

There are three approaches to real estate valuation. This link summarizes the sales approach, the cost approach, and the income approach and what steps each approach involves. The sales approach is commonly used in appraising single family homes and land. The cost approach is used to estimate the value of properties that have been improved by one or more buildings, and the income approach is based on the relationship between the rate of return an investor requires and the net income the property produces. 

Appraisers are often viewed as having no stake in doing a good or timely job. There is some debate over whether or not real estate appraisal will be a viable career in the future. The following link discusses two views on the future of appraisal. One view is that appraisals will no longer be needed, and the opposite view is that appraisals will always be needed and that the industry is growing.

What is takes to be a Real Estate Appraiser

So how do you become an appraiser?

There are four different categories of appraisers. The first category is a trainee appraiser. Under this category, you must work under the supervision of a licensed/certified appraiser who is ultimately responsible for the work you perform. To be a trainee appraiser you must complete at least 75 hours or classroom training in appraisal topics. There is no experience required and no exam to be passed. As you gain experience you can move on the the next category, a licensed real property appraiser. Licensed appraiser can perform appraisals involving one- to four- unit residential properties in transactions less than $250,000, and noncomplex properties in transactions less than $1,000,000. To become a licensed appraiser you must complete 150 hours of classroom training, must pass a written exam on appraisal topics, and must have at least 2000 hours of experience. The third category is a certified residential appraiser. This kind of appraiser can perform appraisals on residential one to four units without regard to transaction amount or complexity. To become a certified  residential appraiser you must complete 200 hours of classroom training, pass an exam, and must have at least 2500 hours of experience. Finally the last and most advanced category is a certified general appraiser. This appraiser can appraise any type of property. To be a certified general appraiser you must complete 300 classroom hours, pass an exam, and have a minimum of 3000 hours of experience.

So what does a real appraiser actually do? The video below gives a quick, but informational summary of an appraisers job description.

With so many appraisal companies out there, you could feel overwhelmed by who to choose. I have provided a website link that lists the Top 10 Appraisal Management Companies in the United States. These ten companies can help you no matter what state you live in or what kind of property you need appraised.

Now if you have an interest in becoming a real estate appraiser, you probably want to know how and how much you get paid. CNN's money magazine has named this career one of the best jobs in America. Click on the link to get all the statistics on what real estate appraisers make and the opportunities if you decide to pursue this career.

Public Restrictions on Ownership

Now you don't just have to worry about private restrictions, you have to worry about public restrictions too. There are tons of public restrictions from zoning regulations to subdivision regulation to building codes. Government can also create limitations on the ownership of real estate. These limitations come from the governments power of taxation, eminent domain, police power, and escheat. 

One example of eminent domain that may hit close to home involves a Canadian company trying to build a pipeline to the Texas Gulf Coast. The article Texas Rice Farmers Object to Pipeline Plan, explains that some Texas farmers are outraged at the possibility that they might lose land to a Canadian company to build a pipeline. Although President Obama has rejected the company's proposal, it is continuing to redesign the plan in hopes that they can get their plan approves. In a case like this, if the Canadian Company get permission to build to the Texas Gulf coast, there isn't much more the farmers can do. This type of government restriction can be very controversial seeing as many property owners are not okay with getting their land taken from them.

The video above provides a detailed account of how the Plano Building Inspections Department works. From this video you can see how tedious and complex the process is just to get your building approved for construction. There are a lot of steps to go through before a new building is complete. 

Another type of public land restriction is zoning. Most major cities have a zoning ordinance, but here in Texas we like to be different. Houston, Texas, is the only major city in the United States without a zoning ordinance. In the article Pros and Cons of Zoning in Houston Texas, some interesting points are made as to why Houston should or should not start zoning. Those against zoning claim that keeping Houston free of zoning "gives owners the ability to choose how their land is used, maximizes a property's potential, and allows for mixed use development." Those for zoning claim that Houston would be better off because zoning "give the community more control over how the land is used, preserves existing neighborhoods, and provides a citywide planning vehicle." Either way zoning is definitely a controversial topic and not only in Houston, Texas. 

So I've given a few examples of government and public restrictions but for a more in-depth explanation of different restrictions click here!

Private Restrictions on Ownership

Private restrictions, also known as private encumbrances, are restrictions and limitations on the fee simple ownership rights that generally run with the land. There are several types of private restrictions including covenants, conditions, and restrictions (CC&Rs), liens, easements, profit a prendre, adverse possession, and encroachments. 

The article Residents of Eastern Travis County Taking Advantage of New Easement Program is a good example of how an easement can work. Farzad Mashhood reports that residents in Travis County, Austin are being paid by the government to permanently restrict development on certain lots. The main goal is to protect some of the land in Travis County so that it isn't all developed.  This type of easement is known as a conservation easement which prevents specific uses of the real estate by the owner. 

In the article Restrictions-What you can't see can affect you, author Rona Fischman explains how many home buyers will 
move into a property expecting that they can do that every they want with it. She give two specific examples of private restrictions that can stop homeowners from doing what they wish with their property-zoning and deed restrictions. Zoning can restrict owners from expanding or modifying their homes. It can stop you from doing something as simple as putting up a fence. The other example Fischman mentions is deed restrictions. Deed restrictions are placed by sellers to make sure the property they are selling is used or certain way or not used a certain way. For example, if you buy a large lot with the intent to build several houses on it, but the deed restriction says that it is to remain one lot with one house, then your plans are ruined and you can no longer use the land as you planned. 

So how can private restrictions affect real estate owners? Well they can sometimes surprise owners, and they are usually never good surprises. It's very important to know before hand how you can and can't use your property and what you can do with it. You don't want your plans for some property to get ruined because you didn't bother to ask about restrictions a head of time. 

Property Rights and Legal Descriptions

What is a property right? 

According to "The Concise Encyclopedia of Economics," property rights are "the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals." 

This may sounds simple enough, but property rights are much more complex than they seem. You have to worry land rights, mineral rights, water rights, air rights, and so much more. Property rights affect what you can do with your property, what you can't do with your property, and what others can do with your property. 

In the video The Power of Property Rights, Professor Tom W. Bell of Chapman University School of Law does a fantastic job of explaining property rights and how they affect society as a whole and as individuals. Basically he "explains that property rights allow people to live together in peace, prosperity, and freedom. They prevent conflicts over scarce resources, encourage productive labor, and discourage waste," and I completely agree with him. When it isn't clear who own certain property, it isn't in anyone's interest to preserve and protect it which leads to neglect and waste. Such is the case with many foreclosed homes. This video gives a clear picture of why property rights are so important.

Next topic, legal descriptions. What are they? 

Legal descriptions is a way to define or accurately pinpoint where a particular piece of property is located. There are different kinds of legal descriptions. Right is an example of a Metes-and-Bounds Description. 

Metes= Distance used in description

Bounds= directions of boundaries enclosing a piece of land

Another type of legal description is the Rectangular Survey System. This system includes principal meridians (running north and south) and baselines (running east and west). The picture to the left shows all the principal meridians and base lines in the United States. Sections and townships are two other terms associated with this type of legal description. Townships are 6 square miles consisting of 36 sections (640 acres in each section). This type of description can get a bit confusing. Visit How To Read Legal Descriptions to get a better understanding of how to read different legal descriptions as well as tons of examples of each!