The real estate sector with over $217 trillion in value is the largest asset class globally. There are four main segments of the real estate market; residential, commercial, agricultural and industrial properties. The residential market is predominately home and living spaces that are not professionally related. Commercial real estate relates to offices and retail spaces. Agricultural real estate is used for growing food crops. Lastly industrial real estate refers to manufacturing and production of goods. Property ownership covers the surface area of the land, the buildings on it, the vegetation growing, the minerals below the soil surface, the air above the surface, and water sources found there. These four comprise the greatest majority of land and buildings on the globe. The other type of land is infrastructural which is typically owned by governments for public use such as roads, airports.
All of these real estate investments have the same problems. Some of the headaches in property investments are liquidity, large initial investment, market fluctuations, qualifying for bank loans and mortgages, so many middlemen required to get the right information on properties, management of properties is time-consuming and requires hard work. While there are enormous benefits to real estate investment, these problems keep many people from entering the market and becoming investors.
The sheer number of people involved in nearly every real estate transaction is also daunting. First are the Realtors. There are at least two involved in most transactions. Buyers Agents help real estate investors to find properties for sale. Sellers Agents are responsible for helping to find buyers for the property, sometimes known as Listing Agents. To determine the value of the property an Appraiser is required. The Country Recorder and Auditor establish the title deed and provide information on the taxable value of the property and the real estate property taxes. A Home Inspector is required to determine the condition of all the mechanical and structural aspects of the property. Every property needs a Home Insurer to insure the asset for hazards, damages, and for the mortgage. If someone is selling a home often there is a Home Stager. The job of the Home Stager is to bring out the best in the house for showing it to potential buyers as attractively as possible.
When buying a property using a mortgage a host of other professionals get involved in the transaction. Of course, there is a Mortgage Lender from the bank unless purchasing the property in cash. There is also a Mortgage Underwriter to evaluate your loan application and the property to determine if you and the property meet the Lenders criteria. In most cases, the property will need a Licensed Surveyor to draw the geographical property lines and drawings of the structures. Also, a Title Insurer could be required to protect the buyer and lender against disputes over ownership should they arise. You might also need an Escrow Officer also known as a Loan Officer who works for the bank and acts a neutral third party to facilitate the sales, payment, document preparation, and funds disbursement.
The largest investment most people used to make was the purchase of their own home. As few as 20 years ago, the home purchase paperwork was as short as a 2-page contract! It was less complicated than most lease agreements are today. In the United States, the lure of homeownership has remained stable at around 67 percent which is about the average internationally. This has remained relatively stable internationally at 50 and 70 percent since 1960.
However, as the prices of homes increases and home equity decreases, a decrease within the next 20 years is expected from the Millennial Generation as home prices increase without the equal increase in incomes. A major factor is the availability of mortgages and real estate lending. The median price of a newly built home is now up to $335,000 in the US according to the last Census. To qualify for a mortgage in that range, the individual would need to make more than $90,000 per year leaving only 20 percent of the US population able to qualify. Investors are still investing in the market, but the percentage of homeownership is expected to drop as other investments become more attractive.
One alternative option for real estate investment is Real Estate Investment Trusts (REIT). Numerous shopping malls and retail spaces are built under REITs. Also hotels, office buildings, apartment buildings, and sometimes industrial properties. Investors can buy or sell REITs shares like stocks, bonds, or other securities. REITs are now expected to own about one-third of the commercial real estate market. The 2008 Financial Crisis hit the REIT market hard and many development loans that came due in 2017 were not able to be refinanced and it led to foreclosure.
Bitcoin started to be more widely used in real estate transactions in 2017. It is believed that the first house sold purely using Bitcoin was done in the US in the State of Texas. Bitcoin and other cryptocurrencies can do more than purchase homes and properties as whole units. We believe that real estate tokenization on the blockchain is the next leap forward in Future Living and the sharing economy. Stay tuned for next week’s blog on aassioHOME, a new solution to holding of real estate assets!