Real Estate Basics For Complete Idiots

By Author: Miachel Tang
Total Articles: 35
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It is our personal belief that any idiot can buy or sell real estate, it is not only our belief it is also a fact, no one would ever believe that a lower class gun touting hill billy from Texas could ever cash in on the prospects of real estate however texas is home to some of the most wealthy real estate investors whom never finished Middle school and began work at the age of 13 to pay the bills after marrying there cousins (ok yeah I know that was out of line). The point we are trying to make is by knowing real estate basics anyone and we mean anyone can make money buying and selling real estate, just read our basics below.

Heterogeneous - Every piece of real estate is unique, in terms of its location, in terms of the building, and in terms of its financing. This makes pricing difficult, increases search costs, creates information asymmetry and greatly restricts substitutability. To get around this problem, economists (beginning with Muth (1960)) define supply in terms of service units, that is, any physical unit can be deconstructed into the services that it provides.

Olsen (1969) describes these units of housing ...
... services as an unobservable theoretical construct. Housing stock depreciates making it qualitatively different from a new building. The market equilibrating process operates across multiple quality levels. Further, the real estate market is typically divided into residential, commercial, and industrial segments. It can also be further divided into subcategories like recreational, income generating, area, historical/protected, etc.

High Transaction costs - Buying and/or moving into a home costs much more than most types of transactions. These costs include search costs, real estate fees, moving costs, legal fees, land transfer taxes, and deed registration fees. Transaction costs for the seller typically range between 1.5 - 6% of the purchase price.

Long time delays - The market adjustment process is subject to time delays due to the length of time it takes to finance, design, and construct new supply, and also due to the relatively slow rate of change of demand. Because of these lags there is a great potential for disequilibrium in the short run. Adjustment mechanisms tend to be slow, relative to more fluid markets.

Both an investment good and a consumption good - Real estate can be
purchased with the expectation of attaining a return (an investment good),
or with the intention of using it (a consumption good), or both. These functions can be separated (with market participants concentrating on one or the other function) or can be combined (in the case of the person that lives in a house that they own). This dual nature of the good means that it is not uncommon for people to over-invest in real estate, that is, to invest more money in an asset than it is worth on the open market.

Immobility - Real estate is locationally immobile (save for mobile homes, but the land underneath them is still immobile). Consumers come to the good rather than the good going to the consumer. Because of this, there can be no physical market-place. This spatial fixity means that market adjustment must occur by people moving to dwelling units, rather than the movement of the goods. For example, if tastes change and more people demand suburban houses, people must find housing in the suburbs, because it is impossible to bring their existing house and lot to the suburb (even a mobile home owner, who could move the house, must still find a new lot).

Spatial fixity combined with the close proximity of housing units in urban areas suggest the potential for externalities inherent in a given location. After learning these basics you two can be rich and finally move out of your parents basement or grandmothers attic.