Year: 2020

Debit and credits in real estate come up during closing in a real estate transaction. A debit is money you owe, while a credit is money owed to you. Debits and credits are described on a closing statement in their sections respectfully.

In this article, we are going to define debits and credits, talk about how it deals with real estate, and of course, cover what you need to know about debits and credits for the real estate exam.

What are Debits and Credits?

Definition: Debit is money you owe, while credit is money owed to you.

Debit and credits in real estate come up during closing in a real estate transaction. It’s worth mentioning that because debits and credits in the accounting world are slightly different. In our case, debits and credits come up in closing.

Closing is the final step in executing a real estate transaction. It is when official ownership and payment is transferred to the appropriate parties. Closing usually occurs after a purchase agreement is made, and the title is now ready to be transferred.

On most purchase agreements, there will be a debit and credit section. The debit section highlights items that you owe at closing. At the same time, the credit section covers items that are owed to you. Generally speaking, these debits and credits go hand and hand, meaning a debit is usually balanced by a credit. They typically coexist with one another.

For example, if a seller is credited for repairs made on the house, there will be a debit for the buyer in the same amount. There are some exceptions to this rule, like if a seller’s debit is to a bank or the government, but generally speaking, they are between the buyer and the seller.

Debits and Credit Real Estate Examples

The most common debit and credit real estate example is when a buyer puts down an earnest deposit. An earnest deposit or earnest money is a deposit made to a seller representing a buyer’s good faith to buy a home. At closing, buyers will be credited for this in the form of a credit.

Here are some other debit and credit real estate examples. It’s worth mentioning who pays for what, and for how much, is almost always negotiable, but these are some general debit and credit real estate examples.

• Prepaid Property Taxes: If a seller has paid for the full years’ worth of property taxes and is selling the property, the buyer will then owe the seller the remaining months of taxes (see proration covered in real estate math). This means the seller would be credited for the taxes while the buyer would be debited.
• Prepaid Insurance: If the seller has paid insurance on their home and their policy still has time on it, the seller will get a refund for the amount of time remaining. The seller would be credited while the buyer would be debited.
• Prepaid Homeowner Association Fees: If the seller has prepaid HOA fees, the seller will get a refund for the amount of time remaining. The seller would be credited while the buyer would be debited.
• Past Due Taxes: If the seller has any past-due taxes, this could result in a seller being debited at closing. 
• Repairs or Upgrades: If there are any repairs or upgrades that need to be made before closing, the buyer or seller can pay for them and, in return, receive a credit at closing.

Remember, every state is different. Generally speaking, it’s best to determine your state’s laws regarding debits, credits, and property taxes; some states differ slightly.

What to Know for the Real Estate Exam

What’s important to understand for the real estate exam is how debits and credits function. You might not be asked exactly what a debit or credit is, but you will be asked questions directly related to debits and credits. You’ll have to use your knowledge of those aspects to figure out property taxes, proration, closing problems, and more.

Real estate economics is the application of economic techniques on real estate markets. The primary purpose of real estate economics is to explain and predict prices utilizing supply and demand. Mastering real estate economics can help real estate agents, investors, and more.

In this article, we will define real estate economics, talk about how it deals with real estate, and cover what you need to know about real estate economics for the real estate exam.

What is Real Estate Economics?

Definition: The application of economic techniques in real estate.

As I mentioned before, real estate economics’ primary purpose is to explain and predict patterns of prices utilizing supply and demand. Supply and demand is the core principle and foundation of modern economics. I’m sure most of you have heard the phrase before “supply and demand,” but what does it mean, and how does it apply to real estate?

Supply and Demand

Demand refers to how much of a product or service is wanted by buyers. Supply represents how much the market can offer.

Think of supply and demand like a scale usually; if one side raises, the other will lower or vice versa. Generally, low supply and high demand increase prices. In contrast, the greater the supply and the lower the demand, the prices tend to fall.

It’s worth mentioning that typically the market will slowly adapt. Real estate markets usually adjust pretty slow compared to other markets (for many reasons). It could take weeks, months, or longer, but it does change and can change substantially. The exception is if something drastic happens, like a natural disaster or maybe construction of a new factory that brings in thousands of jobs, then a market can adjust rapidly.

Supply and Demand Real Estate Example

Imagine a big city where demand is high for property. So many people want into this booming city that eventually the supply of available houses lowers. Because of the lack of available houses, people can sell their houses at a higher price. Like a scale, one side rises while the other lowers. That is supply and demand.

Participants in Real Estate Markets

Who makes up real estate markets? Well, the participants do. Users, owners, renters, developers, renovators, and facilitators are the main participants in real estate markets. Keep in mind these definitions may vary slightly (depending on where you are located). These are the general terms for the United States.

• Users: These participants purchase property to live in it, or purchase property to run their business out of.
• Owner: These participants are purely real estate investors. They do not occupy the property that they purchase, instead they rent or lease it to other parties.
• Renters: These participants are purely consumers.
• Developers: These participants buy raw land and develop buildings on it, to be sold in the market.
• Renovators: These participants flip or refurbish properties.
• Facilitators: These participants act as the catalyst for the purchase and sale of real estate. This includes banks, real estate brokers, lawyers, and more.

If you didn’t notice already, typically: users, owners, and renters form the market demand side, while owners, developers, and renovators form the supply side. Owners are on both sides because their choices directly can affect both supply and demand.

Why are Real Estate Markets Unique?

Real estate economics and real estate markets are unique because they have a set of characteristics that the market must accommodate. These characteristics include both physical characteristics as well as economic characteristics.

Physical Characteristics

• Indestructibility: Meaning land cannot be destroyed or worn out. Its appearance may be altered but it always continues to exist. 
• Immobility: Meaning geographical location of the property remains the same & can never be changed, it is fixed. 
• Uniqueness or Non-Homogeneity: Meaning no parcels of real estate are exactly alike. 

Economic or Other Characteristics

• Scarcity: Meaning the total supply is fixed. Land is not limitless.
• Improvements (also known as modification): Meaning improvements to a piece of land can have either a positive or negative impact on its value.
• Permanence of Investment: Meaning investments in real estate are long-term. Since real estate transactions are complex and lots of money is involved, transactions are not made very frequently.
• Location or Area Preference: Meaning people’s preference for a specific area. Things such as history, convenience, and reputation an area may have.

Both sets of characteristics create real estate and establish it as one of the most unique markets. With that in mind, it’s important to remember each one of these characteristics, as they separate the real estate market from the rest.

Why is Real Estate Economics Important?

Mastering real estate economics can help real estate agents, investors, and more. Understanding the market can directly lead to success. The market is a powerful force, and some experts can use their expertise to predict trends and make millions. Employment, income, and population are just a few of those factors. Remember to keep those circumstances in mind during your real estate career.

What to Know for the Real Estate Exam

What’s important to understand for the real estate exam is supply and demand, the participants in real estate markets, and of course, both sets of characteristics (physical and economic). Knowledge of those aspects will give a strong enough grasp on real estate economics that you should be able to pass that portion of the exam. For more real estate concepts and terms, check out our article: Real Estate Terms: The Ultimate Guide.

Ingress and egress just mean entering and exiting; however, there is more to it than that. Ingress and egress issues in real estate can be complicated, so it’s super important to understand how it all works.

First off, to fully understand ingress and egress, you must somewhat understand what an easement is.

For those who do not know what an easement is – an easement is a right held by one person to use the land of another for a specific purpose, such as driving through someone else’s property.

Keep that in the back of your mind as you go through these brief definitions.

What is Ingress and Egress?

Ingress

Definition: The right to enter a property.

Egress

Definition: The right to exit a property.

As simple as that sounds, there are some things we have to address. First and foremost, these rights come together. After all, it’s impossible to enter a property and not be able to exit it. So when hearing these terms, remember that they go hand and hand.

Verifying ingress and egress rights is an essential part of the due diligence process when purchasing property for both real estate agents and buyers. If one of your clients is planning to buy landlocked property, don’t assume anything. Check records. Have the land surveyed, if necessary, take extra steps to ensure the property holds an easement for ingress and egress.

What is an Easement for Ingress and Egress?

Definition: An easement used for entering and exiting a property.

Why do we need to define that? Well, because there are different types of easements, of course! This type of easement explicitly has to do entering and exiting a property.

It’s also worth noting an easement for ingress and egress may not be written into the deed. Sometimes it may be listed on a separate document or even sometimes implied verbally. Or in some extreme circumstances written into the deed that appears valid but maybe legally defective.

Ingress and Egress Example

Let’s say Aaron can’t get to his property from a public road without crossing over his neighbor Ron’s property. In this situation, Aaron needs an easement for ingress and egress over Ron’s property.

What to Know for the Real Estate Exam

Well, you need to know how ingress and egress work. Simply put, ingress and egress just mean entering and exiting property. You also need to understand what an easement for ingress and egress means. Which, as we discussed earlier, is an easement used for entering and exiting a property.

Color of title refers to a claim to title that appears to be legally valid but may be defective. As you probably know in real estate, things can be complicated, so it’s vital to understand all legal concepts fully.

Before we jump into specifics, though, if you have no idea what title is – title exists to prove ownership. Having title is not a physical thing, though. It’s NOT like a deed where there is an actual paper in the courthouse that says you own the property. No. Title is a legal concept. It’s worth mentioning this because, like title, color of title is a legal concept, not a physical thing.

Now with that being said, let’s take a look at the term color of title.

What is Color of Title?

Definition: The legal concept of a claim to title appearing to be legally valid, but in actuality, the claim is defective.

So what does this mean? Well, color of title refers to a claim that may have the appearance of having valid title to that property, but in reality, the person either does not hold actual title, or there is a significant defect in the deed/written documents supporting title, that makes it invalid.

It’s also worth noting just because the claim is invalid, that doesn’t mean it can’t turn into a valid claim, to do that the titleholder would need to go through something called adverse possession.

Color of Title and Adverse Possession

Color of title is often discussed in adverse possession claims. Adverse possession is a legal principle under which a person who does not have legal title to a property acquires legal ownership. If adverse possession is claimed under color of title, usually the claims are met sooner or in an easier fashion.

What to Know for the Real Estate Exam

Well, you need to remember what color of title means. Remember color of title is a claim appearing to be legally valid, but in actuality is defective.  You should also find out if it’s a requirement in your state for adverse possession claims.