105. The Real Estate Business

All right, welcome back to another episode. I'm Ray Tesske and I'm going to be discussing the business or the real estate business. The business of real estate. So the real estate industry is the largest single industry in the American economy. And if I get an email from Martha Mangum here in San Antonio, she's the executive director of the real estate council of San Antonio, which is an advocacy group for the real estate development community. And in her email, of course, it gets updated as needed. But in the signature line of her email, it says, do you know how important real estate development industry is to the San Antonio area economy? It generates approximately one seventh of the areas economic output. It employs 133,500 people in the San Antonio area. It has an economic impact of 35.8 billion each year. It has a payroll of 6.7 billion each year and it generates approximately 232.8 million in tax revenue. So you look at the impact that's just in San Antonio or the San Antonio area. It's the multiply that out throughout the United States. Real estate can be said to include the creation management and demolition of every residents and business facility in the United States. So what this means is that, you know, under that umbrella, that's all sorts of real estate come into play there. So homes, if you've lived in an apartment. So we look at the creation management and demolition. So building a house building an apartment building, managing that multifamily facility offices, warehouses, factories, retail stores, special purpose properties. We've got such as golf course, you know, other entertainment venues like top golf. So if you look at, you know, just imagine driving down the road on your way to work or on your way to school or wherever you're going and look at it, you know, take a 360 perspective of everything that's out there, everything that's around you. And how that relates to real estate and then also not just real estate itself. So where we've got the dirt and improvements to or on the real estate. But also in terms of the jobs, you know, the business of real estate that ties into those properties that you see. Or their cranes up, you know, in the skylines, you know, of downtown San Antonio or Houston or Austin or Dallas. You know, do you see apartment buildings being built or office buildings being developed industrial buildings being developed and then associated with that there, those are jobs. And then you've got people that wants that, wants that building or that improvement is finished. Then you've got an in many instances, the management of that property. The real estate business also includes managing undeveloped land in the United States, such as parks, forests and other federal, state and local undeveloped land. And there's a significant amount of undeveloped land within the United States. And I don't have the physics on me, but the amount that's actually owned by the federal government is significant. If you look at the number of federal parks and then not just the parks, but if you look at, you know, properties that are under the BLM Bureau of Land Management. And then all the other federal properties that exist and that are either leased or that are operated. Those are those are develop properties. But if we look at under just undeveloped land, it's a significant percentage of land in the United States. And then also land owned by by the state and then also local government as well. If we look at real estate activities, real estate professionals are individuals and business organizations who solve enterprise is performing a real estate related service or function. So in terms of how does that person fit into going back to the creation management or demolition of properties in the United States. So real estate professionals perform the following property related functions. So creation and improvement management and maintenance demolition. So we've already talked about those three investment ownership is the fourth one regulation is the fifth and transfer is the six. So creation and improvement is one management maintenance is two. Demolition is three investment ownership is four regulation is five and then transfer six. So we're going to talk about those. So if we look at the creation and improvement. So this involves, you know, taking raw land and then developing it, you know, creating something on that land developing something on that land. And so in relation to that, that that involves a couple of there's a couple of elements that are required that tie into that. We've got capital formation, which is raising equity. So if you have a developer that wants to develop a piece of land, let's say built it could be anything built in office building, build a retail project, a multifamily project that that developer has to raise equity. Now sometimes the developer will put some of its own money in his equity. Sometimes they will, you know, their equity will be the work that they're performing that developing the property managing the development phase of the property. And so they've got to get investors to raise equity because the next the next element is financing. So the developer is going to have to get alone to support that development. And so the lender is going to say, you know, we'll give you 60% 70% you know back in the good old days 80% LTV. And so that means the if there was an 80% LTV that means the developer would have to raise 20% equity. And in many cases if the land is already paid for then the land can be included as part of that equity cost. But if it's if it's a 60% LTV then the lender is going to loan 60% debt on that property. And that means the developer is going to have to raise 40% in equity. And so that's the capital formation and the financing pieces. So the equity and the debt. So financing is equivalent to debt. And then capital formation is equivalent to equity. Construction contracting is another element and then regulatory approvals. So as part of that process you've got the developer. So you know through a couple of different means obtains a general contractor and then that general contractor in turn hires subcontractors to develop to to construct that property or to construct that improvement I should say. And then as part of that process though the developer has to get government approval. And so in the San Antonio area we call that the entitlement process. So that's going through all the requirements where the government or the local government signs off on that project. So capital formation, financing, construction contracting and then regulatory approvals fall under that development heading creating properties from raw land. The key parties involved in the development of real estate and there's a laundry list here. We've got the developer. So that's the individual entity that will develop the real estate project. We've got the land owner. And so that's the individual who will sell the land to the developer. We've got investors. As I said, those investors provide equity. We've got the mortgage lender who provides the debt. There are analysts that come into play. You know there's a lot of students that understand corporate analysts or the analyst function on the corporate side. Well we've got the same you know same position or same function on the real estate development side as well. We've got a we've got to look at the market in terms of where are we going to buy it? Where's the developer going to buy land and why? Why is the developer going to buy land in that location? The analysts are going to be involved on running the construction costs, running the investment analysis to determine if building that project that real estate development on that piece of property is a feasible investment. And so that's that has to be done before the product well before you know that's that's that's a process that's ongoing within the within the real estate developers. A company or organization to determine where should they build and why and is it sustainable as an investment. We've got architects that drop the plans we have attorneys that drop the documents we've got government regulatory officials that are employed by the company. the city or the county that approve role-state developments. We've got the contractor and subcontractors. We've got the surveyor. We've got the civil. We've got engineers too. We've got the civil and mechanical electrical and plumbing. Space planners. So once the building is built, how is that you know space going to be filled out? Interior designers, landscape design architect, insurance companies that provide insurance for the project during construction and then post construction. We've got title companies that provide a title policy for that project. We've got CPAs that provide a county support to the developer and there are CPAs that specialize in representing role-state developers and role-state related organizations because there are counting rules that apply specifically to the real-state side of the business. We've got property managers that manage the property on the day to day aspect of that management of that property and then we have asset managers. We'll get into a little bit more detail on property managers and asset managers here in a minute. So we'll end that's next. So under creation improvement we've got management and maintenance of the property as well. So real-state whether it's raw land or improved land must be managed and maintained. There are two types of managers. There are property managers and then there are asset managers. So what's important to know about property managers is that you know and you may just have one property manager or you may have a property manager and a whole staff. And in larger organizations you may have an area of property manager that is over the property managers. So it kind of a supervisor over a property manager who's a supervisor over the property managers themselves. And so the property manager and if there's a staff so property managers and the staff oversee the management of one or more specific properties for an owner. So a lot of times what you it depends on the the property. So if you've got a class a property you know office building you may have one property manager assigned to that building because there's a there's a significant role for that individual to fulfill. And in that case there would be a staff for that individual. So that property manager oversees the management of one or more specific properties for an owner. They ensure the condition of the property and its financial performance meets specific standards. So the owner is going to have certain requirements for that property and it could be I want to improve the property. I want to maintain it or I want to pull as much cash out as possible in just defer maintenance. So it depends on what that owner's you know overalls perspective is in terms of owning that property. And then same thing on the budget side. So there will be a budget set and on an annual basis. So just like with the business with the corporation or any business they should set a budget before they usually it's in the the fourth quarter. You probably use your round October or starting in October and then that budget's going to get certified or you know get finalized and then that budget is what is going to be used to manage that business for the next year. Well the same thing applies to a real estate project. So a budget's going to be put in place and then that budget is going to be used to manage that property on a day-to-day basis. And so the the property managers role is to ensure that the property operates under that budget. Now there's there's there's some things that change like the property manager can't control the cost of taxes or can't control the cost of insurance but but that property manager should have a good idea of what those costs are going to be. And if you you get locked into an insurance premium for the for the given year then for the next budget for the next year's budget then that's likely going to be revised based on what that next year's premium is going to be. But taxes go up you know the says value comes out in end of April beginning of May and then you go through the tax protest process and so that is going to apply for the for for that year you're going to get assessed as of January 1 of what's on the ground January 1 and then those taxes are going to become doing payable in October of that year and then not become delinquent until February 1 of the following year and so all of that has to get managed. The and then the cost of electricity you know or water or sewer can go up or down and so all that's got to be managed and then you get into all the different trades that tie into the building you know so building engineers and plum plumbers and electricians and etc. So part of that also includes managing the not just the staff but also the trades. If you've got security contract you know to provide security for the property managing the security contract making sure the lights stay on making sure everything runs and operates like it's supposed to and then also includes repairing the building if if that falls under the you depend again it goes back to what the owner's objective is for that property but you know if there's a leaky faucet making sure that leaky faucet gets repaired making sure that the landscaping is taken care of on a on a regular basis whatever that whatever that schedule is so the property managers I mentioned includes developing and managing a budget paying the bills and keeping the lights on and then any repairs that are needed. So now asset managers so we're looking at the difference between property managers and asset managers so property managers take care of the day-to-day responsibilities of that property and asset managers generally oversees a group of properties or what may be referred to as a portfolio and so you may have an asset manager that is over a certain geographic area you may have an asset manager that's over a certain geographic area for a certain property type so for the class a office buildings in the portfolio in the southeast geographic section of the United States so an asset manager's role is to achieve the investment objectives of the owner so the owner so the property manager takes care of the day-to-day responsibilities of that of that business or mean of the property and then the asset manager looks at you know how how can value be created for that property and for that owner okay so it's think think of it it's not exactly like a consultant but think of it more than that in that you know from that perspective that the property manager is just saying hey here's a bill I got to pay the bill does it fit you know is it I've got to make sure that it fits within the budget and you know we can't spend money that you know more than what we're projecting revenue but you know an asset manager is going to look to see how can we create value for that property the let's see over the holding period and that's that's important to note over the holding period for that owner so that that owner may only want to own the property for for three years for five for seven for ten fifteen sometimes it's even longer so that has to be taken into consideration as well you know when we're looking at an investment analysis we look at the initial cost we look at the holding period and then we look at the the future value what do we expect that property be worth at a a point in the future and so you know an owner's going to say I have my investment objectives this is this is what my my returns to be you know so where the property manager manages the day today aspects of the property and asset manager takes into consideration the investors or the or the owner so the investor and the owner of the same thing takes into account the investors investment analysis over that holding period you know and then they look at you know will there be positive or negative cash flow you know in certain years and you know if there's going to be negative cash flow why is there negative cash flow and what what needs to be done to to counteract that or can anything be done to counteract that you know to leases need to be restructured in a different way do reimbursement operating expenses need to be restructured in a different way if you look at like and here's an example if you look at a building and let's say you've got a 20-year roof on it so 20 year roof and when that roof has to get replaced you can do you're going to do regular maintenance on that roof on on on an annual basis but when that roof has has would need to be replaced it's going to be a six-figure expense okay and and so let's say that you know in another year you've got so it's managing that cost. So if you're looking at it going well, in this year we've got a few leases rolling over that means that they're terminating and we don't know if they were new or not. And so usually we assume that's where we get into market leasing assumptions. What we call market leasing assumptions is what do we think's going to happen whenever that leases terminates? Are they going to renew? Are they going to vacate the property? Are we going to be able to get another tenant in? How long is that going to take us? What's the cost of getting that tenant in that new tenant in? And so you may have a situation where you've got, let's say in one year, you've got a large tenant is going to vacate the property. And it's in that same year that you you were projecting to replace the roof. Well, you're going to potentially lose that revenue in that year and you're going to have a six figure expense on top of that. So that year could end up putting you in the red. So then it's managing that strategy in terms of what gets paid when and how. Another instance, another example, you don't want all your leases necessarily beginning and ending at the same time because in that case, what you're going to have is for any leases, you're generally going to have a leasing commission that the owner is going to have to pay out to the tenant rep and then depending upon how the owner rep commission is structured. So that's going to be an expense and then you might have tenant improvements or TIs. And that's in a amount that the owner will give the tenant to improve that space. Now in office buildings, you know, existing office buildings where they've already got carpet and lighting and paint on the walls, usually that dollar amount is not going to be very high. And that's because they, you've got an office space move in, you know, slap some update to paint on the walls and you're good to go. Whereas in a retail project, you know, each retail space is going to be designed for that tenant. And so there may be a significant expense or significant outlay by the owner to get that tenant into that property. And then you get into, well, why would they do that? Well, you want your property to be marketable. And if you go to a tenant and say, hey, I want you to, I want you to lease this space and oh, by the way, it's going to cost you, you know, a lot of money for you to move into this space and then tenants like, I don't retail tenants like I don't have that money. So in some instances, the owner gives that money to the tenant and that that amount that's given is built into the lease, but it's not a line item. So it's built into the rent. Here's what I can, here's the whole package deal. I can give you, which includes, you know, five or seven dollars in TI's. Right. And so, but I need you to sign a five year lease so I can recoup that expense, you know, where it's advertised over a five year period. I can recoup that expense over that period. But if you look at a a retail project that that cost may be significant higher, the TI cost may be significantly higher. So and in some instances that that TI expense may be reimbursable either all or part of it. So now that looks like a loan to the tenant. It's not a loan, but it's it's just, you know, for the sake of this discussion, view it as a loan where the loan, the lenders are the owners saying, I'm going to loan you this amount of money and then over the next seven to ten years, I'll get paid back or over the next five years, you know, in a seven year lease, I'll get paid back. And so, when when you have those leases rolling and then you've got TI as an LC. So tenant improvements and leasing commissions hitting that there are instances where you may have a million dollars an outlay in a year because of all these leases rolling in the TI and LC cost. And so that owner is going to have to come up with that money. Well, do they have cash on hand or are they going to be able to get a loan? You know, how are they going to structure that because if they don't have that money, then, you know, they're not going to be able to sign new leases. If they don't sign new leases, then they're not going to have any revenue coming in. So that's where all that gets managed from an asset management perspective. What happens when and why? You know, portfolio or the asset management or portfolio management also takes into account the investors investment analysis. It includes financial ratio such as the internal rate of return or IRR, cash on cash return, debt coverage ratio, the cap rate or capitalization rate, operating expense ratio and then many others. You know, so part of it depends on what that owner wants to focus on. And then, as I mentioned, making sure that you're looking forward, you know, looking ahead in terms of what might happen, you know, when in terms of expenditures for the property. All right. So we've discussed the creation improvement and management and maintenance of, you know, in relation to property related functions. And then next, we've got demolition. And so demolition experts in conjunction with excavation and debris removal experts serve to remove properties from the market that are no longer economically viable. You know, there's a post in a Facebook group from real estate agents recently that had asked the question because that the real estate agent said there's a retail store that is being torn down. And why would they do that? Instead of just repurposing the, you know, the property itself. And I think this was a single purpose property, meaning it was like a standalone. And then, you know, the most valid response was that it may have been no longer functional. And it's just, you know, the amount of, you know, based on the layout of space, the plumbing, the electrical, it may have cost more to just rehab an older space. And it would have been to tear it down and start over fresh so that that tenant had the building design exactly how they wanted it. And I know there's an example of that around I-10 and Worshbach where there was an older restaurant that was torn down and then a new one built up because that, you know, not with office, like say with an office space, you've got an office building and you've got, you know, the typical office layout and that's going to work for, you know, a fair number of businesses. Whereas, you know, either retail, tenant or, you know, on the sale side or on the restaurant side is, you know, needs a space that is, you know, custom, custom designed for their use. And so there in that regard, it's easier just to go ahead and tear it down, tear it down the property and then start over. And then in other instances, you've got properties that are in such bad repair that they just need to be torn down and then you start over. Next one is investment ownership. Real estate investor is one who risks capital in order to buy, which also includes developing, hold and sell real estate. So buy, hold and sell real estate. In contrast to property owners whose primary interest is in some other business, the real estate investor will focus on identifying and exploring real estate investment opportunities for profit. Real estate investor provides capital and liquidity to the real estate market. We've got regulation. So all real estate is regulated to some degree by the federal government, state government, county and local governments. The principal areas of regulation are development and in taxation. So in order for real estate developer to develop a piece of property in the San Antonio area, we call that the entitlement process and that's getting government approval to develop real estate. And then we also have taxation. The local government has the most influence over real estate development. So the local government has the most influence over real estate development. Examples of federal regulations would be, and this is federal law, would be fair how the fair housing act, you know, where we get into legislation that prevents discriminatory practices in relation to the sale or releasing or lending in relation to real estate. We've got the Endangered Species Act. An example of a state regulation would be real estate development in the Edwards Opera Recharge Zone, which is overseen by the Texas Commission on Environmental Quality or TCEQ. So if you have a property that's within the Edwards Opera Recharge Zone and then there are three zones. There's the the main zone, there's the contributory and the transitory. So there's regulations that apply for properties in any of those zones. And then that's overseen by TCEQ, real estate development in any of those zones. And then example of local regulations would be zoning. So most municipalities in Texas have a zoning regime and that's where every piece of property within the city limits has a zoning designation tied to it in terms of its use. And not all cities in Texas have zoning. So Houston is one city that does not have zoning. And then there's some other cities around the Houston area that also do not have zoning as well. And so those are going to be governed generally by private regulation, you know, through CCR conditions, covenants and restrictions. Or we can just refer to it as restrictive covenants or restrictions. And then another example of local regulations would be building permits. And so transfer. So rights and interest in real estate can be bought, sold, assigned, leased, exchanged, inherited, or otherwise transferred from one owner to another. Real estate brokers and sales agents are often involved in these transfers. So other professionals include mortgage brokers, appraisers, surveyors, insurance companies, residential service companies, and title companies. And then there could be many, many, many more that are tied in based on the type of property that's involved. If we look at real estate activities from a professional standpoint or from a professional specialty standpoint, you know, in relation to the six primary areas that we discuss. So creating managing and maintaining, destroying or the demolition side, holding, regulating and transferring. So those are the six areas. If we look at creating, you know, a developer, for example, the developer's primary focuses on creating new properties. We also have architects under creating, we have architects, we've got building contractors, space planners, real estate agents and brokers, attorneys, appraisers, surveyors, engineers, analysts. So, you know, individuals that are involved with creating real estate, creating new properties. But a developer's primary focus is on creating new properties. Under managing and maintaining, we have the property managers and asset managers. And then we also have the trades that are on the maintenance side that tie into the management of a property. And then there's other services. There's other vendors. And so if you ever go to Obama or an I/ROM or if Malunchen, you'll see a fair number of vendors that are members of those organizations and attend those events, those lunches and events because they're networking with the real estate professionals, the property managers and asset managers and consultants who are involved with the management side of real estate. And so they need these services. That could be anything from, you know, the elevator maintenance contract to the having a sprinkler system vendor maintained the system in that building that is under management. Floring, new flooring, then needs to be installed a new carpet, carpet removed, painting, plumbing, electrical, landscaping, interior design, office furnishings. So there's janitorial, I mean the list goes on and on and on. Under the destroying, we've got the demolition contractors and the excavators. Underholding, we have investors and corporate managers. Under regulating, we've got, that's the government side. So we've got tax assessors, we've got the city. In San Antonio, we've got the San Antonio Development Services Department. That is the agency, the city agency that oversees real estate development within the city of San Antonio. And then we also have building inspectors that go out and inspect existing projects or projects that are under construction. And then we're transferring, we've got real estate agents and brokers, the lenders, title companies, insurance companies, attorneys, appraisers, surveyors. So a lot of those that are listed under the creating element as well, the creating function. When we look at property type specialization, many professional specialize in the type of property that they work with. And you'll generally find, so what I've seen on the residential side is, if you ask a residential real estate agent what they do, they say, I do real estate. You do have a few that say, I specialize in certain areas like short sales or individuals from certain niches, say, focus on representing military families or relocation. So there are some niches out there. I knew one real estate agent many, many years ago, and her specialty was hood sales, representing the asset managers. The banks had taken these properties back as our roads, real estate owned properties, and then they're put with an asset management company to manage that property. And then she would take the listing and then sell the property. And then that's a totally different process than just a traditional residential listing. So there are real estate agents, residential estate agents, specialized, but also see residential estate agents that just try to do everything, because they don't set their business model early on. On the commercial side, though, what you'll generally see is that you do have agents that tend to specialize in a certain area. And so for example, I've got, there's one guy that I reference. When I talk about this topic that he's known and San Antonio for hotel sales, for listing and representing buyers of hotels, that's a different animal. It's a different process. It's a different type of property. There's different elements that come into play with that type of property in terms of how that property was constructed, how it's being managed, the mechanical, electrical plumbing. There's a lot more moving pieces with a property like that. And then he's an expert in that area. There are under the competency rule, the trek has a competency rule in the Texas administrative code. And in that, in the Texas administrative code, is where we'll find the trek rules that govern real estate brokers and agents. And in there, there's the competency rule that says that a real estate broker agent is required to be competent in representing their clients. And that includes staying up to date on market conditions and then also real estate development in the area. And so there are some other elements that tie into that though. And the trek is really starting to focus on these. And that is the one is the geographical area. Second is the property type. Third is the price or price range. And so if we look at geographical type, you know, when you're licensed in Texas, you're licensed throughout the whole state. So in theory, you can sell not in theory, but I mean, you can sell property anywhere in the state of Texas. You can represent a buyer or seller anywhere in the state of Texas. And there are agents that do that. The problem I think is that or the issue that comes into play is that let's let's go back 20, 30 years where life was much simpler and transactions were much simpler. And we didn't have the level of government regulation that we do just over regulation. And part of that is because of the, just, you know, it's the question if we created this problem or, or, you know, where we've got over regulation or is it necessary for one reason or another. And I think in some regards, one is we've become more knowledgeable in certain areas, you know, especially on the environmental side. So in that case, you know, where individuals used to contaminate roles, you know, the ground with hazardous substances. Now, you know, we have, we have laws that say don't do that. But on the other hand, you know, it looks, you look at, you know, people complain about the, the size of the, the contracts. And, you know, you look at a closing packet as a buyer, it's pretty thick in terms of the amount of document you have to sign. And most of those are disclosures, they're disclaimers, they're releases, there's their waivers. Putting the buyer slash borer on notice of, here's all the stuff we're not doing or here's all the stuff you need to know about because what happens in is then you have people say, well, you didn't tell me. So, so it's gotten more, much more complicated. So I think many years ago, it may have been easier to represent somebody throughout the state of Texas, but now it's gotten much more sophisticated. And I'll give you some examples of subjective elements that really come into play here. So one is if you are a real estate agent, let's say in the San Antonio market, then my advice is become an expert in that market. Now before we have the traffic issues that we do now, it used to be much easier to get in the vehicle and drive anywhere without any traffic issues. You can still get through a San Antonio relatively easy compared to other cities in the state or even in the country, but still we just didn't have those issues. And so it was much easier just to run up to Bernie real quick or run over to the northeast side of San Antonio. And now with the amount of traffic that we have, people still do it, but I don't have the desire to do that. And so I'm not up in Bernie as much as near as much as I used to be. And so as a result, I don't know what's going on in that market. I used to. I used to know the roads. I used to know what was listed. I used to know the price ranges, the issues, the development that was coming online. I was in tune with all that. And right now I'm not. Same thing where I was up in Austin a lot more all over Austin and was more in tune with what was going on in that market. And so while I could represent somebody in Bernie and I could probably represent somebody in Bernie relatively easy and get up to speed pretty quick. But you take Austin, for example, I don't know where people want to live in Austin. You know, I don't know what's going on with development, what's going on with regulatory controls. And so if I were to do that, I would have to come up to speed pretty quick and become an expert in that market. Rather than just saying, yeah, I can represent you on either residential or commercial deal, no big deal. I'll get paid. That I think that we, one, we've got to provide the highest level of service to our clients. And so in many regards, it would be doing them a disservice if you're not an expert in that market, in that geographical area. So same thing. If you had somebody from Dallas coming down to San Antonio or vice versa, somebody from San Antonio, one of the Dallas trying to, trying to list or sell a house, I don't know what's going on up there in the, in the DFW market. Could I come up to speed quickly? I could. Yes. But is that my core, is that my focus, is that my core competency? That probably not. I mean, how many times am I going to represent a buyer, let's say, of a house in the DFW market or somebody who's listing the house up there? So is it worth my time to get the speed to do that? And the answer is no. So in that case, it would be best just to refer it off. And then now you really look at the divide between South Texas and the Panhandle and East Texas and West Texas. There's so many changes that have taken place in West Texas compared to what it used to be. So you know, I thought that you go forward shale and everything going on out there. Windmill is going in. You know, you drive from here to West Texas and it's windmill is all over the place. So you've got to become an expert in that area. So one way is by specializing in a geographical area. The other is focusing on a property type. And here we look at, there's two ways to look at this. One is, you know, we break it down between residential commercial. So let's go commercial first. So within commercial, we've got office. We've got retail, multifamily and industrial. And then we've got raw land for development. So those are different market segments, different property segments, I should say, not market segments, but property segments. And so there again, becoming an expert and then you also throw in special properties such as golf courses and hotels and maybe you get to own hospitals, medical office buildings are different, but, you know, selling a hospital that's a unique, you know, property type. So anyway, specializing in a property type. So you generally what I've got, and there's some brokers that will, you know, list multiple property types. Oftentimes you'll see a team in effect and you've got different individuals on that team that kind of focus on different property types. But then you also have other individuals that they focus on a certain area. Like I know one guy, he's like, his specialty is shopping centers. You know, the other guy mentioned hotels, another guy, you know, office owner rep. You know, you've got owner rep and you've got tenant rep. And those are two different transactions. And so it's really becoming an expert in that property type and in that transaction type as well. You know, I'm trying to represent owner on office buildings and I'm trying to represent tenants on retail projects. Those, if you imagine, those are two totally different types of projects. And so, you know, you want to have your checklist in effect and then just work that checklist over and over so you can provide the highest level of customer service. So that includes focusing on a geographic area and also picking a property type. There's, so if we kick it over to the, and then even then on the commercial side, if you say office, what type of office? You know, there's individuals that specialize in class A, class B plus offices, you know, type offices. And then you've got those specialized in class C. Those are two totally different types of tenants, two different types of properties, different types of maintenance upkeep. You know, the requirements. If you've got a 15 story class A office building with a, you know, small cafe and a bank and security guards and fountain, fountains and landscaping and parking garage, that's an elevators and, you know, and conference rooms. That's different than a class C office building that's in a less desirable area. Not always, but, you know, usually we're looking at, you know, one or two story buildings where the doors open to the exterior so you don't have any inside common areas. And, you know, you probably don't, you're not going to have security. The tenants may pay for their own janitorial. You're not going to have a parking garage. You know, landscaping is, there's different requirements for landscaping. So it's, you know, those are, it's managing two different types of projects and two different types of tenants. Class A office building, you may have five, seven, ten, fifteen year leases. Class C office building, you may have, you know, one year leases or even sometimes month a month or, you know, those are generally shorter term leases, not always, but, you know, so it's just a different, it's managed a different type of project. And then if we go over to the residential side, you know, there's different, there's different residential types. You've got new construction, you've got existing, you know, properties that have already been built. You've got land for residential construction. You know, the one story I can tell you that, I've talked, you know, talked to a builder, a customer, a customer, a builder. And he said, you know, the worst thing is when he's got a property owner that says, hey, we bought, we bought a lot and now we want you to come look at it and we want to build, you know, a home on it and here's our budget. And he goes and looks at it and he says, it's going to cost, it's going to cost, you know, a significant amount of money to level this property. And so there goes your construction budget. And so you're not going to get the, like, let's say, let's say the total all in budget was half a million. So now let's, you know, let's go ahead and cut a hundred thousand off of that because I got to, I got to fix the typography issue. And they're like, no, no, this land is level. And it made, like to the eyeball, it may look level to somebody, but once you start putting the instruments down and measuring, it's like, man, this is going to cost a lot of money or the foundation. It's going to cost a whole lot more money for that foundation than because the lot's not level. And oh, if you had chosen, if you consulted with me and chosen this lot over here, it's level. And then that would have been, you know, now you're building a half a million dollar home versus a four hundred thousand dollar home. You know, you're not going to get all the custom upgrades that you want it. You know, so little things like that. But you've got real estate agents that just don't know and you've got a buyer that says, oh, I want that a lot. And the real estate agent says, sure, I get my commission. So you've got to become an expert in that property type you're dealing in. One of the worst things on the residential side too. So one of the worst things I see is when you've got a real estate agent representing a buyer on a new home construction. And they're agent sometimes, you know, I hear stories where they don't even show up. They're like, just put my name down on the sheet in the sales center. So I can get my real estate commission. And whenever that house gets finished, you know, I'll get my 3%. I think that is doing a huge disservice because there are so many more issues that they're encountered in a new home construction. And it's a longer period and it's much more stressful than an existing property. property that's already been built. Apartments, you know, you do apartment leasing. That's, you know, I had somebody contact me a while back and said, "Hey, I'm thinking I want to look into doing apartment leasing." And I said, "Okay," I said, "You know, the difference is, if you want to do that, here's the checklist of everything that you need to do to get up to speed to become an expert in that market. You need to know all the multifamily projects. You need to know the individuals that work in those projects, you know, the leasing office, the property managers. You need to know what kind of concessions are available. There's different resources out there you need to subscribe to that will give you access to data on market rents, on floor plans on pricing. Otherwise, you're having to call that property individually one-on-one to get that information. And that's very time consuming. And that, you know, some, and then you get into multifamily tenant rep versus residential one-to-four-family tenant rep. You know, if you've got somebody that's running a house, they'll generally pay. Sometimes it's just a flat rate. You may have a, you know, it may be a $1,500 a month rent or $2,000 a month rent. And they're like, we're paying $250 for the commission. You've got others that may pay a half of the first month's rent. You've got multifamily that may pay from half to one month. And then, you know, they're those that are slow pay, they're those that are no pay, they're those that are quick pay. So, you know, understanding all of those dynamics, and then that's going to be a high volume low margin business compared to, you know, selling a traditional one-to-four-family residential unit. And so, you know, you've just got to run the numbers and it goes, that's what you want to do. And if you're going to do that, then jump all in. Don't try to do everything. And then price range is the next one. And I think this is important because, like I remember, there's a real estate agent right off the bat that just got her license and was was working on a listing in the Dominion here in San Antonio. And I'm like, that's, you know, you don't know anything about real estate or real estate sales. And now you're trying to represent a seller in that market. You know, that price range, I said, that's a totally different expectation level. And so, same thing, you go with on the wholesaling side or, you know, the residential investment sales or purchase side, that's a different product. You go with home, hood home sales. You go with short sales. You go, you know, there's based on the type of financing, based on the price range, you know, there's different dynamics that come into play for all of those. And, you know, there's different properties that have different days on market. You know, properties over a million dollars. You generally see a, you know, at least a year, 365 days on market, same thing with raw land. Residential raw land. You look at homes that are, you know, under $200,000, those are going, there's so many offers being made on those as soon as they're listed because they're just not enough inventory of that type of property available. And so, if you don't understand the dynamics of how that plays out, you know, you're representing a client and you say, well, we'll put an offer in on this and, you know, it's listed at $195. We'll make an offer for $180. Well, everybody's making an offer for, you know, the list price or higher because they want that property. So, understanding the competency, the geographical area, the property type and then the price or price range are very important. Properties are generally classified as residential, commercial or investment properties. Residential properties are generally owned and used for habitation. And these are going to be considered one to four family units. So, that's a house, a conde, a two-plex, a triplex, or a four-plex. And then when we get into commercial, we're generally referring to retail, office, and industrial buildings. And then this also includes medical office and then multi-family of five or more units, according to Freddie Mac. So, that's up to four units. Up to and including four units is residential after four units is, and which are still considered multi-family, you know, do you collect triplex, four-plex. But once you get to five or more multi-family units, then you're into the commercial segment. And so, there's different applications that come into play, different types of financing that come into play. We've got hotels, we've got land, we've got farm and ranch, and then I've mentioned special purpose, but to give you some more types of special purpose properties, we've got self storage, we've got car washes, themes parks, bullen alleys, marinas, theaters, funeral homes, community centers, senior housing, churches, schools, and government buildings. If we look at property type specialization from the investment perspective, which is gonna be any property health for investment purposes, it's gonna be income-producing property. There's different types of investors that come into play. So under the residential side, we've got house flippers and wholesalers. On the non-residential side, we've got the small investor, the high wealth investor, or high wealth individual. We've got sub-institutional, which is not institutional level, so generally sophisticated investors, but they're not at the institutional level. We've got foreign capital, and then we have institutional. And under institutional, we've got private reads, public reads, hedge funds, corporate pension funds, state pension funds, life insurance companies, and then sovereign wealth funds. And so those are the investors that are investing in real estate. When we look at being, or having a specialization, we look at the skills and knowledge of the individual that is representing that client. The primary real estate brokerage activities involve representing procuring property or sale for a buyer or a seller, locating a property for a tenant or landlord. And so the broker will be hired by the seller, a buyer, landlord, or tenant to procure the opposite party to the sale of the lease transaction. So that's the purpose of hiring the broker, is procuring that other party on the other side of the transaction. A broker may sponsor licensed real estate agents to provide these services. So the real estate broker sponsors, real estate agents and those real estate agents then provide those services. Brokers and agents specialize along the following lines. And so I've already mentioned something of this before, but under property type, residential commercial land, farm and ranch, property management, I had a student come in many years ago and he said, I wanna do, I think I wanna do farm and ranch. And I started writing down a list, a long list. And I said, do you know what any of these things are? And it was like two columns on a piece of paper that I hand wrote out. And he said, no. And I said, if you're gonna do farm and ranch, you have to be an expert in all of these areas. You've gotta know these inside and out. And then some that I don't have on this paper. I said, if you're gonna go do farm and ranch and then you have to understand that, you can list a farm and ranch property. And it may take you a year to three years for that transaction to close. And so you generally have a lower, you know, where I talked about like doing apartment leasing where it's a high volume, low margin business. You know, you look at farm and ranches, it's a low volume, but very high margin business. So just understanding that, you know, and if you may not get a paycheck for three, you know, two, three, four, five years. So geographical area. So this is one way of specializing the real estate broker's business by becoming an expert in an area. The type of transaction, the type of client, you know, I had a real estate agent one time that was, he wasn't working for the builder, but he was sitting in the sales office like a certain, certain number of days a week. And if he sold a property, you know, a home to one of the individuals, then, then he would get a commission. But he could also had agreement that if they didn't buy house through that builder, that then he could potentially represent them on the sale of another property. And he told me these were, at this time, these were $500,000 houses, custom homes. And now that $500,000 house is an $850,000 house. Okay, so just to put that in context. And he said, he goes, you know, he goes, I don't, what I realized is that I have nothing in common with these buyers, these clients. I said, they, he said they operated at a different level. There's a different level of conversation and I'm just not there. He goes, my sweet, sweet spot is like the 150 to up to 300. He goes, those are the clients that I know and that I can communicate effectively with. I understand them, they understand me and he goes, that's what I need to focus on. He goes, I'm not going to sell one of these houses. These people are not going to buy a house from me because I'm just some kid and we're not talking at the same level. We're not communicating at the same level. So, the type of client that you represent, there's real estate brokers and agents that represent institutional clients only. I mean, that's all they do. And then I know of some that there were different tranches in terms of which they represented. So there was one that represented up to 5 million and that's what he did. Anything over in that price range went to somebody else and then there's somebody else that their sweet spot was the $10 million properties. And that's all they do but they're an expert and that's what they know. And they are known as the go-to person in that niche for that property type. They know the expectation of those clients. There's a significant amount of research and marketing materials that have to be put together and how you make that pitch and what they're looking for, what type of properties you're looking for. So it's again, it comes down to project. It's a project and can you represent that client? That type of project. And then there's also, there's another type of relationship. You could have a consultant and provide a consultant advisory service where you work on a task or a project. So it's task based or project based in exchange for a fee or a salary or a retainer as opposed to going strictly on commission. And examples of this could include the Argus Consulting, Housing Tax Credit Consulting, HUD Consulting. There's certain HUD financing projects. So being a consultant on that type of financing for that project, doing site analysis, providing CMAs or BPO's, comparative market analysis or broker price opinions, database research. So that's another type of relationship as a consultant advisory service. You know, under knowledge, if you look at real estate professionals must have a broad range of real estate skills and knowledge. And if you look at knowledge, understanding the local market conditions, knowing the local properties, understanding the real estate principles, knowing the real estate principles, real estate law, providing on residential, providing pricing estimate on properties, knowing real estate financing, understanding the licensing laws, knowing the closing process and procedures having a strong foundation in real estate math. And then over on the skills side, being ethical, time management, data management, effective communication, effective writing, financial skills, market analysis, marketing skills, all of those come into play under skills and knowledge in the real estate brokerage business. Under regulation and licensing, we've got, there's different laws that come into play. We've got the federal, state, county, local and judicial laws and judicial is going to be common law. At the federal level, we have the Constitution, which is the highest law of the land. And giving an example of how the Constitution of the United States ties into real estate, it protects property owners. It establishes the absolute right of private ownership of real estate and prohibits the federal government from levying real estate property taxes. We've got federal statutes, like the Clean Water Act and the Clean Air Act, the Safe Drinking Water Act. There are a number of environmental regulations that come into play that tie into real estate. Then we have agency rules and regulations and these are going to be the rules that the agencies administer, the federal agencies administer. There are many that tie into real estate as well. At the state level, we have the Constitution, state statutes, agency rules and regulations and then also common law. One example for agency rules and regulations relates to the Texas Roll State Commission. So as a state agency, it has been granted authority to regulate licensing of real estate agents and brokers in the state of Texas. We have local level laws, which are ordinances. That's at the city and county level. And then as we mentioned, we've got case law. And then we also have codes of ethics. Like if you're a member of a local board of realtors and then the Texas Association of Realty and then the National Association of Realty, you're bound by code of ethics. If you are a member of any of the organizations such as CCIM or IRAM or I'm trying to think Sci-O or any number of those that fall else, credit and land consulting, any of those that fall under the NAR umbrella, you're also bound by that code of ethics. And then there are other organizations that also have their own code of ethics that provide a guideline for how individuals that are members of those organizations are expected to act. The laws most relevant under regulation and licensing, the laws most relevant to brokers and real estate agents, we're looking at the law of agency in terms of that agency relationship with the principal to a transaction, knowing contract law, knowing the required disclosures, knowing the fair housing laws and then also the environmental laws. The state licensing laws here in Texas are found in chapter 1101 of the Texas Occupations Code. And then we also have the Trek rules that are found in the Texas Administrative Code. And those rules are administered by Trek, which is charged with administering and enforcing the license law. So actually both of them, chapter 1101 of the Occupations Code and then the Trek rules under the Administrative Code. So this concludes the overview of real estate as a business.