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Texas Real Estate, Tenth EditionCharles J. Jacobus

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2

Real estate is a unique subject, and because it is unique, real estate has spawned complexlegal theories and very unusual situations. No two situations are ever exactly alike, and thesubject never ceases to be intellectually stimulating. Everyone has a favorite story aboutreal estate, and it has remained a fascinating topic for centuries. This fascination is whatmakes the real estate business such a fun, interesting business.

As a new real estate student, one must be prepared to learn a lot of new conceptsand be willing to commit the time and effort to that end. Some say that the only wayto learn real estate is by experience. Many years ago this was the traditional concept.Real estate was then considered to be a “marketing” or “salesmanship” business, andexperience was the best teacher. Recent years, however, have seen the developmentof extensive academic applications in real estate education. Real estate has come tothe academic forefront; undergraduate degrees in real estate are becoming more com-mon, as are graduate level degree programs. There is also a resulting emphasis on theprofessionalism and duty of these new real estate professionals. Unlike many otheracademic subjects, however, real estate continues to emphasize the “people-oriented”aspects of the business. Experience and hard work have a very high correlation withsuccess in the real estate business.

With these combinations in mind, this book has been written to provide an understand-ing of the basic principles and business fundamentals of real estate. Emphasis is placed onan easily readable presentation that combines explanations of the basic principles of thesubject with “why” things are done and "how’’ these principles apply to everyday activities.

IN THIS CHAPTERIN THIS CHAPTER

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How to Read This BookChapters 2 through 24 include a list of the new “Key Terms” that you will learn, alongwith brief definitions. Read these before starting your work in each chapter. In thebody of each chapter these terms are set in boldface italic type and given an in-depthdiscussion. At the end of each chapter are questions designed to help you test yourselfon your comprehension of the material in the chapter you’ve just read. The answers aregiven in Appendix F in the back of the book.

A glossary is also included at the back of this book to help reinforce your famil-iarity with the language of real estate.

Transaction OverviewFigure 1.1 provides a visual summary of the real estate transaction cycle. It isincluded here to give you an overview of the different steps involved in the sale ofreal property and to show how the steps are related to each other. The chapter inwhich each step is discussed is also shown. Whether your point of view is that of areal estate agent, owner, buyer, or seller, you will find the chapters that follow to beinformative and valuable.

Chapter OrganizationThis text is organized so as to carefully build your knowledge of real estate. Forexample, land description methods and rights and interests in land are necessary tosales contracts, abstracts, deeds, mortgages, and listings and therefore are discussedearly in the text.

Chapter 2 includes topics such as metes and bounds and tract maps. It alsodiscusses what is real estate and what is not, and how land is physically and eco-nomically different from other commodities. Having described real estate, the nextlogical step is to look at the various rights and interests that exist in a given parcel

11Introductionto Real EstateIntroduction to Real Estate

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4 CHAPTER 1

An overview of a realestate transaction.

FIGURE 1.1FIGURE 1.1

Listingagreement

(19)

Property owner decides

to sell

Individualbecomes a

licensed real estate agent

(18)

Identify the property (2)

Property rightsinvolved (3)

Value the property (17)

Contract law (7)

Contract law (7)

Lending practice (10)

Sources of financing (12, 13)

Forms of ownership (4)

Taxes andassessments (14)

Land use control (23)

Buyer evaluatesproperty (17)

Deed of trust (9)

Title search and title insurance (6)

Deed preparation (5)

Leases (16)

Condo, co-op, and PUD(22)

Offer and acceptance

(8)

Buyerfinancing

Closingor escrow

(15)

Ownership

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of land. In Chapter 3 you will see that there is much more to ownership of land thanmeets the eye! In Chapter 4 we look at how a given right or interest in land can beheld by an individual, by two or more persons, or by a business entity. Included inthis chapter are discussions of joint tenancy, tenancy in common, and communityproperty.

Chapters 5 and 6 deal with the process by which the ownership of real estate istransferred from one person to another. In particular, Chapter 5 discusses deeds andwills, and Chapter 6 deals with how a person gives evidence to the world that he pos-sesses a given right or interest in land. Abstracts and title insurance are among the top-ics included.

In Chapters 7 and 8 we turn to contract law and its application to offers and accep-tances. Because so much of what takes place in real estate is in the form of contracts,you will want to have a solid understanding of what makes a contract legally bindingand what doesn’t.

Chapters 9 through 13 are devoted to real estate finance. Chapter 9 explainsmortgages and the laws regarding their use. Amortized loans, points, FHA and VAprograms, loan application, and mortgage insurance are discussed in Chapter 10.Consumer loan issues are discussed in Chapter 11. Mortgage lenders, the secondarymortgage market, due-on-sale clauses, adjustable rate mortgages, and financingalternatives are covered in Chapters 12 and 13.

Chapter 14 shows how property taxes and assessments are calculated, and Chapter 15explains title closing and escrow. Chapter 16 deals with leasing real estate and includesand describes a sample lease document. Chapter 17 explores the language, principles, andtechniques of real estate appraisal.

In Chapters 18 through 20 we examine the relationship between real estate agents,buyers, and sellers. Chapter 18 deals with real estate license law requirements,how a salesperson goes about choosing a broker to affiliate with, and professionalethics. Chapter 19 discusses an agent’s employment, commission issues, and ethics.Chapter 20 explains the concepts of agency and intermediary status. Chapter 21 intro-duces you to fair housing, equal credit opportunity, and the Americans with Disabili-ties Act (ADA).

The remaining chapters deal with a number of individual and specialized realestate topics. Chapter 22 explores the condominium, cooperative, and planned unitdevelopment and time-share forms of real estate ownership. Included is a look athow they are created and the various rights and interests in land that are createdby them.

Zoning, land planning, and deed restrictions are covered in Chapter 23. These areimportant topics because any limitations on a landowner’s right to develop and useland can have a substantial effect on the value of the property. Finally, Chapter 24 isan introduction to the opportunities available to you as a real estate investor. Topicsinclude tax shelter, equity build-up, what to buy, and when to buy.

Following the final chapter are several appendices that you will find useful.Appendices include the Texas Real Estate License Act and the Texas Canons of Pro-fessional Conduct. In addition, you will find a short real estate math review section,and the answers to the problems found at the end of Chapters 2 through 24.

Career OpportunitiesThe contents and organization of this book are designed for people who are interestedin real estate because they now own or plan to own real estate, and for people who areinterested in real estate as a career. It is to those who are considering real estate as aprofession that the balance of this chapter is devoted.

Most people who are considering a career in real estate think of becoming a realestate agent who specializes in selling homes. This is quite natural because home

INTRODUCTION TO REAL ESTATE 5

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selling is the most visible segment of the real estate industry. It is the area of businessmost people enter and the one in which most practicing real estate licensees make theirliving. Residential sales experience is a good way to find out whether real estate salesappeals to you and whether residential property is the type of property in which youwish to specialize.

Residential BrokerageResidential brokerage requires a broad knowledge of the community and its neighbor-hoods, finance, real estate law, economics, and the money market. Working hours willoften include nights and weekends because these times are usually most convenient tobuyers and sellers. A residential agent must also possess an automobile that is suitablefor taking clients to see property.

A person who is adept at interpersonal relations, who can identify clients’ buy-ing motives, and find the property to fit, will probably be quite successful in thisbusiness.

Commercial BrokerageCommercial brokers specialize in income-producing properties such as apartmentand office buildings, retail stores, and warehouses. In this specialty, the salespersonis primarily selling monetary benefits. These benefits are the income, appreciation,mortgage reduction, and tax shelter that a property can reasonably be expected toproduce.

To be successful in commercial brokerage, one must be very competent in math-ematics, know how to finance transactions, and be aware of current tax laws. Onemust also have a sense of what makes a good investment, what makes an investmentsalable, and what the growth possibilities are in the neighborhood where a propertyis located.

Commission income from commercial brokerage is likely to be less frequent butin larger amounts compared residential brokerage. The time required to break into thebusiness is longer, but once in the business, agent turnover is low. The working hoursof a commercial broker are much closer to regular business hours than those in resi-dential selling.

Industrial BrokerageIndustrial brokers specialize in finding suitable land and buildings for industrial con-cerns. This includes leasing and developing industrial property as well as listing andselling it. An industrial broker must be familiar with industry requirements such asproximity to raw materials, water and power, labor supplies, and transportation. He

6 CHAPTER 1

In only a few real estate offices are new residential salespersons given a mini-mum guaranteed salary or a draw against future commissions. Therefore, a new-comer should have enough capital to survive until the first commissions areearned—and that can take four to six months. Additionally, the salesperson mustbe capable of developing and handling a personal budget that will withstand thefeast and famine cycles that can occur in real estate.

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must also know about local building, zoning, environmental, and tax laws as they pertain to possible sites, and about the schools, housing, and cultural and recreationalfacilities that would be used by future employees of the plant.

Commissions are irregular, but are usually substantial. Working hours are regularbusiness hours, and sales efforts are primarily aimed at locating facts and figures andpresenting them to clients in an orderly fashion. Industrial clients are usually sophisti-cated business people. Gaining entry to an industrial brokerage and acquiring a clientlist can be slow.

Farm BrokerageWith the rapid disappearance of the family farm, the farm broker’s role is changing.Today a farm broker must be equally capable of handling the 160-acre spread ofFarmer Jones and the 10,000-acre operation owned by an agribusiness corporation.College training in agriculture is an advantage and on-the-job training is a must.Knowledge of soil types, seeds, fertilizers, production methods, new machinery, gov-ernment subsidies, and tax laws is vital to success. Farm brokerage offers as manyopportunities to earn commissions and fees from leasing and property management asfrom listing and selling property.

Property ManagementFor an investment property, the property manager’s job is to supervise every aspectof a property’s operation so as to produce the highest possible financial return overthe longest period of time. The manager’s tasks include renting, tenant relations,building repair and maintenance, accounting, advertising, and supervision of person-nel and tradespeople.

The expanded development of condominiums has resulted in a growing demandfor property managers to maintain them. In addition, large businesses that own prop-erty for their own use hire property managers.

Apartment LocatorsIn recent years, the service of helping tenants find rental units and helping landlordsfind tenants has become increasingly popular. This is normally a free service to thepublic. Locators are paid commissions by management companies and owners ofapartment projects for finding qualified tenants. A locating agent must have an in-depth knowledge of the apartment complexes in the community and their requirementsfor tenants. The locating business has expanded in the last few years to include theleasing of condominiums, townhouses, and single-family homes.

An offshoot of apartment locators are roommate locators. These are especiallypopular in cities with substantial numbers of single persons. Roommate locators arecentral places where people who are looking for other people willing to share living


Property managers are usually paid a salary and, if the property is a rental, abonus for keeping the building fully occupied. To be successful, a property manager should be at ease with tenants, a public relations expert, handy with tools, a good bookkeeper, and knowledgeable about laws applicable torental units.


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space can meet. The locator service maintains files on people with space to share(such as the second bedroom in a two-bedroom apartment) and those looking forspace. The files will contain information on location, rent, male or female, smoking ornonsmoking, etc.

Real Estate AppraisingThe job of the real estate appraiser is to gather and evaluate all available facts affectinga property’s value. Appraisal is a real estate career opportunity that demands a specialset of skills: practical experience, technical education, and good judgment. If you havean analytical mind and like to collect and interpret data, you might consider becominga real estate appraiser. The job combines office work and field work, and the incomeof an expert appraiser can match that of a top real estate salesperson. You can bean independent appraiser or work as a salaried appraiser for local tax authorities orlending institutions. The appraisal process is becoming more complex, however. Mostlenders and taxing authorities require that their appraisers have some advanced creden-tial designation to ensure an adequate level of competence.

Government ServiceApproximately one-third of the land in the United States is government owned.This includes vacant and forested lands, office buildings, museums, parks, zoos,schools, hospitals, public housing, libraries, fire and police stations, roads andhighways, subways, airports, and courthouses. All of these are real estate and allrequire government employees who can negotiate purchases and sales, appraise,finance, manage, plan, and develop. Cities, counties, and state governments, allhave extensive real estate holdings. At the federal level, the Forest Service, ParkService, Department of Agriculture, Army Corps of Engineers, Bureau of LandManagement, and General Services Administration are all major landholders. Inaddition to outright real estate ownership, government agencies such as the FederalHousing Administration, Department of Veterans Affairs, and Federal Home LoanBank employ thousands of real estate specialists to keep their real estate lendingprograms operating.

Land DevelopmentMost new houses in the United States are built by developers who in turn sell them tohomeowners and investors. Some houses are built by small-scale developers who pro-duce only a few a year. Others are part of 400-house subdivisions and 40-story con-dominiums that are developed and constructed by large corporations that have theirown planning, appraising, financing, construction, title, and marketing personnel.There is equal opportunity for success in development whether you build four housesa year or work for a firm that builds 400 a year.

8 CHAPTER 1

Most roommate and tenant locator services have been started by individual entre-preneurs and are not affiliated with real estate offices. In Texas, a real estatelicense is required to operate as an apartment locator or a roommate locator.


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Urban PlanningUrban planners work with local governments and civic groups for the purpose ofanticipating future growth and land use changes. The urban planner makes recommen-dations for new streets, highways, sewer and water lines, schools, parks, and libraries.The current emphasis on environmental protection and controlled growth has madeurban planning one of real estate’s most rapidly expanding specialties. An urban plan-ning job is usually a salaried position and does not emphasize sales ability.

Mortgage FinancingSpecialists in mortgage financing have a dual role: (1) to find economically soundproperties for lenders, and (2) to locate money for borrowers. A mortgage specialistcan work independently, receiving a fee from the borrower for locating a lender, or asa salaried employee of a lending institution. The commission paid to a mortgage spe-cialist on a multimillion dollar loan can be quite substantial. Texas requires mortgagebrokers to be licensed.

Securities and SyndicationsLimited partnerships and other forms of real estate syndications that combine the invest-ment capital of a number of investors to buy large properties number in the thousands.The investment opportunities and professional management offered by syndications areeagerly sought after by people with money to invest in real estate. As a result, there arejob opportunities in creating, promoting, and managing real estate syndications.

ConsultingReal estate consulting involves giving others advice about real estate for a fee. A con-sultant must have a very broad knowledge of real estate—including financing, apprais-ing, brokerage, management, development, construction, investing, leasing, zoning,taxes, title, economics, and law. To remain in business as a consultant, one mustdevelop a good track record of successful suggestions and advice. Because it is diffi-cult to be a consultant without performing a brokerage function, most consultants havea real estate license.

Research and EducationA person interested in real estate research can concentrate on such matters asimproved construction materials and management methods, or on finding answers toeconomic questions such as “What is the demand for homes going to be next year inthis community (state, country)?”

Opportunities abound in real estate education. Nearly all states require the completionof specified real estate courses before a real estate license can be issued. All states requirecontinuing education for license renewal. As a result, people with experience in the indus-try and an ability to effectively teach the subject are much sought after as instructors.

Real estate teachers organizations, such as the Texas Real Estate Teachers Associ-ation (TRETA) with their CREI (Certified Real Estate Instructor) designation andthe Real Estate Educators Association (REEA) with their DREI (Distinguished RealEstate Instructor) designation, are now also making a significant impact on improvingthe quality of real estate education.


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Full-Time InvestorOne of the advantages of the free-enterprise system is that you can choose to becomea full-time investor solely for yourself. A substantial number of people have quit theirjobs to work full time with their investment properties and have done quite well at it.A popular and successful route for many has been to purchase, inexpensively and witha low down payment, a small apartment building that has not been well maintained butis in a good neighborhood. The property is then thoroughly reconditioned and rents areraised. This process increases the value of the property. The increase is parlayed into alarger building—often through a tax-deferred exchange—and the process is repeated.Alternatively, the investor can increase the mortgage loan on the building and take thecash he receives as a “salary” for himself or use it as a down payment on another not-too-well maintained apartment building in a good neighborhood.

Other individual investors have done well financially by searching newspaper adver-tisements and regularly visiting real estate brokerage offices looking for underpricedproperties that can be sold at a mark-up. A variation of this is to write to out-of-townproperty owners in a given neighborhood to see if any wish to sell at a bargain price.Another approach is to become a small-scale developer and contractor. (No licenseis needed if you work with your own property.) Through your own personal effortsyou create value in your projects and then hold them as investments. One should becautioned, however, that there are very few legitimate “get rich quick” schemes in thereal estate business.

License RequirementsAs stated previously, property owners who deal only with their own property are notrequired to hold a real estate license. However, any person who for another, and forcompensation or the promise of compensation, lists or offers to list, sells or offers tosell, buys or offers to buy, negotiates or offers to negotiate, either directly or indirectly,for the purpose of bringing about a sale, purchase, or option to purchase, exchange,auction, lease, or rental of real estate, or any interest in real estate, is required to holda valid real estate license. Texas also requires people offering their services as propertymanagers to hold real estate licenses.

If your real estate plans are such that you may need a license, you should turn toChapter 18 and read the material on real estate licensing.

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50221 FM i-1 pp32ra.weebly.com/uploads/2/5/9/0/2590681/texas_real... · Real estate was then considered to be a “marketing” or “salesmanship” business, and experience was