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15 Players In The Real Estate Value Chain (who gets paid)
There are many reason why the real estate industry is one of the most competitive in any economy in the world.
This is even when the total amount of property transactions that take place in a year is just a fraction of the number of transactions that take place on a busy Walmart store in a day.
One reason for this, which is the biggest of all, is that there is a lot of money to be made.
When we consider that the median sale price of single-family homes in the US is between $200k to $400k in 2017, it is easy to see why a single real estate transaction can distribute revenue to so many services providers that are so different in what they do.
So who are the players who add value and makes a living off property transactions taking place?
This is what we call the real estate value chain
1) Builder or developer
In order to buy a house, the house has to either already completed being built, or in the process of being built.
Developers are known to bid for valuable land in order to built houses, especially condominiums on them.
They can afford to pay millions of dollars for a piece of land in a great location because they know that the costs will eventually be passed on to home buyers and investors at a premium.
2) Real estate agent
When a property buyer or a home seller makes the decision to get on the market, a real estate agent is usually the first professional they contact.
They get paid as much as 5% on the sale price.
This is why we often see them spending a lot of time pampering themselves with luxuries. Because a deal a month is often enough to sustain an average agent.
3) Online search portal
Search portals are the first or second player that a client gets exposed to before or after the real estate agent.
These portals have thousands of agents putting up listings for any visitor to search.
The portals make money from charging agents for premium listings or from ad sales… which will eventually be borne by consumers.
An agent after all, must have worked out the sums to determine that commissions from sales should be more than enough to cover advertising expense on these internet portals.
4) Mortgage broker
Often only getting involved when a buyer gets an offer to buy a house accepted by a seller, brokers can also sometimes get involved early in a transaction when buyers need mortgage qualification to determine the amount of house they can afford.
This helps them to narrow down their property search.
Brokers are remunerated either by charging a flat fee plus wholesale loan prices for their services of finding the best home loans for the client, or they get paid referral fees by lenders who underwrite the loans.
A mortgage lender is quite possibly the single player that makes the most money out of property transactions.
This is because the total amount of money a borrower repays over the life of a loan can easily be double what the original sale price of the house is.
This is made up of principal and interest.
When a lender is determining the maximum loan amount, maximum loan to value has to be taken into consideration.
And with that, it is essential to know the appraised value of the property.
The services of qualified and certified appraisers will be needed to undertake this task.
The appraisal company is usually appointed by the bank.
Meaning that as long as they are able to get on the lender’s good books, they will get a steady flow of paying customers that they don’t even have to market to.
Their fees are paid as part of closing costs.
Like the appraiser, the surveyor is often appointed by the lender.
This is because of information as material as the property’s worth, a lender would only be willing to work with parties that are credible in which they can trust.
Otherwise, there is a high risk of mortgage fraud.
Again like the appraiser, their fees are charged and collected at closing.
As a mortgage is a legal contract, attorneys will inevitably be involved as well.
The law firm engaged to document the transaction will be decided by the buyer or seller. Usually the buyer.
However, banks have their own approved panel of law firms that they encourage borrowers to hire.
They would of course prefer their suggested law firms so that contracts can be drafted in their favor.
To entice borrowers from choosing a firm from their list of recommended firms, lenders sometimes offer freebies and legal subsidies should borrowers use any of the firms on their list.
Should a law firm from the lender’s panel be used, the subsidy feature will reimburse the borrower either as a cash rebate or cash.
Should a borrower hire an independent third party, then the client pays the professional fees from his own pocket. If a borrower still qualify for legal subsidies, it will be given as a cash rebate off the final closing costs.
8) Escrow officer
An escrow service basically holds the funds for the deal in a trusted third party account, and upon milestones being met, the funds will be released to the relevant parties to complete the transaction.
The job of escrow officers give all parties more peace of mind.
9) Title company
The title company and escrow service provider often work hand in hand.
This is because a title would only be transferred to a new owner should the funds for the sale go through. Otherwise, we would live in a very messy world.
Since we have mentioned the title, title insurance has become an essential item in the process of real estate transactions.
This helps protect buyers from buying into serious ownership problems that might arise in future.
Other than title insurance, there are also fire insurance, homeowners insurance, liability insurance, etc, to contend with.
You can be sure insurance agents are cashing in on this.
11) Home inspector
A home inspector’s job is to meticulously inspect a property for safety hazards, design flaws, construction defects, etc.
This stage is an important part of a buyer’s concern.
So much so that many buyers put conditional clauses into their sales and purchase agreements that allow them to “get out” should the home inspection report comes back with serious negative concerns.
12) Interior designer
One of the popular reason why homeowners buy a new home is so that they can design their dream homes to fulfill a lifelong goal.
Interior designs feed off the dream of home buyers by helping their realize their dream homes.
When the price of a house is put into perspective, a home buyer would usually be brave enough to spend a lot of money on renovations and remodeling.
That’s what emotions do to you.
This can often go up to tens of thousands of dollars.
Experts will then be needed to install or re-fix wiring, piping, walls, windows, etc.
There is a thriving market for these micro construction jobs that specially serve new home buyers.
It’s not going anywhere anytime soon…
… because it is simply a necessary service.
14) Property management companies
Should the property buyer be an investor, there is a possibility that he needs to hire a property manager or add that unit into the existing property manager’s portfolio.
The tasks that a property manager performs can sometimes be essential to a busy investor with a growing real estate empire.
This is why every investor purchase presents an opportunity to a property management company for new business.
There’s no running away from property taxes.
While the list above of players in the real estate industry with monetary gains in almost all transactions, it is by no means complete.
This is without mentioning the supporting industries of skilled workers who support the players mentioned above.
For example a web hosting company would be hosting the websites of agents, search listings portals, law firms, etc. Or factories that manufacture banners and marketing collateral for agents.
All these service providers making a living from real estate transactions… are paid for by the buyer and seller.