Axiom 2: "People business"

(continuing our post on three real estate axioms...)  A second real estate axiom simply goes, “it’s a people business” (referring to the real estate industry).  Personally, I have heard this notion in some form from numerous developers, brokers, appraisers, investors, lenders, and government officials in both my professional and academic career.  This short statement is profound, but you might be thinking why is “…a people business” used to describe an industry dealing with tangible features such as dirt, brick, and sticks?

Experience and relationships!

First, the real estate industry is a relationship driven industry and therefore a “people business.”  Although one aspect of real estate is physical (dirt, bricks, and sticks), people make the decisions to develop the dirt, change the zoning, lease or sell the building, value the property, or fund the project.  Furthermore, personal relationships developed over time are usually principal factors in these decisions. 

This little insight explains why students starting fresh out of school may find it difficult breaking into the real estate industry, as compared to some other business disciplines.  Let’s use accounting as an example.  Accounting majors can be taught and learn enough accounting theory in an academic environment to be useful to an employer immediately after graduation.  An accounting graduate can quickly contribute to auditing functions, financial statement development, tax preparation, and bookkeeping functions and therefore earn an impressive entry-level salary.

On the other hand, a new real estate hire, with no or few relationships with important people in the local market, is of relatively limited use to an employer.  It will take months or years to develop an understanding of the local market and to develop relationships with important market participants.  Therefore, entry-level positions in the real estate industry are often difficult work with modest pay due to the time and training necessary to develop expertise within the local market and develop relationships with the local participants.  This also might explain why many real estate service businesses are family owned and operated.  A family member in the business, who is willing to train and introduce you to people, can be a convenience for breaking into the business.

 

As a result, you might find that starting salaries in many real estate fields to be significantly less than what is found in the accounting profession.  For a first hand example, just ask any broker, appraiser, or lender about their first few years in their chosen career.  You will likely hear war stories about tough work with modest pay.   However, when someone obtains education, experience, and a network of relationships, the real estate job opportunities can be quite lucrative with impressive upside potential.  

What can someone with little or no experience do to help them get a foot in the door?

One of the barriers to entry to any industry is the industry specific vocabulary and jargon.  To understand computer science, law, medicine, and accounting you need to have a basic command of the vocabulary.  Real estate is certainly no different.  A goal of this and any real estate program to make sure you have the vocabulary and understanding of basic concepts to understand and communicate with the participants in the real estate industry.  This is an important first step in developing relationships within the real estate business.  You need to speak and understand the language of real estate lawyers, developers, investors, appraisers, brokers, tenants, and planners.  How can you join the club if you don’t speak the language? 

Also note, an understanding of real estate concepts and vocabulary is important even if you do not intend to pursue a career in this field.  Do you anticipate that you will ever buy, sell, or lease property?  Will you apply for a mortgage?  Do you think we may have avoided some of the subprime mortgage and foreclosure problems hurting our national economy if people better understood mortgage related concepts? 

 

If you are on this planet, a real estate course or degree should be relevant to you.  I won’t guarantee that you will use Calculus in your daily life but I promise that you will use the vocabulary and concepts covered in REAE 5311 Real Estate Analysis or, for undergraduates, REAE 3325 Real Estate Fundamentals.  In fact, you can get course credit for information that will directly benefit you in your business and personal life, guaranteed.

Real estate axioms: first up "location, location, location"

Every industry has its axioms and real estate is not an exception to this rule.  If you choose a career in real estate, you will certainly run across the following three expressions.

“Location, location, location”

“It’s a people business”

“Gut-feeling”

Although the repetition can be a little annoying, axioms survive the tests of time and reiteration because they contain important nuggets of wisdom.  For this reason, we will examine each one.  In this post we will consider the old "location, location, location" adage.  The other two will be explored in subsequent posts.

This adage is usually expressed as a ‘joke.’

“What are the three most important real estate characteristics?” 

Of course, the answer is “location, location, location.”  It is certainly true that location attributes, or situs (technically, the correct answer above should be “situs, situs, situs”), are critical property features.  As we will learn later, the spatial dimension of real estate is what makes every property different and real estate as an asset class truly unique.  We can assure you that this aspect of real estate will be addressed throughout the text. 

Economics and finance

Real estate and basically all other business disciplines can be thought of as branches or subsets of general economics.  Economics falls with in the realm of the social sciences as opposed to the physical sciences (physics, chemistry, materials science, etc.).  Can you recall a basic definition of 'economics' from you first economics class?  Well a very brief but concise definition of economics might go something like this; economics is the study of the allocation of scarce resources.  If everything were free and abundant, there would be no need for the study of economics!  We study economics because resources are scarce and humans need to make important and sometime difficult resource allocation decisions.

Finance is a specialization developed from economics.  Do you remember a definition of 'finance' from your first finance class?  Another concise definition might be; finance is the allocation of scarce resources (i.e., usually money is the scarce resource) over time.  Time is the important dimension in finance and what differentiates finance from economics.  Core to the finance discipline is the delay of consumption (investing money) in the pursuit of earning a future return.  This is the reason why time-value-of-money concepts are so important and the emphasis of your introductory finance course.  This also leads to another axiom, ‘time is money’ which we will leave for another post. 

Real estate space-time definition

We can define real estate as a discipline as; real estate (space-time definition) is the allocation of scarce resources (i.e., land or real property now!) over time and space.  The space-time dimension differentiates real estate from the economics discipline and the space dimension differentiates real estate from finance.  In real estate, we are concerned with the ownership or use of space over a specified or unspecified time period.  Ultimately, we use or occupy space on this planet for a relatively brief slice in time.  Finally, the uniqueness of the space dimension to real estate is precisely the reason that everyone makes such a big deal about “location, location, location.”

Some view real estate as an academic specialization within finance.  In fact, almost all United States (US) business-based academic real estate programs, including UTA's, can be found within finance departments (a notable exception is Georgia State University’s Robinson College of Business with the largest stand alone Department of Real Estate in the US).