How Real Estate Works


Whether you want to invest in real estate or simply use it as your primary residence, there are many facets to the industry. Real estate encompasses land and anything that is attached to it — such as buildings, structures, roadways or even water and plants. Investors add real estate to their portfolio because it tends to appreciate over time and offers diversification. Real estate also can be a great source of income because it can be leased or sold as needed.

The real estate process formally begins when a homeowner decides to sell. They usually interview and secure a buyer’s agent who can help them discover property that matches their criteria and assist them with the negotiation process. The homeowner and agent then negotiate terms of the seller’s agent commission, which is a portion of the final sale price that the real estate agent will receive as compensation for their work. Also read

Once an agreement is reached, the buyer and seller sign a contract to purchase the home or land. The buyer typically provides a deposit, known as earnest money, to show that they are serious about the purchase. The offer letter, which is a legal document, will then spell out all the terms of the sale. If the offer is accepted by the seller, the earnest money will be applied to the purchase price of the property.

When it comes to residential real estate, the supply of homes and demand for them are what drive prices up or down. When the supply of homes is low and there is high demand, prices rise; when the opposite is true, prices fall. Sellers typically sell for a variety of reasons, including relocation, financial crises or the need for more space.

Commercial real estate consists of retail and office buildings, strip centers and warehouses, as well as the land that they sit on. Unlike residential and industrial properties, commercial properties are often used for business purposes and must meet certain zoning requirements to be approved for construction.

Investors also buy commercial and industrial real estate as an investment, either to lease or to sell later. They can manage the properties themselves or hire a company to do it for them. If they choose to hire a management company, the company will handle everything from marketing the property to screening potential tenants to handling repairs and even evictions.

Another reason investors buy real estate is to add it to their personal or family home. This strategy allows them to get the best tax breaks, which is why it’s so important to consult a real estate accountant and attorney when purchasing real estate. For instance, in some states, home buyers can deduct the cost of the property from their federal taxes if they use it as their primary residence for a specified number of years. The longer the period of ownership, the higher the deduction. In addition, a homebuyer can deduct the interest paid on the mortgage loan from their federal taxes.


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