Taking the view that every transfer of realty or an interest therein is a transaction within the meaning of the Real Estate business, we must divide the business into two general divisions, INACTIVE and ACTIVE. The INACTIVE or INVESTMENT branch of the business is engaged in, usually not as the primary source of livelihood, but rather for income or personal use. The man who has savings from his vocation or accumulated capital from any source, seeking investment for it may turn to real estate and there place his money. His desire is to have his money earn him a profit without devoting his time to the business.
The investment branch of the business may be divided into
1. Purchase for own use.
2. Purchase for income from rents.
3. Purchase to hold for resale at higher price.
4. Mortgage lending.
Purchase for own use occurs in the case of the acquisition of business of factory property by a business firm or a residence by an individual. In neither of the foregoing transactions is there any active engagement in the real estate business, the entry into the business being merely incidental to some other desire or purpose.
Many persons look with favor upon ownership of income producing property, as an investment. They buy a building, collecting the rents either personally or through an agent, pay the carrying charges, looking to the net return to pay them a profit on the money invested. Usually all work is done by an agent, the investor merely receiving a statement at intervals.
An example of (3) is the purchase of unimproved land adjacent to a growing community, the investor expecting to pay the taxes and other charges for several years, looking for no immediate return upon his money invested, but expecting ultimately, that the growth of the community will increase his land value sufficiently, so that he will be enabled to sell at a price which will net him a profit above the original cost of the land, together with the carrying charges during the time he has owned it.
Thousands of people throughout the country invest part or all of their savings in mortgages upon real estate. They loan a certain sum upon the security of realty deriving profit in the receipt at regular intervals of interest on the money loaned.
The ACTIVE branch of the Real Estate business includes all persons who devote all or most of their time to the business as a means of livelihood. They not only utilize money capital if required but contribute time and labor. This branch is divided into Operation and Agency.
Operation is the use of capital in commercial transactions in real estate. Realty is made the subject matter of trade. The operator buys and sells, constantly using his capital in successive transactions; his success depends on rapid turnovers. Operation may have to do with.
3. Mortgage lending.
The operator in land acquires it, either upon speculation for resale at a profit as it stands or for development and resale. In the first instance the operator has no intention of holding the land for any great length of time as in subdivision (3) of the inactive branch of the business but either expects a rise in value very rapidly or believes he can find a purchaser at once for a higher price than he paid, which will result in profit to him. If such rise does not occur, he will sell to release his money for other use. The operator will often develop the land when he purchases it in an unimproved condition. He subdivides it into streets and building lots of marketable size, lays out streets, curbing and sidewalks, instals water, gas and electric light supply, and having done so hopes to sell the lots for a sufficient aggregate amount to net him a profit, after payment of the original cost of the ground, plus the expenses of the improvements.
Operation in buildings may be
1. Speculative erection.
2. Erection for investment.
3. Speculative buying and selling.
In speculative erection the operator purchases one or more lots, erects a building or buildings thereon with the expectation of being able to sell the land and buildings for sufficient to pay him a profit over and above the cost of the land and the buildings. In erection for investment the operator proceeds just as in speculative building, except that his final intent is not to sell the buildings but to retain and use them either for his own occupancy or to derive a profit from the rentals. In this phase of operation the operator ceases to act as such, as soon as the buildings are completed, and thereafter comes within the inactive or investment branch of the business.
Speculative buying and selling of buildings is similar to speculation in land. The operator either thinks he can buy the building for less than he can get for it on immediate resal or believes the price will very soon rise and he be enabled to sell at a profit.
Many operators have of late years engaged in alteratior work. An old building is purchased which, by reason of an tiquated equipment, produces little or no profit. The operato then alters and improves the building, modernizing it, so that i will produce much higher rents, and he is then in position to sell it at a profit over the original cost plus the expense of al teration.
Mortgage lending as an operation in real estate must not be confused with subdivision (4) of the Inactive Branch of the business. In the investment class the lender makes the loar and seeks his profit from the interest paid by the borrowe from time to time. As an operator the lender makes his profi on a fee which he is paid for making the loan. He has no intention of holding the mortgage, but at once sells it to an in vestor, thus releasing his capital for use again.
Under this subdivision are 1 Permanent loans.
2. Building loans.
3. Combination building and permanent loans.
A permanent loan is made for a definite period (usuall; three or more years) at a fixed rate of interest, upon the secur ity of a mortgage upon property, which is to remain in it present general condition - such for example as a mortgage or a building. A building loan is made, as the name implies, to supply all or part of the funds to erect a building. The loar is made under the terms of a building loan agreement which provides usually that the borrower is to erect on the property covered by the mortgage, a certain kind of building, and tha the amount of the loan is to be paid him in instalments, as the building progresses, each instalment bearing interest from the time it is paid. When the building is completed the loan i: payable to the lender, the theory being that the builder will sel the building as soon as completed, and from the proceeds of the sale repay the loan. In most instances the purchaser from the builder desires the loan to remain on the property. This has resulted in the combination building and permanent loan which is exactly the same as a building loan, except that the loan, like a permanent loan, is not payable until the expiration of a fixed period. Thus the builder is enabled to obtain funds to finance his building operation, and continue the loan for the benefit of his purchaser. (Appendix forms 54 and 55.)