For example, if you have a buyer that can purchase a brand new 3 BR/ 2 BA house in Miami for $1,000,0000, why would that buyer pay $1,200,000 for the same house in the same neighborhood with the same quality?  They wouldn’t according to this principle of substitution.

However, there are a few exceptions to the rule.  Think about Michael Jackson’s Neverland Ranch or a house that some people consider haunted. This could have an effect on the pricing because it is rare.

What is an Agency Relationship in real estate?

Before we begin to answer this in detail, let’s first describe what an agent is. An agent is a term commonly associated with the broker or a real estate representative designed to represent the interests of their client in a real estate transaction. With this understanding, agency relationships is a fiduciary relationship between a broker or agent and a principal based upon trust and is solidified with a contract.
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When studying for your real estate exam, do not make this harder than it needs to be! You do not need to know everything in this article word for word. For the real estate exam, you only need to know the following.

• The difference between a customer and a client – customer is not represented by a broker, but a client is. Only the client has an agency relationship.
• Dual Agency – Agent/Broker is representing both parties (This is very rare as most States do not allow this)
• Special Agent – hired to perform a specific task for a client. An example is selling a house. Once the act of selling the house is complete, the relationship is over.
• General Agent – can perform any and all tasks. An example is a property manager. Someone with an ongoing relationship.
• Universal Agent – Basically complete authority. Normally set up with a power of attorney. They can sign legal documents, purchase and sell property that they don’t own. I have never seen this type of agent relationship in my life, but it exists and is on the exam.

Not studying for the exam and want more information? Let’s continue….

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How are agency relationships created?

The relationship is created when two parties agree in terms and in principle on how one would be represented in a real estate transaction. Remembering that the relationship is built upon trust, fiduciary trust that is.

There are three basic principles that establish this relationship which are:

• When there is an agreement between the principal and the broker or agent whether expressed or implied.
• Competency of principal – this means that there must be a person of legal age and of sound mind according to state law who may employ an agent or broker to work on their behalf for the purposes of their estate transaction.
• Consideration– It is not necessary to provide consideration when establishing this relationship.

How Agency Relationships Impact You

One of the most difficult tasks when pursuing a real estate purchase is not only establishing a relationship with a particular agency but also establishing a relationship with an agent. But how valuable is this relationship? Or, is it just somebody that you just talk to just to get some idea as to what the proper value of a home is or does the relationship go much deeper?

When I began looking for house, based on research, it was very important that I actually establish a trusting relationship with an agent who I felt would be looking out for my best interest. Based on discussions with homeowners that I become acquainted with, I had no idea how important his relationship was. There are some agents who are only trying to make a quick buck. They can care less whether your deal is a good one or not.

No matter which way I turned, I was always told to establish a solid relationship with a strongly branded agency. After doing some research, I consistently ran across these two words, agency relationship. So I had to ask myself, what is an agency relationship?

Types of agency relationships

• Seller’s agent – this relationship is established when a seller hires a broker to represent their interests in the process of selling their real estate. All fiduciary duties are geared toward the seller and is confirmed by way of a contract. Once the property is listed, the agent can attempt to sell the property or can influence the seller to allow another licensed agent to assist in the process of the sale of the aforementioned real estate. The selling agent has a responsibility of negotiating the best possible price and terms for the seller.

• Buyer’s agent – an agent has a fiduciary responsibility to the buyer. With this relationship, the buying agent has an obligation to negotiate the best possible price and terms for a purchase on behalf of the buyer. Although it is negotiated, the buying agent’s fee can be paid either by the buyer or the seller of the real estate in question.

• Subagent – this agent works for the listing broker to work out the best possible terms and price on a real estate purchase but also works with the buyer but does not work for the buyer. The fiduciary responsibilities are geared toward the listing broker and seller. Although the subagent cannot work in the best interest of the buyer, this agent has a responsibility to be honest.

• Disclosed dual agent – this agent works with the buyer and the seller concerning the same real estate deal. These agents have limited fiduciary duties with both clients which mainly focuses on negotiations and confidentiality. In general, a contract should be signed by both parties acknowledging dual representation.

• Designated agent – this type of relationship is synonymous with appointed agency. This is a practice that allows the managing broker to decide upon which licensees in their firm will act as agents for the seller and for the buyer without either licensee being considered a dual agent. These agents give their clients full representation and fiduciary duties. To use this type of agency, it must be permitted in the state in which you reside. State laws vary.

• Nonagency relationship – this relationship is synonymous with being called a transaction broker and in some cases a facilitator. Some states do permit this type of nonagency relationship, however, they do vary dependent upon the state in which the relationship is applicable. In general, when this relationship is established, the fiduciary duties are less than complete, but most states do allow this type of relationship to exist although the licensee does owe all of their fiduciary duties to the customer.

• Agency by ratification – this type of relationship is made by accepting conditions that were created after the fact whether oral or written. This probably was created when the seller ratifies what an agent has been doing by accepting the terms. We use “probably” because, in general, an agent wants a fee for services and may end up having to go to court to collect from a seller. If going to court is necessary, then the courts will decide what type of agency relationship was created if any. The term ratification is either expressed or implied and is an approval of a previously authorized unofficial contract by an agent.

• Express agency – this is created when the agency relationship of an agreement in which both the principal and the agent outlined their intentions to enter into such a relationship in which the agent represents the principal. Their intentions were made either orally or in writing. The oral agreement establishes an agency relationship and is binding dependent upon the state in which it is formed. Keep in mind, the oral agreement may not be enforceable by the agent when attempting to collect a fee. Written agreements are easy for both parties to understand the financial terms and are best in creating a binding relationship.

Can an agency relationship be created by estoppel?

First, an agency by estoppel is an agency relationship that is created when the principal does not prevent an agent from going are acting beyond the normal duties of an agent which gives the impression that the traditional agency relationship has been established.

For example, if you own a residence and you tell your agent to show the house to a possible renter, and the agent negotiates a lease even though you do not give complete authorization to do so, the potential tenant assumed that the agent had the authority to do so and then the agency by estoppel has been created.

When are agency relationships used?

Agency relationships are used in the formation of conducting official business during a real estate “transactional” process. It is very important to establish which type of agency relationship that is established. It reduces confusion in and type of misunderstandings whether buyer, seller, or agent.

Agency relationships makes it very clear whose interest is being protected. The agent should be very clear from the outset as to identify to whom the fiduciary responsibilities lie, therefore, a seller or a buyer will not be confused and this will reduce the need for all parties to not consider any type of unfairness throughout the buying or selling process

Sources:
https://en.wikipedia.org/wiki/Law_of_agency

A Quick Guide on How to Get a Real Estate License in New Jersey

A career in real estate is a good career path to pursue in New Jersey because it is a lucrative career that earns great income, lets you meet a lot of people, and opens opportunities for you. However, not just anyone can become a real estate agent in the Garden State. You must first past the stringent Real Estate License New Jersey exam in order to achieve your dreams.

Every law and regulation that is about obtaining this license has been set forth by the New Jersey Real Estate Commission (NJ REC). If you desire to acquire your real estate license as a salesperson or broker, you must first pass your educational requirements for licensure that has been set-up by the law and pass the real estate exam. Those who practice without passing the Real Estate License New Jersey exam are subject to sanction for violating the license laws, which can have serious repercussions if you try anything untoward.

What are the general requirements?

The Commission states that all applicants for any type of real estate license may it be broker or salesperson must first need to meet the standards for good moral character. You must satisfy the commission and prove you are an honest, law-abiding person who has integrity and great community standing. In addition to that, you must be at least 18 years of age, a US Citizen or a permanent resident alien.

Any applicant that has been convicted of a crime, currently in parole, or under probation can have their application for a real estate license be denied. This can be seen in the N.J.S.A. (NJ Statutes Annotated in 45:15-9, 45:15-12.1 and 2A:168A-1 et seq.

You must disclose all crimes, criminal accusations, misdemeanors, and child support issues. You must also state if you have any other real estate license denied, suspended, or revoked in the past in NJ or any other state.

What are the educational requirements from the NJ Real Estate Commission?

You must also show the proof of your high school graduation or its equivalent. You as an applicant must fulfill the educational requirements established by the NJ Real Estate Commission. Those of you who are seeking to gain your license must study very hard and take your education seriously in order to pass your real estate exam. These are all necessary steps before you can apply for the license.

The most important criteria, any applicant to the real estate exam must first be able to complete 75 hours of approved real estate education by any school that is accredited by the NJ REC. You can check the NJ Department of Banking and Insurance website for an extensive list of approved courses to ensure that you are on track to get the right and accredited school. The Banking and Insurance department oversees the Real Estate Commission.

The applicants must fulfill all of these educational requirements established by the NJ Real Estate Commission. Then those seeking to gain their license must apply for their  real estate exam and pass this exam, which is conducted under the supervision of the commission. The NJ REC also has the full powers to revoke licenses, conduct investigations/ inquiries, hold hearings, and sanction real estate sales persons or real estate firms for violating the license law and its administrative rules.

Noteworthy, there is also a real estate broker’s license. To qualify for a broker’s license, you must complete 150 hours of pre-license studies, along with a 90 hour general real estate course, coupled with two 30 hour courses on Agency Ethics, Office Management, and other topics related to business. On top of this, you must have been employed as a licensed real estate salesperson for three years before your application. In addition to this, you must pass the real estate broker exam.

How Long does it take to get a real estate license in New Jersey?

As noted above, after garnering your high school diploma or its equivalent, you will need to spend 75 hours on an accredited school before you can take your real estate exam to become a qualified real estate salesperson. After you finish this required education, you will are given one year to review, take, and pass that state examinations.

This exam is administered every year by the PSI Services LLC, and you can register with them at their official website for a seamless application process. You can also check their other requirements at the same site. If you want to further prep for the exam, you can choose to enroll yourself in an exam preparation course.

Are there any other requirements?

Before you can submit your application to become a licensed real estate personnel, you must have your biometrics or fingerprints taken. In order to get this done, you must fist be sponsored by a licensed broker. In order to avoid any kinds of issues, problems, or delays, you must file on time. As soon as you pass your real estate exam, submit your fingerprints right away. For more information on this process, visit this website in charge for collating the information.   

It is critical to note that your application for the license must be submitted within a year of completing your 75 hours of required schooling. On top of this, your application will only be entertained and accepted, if it is fully complete, along with the appropriate license fees and the evidence that you have finished with the fingerprinting process. The final step is submitting your license application to the Licensing Services Bureau, Real Estate.

How much does it cost to get a real estate license in New Jersey?

These licenses are issued for a two year period that typically ends on June 30th. Since March 2010, the initial license for a real estate salesperson is $160, while the initial license of a real estate broker is $270. To renew, you must pay $100 or $200, respectively. All candidates for the NJ license for real estate must pay the fees of fingerprinting, which costs $66.05. In addition to that, it is also necessary to undergo a background check which costs $70.25. For additional information on fees, check out this site. If you need additional forms, go here.

Online Real Estate Schools in New Jersey

For those of you who are having trouble getting to an actual physical school, you can choose an online real estate program accredited in the Garden State. These online schools offer flexibility without compromising their standard of excellence in real estate education. They are committed to giving you the right education to help you pass your license exams.

They work with the Real Estate Commission to help guide you and prepare you for the rigorous exam process so you just won’t pass, but pass with flying colors. You can also go to them for continuing educational courses for your renewal requirements or to stay updated with industry trends. Check here for a list of accredited institutions.

Final Word

As you can see, obtaining your license to practice being a real estate agent or real estate broker in the Garden State is a fairly straightforward process. With the right preparation, education, and application materials, you can easily get your desire license without any headaches.

For more information regarding obtaining your License for Real Estate in the State of New Jersey or any other licensing questions, you may visit the Real Estate Commission website or contact them via phone at 609-292-7272, with the extension 50546. Please take note that NJ doesn’t have reciprocity with any state.

Resources:

Real Estate Terms

New Jersey Real Estate Commission
PSI Examination Online AMP
New Jersey Real Estate Commission Candidate Handbook

The Bundle Of Rights 

When you own real estate property a set of rights comes along with it. This set of rights is commonly referred to as a bundle of rights in real estate. This is one of the most important terms you will need to know for your real estate exam.

What is the Bundle of Rights Theory?

The bundle of rights in real estate theory is the common way to explain the concept of real estate property ownership. These rights are transferred along with the property when it is purchased. The person or people who holds the title of the real estate property owns these rights. The rights in the bundle include possession, control, exclusion, enjoyment and disposition.

The First Right: Right of Possession

The first bundle of rights in real estate is the right of possession. When you purchase a property and hold title to it you have the right of possession. Also, you must pay for the property with cash or have a mortgage on the property to enjoy the right of possession. To continue the right of possession you must pay taxes, pay homeowners association fees and abide by any rules and regulations of the association.

The Second Right: Right of Control

As a real estate property owner you have the right to control or use the property how you desire. You can live in it, let other family members or friends live in it and so on. However, you must obey the law. If there are city occupancy standards you must adhere to them and not have too many people living in the home. You must also adhere to any covenants or restrictions placed by the homeowners association. For example, if having an above ground pool isn’t allowed, then you cannot have one.

The Third Right: Right of Enjoyment

As a property owner you have the right to enjoy your property as long as you are not doing anything illegal on the property. You must obey city, county, state and federal laws. For example, you cannot run a drug dealership out of the property or have a methamphetamine lab on the property. This applies to inside the property and on the land that is owned with the property.

The Fourth Right: Right of Exclusion

You don’t have to allow anyone in or on your property when you own it. No one has the right to be on your land or come inside your home without your permission. Of course, there are exceptions to this. If a law enforcement officer comes to the door with a warranty to search the property you have to let him or her in. If a utility company needs to repair a utility box that is on an easement of your property you have to allow this.

The Fifth Right: Right of Disposition

As a homeowner or real estate property owner you have the right to dispose of the real estate at your will. This means you can sell it or transfer the ownership to someone else. Or you can rent it out and let someone else live in it. However, you must do this legally. If you have a mortgage on the property it must be paid off first before the property can be sold or ownership transferred. If you have had any work done on the property that hasn’t been paid for in full or if there are liens on the property such as mechanics’ liens, these must be paid off first.

The bundle of rights in real estate are protected by title insurance. Title insurance protects against claims or disputes on your property that are not valid.

Why Do We Refer to Property Rights as a Bundle of Rights or a Bundle of Sticks?

Each right that comes along with property ownership is a separate right that the owner can enjoy. When you put these property rights together, they are commonly referred to as a bundle of rights or a bundle of sticks. The owner can use one or all of these rights or sticks. So if you hold all of the sticks together the owner can pick one, two, three, four or all of the sticks to use when it comes to property enjoyment.

More sources:

https://en.wikipedia.org/wiki/Bundle_of_rights

Easement By Necessity

An easement is a legal means of trespassing on another’s land. These access permissions are passed on from one landowner to another. There are various types of easement, all mandated by one legal reason or another.

Easement by necessity is a specific type of easement provided from one landowner to another.

What Does Easement By Necessity Mean?

This type of easement is specifically for those whose property directly borders another. If a piece of neighbor A’s property is separated from their main tract of property by the property of neighbor B, neighbor A is entitled to this type of easement.

Obtaining this easement would allow neighbor A to access the property divided from them, as it would be necessary for them to trespass on neighbor B’s property in order to reach their own.

In this instance, there is no practical way for neighbor A to reach their property without trespassing. This easement not only makes it legal for neighbor A to reach their property but prevents neighbor B from taking legal recourse against neighbor A for trespassing.

This type of easement can also be granted if neighbor A is completely landlocked by neighbor B’s property. It is not legal to landlock one into their property. In order for neighbor A to exit their property, they will have to trespass on neighbor B’s land and find themselves a likely candidate for being granted this easement.

How Does One Acquire An Easement By Necessity?

One must be sure their landlocked situation was caused by a division of land and not a newly purchased tract of land. Additionally, one must be blocked from accessing a public road by the property arrangement.

If one is sure they are within the bounds of applying for an easement, the easement will be granted by court order. Typically, it is advised to enlist the help of an experienced real estate lawyer in these cases.

They will be able to explain and argue real estate laws that bring into question your easement arrangement. Arrange a meeting with a real estate lawyer to explain your situation. If the lawyer believes you to have a strong case for a possible easement, they will likely risk representing you in court.

Next, be sure to speak to your neighbor regarding the easement. In many cases, your neighbor will be willing to work with you in order to make a case for the easement of the land. If both parties appeal to be in agreement and it is apparent the need for easement exists, it is likely you will not have to deal with a complicated battle in court.

Can You Be Forced to Give an Easement?

There are a lot of factors involved in determining if this type of easement is necessary. It is, after all, called by necessity. If it is clear there is no legal necessity for the property owner to be given access to the land, the original landowner will be able to fight this in court.

As the property owner requesting the easement will be asking to trespass over your land, they are already fighting an uphill battle. The court will likely not want to grant the easement unless it is truly found to be necessary.

What’s more, state law comes heavily into play when it comes to easement. Whether or not your state recognizes forced easement is something best discussed with a lawyer familiar with easement laws in your state.

An Example of Necessary Easement

For example, if one’s property has been severed long ago, prior to modern city planning, one may have recourse for easement. If a public road has since been built post-division and the layout of the land prevents neighbor A from accessing said new road without trespassing on neighbor B’s property, neighbor A will likely be granted the easement by a court of law.

For more real estate terms you will need to know for your exam, check out our other posts.

Land Contracts

A land real estate contract is akin to a private financing contract where real estate – either real property and/or structures on that property – is changing hands.

In this article, learn how a land sale contract works, why they are still used today, who is responsible for paying what, details about deed holders, pros and cons and much more.

What Is a Land Sale Contract and How Does It Work?

A land sale contract, sometimes also called a sale to land contract, is a written record detailing a transaction wherein land is bought and sold using seller financing rather than a traditional mortgage.

This type of real estate contract outlines key specifics about the land trading hands as well as the details of the financing agreement between seller and buyer.

Both the buyer and the seller must sign the land sale contract indicating they are in agreement with all the terms of the exchange and the financing required for it.

Why Are Land Sale Contracts Used?

There are mutual benefits to both buyers and sellers to opt for a land real estate contract over a traditional mortgage arrangement.

After the great mortgage crash in 2006 and the subsequent 2008 financial crisis, traditional mortgage loans became much harder to obtain. Not all land buyers have the requisite credit history and credit score to qualify for traditional big bank mortgage loans.

When a buyer cannot be approved for a traditional mortgage for these or other reasons, a land sale contract offers two interested parties another viable way to conduct the transaction.

Sellers also reap some potential benefits by agreeing to a land sale contract rather than stipulating a traditional mortgage loan agreement. For starters, sellers often find they have access to a wider pool of potential buyers by offering a land sale contract option.

Sellers may also enjoy greater bargaining power, including a higher purchase price, by offering interested buyers who cannot qualify for a traditional mortgage the option of a sale to land contract instead.

In some cases, sellers may also require buyers to make a larger initial down payment (called an “option to buy”) as a part of a land sale contract agreement.

Who Pays Property Taxes on a Land Sale Contract?

A land sale contract puts the responsibility for paying property taxes on the shoulders of the land buyer.

Not only does the land buyer need to pay the property taxes, but the buyer is also responsible for paying interest and insurance premiums as well as any other fees stipulated in the contract for deed agreement.

As a perk for paying the property taxes, the land buyer can also write this off on their annual tax filing as an expense.

Who Holds the Deed in a Land Sale Contract?

A contract for deed agreement transfers the deed to the property from seller to buyer little by little. This is called having an “equitable title” and it offers some valuable protections to both seller and buyer.

For the buyer, the presence of the land sale contract and its equitable title effectively prevents the seller from re-selling the property under agreement to a third party before the transaction is complete.

This equitable title also prevents the seller from placing any kind of undue financial burden (such as a lien) on the property in the process of being re-deeded.

For the seller, retaining the majority of rights to the deed (legal title) is a protection in the event the buyer does not complete the payments required to receive the final property deed.

In this way, with a sale to land contract, the deed to the property remains in the hands of the seller until such time as the contract is satisfied and payment is made in full.

Only at that time does the contract for deed on the property finally transfer to the land buyer.

Land Sale Contract Pros and Cons

A land sale contract offers benefits and drawbacks to both buyer and seller.

For the seller, this type of real estate contract offers a way to sell land when a buyer is not able to obtain traditional mortgage financing. The seller can also assess an option to buy up-front payment (similar to a mortgage downpayment) as a cushion against future land devaluing or buyer default.

Another benefit to the seller of entering into a land sale contract is that they can stop paying property taxes on the land under contract right away. However, the seller also loses the option to write off that cost on their annual tax filing.

For the buyer, the benefit occurs in reverse – that extra tax write-off now transfers to them, along with the responsibility of paying the property taxes on the land under contract.

For the buyer, a land to sale contract offers a way to purchase land after being declined for mortgage financing. It also gives the buyer a built-in exit strategy in the event property values decline or circumstances change to the point the land purchase is no longer desirable.

In most land to sale contracts, the buyer’s right to make modifications to the property under contract is limited until the agreement is paid for in full. This is also a valuable protection for the seller in the event the buyer defaults and the land goes back on the market.

Because a land sale contract is a private financing agreement, there will be no big bank mortgage lien holder watching over the process or vetting the legality of the agreement. This can be a major drawback for both buyer and seller, so it is important that both parties have the contract reviewed by a real estate attorney prior to executing the agreement.

Both buyer and seller also take risks in brokering a real estate sale through a land to sale contract rather than a traditional mortgage lending agreement. Both risk devaluation of the property or its resale value over time. Both also bear the risk of a potential default that could have negative financial consequences on each end.

One drawback the buyer typically bears is that the purchase price under a land sale contract is often higher than it would be with traditional mortgage financing. Choosing to use a land sale contract means the seller is free to set a higher valuation on the property without having to justify the purchase price to a mortgage lender.

What Happens If the Buyer Fails to Make the Land Sale Contract Payments Due?

It sometimes happens that the buyer’s circumstances change and renders them unable to make the contract payments as they fall due. When this occurs, it is called “defaulting” on the sale.

If a buyer defaults on the land to sale contract, the seller can then move to what is called a contract forfeiture. A contract forfeiture allows for the seller to retain all the land payments the buyer has made to date and also extinguishes any existing equitable title the buyer holds on the property.

This means the seller can then enter into a new agreement with a new buyer to sell the land, keep the land in their possession or something else. All ties between the buyer in default and the land seller are now null and void.

Having the option of a contract forfeiture is an important protection to the seller, but also to the buyer in the event circumstances prevent further payment towards ownership of the land.

By understanding how a land sale contract works, what it is used for, the pros and cons of such an agreement and what occurs if the buyer defaults on the agreement terms, it becomes possible to know if this is a viable method to conduct a real estate transaction.

Emblements: Who Do They Belong To?

What are Emblements in Real Estate?

In real estate these are crops that are planted and taken care of by tenants, and remain the property of the tenants even after they lose possession of the land. When tenants are leasing property that has a farmland on it they may have an opportunity to plant crops on the land. If they do cultivate the land, plant the crops, take care of the crops and then their tenancy is terminated they still have the right to access the land to harvest the crops at harvesttime. And the harvested crop are considered the tenants’ property.

What is the Doctrine of Emblements?

This is a doctrine where it is agreed that if a tenant cultivates land, plants crops and takes care of the crops on a piece of land during their tenancy, and then they lose possession of the land, they still have the legal right to enter the prior leased land to harvest and remove the crops that grew because of their efforts. This is a belief that is adhered to and agreed upon between landowners and tenants that are leasing a property to grow crops on.

Are Crops Personal Property?

Crops are considered personal property when they are separated, harvested or picked from the soil in which they grow. Crops that are still planted in the soil are considered real property or the property of the owner of the land. When crops such as corn, soybeans, wheat and other vegetables are still growing in the ground they are considered real property of the landowner. However, when they are harvested, or taken out of the ground, they become real property.

What Does Fructus Industriales Mean?

Fructus Industriales has the same meaning as emblements. These are crops that are planted annually on land. They are planted by people and require labor to cultivate the land, labor to plant the crops and labor to take care of the crops until it’s time to harvest them. It takes work, time and energy for the final product to be a successful harvest of vegetables, wheat or whatever has been planted. Because it takes work and labor fructus industriales are considered the “fruit of the work.” In the case where tenants of the land cultivated, planted and cared for the crops they get to reap the rewards of their labor.

Economic Obsolescence

In the process of determining the value of residential real estate, much of what you will evaluate will be within the property lines. You will start by answering a host of questions about the property itself, such as:

• How many bedrooms does it have?
• How many bathrooms does it have?
• How many square feet is the house?

Of course, this is always context dependent. The very process of estimating the value or sale price admits this by using comps, or similar properties within the same neighborhood.

If they aren’t within the same neighborhood, they are no longer considered comparable, even though they may have the same number of bedrooms, bathrooms and other details. Two homes that are identical in every other way can have a very different valuation if they are in different neighborhoods.

So we implicitly know that there are factors off the property that will impact its value tremendously. This is why we have the famous real estate phrase “Location. Location. Location.”

What is Economic Obsolescence?

Economic obsolescence is depreciation of the property due to factors in the surrounding neighborhood which impact its economic utility. This is also termed external obsolescence because it occurs outside the property lines of the piece of real estate in question, yet impacts the value of that property.

What is an Example of Economic Obsolescence?

A rise in neighborhood crime can negatively impact the value of the neighborhood and the properties therein. A wave of foreclosures that leaves behind vacant and derelict properties can also seriously impact the value of the rest of the homes.

One potential cause includes too many people moving away who are college educated. The book The Tipping Point indicates that there is a point past which a loss of a few educated locals can so seriously damage the fabric of the neighborhood that crime skyrockets thereafter.

A change in zoning may also lead to external obsolescence. This can fundamentally change the character of the neighborhood in negative ways. For example, if it becomes legal to run a bar or similar in a previously straight-laced area.

Is Economic Obsolescence Curable?

The short version is “No.” If you own a property in a deteriorating neighborhood, there is probably not much you can do to fix it because the problem is external to your property, hence the term external obsolescence.

You don’t directly control what goes on in the surrounding neighborhood, so you have limited ability to resolve the kinds of problems to which this term applies. Plus, because they occur at the neighborhood scale, these tend to be expensive problems that take a long time and a lot of effort to resolve, if they can be resolved at all.

But sometimes people do fight external obsolescence. Jane Jacobs became famous for her writing precisely because she was involved in fighting such trends in her own neighborhood. If you are unable or unwilling to move, her writings may be of interest to you. But do keep in mind that external obsolescence is so hard to remedy that most sources simply state “Nope, there is no cure for it.”

Economic Obsolescence vs Physical Obsolescence

Another kind of depreciation is physical obsolescence, sometimes called functional obsolescence. These are factors directly on the property, but in some cases they are a liability only because of upgrades to surrounding properties.

A simple example that is clearly and obviously physical obsolescence is if the house is in an older neighborhood, so it has a one car garage but you are a stereotypical modern two-car family. If there is also no street parking and a narrow driveway, you have a serious problem.

A less clear situation is if your house lacks a Master Suite, you have lived there for years and Master Suites have become all the rage in the neighborhood. One assessor might say this is physical obsolescence because the lack of a Master Suite is something on the property itself. Another might say this is economic obsolescence because it only matters due to changes in the surrounding neighborhood.

Bilateral Contracts

What is a Bilateral Contract?

Contracts are an integral part of everyday life! Many times, people don’t even know they are participating in a contract. A bilateral contract is an agreement between two people or two groups of people. It can also be a contract between a company and a person or group of people. Basically, it as a legal agreement between two parties. Bilateral contracts don’t have to be in writing. For example, if a person is dining at a sit-down restaurant they can expect that the restaurant personnel provide them with service and get their order right in return for payment. Or a contract can be in writing such as a written lease for when a person leases a house to live in. The lease is between the landlord and the tenant.

What is the Difference Between Unilateral and Bilateral Contracts?

A unilateral contract is where one person or group makes an agreement or promises to do something. And a bilateral contract is an agreement or promise between two people or groups of people. For example, a unilateral contract would be if a woman loses her engagement ring, she might place an ad for a reward if someone finds it and returns it to her. She is the only person obligated in this case, thus it’s unilateral. If someone finds her ring and returns it to her, she must fulfill the obligation to pay them the reward she promised in her ad. An example of a bilateral contract is a contract to purchase a house. A seller agrees to sell the house to a buyer for a certain price and for other specific terms which are written in the contract. A buyer is obligated to meet these terms and close on the property. Both parties made contractual promises and are legally obligated to fulfill them.

Is a Lease a Bilateral Contract?

A lease is considered a bilateral contract because it involves two people or two parties making a legal agreement with each other, the landlord or landlords and the tenant or tenants. A lease is a legal agreement that specifies the rent amount, the dates the rent is due, the dates the lease begins and ends, and other stipulations. The tenant must fulfill the terms of the lease, and the landlord provides the property for them to live in, and fulfills other obligations that the lease states he is responsible for.

Is Employment a Bilateral Contract?

Employment is definitely considered a bilateral contract. The contract is between two people or parties, the employee and the company the employee works for. The company or employer promises and is obligated to pay the employee a certain amount of money to perform certain work. The employee must perform his or her duties and other terms of the employment agreement in order to get paid. The pay can be by the hour or by an annual salary, for example.

Examples of examples bilateral contracts in every day life

Sales contract for a vehicle – you’re buying a car from someone else.

Sales contract for a house – once again, one party is buying from another party.

Buying a bag of chips – You are giving Walmart $ for a bag. This is another great example.

Key Takeaways

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