Real estate, while constant as an existing area of business, is a business that must adapt to inevitable change. Changes in the market, the global economy, consumer trends, available supply, and technology all alter the waters that real estate service providers must navigate. Profits and prices rise and fall, oftentimes unpredictably, and almost always uncontrollably. This reality was evident most recently during the onset and aftermath of the COVID-19 pandemic. In this sense, real estate is a business of adapting to and flourishing in change.
In order to successfully manage the ebbs and flows of the real estate market’s uncertain and ever-changing waters, CCSK Law strongly recommends that landlords, property managers, and other real estate service providers consider the points outlined below.
Entering the Business of Real Estate
As a strict definition of “real estate business,” literature states that it “involves buying, selling, managing, operating, or investing in land and buildings.” Real estate itself, while typically seen as domiciles or buildings of some kind, includes natural resources below or above ground, such as crops, minerals, and water.
The real estate industry is enormous and has great potential for profit. The residential real estate market alone has seen significant growth in the past decade, according to the National Association of Realtors (NAR):
- 5.34 million existing and 667,000 new homes were sold in 2018
- The Association of Real Estate License Law Offices (ARELLO) estimates about 2 million active real estate licenses in the U.S.
- There are about 1.4 million licensed real estate providers who are members of the NAR
- Realtors’ median gross income was $41,800 in 2018, which is an increase of several thousand from 2017
- Over 86,000 real estate brokerage firms are operating in the U.S.
- Annual sales have been increasing for more than a decade
- While 2020 and the global pandemic put a lot of pressure on the real estate market, the end of 2020 saw a strong rebound in real estate sales across the country
Despite its popularity and its consequential competitive environment, in the long term real estate can be a very lucrative small business. In Figure A, the following thirteen steps note the ways in which one can enter the market, find their niche, and grow their business.
Figure A
The Corporate Realm of Real Estate
| The What | The How |
| The Idea | Find a niche -Consider your strengths, weaknesses, and experience -Choose something you are deeply familiar with -Perhaps selling a particular type of real estate or selling to a particular group of people or in a particular area Possible Business Niches -Residential real estate -Resort and vacation homes -Income properties -Condos -Commercially zoned real estate properties -Property management -Rental property Choose a location -Know the towns and surrounding areas of your chosen location -Look at the other realtors and real estate companies in the area to see what they are doing Questions to consider -How do your natural strengths differentiate you from the competition? -What is the purpose of your business? -Who are you providing a service or product to? -What is the maximum figure you can spend? -If any, how much outside capital will you need? -What kind of work/life balance do you want to maintain? -What kind of expectations do you have for starting a real estate business? |
| Business Plan | What is a Business Plan -A document that outlines the financial and operational goals of a business, including business ideas, the definition of company objectives, and specific information that shows how the company plans to reach its goals The Studies -Entrepreneurs who take time to write a business plan are 2.5 times more likely to follow through with their plan and get their business off the ground The Traditional Format -An executive summary: summarizes the entire business plan -An industry overview: gives a brief overview of your business’s industry sector, including key players, industry trends, and estimates of industry sales -Market research and analysis: Looks at the target market for your product or service; breaks down your market segments, geographic location, and needs; shows anyone reading that you thoroughly understand the people you plan to sell to or serve -Competitive analysis: lists direct and indirect competitors and how they both meet and fail to meet the market’s needs -Sales and marketing plan: define your unique selling proposition and value proposition; explain how you will promote your business and persuade your target audience to buy; define your marketing strategies -Management plan: Outlines your legal and management structure; should show who your leadership team is and employees you will need; note any suppliers, manufacturing processes, and any other relevant operating details -Operating plan: note your business location, facilities, equipment, and what kind of employees are needed; note any suppliers, manufacturing processes, and any other relevant operating details -Financial plan: for everything financial; includes an income statement, a balance sheet, cash flow statement, anticipated startup costs, and any non-startup business models you plan to pursue –Appendices and exhibits: any information that helps support your business idea, including target market studies, legal agreements, and photos of your product Do market research -Primary: Talk to potential customers via surveys, focus groups, one-on-one interviews, conversations on social media, and questionnaires -Secondary: Information pulled from existing sources and currently available data |
| Hire an Attorney | -Ensure they are familiar with the real estate business and have experience representing other agents or brokers -Start this relationship before officially starting your business |
| Legal Business Structure | -Most real estate agents are self-employed business owners affiliated with a licensed real estate brokerage firms (independent businesses) Becoming a Broker: 4 Legal Business Structures -Sole Proprietorship: the most basic business entity; one person is solely responsible for a business’s profits and debt -Partnership: a shared responsibility between two or more people who hold personal liability for a business -Limited liability company (LLC): a structure that permits owners, partners, or shareholders to limit personal liability but include tax and flexibility benefits associated with a partnership -Corporation: an entity legally considered separate from its owners; that means they can own property, be held liable, pay taxes, and enter contracts -Companies and corporations require more effort to set up, but each have distinct financial and business benefits Registration -Once you decide on your legal business structure, register with the government and the IRS -In some cases, you may need federal, state, or local licenses and permits to operate, as well as an EIN from the IRS |
| Accounting and Bookkeeping | -Business accounting: how your business records, organizes, interprets, and presents financial information; accountants analyze the financial condition of a business to help the business owner make better decisions -Bookkeeping: recording, organizing, storing, and retrieving financial information related to your business; it is recommended that you hire a bookkeeper -There is some overlap between business accounting and bookkeeping -Review your accounting processes annually and make adjustments as needed |
| Assessing Finances | -Track your sales and commissions -Business finance: uses your company financial information to help you manage your money and make your business operations profitable and sustainable -Do not overspend -Most real estate agents and brokers can run their businesses without considerable costs in the beginning until they build a book of clients and can spend a bit more on equipment and supplies |
| Real Estate License | -In most states, a real estate license allows you to sell residential real estate; separate certifications are required for selling commercial real estate Steps to get a real estate license -Take the real estate pre-licensing course for your state, which will cover rules and regulations for your state and the federal government -Pass the real estate licensing exam; 1.5-3.5 hours depending on the state; 70-75% required to pass depending on the state -Submit your real estate license application -Find a real estate broker to work for Steps to get a broker license -Need a real estate license -Experience (2-4 years, typically) -Education (pre-licensing courses mandated) -Broker’s exam (lengthier and more comprehensive than the real estate licensing exam) -Application and fees |
| Business Insurance | -Business insurance can cover property damage, theft, intellectual property lawsuits, and other incidents |
| Number Crunching | -Tracking sales and profits -Plan for health and life insurance costs -Include unpaid vacation time Potential brokerage business costs -Your branding -Any license or permit fees -Fees for tools (physical and online) for marketing -Deposits and rent for a physical work location if you plan to lease your workspace -Basic infrastructural costs -Equipment costs or leases -Salaries or wages for any employees |
| Brand Identity | -Brand should embody the best attributes of your company -How people get to know you and your business |
| Online Presence | -A business website is usually the first contact point between you and potential customers |
| Sales Plan | -In-person consultations -Post-service customer care -Ensuring the spread of your business via word-of-mouth through good networking |
| Joining a Team | –Franchise brokerage: larger, more resources, higher pay, less of a personal relationship and opportunities for mentorship -Boutique brokerage: smaller, fewer resources, more of a personal relationship and opportunities for mentorship |
The corporate side of real estate is worth considering for anyone managing a business. In fact, one can seldom run a business very effectively without real estate considerations of some kind. The “Big Three” essentials for a business are land, labor, and capital. The “land” in this case refers to real estate. In the literature on real estate, it has been long argued that labor and capital have received more attention than land from scholars and practitioners. Though technology and information have stolen the spotlight, real estate assets have made up a significant portion of corporate assets for decades. As far back as the early 1980s, real estate assets formed more than 25 percent of the total corporate assets of major corporations in the United States. Other estimates suggest that real estate has accounted for between 10 and 30 percent of the total corporate assets of major European and American corporations.
Despite their tangible and meaningful presence in total corporate assets, they have been historically brushed aside. Approximately 60 percent of American companies treat real estate as an overhead cost, “just like stationary and paperclips.” Moreover, most American senior executives perceive the role of real estate assets as providing appropriate work environments for the least space costs. In other words, real estate is often seen as cost cutters as opposed to profit earners.
Corporate real estate, however, does have immense potential for earning profit for a business. One of the earliest research works on corporate real estate is the investigation of major U.S. corporations in the early 1980s by Harvard Real Estate Incorporated. The principal researchers for this investigation, Zackhauser and Silverman, defined corporate real estate (CRE) as “the land and buildings owned by companies not primarily in the real estate business.” This definition implies that a business’s real estate tends to act as a production factor rather than the end product. CRE is to be managed properly via owning or leasing for business purposes. Perhaps the most fitting CRE definition in the literature is “a functional unit in an organization which is responsible for the real estate holdings and their activities and supports the organization to achieve its business objectives.”
Whatever the preferred definition or perception of CRE’s role, the consensus in the real estate literature is that real estate constitutes a significant amount of a company’s assets and can often act as a cost. CRE is an asset that can increase a firm’s equity. For instance, the profit that is generated through the sales of the appreciated property increases the amount of a given organization’s equity. On the other hand, CRE is a cost that can reduce a firm’s profitability. In a 1989 study, researchers Gale and Case determined that 90 percent of American organizations treat real estate as similar to other production factors, thus perceiving it as a cost. As a result, many organizations with this view, to strategically manage the cost, tend to reduce it.
The way to ensure that the benefits of CRE outweigh its costs, it is important for businesses to work to enhance CRE’s equitability and mitigate its contribution to the loss of profit. To do this, it is worth understanding CRE’s functionality. First, CRE has a physically valuable function as a working space, one which enables people to carry out their allotted tasks. Second, CRE has a symbolic function as a physical embodiment of the organization itself. Furthermore, there are a variety of activities associated with ensuring CRE as a benefit to business objectives: acquisition and divestiture, finance, and custodianship.
These three activities involve the following management tasks:
Acquisition and Divestiture
- Identify real estate investment needs
- Select sites
- Acquire property
- Identify and dispose of surplus property
- Make design decisions
- Supervise construction related to the acquired property
Finance
- Budget capital
- Conduct financial analysis
- Conduct property tax evaluation
Custodianship
- Involves property management aspects and real estate record keeping
In addition to these tasks, business organizations can make strategic and economic decisions about their CRE.
Strategic Decisions: A decision that supports the core purpose of a business.
Economic Decisions: A decision that leads a business to efficiency.
In Figure B below, strategic and economic decisions for owning and leasing property are listed.
Figure B
| Decision Types | Owning Property | Leasing Property |
| Strategic | -Security -Unique location -Transportation links -Unique design for building -Safeguarding location for the plant cannot be moved -Ensuring space for expansion -Freedom of choice over -Desire to establish community links -Supply or suitably educated or trained labor -No suitable property available for rent | -Freedom to move, especially if expansion is predicted -Less risk of being tied to an obsolete building -Freedom to reduce the size of the estate if floor space needs to be reduced -Opportunity to test locality without a long-term commitment -Flexibility of size of setting -Availability of additional services -Accommodation included in outsourcing contracts |
| Economic | -Avoidance of rent rises -Avoidance of long-term commitments to lease conditions -Control over management costs -Protection of expensive investment in plant -Potential for particular capital gain above the level of inflation -Potential for long-term development opportunities -Contribution to joint venture program -Availability of grants -Capital allowances | -Demands less capital -Desire to limit the size of nonliquid capital assets -Freedom to choose cheaper, or more expensive locations |
When dealing with corporate real estate, maintaining the real estate inventory is critical for property performance evaluation and real estate decision-making. The following are potential obstacles in developing a real estate inventory system within an organization:
- Costs of setting up the management information system (MIS)
- Lack of manpower
- Unfamiliarity with an available MIS
- Being unable to convince the top management of the importance of a real estate inventory system
The individual with the discretion of managing an organization’s CRE and its real estate inventory system
is a CRE manager. The CRE manager of a particular business should provide necessary facilities at the lowest cost by taking into account the impact on operating risk, financial risk, and corporate stock valuation. Additionally, this individual has the task of acquiring and disposing of real assets, arranging the financing of these assets, and integrating them into the corporate strategy. A CRE manager is distinguished from a general property manager and a facilities manager in the real estate literature. In terms of a functional role in a corporation, Figure C details the differences between the three management positions:
Figure C
| Management Position | Property Manager | Facilities Manager | CRE Manager |
| Objectives | -Building maintenance | -Provide a quality working environment to support the business operations | -Strategic real estate activities to support the business operation |
| Activities | -Day-to-day tasks -Administrative management -Marketing advertisement -Physical management | -Acquisition and disposition -Physical upkeep -Recordkeeping -Reporting tasks to CRE owner | -The management of all aspects of real estate -Acquisition and development -Disposition -Property management -Financial analysis -Surplus property -Leasing -Brokerage |
| Users | -Building occupants or tenants | -Staff and workers in the organization | -Stakeholders |
| Skills | -Property specialist -Business administration and engineering | -Professionals with architecture, construction engineering, industrial engineering, and operation management skills | -Property specialist with financial and management background |
| Level of Management | -Tactical or operational | -Tactical and operational | -Strategic or tactical |
Research conducted in the late 1990s and early 2000s has generally placed greater emphasis on the strategic importance of CRE within corporations. The specific strategies that corporations can employ and have employed to allow CRE to support business interests are listed below:
Reduce Occupancy Cost
- Explicitly choose the lowest cost-provider strategy and promote cost-consciousness
Flexibility
- Accommodate changing organizational space requirements
- Manage variability and risk associated with dramatic escalation and compressing space needs
- Favor facilities that can be readily adapted to multiple uses by corporations and others
Promote Human Resources Objectives
- Provide an efficient environment to enhance productivity
- Recognize that environments are important elements of job satisfaction and therefore compensation
- Seek locations convenient to employees with preferred amenities such as transportation, shopping, and entertainment
Promoting Marketing Message
- The symbolic statement of substance or some other value
- Form of physical institutional advertising
- Control environment of interaction with company’s product or service offering
Promote Sales and Selling Process
- High traffic location to attract customers
Facilities Production, Operation, and Service Delivery
- Seek and design facilities making company products and delivering company services
- Favor locations and arrangements that are convenient to customers
Facilities Managerial Process and Knowledge Framework
- Emphasize knowledge work setting over traditional industrial paradigm
- Recognize changing character, tools used, and location with one
Capture the Real Estate Value Creation of the Business
- Real estate impacts resulting from the demand created by customers, employees, and suppliers
In considering the corporate side of the real estate business, business entities can utilize that knowledge and the strategies recommended therein to promote their interests and balance the costs and benefits in their favor.
The Inseparability of the Internet and Real Estate
In today’s world, there is no escaping the internet, and the real estate business is no exception. As technology continues to advance, and more of the world moves to the internet for its resources and quick access to information, real estate will increase its reliance on it as a medium for business. The internet conveniently improves real estate communications and transactions that “foster closer relationships among stakeholders.”
Before the internet, the real estate industry primarily relied on printed media for marketing purposes. This medium constrained real estate actors to geographical areas where properties were located. The internet has expanded the geographical scope by enabling seamless collaboration between all actors. Stakeholders online can easily communicate, send and receive pictures of property listings, see videos of properties, and view electronic maps of properties nationally and internationally.
To harness the benefits of the internet, real estate service providers would be wise to utilize online business models. Business models are “conceptual instruments for rationalizing and expressing the business logic of companies” and “they are operationalized through internet sites.” Familiarizing oneself with the role and relevance of online business models—or “e-business models”—is valuable to those in the real estate industry due to their position as the “primary unit of analysis for understanding the allocation of resources and the distributing of profits.”
Successful use of e-business models depends largely on the economic environment, market and industry conditions, and the internal and external factors affecting organizations. Examples of internal and external factors are listed in Figure D.
Figure D
| Internal | External |
| Product & Service Innovation -Key driver of new e-business models, especially for companies introducing new products or services to the market that require new skills, capabilities, and processes that lead to new value propositions Financial Performance & Availability of Resources -Both drivers and enablers of business model innovation | -New entrants -Competitors -Customer preferences -Customer segments -Technology -Regulatory and legal -The business environment |
There are also different types of e-business models that real estate service providers can use for their respective purposes. There are four general categories outlined in the literature: (1) the diversified model, (2) the web-advertising model, (3) the brokerage model, and (4) the virtual value-chain model.
Diversified Model. The diversified model of e-business involves expansion into myriad interests and adaptability. The network of entities within a business is owned by a single parent company, and the parent company provides for an “integrated product-service mix.” Essentially, this model helps companies expand their core business and its aims to related products and services, much like the branches stemming from the same tree trunk.
Merits
- Offers opportunities to develop powerful brands
- Allows a company to acquire a better and more complex corporate image
Drawbacks
- Requires more investment in new technology
- Requires major cultural changes in providing diversified products and services
Web-advertising Model. This model is an extension of the traditional media broadcast model in which an internet site sometimes provides free content and services—via email, IM, and blogs—mixed with advertising messages in the form of banner ads. Banner ads are a major source of revenue for those who broadcast them. The web-advertising model is fairly popular and it is used by well-known real estate sites such as Craigslist.com, Redfin.com, Realestate.yahoo.com, Realtor.com, Trulia.com, and Zillow.com.
Brokerage Model. The brokerage model brings together brokers, sellers, and buyers to do business, charging a fee to at least one party involved in the transaction. This model allows for the online search for properties and the provision of easy-to-access and readily available brokerage services. Redfin.com and Realtor.com use this model.
Virtual Value-Chain Model. All of the most popular real estate service provider sites use the virtual value-chain model. This model supports the traditional value chain, whereby information about real estate services and opportunities is conveyed through information-based channels.
Depending on the particular needs of one’s real estate business, the above models and combinations of their characteristics can be used to achieve key business aims and functions.
Conclusion
The real estate business can fluctuate and flow in ways that can be difficult to predict and impossible to control. However, by taking advantage of available information about turning real estate into an equity-building asset of a business; mitigating the reduction in profitability that real estate can have on a business; utilizing the internet and fitting e-business models to provide real estate services; and carefully planning the start, maintenance, and growth of one’s real estate business, real estate service providers can sail smoothly across the industry’s chaotic waters.
About the author
Isaac Isaiah Carr, JD MBA is founder, CEO, and business attorney of CCSK Law, a kingdom-driven law firm. Launched 5 years ago, CCSK Law grew from a single member firm to a 10 person team. His areas of focus include business formation and strategy, contract writing, sales, and corporate finance. Often referred to as an entrepreneur with a law degree, Isaac is able to offer business strategy utilizing creative solutions guided by legal and accounting principles that are then well executed in law. Experience in a variety of industries including real estate, hospitality, automotive, e-commerce, professional services, and healthcare. Successfully negotiated and closed multi-million-dollar transactions, ranging from $1.8M to $10M, with private investors, corporate leaders, and municipalities. Ultimately, he builds sustainable structures for systematic growth. Graduated from Valparaiso University Law School summa cum laude with his Juris Doctorate as well as the AACSB-accredited Valparaiso University School of Business with his Master’s in Business Administration. Passionate about education in all forms, Isaac is involved in the nonprofit organizations of SCORE, Neighbors’ Educational Opportunities (NEO) and New Vistas High School, ValpoNext, and Music Neighbors.
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