Some laws that govern real estate

(By ABIODUN DOHERTY ).

The world is governed by laws and regulations but more importantly, the whole universe operates in accordance with laws and principles. These principles are often general in nature and are applicable irrespective of location and culture. Real estate investment is equally governed by certain principles which when understood and applied could help an investor make informed decisions under various circumstances. These principles are also applicable to several other spheres that share similar characteristics with the real estate sector.

First, let’s examine how the law of demand and supply operates in real estate. In simple terms, when the demand for a thing is very high and supply is low the usual tendency is for price to increase. Put in another way, when the number of people willing and able to buy properties is more than the number of properties in the market for sale then prices will go up. This law also operates in reverse. When the number of those willing to sell their properties is more than those willing and able to buy properties in a market the usual trend is for prices to go down. The first scenario could be called a seller’s market while the second scenario is better described as a buyer’s market.

This law creates a cycle in the real estate market and it is often in response to economic trends and challenges. The implication of this for astute real estate investors is that they profit from their ability to correctly analyse the market by determining its current cycle or the cycle that is about to start. Many real estate investors have lost or made money either by riding on the trend successfully or by failing to read the trend.

Some years ago, during the stock market boom in the country, one of the principal beneficiaries of the boom was the real estate sector. Many people who made money in the stock market to a greater or lesser extent also invested in real estate. Companies and individuals were buying properties and people made good money in the process. The banking sector was a major force in property acquisition during this period and if you were lucky to have your property in a strategic location or busy intersection you are likely to be approached by a bank directly or indirectly.

Due to the competition amongst the banks there were instances when they literally turned the purchase into a bid by increasing their offer prices in order to edge out their competitors. The property seller with an open and a business mind leveraged on their eagerness to buy to make more money than he or she would otherwise have sold the property. At the same time there were property owners who had over bloated perspective of the value of their property and failed to recognise the period as a cycle that will not last forever. In their bid to get more than is reasonable they allowed the downturn in the market to catch up with them. The result was that some of them who really needed money had to sell their properties for far less than they were offered previously and they lost millions in the process.

Secondly, there is the law of cause and effect. In simple terms, every action has a consequence or effect. The real estate sector is an integral part of the economy of every society. Infact, it is one of the means of measuring the strength or weakness of any economy. Whatever happens in the real estate sector is a clear indication of what is going on in the economy of the nation. In addition, when there is price appreciation or depreciation in an area, it does not just happen by chance. It is a product of certain actions that should be identified and analysed in order to make an informed decision.

In order to identify possible growth areas in real estate, for instance, you should start from the premise that growth doesn’t just happen. There are several reasons why people want to live in particular areas and there are different sets of reasons why a company would love to build its factories in an area. Sometimes a confluence of these factors can stimulate development and growth in an area thus paving the way for some well positioned investors to make money from such a development.

This is one of the reasons why you should pay attention to certain government policies and developmental plans in particular. For instance, the decision of the government to relocate a school from a locality, a major government project or to construct or expand a highway may be all you need to identify where to invest in the next few months or years. From past trends, if the project goes ahead and is successfully completed the value of properties along that corridor would increase.

Source: Punch Newspaper.