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Property Definition: Rights, Restrictions, and Valuation.
Definition of Real Estate: Rights, Restrictions, and Value
Real estate includes land and what is permanently affixed to it, such as buildings, structures, and trees. It also includes the rights and interests associated with land ownership and use.
Elements of Real Estate:
- Land: The earth’s surface, subsurface minerals and resources, and airspace above within limits.
- Improvements: Buildings, structures, roads, fences, and other developments that enhance land use.
- Rights: Legal rights granting the owner control, use, and disposition of the property.
Types of Real Estate:
- Residential: Houses, apartments, villas.
- Commercial: Offices, retail stores, warehouses, industrial buildings.
- Agricultural: Farmland, farms, orchards.
- Industrial: Factories, warehouses, buildings used for industrial activities.
- Vacant Land: Undeveloped land.
Real Estate Rights:
These rights grant the owner control, use, and disposition of the property, defining the scope and limitations of ownership.
Types of Real Estate Rights:
- Fee Simple: The broadest form of ownership, granting the owner full rights to use, dispose of, and transfer the property, subject to legal restrictions.
- Leasehold Interest: Grants the tenant the right to use the property for a specific period in exchange for rent.
- Easement: Grants someone the right to use a portion of another person’s property for a specific purpose, such as passage or utility lines.
- Mortgage: Grants the lender the right to seize the property as collateral for debt repayment.
- Lien: Grants someone the right to claim payment from the property’s value for a service or debt owed.
- Other Rights: Mineral, water, and air rights.
Restrictions on Real Estate Rights:
These are legal and regulatory limitations aimed at serving the public interest and regulating land use.
Types of Real Estate Restrictions:
- Zoning Regulations: Dictate permissible land uses, building heights, and construction requirements.
- Building Codes: Set safety, durability, and quality standards for construction.
- Environmental Regulations: Protect the environment and natural resources.
- Public Easements: Grant the government or public utilities the right to use part of the property for public purposes.
- Private Restrictions: Imposed by agreements between owners, such as restrictions on height or building type.
- Property Taxes: A form of restriction where owners must pay taxes to maintain their rights.
Real Estate Value:
The amount a willing buyer is willing to pay a willing seller under normal market conditions.
Types of Real Estate Values:
- Market Value: The most probable price a property should bring in a competitive and open market, with both parties acting knowledgeably and freely.
- FNMA/FHLMC definition: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.”
- Investment Value: The value a specific investor sees in the property based on their expectations.
- Insurable Value: The value of the property that can be insured, based on the cost of rebuilding.
- Value in Use: The value the property provides to its currentโ owner based on its current use.
- Liquidation Value: The value obtained from a quick sale under non-ideal conditions.
Factors Affecting Real Estate Value:
- Economic factors (interest rates, inflation, economic growth).
- Demographic factors (population size, age distribution, education levels).
- Social factors (lifestyles, crime rates).
- Governmental factors (tax policies, zoning regulations).
- Property characteristics (location, size, design, condition).
- Real estate market conditions (supply, demand, price levels).
Methods for Measuring Real Estate Value:
- Sales Comparison Approach: Comparing the subject property to similar properties recently sold in the same area.
- Cost Approach: Estimating the cost to rebuild the property with the same specifications, then adding the land value.
- Income Approach: Estimating the net income the property can generate and converting it to a capital value.
Examples:
- Easement: A landlocked property granted right of way over another property.
- Zoning Restrictions: Land in a residential zone cannot be used for commercial purposes.
- Sales Comparison Approach: Adjusting the sale price of a comparable house to reflect differences in size or features.
Formulas:
- Present Value (PV): PV = CF / (1 + r)^n (where CF = Cash Flow, r = Discount Rate, n = Number of Time Periods)
- Capitalization Rate (Cap Rate): Cap Rate = NOI / Value (where NOI = Net Operating Income, Value = Property Value)
Chapter Summary
The chapter defines real estate considering physical components, associated rights, and restrictions affecting valueโ, and determining the appropriate standard of value for appraisal purposes.
Main Points:
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Defining the Physical Real Estate:
- Includes a precise description of the geographic location using maps and approved references.
- The type of occupancy (owner, tenant, vacant) is determined.
- Specific fees and taxes (if any) and their impact on value are identified.
- In the case of Planned Unit Developments (PUDs), the developer/builder’s control over the homeowner’s association is determined.
- Homeowner’s Association (HOA) fees and their calculation method (annually/monthly) are clarified.
- In condominium valuations, HOA fees must include condominium association fees.
- Any personal property in the valuation should be included in a separate appendix to the report.
- Any repairs, improvements, or new constructions to be made and their impact on the estimated value are identified.
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Defining Real Estate Rights:
- Real estate is not just landโ and buildings but a collection of rights associated with the land.
- The real estate rights to be evaluated must be determined (such as Fee Simple, partial rights, or Leasehold).
- Fee Simple is the most common in appraisals.
- It is important to identify external rights that transfer with the property (such as easement rights to common facilities).
- The appraiser should be aware of the rights outside the property that transfer with the property. For example, the property may include rights to shared ownership of facilities such as a public swimming pool, golf club membership, water rights, or even easements. Appurtenant rights and interests that run with the property can greatly affect value. Typically, appurtenant easement rights over the land of others enhance value.
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Identifying Restrictions:
- The restrictions to which real estate rights are subjectโ must be identified (such as zoning laws, public and private easements, rights of way, and deed restrictions).
- Restrictions can increase or decrease the value of the property.
- Property taxes are also considered a form of restriction on real estate rights.
- Information on rights and restrictions can be obtained from deeds, title abstracts, title insurance policies, and local planning offices.
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Defining the Standard of Value:
- The type of value required by the client must be determined (such as investment value, insurable value, use value, or market valueโ).
- The standard of value must be clear and defined in the appraisal report.
- Market Value is the most common in real estate financing.
- The intended user of the appraisal must be identified.
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Defining the Effective Date of Appraisal:
- The valuation date must be determined accurately as values change over time.
- An assumption clause should be included in the appraisal assuming that the described improvements are in good condition.
Conclusions:
- Accurate definition of real estate, including rights, restrictions, and value, is critical to the real estate appraisal process.
- Understanding rights and restrictions helps determine the fair value of the property.
- Determining the appropriate standard of value ensures that an appraisal report meets the client’s needs.
Implications:
- Failure to properly define the property may result in an inaccurate valuation.
- Ignoring rights and restrictions may mislead users about the value of the property.
- Using an inappropriate standard of value may lead to incorrect decisions.
- Defining the effective date of the appraisal ensures that the value reflects prevailing conditions at that time.
