Real Property Rights and Definitions

Chapter: real property right❓s❓❓❓ and Definitions

Introduction

In real estate valuation, it is not the physical land and buildings (real estate) that are directly valued, but rather the rights associated with the ownership and use of that real estate (real property). This chapter delves into the intricacies of real property rights, providing a comprehensive understanding of the legal and economic principles underpinning real estate valuation.

1. Defining Real Estate and Real Property

• Real Estate: Encompasses the physical land and all permanently attached improvements, both natural and man-made. It is tangible and immobile.
  • Examples: Land itself, minerals, trees, buildings, fences, roads.

• Real Property: Refers to the rights, interests, and benefits associated with the ownership of real estate. These rights are intangible, representing a legal claim to possess, use, and dispose of the real estate.

  The relationship can be expressed as:

  Real Estate + Bundle of Rights = Real Property

  Where “Bundle of Rights” refers to the collection of rights associated with ownership.

2. The Bundle of Rights

The “bundle of rights” is a conceptual framework used to describe the comprehensive set of rights associated with real property ownership. Each right can be viewed as a separate “stick” in the bundle. Key rights include:

• Right to Possess: The right to physically occupy and control the property.
• Right to Use: The right to utilize the property for any legal purpose, subject to local regulations and restrictions.
• Right to Transfer (Alienate): The right to sell, lease, gift, or otherwise convey ownership of the property to another party.
• Right to Encumber: The right to mortgage or otherwise use the property as security for a debt.
• Right to Exclude: The right to prevent others from entering or using the property.

These rights are not absolute and are subject to limitations imposed by government (e.g., zoning, eminent domain) and private agreements (e.g., easements, covenants).

3. Estates in Land

An estate in land defines the degree, nature, and extent of an owner’s interest in real property. Estates are classified based on their duration and the rights they confer.

• Freehold Estates: Represent ownership interests of indefinite duration.
  • Fee Simple Absolute: The highest form of ownership, granting the owner complete and unrestricted rights to the property.
  • Fee Simple Defeasible: Ownership is subject to certain conditions, and the estate may be terminated if those conditions are violated.
  • Life Estate: Ownership lasts for the duration of a specified person’s life (the life tenant).
• Leasehold Estates: Grant a tenant the right to possess and use property for a specified period under the terms of a lease agreement.
  • Estate for Years: A lease with a definite term (e.g., one year, five years).
  • Periodic Estate: A lease that automatically renews for successive periods (e.g., month-to-month) until terminated by either party.
  • Estate at Will: A lease that can be terminated by either party at any time, with proper notice.
  • Estate at Sufferance: Occurs when a tenant remains in possession of the property after the lease has expired, without the landlord’s consent.

4. Interests Affecting Real Property

Various interests can affect the ownership and value of real property without conveying full ownership. These interests can be categorized as:

• Easements: Grant a specific right to use another person’s property for a limited purpose.
  • Easement Appurtenant: Benefits a specific parcel of land (the dominant tenement) and is attached to that land.
  • Easement in Gross: Benefits a specific person or entity, rather than a particular parcel of land.
• Liens: A legal claim against property as security for a debt or obligation.
  • Mortgage Lien: A lien created by a mortgage, securing a loan used to purchase the property.
  • Mechanic’s Lien: A lien filed by contractors or suppliers for unpaid work or materials used to improve the property.
  • Tax Lien: A lien imposed by the government for unpaid property taxes.
• Restrictions: Limitations on the use of property, typically created by covenants, conditions, and restrictions (CC&Rs) in a deed or subdivision plat.
• Encroachments: An unauthorized physical intrusion onto another person’s property.
• Licenses: A temporary and revocable permission to use another person’s property.

5. Legal Descriptions of Real Property

A legal description is a precise and unambiguous identification of a specific parcel of real estate. Accurate legal descriptions are crucial for property transfers, surveys, and valuation purposes. Common types of legal descriptions include:

• Metes and Bounds: Uses distances (metes) and directions (bounds) to define the property boundaries, starting from a known point of beginning (POB).
• Lot and Block: Identifies a property by its lot number within a recorded subdivision plat, which also specifies the block number, subdivision name, and recording information.

• Government Survey System (Rectangular Survey System): Divides land into a grid system using principal meridians, base lines, townships, and sections.

  • Township: A square area of land measuring 6 miles by 6 miles, containing 36 sections.
  • Section: A square area of land measuring 1 mile by 1 mile, containing 640 acres.

  The area of a property described using the Government Survey System can be calculated as follows:

  Area (acres) = 640 / (Number of divisions)

  For example, the area of the SE 1/4 of the NW 1/4 of a section is:

  Area = 640 / (4 * 4) = 40 acres

6. Impact on Valuation

Understanding real property rights and definitions is fundamental to accurate real estate valuation. The specific estate being appraised, the presence of any encumbrances or restrictions, and the legal description of the property all significantly impact its value. An appraiser must carefully analyze these factors to develop a credible opinion of value.

• Example: A property subject to a long-term lease with below-market rent will typically have a lower market value compared to a similar property without such a lease. The impact on value can be quantified using discounted cash flow analysis, considering the difference between market rent and contract rent over the remaining lease term.
  Value Impact = Present Value of (Market Rent - Contract Rent) over Lease Term

7. Practical Applications and Experiments

• Title Search Exercise: Conduct a title search on a sample property to identify the current owner, legal description, and any recorded encumbrances (e.g., mortgages, easements, liens).
• Highest and Best Use Analysis: Analyze the potential uses of a property, considering zoning regulations, physical constraints, and market demand, to determine the use that maximizes its value. This exercise will highlight how restrictions impact the highest and best use.
• Easement Valuation: Research case studies involving the valuation of easements, such as conservation easements or utility easements, to understand the methods used to quantify the impact of these interests on property value. The before-and-after method is commonly used:
  Easement Value = Property Value Before Easement - Property Value After Easement
• Scenario Analysis: Develop different scenarios for a property, varying the assumed property rights (e.g., fee simple vs. leased fee) and analyzing the resulting changes in value.

Conclusion

A thorough understanding of real property rights and definitions is essential for competent real estate valuation. Appraisers must be able to accurately identify and analyze the specific rights being valued, as well as any factors that may affect those rights, in order to develop credible and reliable value opinions. The legal framework surrounding real property defines the nature of the asset being valued and provides the foundation for applying appropriate valuation methodologies.