PROFCOR7&10.PRELIM.WEEK3.A.pptx

LEGAL CONSIDERATIONS IN APPRAISAL  Ownership of real estate is a direct function of constitutional guarantees. Focuses on the various legal considerations involved in the ownership of real property that a professional appraiser must understand. Six legal considerations: Fundam...

LEGAL CONSIDERATIONS IN APPRAISAL  Ownership of real estate is a direct function of constitutional guarantees. Focuses on the various legal considerations involved in the ownership of real property that a professional appraiser must understand. Six legal considerations: Fundamental definitions of legal interests Limitations on ownership of real estate Forms of legal interests Property ownership forms Four types of legal descriptions  FUNDAMENTAL DEFINITION OF LEGAL INTERESTS A. PROPERTY All things which are, or may be the object of appropriation. 1. Res nullius are those physical things which "have not or have never had" an owner. Res nullius is a category of "things."(1) Those things have not been reduced to "property" because they are not, or more accurately cannot, be appropriated A. PROPERTY 2. Res Alicujus - Things owned by someone - a particular person or group of persons 3. Res Alienae - Things belonging to others 4. Res Communes - The property status of such a thing while it remains in a wild, unappropriated, state is "res communes," or a "thing common to all“. Unlike a res nullius which cannot B. REAL ESTATE Real estate relates to the land and all improvements permanently attached to the land, either by nature or by people. Real estate has the following five unique characteristics that distinguish it from other asset types: 1. Unique in location 2. Unique in composition 3. Durable 4. Finite in supply 5. Useful These five unique characteristics all relate to the C. REAL PROPERTY Real property relates to the interests, benefits, and rights inherent in the ownership of real estate. Based on this distinction between real estate and real property, those involved in the valuation of real estate are technically real property appraisers as opposed to real estate appraisers. Consistent with the concept of real property is the bundle of rights concept, a view of real property ownership suggesting that the rights inherent in the ownership of a parcel of real D.BUNDLE OF RIGHTS Rights generally inherent in the ownership of real estate include but are not limited to the following: 1. The right to use (Jus Utendi) 2. The right to its fruits (Jus Fruendi) 3. The right to dispose (Jus Disponendi) 4. The right to recover (Jus Vindicandi) 5. The right to abuse (Jus Abutendi) The bundle of rights can be divided through various instruments including leases, easements, and mortgages. D.BUNDLE OF RIGHTS For example, in a lease arrangement, the person leasing the property (lessee) generally acquires the right to use and occupy the premises for a certain reason, for a certain period of time, usually at a specified rental rate. The owner of the property (lessor) retains the right to receive rent for giving up the use of the property but also retains the right to the reversion, or the E. PERSONAL PROPERTY Personal property is an item that is not real property. It usually falls outside the subject of an appraisal. Three examples of personal property that may appear to be related to the real estate are the following: 1. A portable microwave oven 2. A window air-conditioning unit 3. Furniture F. FIXTURE A fixture is an item that was once personal property that has become part of the real estate. When a dishwasher has been delivered to a construction site and is awaiting installation, it is personal property. When installed, however, it becomes a fixture and is considered part of the real estate. Following are examples of fixtures: 1. Light fixtures 2. Stoves  LIMITATIONS ON OWNERSHIP OF REAL ESTATE  The purest and most complete form of real estate ownership is fee simple. Yet, even though an individual may own a parcel of real estate in fee simple with no mortgage encumbrance, he or she does not have exclusive use of that property. There can be private restrictions placed on the property by the previous owner or the developer. Such restrictions may require a minimum floor area, architectural controls, and placement of improvements. There can also be governmental controls. When purchasing real estate, one should  PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE There OWNERSHIP are four public or governmental restrictions known as the four powers of government. These limit the ownership of all real property. The four powers are as follows: 1. Police power 2. Eminent domain A. POLICE POWER Police power is the right of government to regulate land use for the public good. There are numerous examples of police power, but the most obvious ones are zoning and building codes. Zoning is intended to promote orderly development of land. Zoning may allow commercial development along a major highway but may restrict adjoining land to residential usage. By promoting orderly A. POLICE POWER Building codes are intended to protect the consumer from inappropriate or faulty construction. The requirement of sprinkler systems in office buildings over four stories high may have a significant impact on construction costs and rental rates. The requirement to reinforce foundation footings may insure the viability of a residential structure for years to come B. EMINENT DOMAIN Eminent domain is the right of governments to acquire private property for public use, such as a road widening. The process of acquiring private property for public use is called condemnation, whereas the right of government to acquire the property is eminent domain. Whether we agree or disagree with this right as individuals, it is inherent in the Constitution. Laws recognize the power of eminent B. EMINENT DOMAIN Examples in which the power of eminent domain is employed may include the following: 1. Highway construction 2. Parks 3. Governmental building sites 4. Airport expansion 5. Reservoirs 6. Utility construction C. ESCHEAT Escheat actually means going to the state. If a person dies without a will, that person is said to have died intestate, and that person’s property transfers to the state. D.TAXATION Governments are granted the right of taxation, that is, they are allowed to levy taxes on properties. In many communities, property taxes are the primary funding basis for local operations including schools. If property taxes are not paid, governments have the right to acquire the properties, although proper legal  PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP In addition to governmental restrictions, individuals may place private limitations on property, and these restrictions may or may not transfer with the property when it sells. Following are examples of private restrictions: 1. Deed restrictions 2. Easements A. DEED RESTRICTIONS A deed restriction is a limitation on the use of real estate through a written legal document that is usually recorded. The recording document is usually referred to or stated in the transfer agreement such as a deed. While a zoning restriction usually applies to many parcels, a deed restriction usually relates to a specific parcel or even a defined subdivision or planned use development. When deed restrictions are in conflict with A. DEED RESTRICTIONS One of the most common deed restrictions is a subdivision restrictive covenant. A subdivision deed restriction may state that the minimum size of a house must be 200 square meters, even though zoning may only require a minimum of 150 square meters. Another common restriction, particularly in first-class residential subdivisions, would be state that the minimum cost of the house to be constructed on a parcel of land is P5,000,000. Usually deed restrictions have time limitations, but under certain circumstances, they can be B. EASEMENTS An easement conveys the right to use part of the land for a specific purpose. Easements thus divide the bundle of rights. Utility companies have to acquire easements to extend utility lines through property. In order to widen an existing highway, a governmental authority may have to acquire a temporary easement alongside the highway for construction purposes. An easement typically does not convey ownership of the majority of the rights in the bundle of rights; easements relate to B. EASEMENTS An easement that runs with the land and can be conveyed from a seller to a buyer is called an easement appurtenant. An easement that serves only one person that cannot be conveyed from a seller to a buyer is called an easement in gross. C. LEASES A lease is a contractual agreement between a property owner (lessor) and a tenant (lessee). It specifies the use of a property for an identified period of time. The tenant acquires the right to occupy and use a property. The owner usually receives the right to collect rent from the tenant and also has the right of reversion, that is, the right to get the property back at the end of the lease. Usually, sales of property do not nullify leases. D. MORTGAGES When real estate is purchased, there are usually some borrowed funds involved as part of the purchase price. When part or all of this money is borrowed from a lending institution, a mortgage instrument is usually created. A mortgage is a loan or promissory note that is secured by the real estate. If the loan is not paid back according to the agreed upon terms and conditions, the E. LIENS A charge against a property in which the property is security for payment of a debt is called a lien. There are many forms of liens, or liens which may be placed on a property through a condominium association for nonpayment of mandatory association fees. All mortgages are liens, but all liens are not mortgages (mechanic’s lien). F. ENCROACHMENTS An encroachment is a trespass on another’s land. If a fence has been installed over the property line onto the adjacent property, an encroachment has been created. A house that extends over a property line is also an example of an encroachment. In most cases, the person doing the encroaching can be G. ADVERSE POSSESSION Adverse possession is a method of acquiring ownership through possession. If a person utilizes another person’s property openly for an extended period of time, that property may be transferred as to ownership. Several requirements are necessary for one to acquire title through adverse possession. Possession must involve all of the following: 1. Be apparent (open and visible) 2. Be continuous and uninterrupted for a certain period of time Be exclusive 3. Be claimed, i.e., the person who has the apparent possession must make a claim to that possession 4. Be hostile with denial or opposition to the original FORMS OF LEGAL INTEREST FORMS OF LEGAL INTEREST Several forms of ownership of real property exist, varying from state to state. As noted previously, because appraisers are technically appraising real property rather than real estate, they must have a clear understanding of the ownership interest being appraised. 1. FEE SIMPLE ESTATE The most complete form of ownership is a fee simple estate. Although the purest form of ownership without any claims by heirs or private restrictions, a fee simple estate is limited by the four powers of government. Usually, an appraisal of any interest less than fee simple begins with an 2. PARTIAL INTERESTS Any interest less than a fee simple interest is known as a partial interest. Several forms of partial interests are discussed in the following paragraphs. 2. PARTIAL INTERESTS 2.1. Leased Fee Estate A landlord’s (lessor’s) interest in a property when there is a lease encumbering the property is called a leased fee estate. The lease document or lease contract itself has divided the bundle of rights The landlord usually retains the right to receive rent in exchange for giving up use of the property for a specified period of time; the landlord also retains the right to get the property back at the end of the lease (reversion). In such an arrangement, the obligations accruing 2. PARTIAL INTERESTS 2.2. Leasehold Estate In contrast to the leased fee estate, the tenant’s (lessee’s) interest in a leased property is called a leasehold estate. The tenant usually obtains the right to use and occupy the property but assumes the obligation to pay rent. A leasehold estate can have a positive value (tenant has an advantage) if the contract rent (rent specified in the lease) is less than economic or market rent (rent which could be achieved in an open market). 2. PARTIAL INTERESTS 2.3. Air Rights Air rights are particularly important in urban areas. In many cases, buildings are constructed within an identified air space. Air rights do not extend indefinitely. There are height limitations imposed by the restrictions, either 2. PARTIAL INTERESTS 2.4. Surface/Subsurface Rights Surface/subsurface rights also come into play more in urban areas. A government agency may acquire (through eminent domain) subsurface rights for the construction of an underground sewerage system. An owner of a parcel of land may retain the surface rights for use as parking and sell the air rights for an overhead