PROFCOR7&10.SEMI.LECTURE1.pptx

BASIC APPRAISAL FOR R E A L E S TAT E B R O K E R S  MODULE 2 LEGAL CONSIDERATIONS IN APPRAISAL  LEGAL CONSIDERATION IN APPRAISAL INTRODUCTION Ownership of real estate is a direct function of constitutional guarantees. Focuses on the various legal considerations involved in t...

BASIC APPRAISAL FOR R E A L E S TAT E B R O K E R S  MODULE 2 LEGAL CONSIDERATIONS IN APPRAISAL  LEGAL CONSIDERATION IN APPRAISAL INTRODUCTION 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 Types of real estate transfers  FUNDAMENTAL DEFINITIONS OF LEGAL  INTERESTS PROPERTY All things which are, or may be the object of appropriation. 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 Res Alicujusby- individuals. Things ownedLight, by for example, someone - ais res particular nullius. person belonging Res Alienae - Things or group oftopersons others 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 be owned, res communes can be owned, and are owned, by the state, though a state may permit anyone to appropriate,  FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS  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 physical attributes of land and/or improvements.  FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS 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. Through these instruments, one party owns or controls certain rights whereby another party owns or controls other rights.  FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS 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 right to get the property back after the lease has ended.  FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS 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: A portable microwave oven A window air-conditioning unit Furniture  FUNDAMENTAL DEFINITIONS OF LEGAL INTERESTS 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: Light fixtures Stoves Basketball goals (permanently installed)  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 recognize that the purchase is being made subject to these restrictions which are inherent in the ownership of the property.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP There 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: Police power Eminent domain Escheat Taxation  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP 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 development, zoning generally tends to maximize and maintain an individual parcel’s value.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP 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 whereas the average consumer may be unaware of its importance.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP 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.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP Eminent Domain Laws recognize the power of eminent domain but go on to state that just compensation must be paid to the owner. Examples in which the power of eminent domain is employed may include the following: Highway construction Parks Governmental building sites Airport expansion Reservoirs Utility construction  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PUBLIC (GOVERNMENT) RESTRICTIONS ON REAL ESTATE OWNERSHIP 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. 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 procedures LIMITATIONS ON OWNERSHIP OF REAL ESTATE 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: Deed restrictions Easements Leases Mortgages Liens  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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 zoning, usually the more restrictive prevails.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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 extended. Example: Bel-  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP Easements An easement typically does not convey ownership of the majority of the rights in the bundle of rights; easements relate to specifically identified rights usually identifying a temporary or perpetual use. 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.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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. This concept is particularly important when valuing properties that are subject to leases.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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 lending institution providing the funds can acquire title to the property through foreclosure.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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).  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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 forced to correct the encroachment.  LIMITATIONS ON OWNERSHIP OF REAL ESTATE PRIVATE RESTRICTIONS ON REAL ESTATE OWNERSHIP 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: Be apparent (open and visible) Be continuous and uninterrupted for a certain period of time Be exclusive Be claimed, i.e., the person who has the apparent 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. 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 analysis of the fee simple value. 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.  FORMS OF LEGAL INTEREST PARTIAL INTERESTS 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 to the landlord and the obligations accruing to the tenant are usually  FORMS OF LEGAL INTEREST PARTIAL INTERESTS 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). A leasehold interest can have a negative value (tenant is at a disadvantage) if the contract rent is more than the economic or market rent.  FORMS OF LEGAL INTEREST PARTIAL INTERESTS 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 public or private, related to air space.  FORMS OF LEGAL INTEREST PARTIAL INTERESTS 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 walkway connecting to adjacent buildings. PROPERTY OWNERSHIP FORMS As appraisers, we are concerned with the valuation of an ownership interest (real property) in specified real estate. The bundle of rights relates to real property and can be divided. In addition to understanding rights, an appraiser should also understand the various types of ownership. INDIVIDUAL (SEVERALTY) This is the most common form of ownership where one person or corporation owns the entire bundle of rights, still subject to governmental and private restrictions. PROPERTY OWNERSHIP FORMS TENANCIES Tenancy is created when the bundle of rights is divided, and in real estate generally has the following two meanings: The possession of title or other ownership form The right to use and occupy property As discussed, the second meaning relates to leased property in which the lessee has the right to use and occupy the property, and the landlord has the right to receive rent and get the property back at lease termination. PROPERTY OWNERSHIP FORMS UNDIVIDED INTERESTS Related to the ownership of real property, there are several important ownership forms that warrant explanation. They relate to an “undivided interest” in the real property. The undivided interest concept is difficult for many people to comprehend. What this means is that the property itself cannot be divided, only the ownership interest. PROPERTY OWNERSHIP FORMS SPECIAL FORMS OF OWNERSHIP The following three special types of ownership evolved in recent years as the bundle of rights separated in more creative ways: Condominium Cooperative Time-share PROPERTY OWNERSHIP FORMS SPECIAL FORMS OF OWNERSHIP Condominium The term condominium describes a type of ownership, not a type of building. This is a form of ownership in which an owner has an interest (usually fee simple) in a certain unit defined such as the space between the interior walls, the ceiling, and the floor of that unit; the owner also owns a pro-rata share of the common areas (drives, grounds, recreational amenities, etc.) within the development.  PROPERTY OWNERSHIP FORMS SPECIAL FORMS OF OWNERSHIP Cooperative A cooperative is a form of ownership in which a corporation owns the land and improvements, and the residents own stock in the corporation. Then, the corporation signs an exclusive lease with the tenant-stockholder. Cooperatives are common in certain regions of the country. This type of ownership allows tenant-stockholders to select their neighbors, voting on whether to allow or deny a prospective buyer to be allowed into the corporation, and thus occupancy of a unit in the building.  PROPERTY OWNERSHIP FORMS SPECIAL FORMS OF OWNERSHIP Time-Share A time-share is a partial form of ownership in which other time- share owners (tenants in common) purchase the right of use/occupancy for a specified period of time, say one week per year. Typically, 50 weeks per year are sold, with the other two weeks reserved for maintenance. Thus, an owner who buys one week will have a 2 percent ownership (1⁄₅₀) in the unit, but his ownership/occupancy may be restricted to a certain period or week of the year. A Baguio time-share week is likely more expensive in April and May than is a week in February; hence, a buyer cannot FORMS OF LEGAL DESCRIPTIONS Legal descriptions are methods of describing real estate so that each property can be recognized from all other properties, recognizing its unique characteristics with regard to location. Because land is a unique commodity in that it is immobile, it must be described specifically. Following are the four types of legal land descriptions: Metes-and-bounds description Government (rectangular) survey system Lot-and-block system Monuments system  FORMS OF LEGAL DESCRIPTIONS METES-AND-BOUNDS DESCRIPTION A metes-and-bounds description begins at a point of beginning (POB), and the terms metes and bounds relate to distance and direction. From the POB, the reader of the legal description is walked around the perimeter of the parcel using angles and distances, eventually returning to the POB. A basic understanding of plane geometry is needed in this system because of the emphasis on angles and distances. In addition to defining the geometric shape, a metes-and-bounds description also makes reference to a specific land lot, within a district/barangay, within a city/municipality. Generally, all city/municipality are divided into several districts/barangays for identification purposes.  FORMS OF LEGAL DESCRIPTIONS LOT-AND-BLOCK SYSTEM Under the lot-and-block system, a certain plot of land is subdivided. The key is the recording of the subdivision plat into public records. Within each subdivision, the lots and blocks are identified, making reference to the recorded plat.