Real Estate Notes PDF

REAL ESTATE NOTES [email protected]. Steps to getting your real estate license! 💻 1. Take a pre-license course approved by the Virginia Real Estate Board (like this 📝 on...

REAL ESTATE NOTES [email protected]. Steps to getting your real estate license! 💻 1. Take a pre-license course approved by the Virginia Real Estate Board (like this 📝 one!) ✉️ 2. Pass the Virginia state exam 3. Submit an application form Study for 2 hours everyday! Level 1 Objectives- Differentiate between land, real estate, and real property Name all of the rights included in a bundle of rights List the different types of property that are most common in real estate Distinguish between real property and personal property Describe the characteristics of land List the various land rights that come with a tract of land Explain the various types of freehold estates List the different types of property that exist in the world of real estate Differentiate between residential, commercial, industrial, agricultural, and special-purpose property REAL ESTATE NOTES [email protected]. Chapter 2: What Is Real Estate? Key Terms asset bundle of rights common law equity exclusion improvement land legal title property quiet enjoyment real estate real property Land- The surface of the earth, including all permanently attached natural features, extending downwards to the center of the earth and upwards to infinity. Real estate- The land plus improvements. Improvement- Any non-natural structure built on or affixed to land. Buildings, fences, decks, and roads are all examples of improvements. (Objects such as picnic tables are not improvements, either, as they are not affixed to the land.) Real property- Both Real Estate and the Improvements PLUS the bundle of rights associated with real estate ownership. REAL ESTATE NOTES [email protected]. BUNDLE OF RIGHTS- Exclusion- The right of exclusion gives an owner the right to tell trespassers (or anyone!) to get off their land. Possession- The right of possession is the right to occupy, live, breathe, and do whatever on your property because you own it. This is also known as the right to use. Disposition- The right of disposition is the right to sell, lease, and/or will a property to anyone you choose (you have the right to transfer all of your property rights or just some of them). This is also called the right to transfer. Quiet Enjoyment- The right of quiet enjoyment is the right to (legally) use the property for your enjoyment however you (legally) want, no matter what. In other words, this right covers a lessee's right to possess a property without interference from a lessor, previous owner, or anyone else with claim to the title. Control- The right of control is the right to alter, change, or improve a property as an owner sees fit. Encumber- The right to encumber is the right to put a property on the line as collateral for debt. Package Deal The right to control and right to encumber are often rolled up into one, handy-dandy right, referred to simply as the right to control. It's important to note that an owner might not enjoy all of these rights, all the time. Rights may be sold separately from the physical property, itself, or public law could inhibit or affect them. Property- is any item that may be owned, including the rights associated with ownership. Tangible property: Possessions that physically exist, such as a house or a toasty bagel Intangible property: Stocks, patents, and other incorporeal things REAL ESTATE NOTES [email protected]. Asset- When someone buys real estate and real estate is conveyed, real estate is an asset, or item of value. The buyer typically hopes their asset will increase in value, earning them equity. Equity- Equity is the portion of a property's total value owned outright by the holder to title, equal to the difference between the market value and all outstanding debts on the property. In other words, equity is all the value of a property above what an owner owes their lender or other debt-holder. EX- Let's say Ahmed buys a home that costs $200,000. He makes a $20,000 down payment on that house, meaning that initially, his equity = $20,000. As he makes more mortgage payments, his equity (or the amount of the house he actually owns) will gradually increase. Legal title is the complete legal ownership of real property and the bundle of rights associated. When you officially assume ownership of a property, it's often referred to as taking title. Real property is conveyed by a written instrument called a deed, which gives the deed-holder legal title. Deeds are used to transfer estates, and they can even include restrictions on property use. A transfer of legal title (by deed) is how real property moves around. The conveyance of real estate (not to mention real estate in general!) is governed by several regulatory bodies. The federal government regulates broad issues, such as general land usage, natural disaster reaction, and discrimination. The state governments are the primary regulators of real estate law. They address things such as more specific environmental control of flood zones and waste disposal. The local governments cover real estate on an even smaller scale, addressing issues such as land use control, taxation, and zoning. But conveyance rules, and the rules of real estate in general, are largely governed by the judicial government and common law, or the side of law that arises from judgments and decisions made in courts rather than explicit legislation. REAL ESTATE NOTES [email protected]. Common Law Think of common law as something that is generally accepted by society. For example, we generally accept that peanut butter is the best complement to jelly when creating a sandwich. In the world of real estate, common law comes from decisions made in court that are then applied to and accepted in real-life scenarios, each and every day. Chapter 3: Types of Property Types of Property Residential 🏡 Commercial 🏬 Industrial 🏭 Agricultural 🚜 Special purpose ⛪️ Residential real estate can include: Single-family residences Vacation properties Multi-family residences Townhouses Condominiums Apartment buildings Manufactured homes For a property to truly be deemed residential, it must be approved for the purpose of habitation. REAL ESTATE NOTES [email protected]. Commercial Real Estate Commercial real estate generally refers to properties that: Are used for business purposes Generate revenue Are typically considered investment properties Commercial real estate can include: Office buildings Retail complexes Gas stations Entertainment venues Restaurants But commercial property revolves around the idea that commercial properties generate revenue for their owners. Industrial Real Estate Appropriate for the manufacture of products or materials Operating as distribution facilities Serving as warehouses Industrial leases tend to be much longer than those drawn up for commercial or residential use. Industrial real estate can include: Manufacturing plants Distribution facilities Warehouses Storage facilities Research facilities Data centers REAL ESTATE NOTES [email protected]. Agricultural Real Estate Agricultural real estate includes: Properties dedicated to the commercial cultivation of food, feed, and fiber Commercial ventures that provide us with fruits, vegetables, livestock, plants, wood products, and other resources that are an essential part of our daily lives Agricultural real estate can include: Family and commercial farms Ranches Orchards Nurseries and greenhouses Pastures Feed lots It's important to note that, for property tax purposes, the on-site residence of the owner of an agricultural enterprise may not be considered agricultural real estate, but rather residential real estate. That "on-site residence" would include the owner's home and all related residential structures. If the agricultural real estate contains housing facilities for employees of the agricultural business, however, that WOULD be included in the property tax assessment. REAL ESTATE NOTES [email protected]. Special-purpose Real Estate Here are three characteristics typical of special-purpose real estate properties: 1. Often publicly owned 2. Require substantial reinvestment to convert to another purpose or use 3. Do not come up for sale as frequently as other property types Special-purpose real estate can include: Churches Schools Recreational facilities Cemeteries Government-held land REAL ESTATE NOTES [email protected]. Chapter 4: Real vs. Personal Property After completing the chapter, you will be able to: Define and differentiate between personal property and real property Describe how personal property changes to real property and vice versa Recall what a fixture is and why identifying fixtures is important Property can also be classified as either personal or real considering the law classifies all property as either personal or real. Key Terms chattel emblements fixture personal property severance trade fixture Personal Property vs. Real Property Real property is land plus permanent improvements. It is considered real estate. Once something becomes real property, it generally goes with the property when it's sold and is conveyed by deed. Examples of real property include: A home An industrial warehouse A 10-acre soybean field Personal property (or personalty or chattel) is an unattached, moveable asset not considered real estate. Personal property usually goes with the seller in a sale, unless otherwise specified in the sales contract. Personal property is conveyed by a bill of sale or bequest. Examples of personal property include: A hairbrush Dining room furniture REAL ESTATE NOTES [email protected]. The primary distinction is found in the permanency of the property being considered. Personal property is conveyed by bill of sale or by bequest in a will. Real property is conveyed by deed. In writing means something is included in an official, printed, signed, bona fide contract. "Since personal property is moveable and chattel is personal property, cattle can be chattel." Fructus Naturales Trees, persistent decorative plantings (such as perennial landscape plants), and uncultivated plants are referred to as fructus naturales and are usually considered to be real property because of their permanence. Example The 300-year-old oak tree growing in the backyard of Mr. Jovial's residential home is pretty permanent and would be considered real property or fructus naturales. Fructus Industriales Annually cultivated crops are called fructus industriales, or emblements, and are generally considered to be personal property, even prior to harvesting. Example Consider the soybeans in Farmer Charlie's soybean field. These soybean plants, and the cute little bean pods they produce, would be considered fructus industriales or emblements. REAL ESTATE NOTES [email protected]. Seal (the singer) decides he wants a new ceiling fan (or should I say, Sealing fan) for his dining room. He goes to IKEA, picks out one he thinks will match his dining set, and takes it home. This ceiling fan, while still in its original packaging, would be Seal's personal property. He can pick it up, move it, and take it with him to his next house if he decides to move. The following day, Seal decides to install the ceiling fan in his dining room. He attaches all of the necessary wires and screws it into the ceiling. Once attached to the ceiling, the fan is considered real property — having been firmly attached to the existing real property (the house). But let's say Seal is particularly attached to this ceiling fan. (It was the first ceiling fan he ever purchased on his own, after all.) If Seal were to sell his home, it would be your responsibility as a license holder to help Seal outline in writing that the ceiling fan is his personal property, and NOT a piece of real property that will be conveyed with the house. Converting Personal Property Into Real Property (and Vice Versa) Personal property becomes real property when it is permanently attached to the land. Attachments can be man-made or natural. If man-made, they're usually referred to as improvements or fixtures. Once affixed to the land, the improvement is considered part of the real property. Examples of improvements: Housing 🏡 Landscaping 🌷 Permanent BBQ pit🍔 Horse stables 🏇 REAL ESTATE NOTES [email protected]. Fixtures: Converting Personal Property into Real Property A fixture is an object that was once personal property but is now firmly attached to the land in such a way that it is considered to be real property. Most fixtures are created in a similar fashion and for similar reasons. Here are a few additional examples of fixtures you may be familiar with: Chandeliers Garage door openers Shelves Bidets Affixation or Annexation The process of converting personal property to real property is called affixation or annexation. When Seal's ceiling fan is attached to the ceiling, it is converted from personal property to real property through affixation (or annexation). Because fixtures can be detached from land and can switch from personal property to real property, the best practice is to list all fixtures in writing in the sales contract. This way, there is no confusion and there are no miscommunications between the buyer and seller. Annexation, or physical attachment, tends to be what we think of when talking about how fixtures convert from personal property to real property. But there are other ways this can happen, including: Close association Adoption Agreement REAL ESTATE NOTES [email protected]. Close Association Close association is a conceptual linkage to real property, such as a garage door opener. Example- Let's say Barb has a lovely, heated, six-car garage with an automatic rolling door. When she sells her property, the custom-made garage door opener isn't actually attached to the home, but the garage door opener is conceptually linked to the garage, making it real property. Adoption Adoption is the customization of personal property for use with real property, such as drapes cut for a window in a room with a vaulted ceiling. Example- Let's say Amir builds his own home with 100-foot ceilings and floor-to-ceiling windows. He purchases custom drapes for these windows from Cute Curtains, his favorite drape store. When Amir sells his home, these massive drapes will likely be considered real property, as they are customized specifically for the home. Agreement Agreement is when the parties to a contract agree that personal property will remain with the real property (make sure to get this in writing!). Example- Let's say Kirpa is looking to buy a single-family home from Jordan. Kirpa loves the antique wardrobes in the bedrooms and asks Jordan if he will include them in the sale. Jordan agrees to include the wardrobes (his personal property) with the sale of the home, as he didn't want to go through the stress of moving such heavy furniture, anyway. The wardrobes changed from personal property to real property through agreement. REAL ESTATE NOTES [email protected]. Trade Fixtures Trade fixtures are different from other fixtures in that the tenant can usually take trade fixtures with them when they leave. A trade fixture (or chattel fixture) is personal property that is owned by and needed for a tenant’s business. It is not subject to the same rules of transfer as fixtures in general. Example- Shelves that a store owner attaches to the wall when leasing a storefront in a strip mall are trade fixtures. The shelves belong to the tenant. They are fixtures, but the shelves are for the business of the tenant or the tenant’s trade. The tenant is allowed to take the trade fixtures with them when their lease is over. Unlike a tenant in a residence who improves the property, trade fixtures are property of the tenant. Severance Severance is the act of converting real property into personal property. You could say, then, that severance is the opposite of affixation. Example- Severance might also look like something as simple as picking berries. Let's say Severance Snape, a homeowner, has wild blackberries growing along the stream that runs through his backyard. He plucks the berries from the bushes for his breakfast cereal, performing an act of severance that converts the berries from real property to personal property. REAL ESTATE NOTES [email protected]. MARIA- Who is Maria? She's a mnemonic device to help you remember the tests to determine whether something is a fixture: Method of attachment Adaptability Relationship of the parties Intent Agreement The Method of Attachment refers to how the potential fixture is installed. Anything that would damage the home to remove? That's probably a fixture. Even overhead lights (which can be easily uninstalled) meet this criteria because they're wired directly into the ceiling, indicating they are intended to be permanent. Example- Let's say Caelyn is selling her home and wants to take the crystal chandelier in the living room with her so she can sell it on eBay. While hurrying through the moving process, she rips the chandelier from the ceiling. When the buyer moves in, there is a massive hole in the ceiling, exposed electrical wires, and no light – all things the buyer did NOT think they were signing up for. Adaptability means that anything specifically adapted to the home (like window shades) or anything that is integral to the operation of the home (like a box air conditioning unit or a specially-sized door) could be a fixture. Example- Let's say Dracula wants his indoor lime trees to thrive, so he builds a home with an all-glass roof. Dracula is also a vampire and cannot come into contact with sunlight, so he orders custom shades for his all-glass roof. The shades are integral to his home and would likely be considered a fixture. REAL ESTATE NOTES [email protected]. Relationship of the parties refers to landlord-tenant relationships. When tenants install things in a home, they are allowed to take them when they leave, like a trade fixture. Example- Lenny rents a commercial property to house his bakery. He installs shelves in the unit to hold his 47 types of flour. When Lenny's lease is up, he can take his shelves with him. Intent means the intent the homeowner had when they installed the item in question. Something that was intended to be permanent, like a built-in bookcase, is probably a fixture. If someone installed something intending to take it with them when they left, even if it has to be attached permanently, it might be personal property. Example- Let's say Lebron installs his lucky basketball net to his wall so he can practice making buckets while watching television. Lebron's lucky net is one of his most valuable possessions, so he plans on taking it with him when he moves. The net, though attached to the property, would still be considered personal property. Agreement between the parties: The contract trumps all, so whatever has been agreed upon by the parties to the transaction (IN WRITING) is what happens. Example- Ida installed handblown light fixtures in each room in her home. They are attached to the ceiling in a way that might damage the property upon removal and are adapted specifically for her home. When she installed them, she didn't intend to keep them – but she changed her mind and listed, in her contract, that the light fixtures are her personal property. No matter what the buyer may say, if it's listed in the contract, Ida can take those handblown light fixtures with her. REAL ESTATE NOTES [email protected]. MARIA is a mnemonic device to help you remember the tests to determine whether something is a fixture: Method of Attachment. Will it damage the home if I remove this? Adaptability. Is this item specifically adapted for this home? Relationship of the Parties. Who installed this item? Intent. Who bought this item? Were they intending to keep it? Agreement between parties. What does the contract have to say about this? Chapter 5: The Characteristics of Land Key Terms accession accretion avulsion erosion fixity illiquidity reliction scarcity situs Land’s Unique Physical Characteristics One way land is special and separate from personal property is that it has three unique physical characteristics. They are: Indestructibility Immobility Non-homogeneity REAL ESTATE NOTES [email protected]. Indestructibility Land is pretty tough to destroy. In fact, it’s indestructible. No matter what humans or nature may try to do to a plot of land, it will still be there afterward. Land can be trashed, flooded, or burned to a crisp, but the land will still exist. Land may: Go under water 🌊 Become a crater 🌑 Have improvements added to it (like houses) 🏠 Immobility You can't move land because It's immobile. When a buyer purchases personal property, they can move it to a new location. Non-homogeneity Every piece of land is different in some way, making it non-homogenous (this is also referred to as heterogeneity). Forces of Nature Accession Accretion Erosion Reliction Avulsion These factors are important, as their occurrence affects the value of a property, estate ownership, and title. Accession Accession is the right to all that one's own property produces, including that which is added, either naturally or by human action, to the property already owned. This often comes into play when dealing with crops. REAL ESTATE NOTES [email protected]. Accession can also be defined as increasing, adding, or coming to possess a right. Think of this as an owner having the right to whatever is produced by what they already own. Example- Let's say strawberry plants sprout in your backyard. You didn't plant them, but you still have the right to pick them, eat them, or make them into strawberry shortcake. 🍰 Accretion Accretion is the process that results in the gradual increase in land area through deposits of soil by natural forces. Example- Soil is deposited over time on the shore banks and deltas of a river. (The soil that gets deposited is also referred to as alluvion.) Erosion Erosion is the gradual loss of land over time. This most often happens when bodies of water wash away bordering land. Reliction Reliction is a gradual increase in land area when water gradually withdraws. Example- Let's say your property is on a lakefront in an area suffering through a 10-year drought. Chances are the water level in the lake has gone down during the drought, making your property's land mass larger. Avulsion Avulsion is the sudden loss of land by flood or when a stream or river changes course. Because it's a sudden change, no title is lost. Avulsion is caused by water. This is not to be confused with alluvion, which is the soil that gets deposited in accretion. REAL ESTATE NOTES [email protected]. Example- Let's say Kevin's property borders a river. During a massive rainfall, the river floods and washes away tons of the soil from the banks of Kevin's property. Kevin's sudden loss of land is called avulsion. Scarcity Scarcity is the economic characteristic that informs the economic principle of supply and demand. The supply of land will never increase, but the demand for land will increase as the population grows. And this is because land is scarce. Example- Let's say you live in a very small town but decide to move to Virginia Beach. When you move, you find that property prices in Virginia Beach are much higher than they were in your hometown. This is partially due to scarcity. Situs Situs refers to the economic significance of a property's location. The popular real estate phrase, “location, location, location,” is referring to the preferences people have for certain areas. Situs takes into account not only the geographical location of property, but also the economic qualities of that area that make it more or less desirable. Example- Let's say a buyer wants to move from a rural area to a home in a nearby city because the city has a strong local economy with plenty of job opportunities. This buyer is influenced by situs. Modification Building off of situs, modification refers to the fact that the value of land can be affected by human-made changes to the land. If the city decides to build a park in a particular zip code, then the houses that border that park will probably appreciate in value. This is also true if the city decides to add a train stop near a neighborhood. REAL ESTATE NOTES [email protected]. Example- Consider Orlando, Florida: After the construction of Disney World®, the farmlands that surrounded the theme park suddenly appreciated in value. People desired the land for new hotels and homes for people who worked at the park, and for businesses to serve the amusement park workers, etc. Fixity Fixity refers to the fact that real estate exists in a fixed location and cannot be moved. (This economic characteristic is very similar to the physical characteristic of immobility.) Fixity describes this truth about land (it can't be moved) from an economic viewpoint. Example- Jose's best friend decides to invest his money in stocks. Jose also wants to invest his money, but he doesn't have a very good knowledge of the stock market, so he sets out to invest in real estate, instead. Hopefully, Jose will work with a license holder who will inform him of the fixity of his investment. Illiquidity Illiquidity is the relative difficulty of converting an asset to cash without loss of value. Example- If you owned property that appraised at $250,000, given the right amount of time you would probably be able to sell it for that amount. However, if I told you that you HAD to sell the property by end of day tomorrow, you'd have to drop the price significantly to get someone to commit that quickly. It takes time to convert property into cash, and to rush the process, you would likely have to drop the price (and lose value). REAL ESTATE NOTES [email protected]. The Economic Characteristics of Land: - Scarcity: Addresses supply and demand; how scarce is this land? - Situs: Addresses the significance of property’s location; what might make this property’s location especially valuable? - Modification: Addresses human-made changes and improvements; what nearby modifications affect this land? - Fixity: Addresses the permanence of land; this land can’t be moved — how does this impact investments? - Illiquidity: Addresses the difficulty of converting an asset to cash without losing value; how fast could land be sold? At what price? Chapter 6: Land Rights After completing this chapter, you will be able to: List what rights are associated with land Differentiate between surface rights, subsurface rights, air rights, and water rights Discuss the importance of land rights in real estate Key Terms air rights air space appurtenance doctrine of prior appropriation littoral rights percolating water rights rule of capture REAL ESTATE NOTES [email protected]. riparian rights subsurface rights (or mineral rights) surface rights water rights Surface Rights Surface rights are the rights to access the surface area of a parcel of real property. They govern both natural elements and structures (called improvements) built on or attached to the uppermost layer of the land. This is the type of real estate ownership that the public understands the best. When driving down a street, it is easy to see homes that are built on the surface. Surface rights also include the right to build improvements on the surface that will enhance the value of the real estate. Example- A homeowner who elects to build a barn in his backyard to house his amiable herd of sheep is exercising his surface rights. Subsurface Rights Subsurface rights are ownership rights to all that is found beneath the surface of the tract of land owned, extending downward to the center of the earth. The importance of this right lies largely in the fact that it may secure ownership of mineral deposits located under the surface of a property. For this reason, subsurface rights are also commonly referred to as mineral rights. Example- Let's say William sells his property to Laura. Laura moves in and discovers buried treasure in her backyard. Laura has the rights to that buried treasure because of her subsurface rights. REAL ESTATE NOTES [email protected]. Subsurface rights may be sold separately from surface rights. In the event that two parties each hold an interest in a property — one holding the subsurface rights and the other holding the surface rights — the holder of subsurface rights has priority and may legally enter the property to extract the minerals they have rights to, but they must take care to not materially disturb the surface. Example- Let's say William owns the surface rights to a property and Laura owns the subsurface rights. Laura has the right to enter William's property and extract some of that delicious black oil she has the right to, but she can't excavate William's whole backyard to get to it. That would be a material disturbance. Rule of Capture A discussion of mineral rights should always include the rule of capture (also called the law of capture), which states that a landowner who drills a well for gas or oil on their land is entitled to all that well produces — even if the gas or oil migrates from beneath a neighbor's property. This rule acknowledges the fact that gas and oil will flow in the direction of the lowest point of pressure, which will be at the well's entry point into the reservoir that potentially extends beneath property owned by multiple parties. Supporting Rights Supporting rights is the legal concept of responsibility adjacent landowners share. Land is supported by the land that surrounds it. So, landowners shouldn't do anything that undermines that support. Lateral support is provided by adjacent properties. Subjacent support comes from the underlying earth. REAL ESTATE NOTES [email protected]. If a landowner were to engage in excavation or other underground activities on their own property that caused shifting or otherwise disturbed a neighboring property, they could be held liable for damages. Air Rights Air rights are the right to use the air space above the surface of land. Air space is the area above ground that is owned along with a property. It could include space above a piece of land, or the space owned inside a condominium unit. These rights may be sold or leased independently of the tract itself. In some dense cities with zoning regulations that dictate how high buildings can be built, smaller buildings like churches or theaters can sell their air rights to other, larger developments, giving them the ability to build higher than their zoning would otherwise allow. Planes and air travel also affect air rights. Water Rights Water rights can be a bit more complicated than air rights. When thinking about water rights, license holders should ask themselves three questions: 1. Who controls the water in question? The state or the property owner? 2. Is the water moving? 3. Is the water navigable? The Doctrine of Prior Appropriation Appropriative rights are water rights (granted by the government) that allow a party to take water from a body of water for a specified and approved use. This doctrine applies to water resources within a state's borders. Water rights vary by state, and states are empowered to pass laws governing the water rights and access in their state. REAL ESTATE NOTES [email protected]. The Doctrine of Prior Appropriation grants a state the power to control and regulate all water resources within its borders, and property owners must apply for a permit to use any available water source. The approvals are majorly affected by an owner's rights to the water, but their concerns are considered. Appropriative rights are typically applied to riparian rights. There are also correlative rights, which apply during periods of drought or when water is more scarce. Correlative rights give owners the rights to a portion of their water, but not all. Think about it like this: Correlative rights correlate to the amount of water available. Be Reasonable Virginia honors the Reasonable Use Rule, a law which allows property owners to extract water from a water source (such as a river) IF the water is put to reasonable use. What is a reasonable use? What's important is that water taken from a water source MUST be used on the tract of land where it was extracted. It cannot be transferred to another tract of land. Water Rights When a property borders a body of water or a river, the right to enjoy the water is usually included in the bundle of rights. These are called the water rights. State water rights can impede upon and limit an owner's water rights. There are two types of rights associated with waterfront properties: 1. Riparian rights- Govern the use of flowing water, such as rivers and streams that pass through or border a property. In accordance with riparian rights, a property owner does NOT own the water, but they may use the water and share those same rights and uses with other property owners whose land also interacts with the water. REAL ESTATE NOTES [email protected]. Example- Analise owns a single-family residence that borders a river. She is a kayak enthusiast and frequently exercises her riparian rights (and biceps) by kayaking on the adjacent river, paddling by properties owned by other people. 2. Littoral rights- Govern lakefront or oceanfront property and usually allow the property owner to use the water bordering their property. Littoral use prohibits the property owner from artificially changing the water’s location. Example- Valerie owns a lakefront property. She loves to fish, so she builds a dock that extends into the lake. In doing so, Valerie is exercising her littoral rights. Riparian = River Littoral = Lake Riparian water includes all flowing rivers and streams, and littoral water includes lakes and oceans. Navigating the Question of Ownership Where riparian rights (flowing waters) come into play, and the water is considered navigable, the land owners to each side of the water own the land just to the water's edge. For non-navigable water, ownership extends to the midpoint beneath the flowing water that divides their property. When evaluating littoral water rights, the water is always considered navigable, so ownership is always only to the water's edge. When there are tides involved, the water's edge is considered to be the mean high-water mark (high tide). REAL ESTATE NOTES [email protected]. Percolating Water Rights Percolating water rights refer to the use and ownership of underground water. Real property owners have a right to access that water by installing wells for their own use. If a homeowner wishes to build a well, they will likely have to perform a perc test (much less stressful than a real test you have to study for). This test will determine if the land absorbs water quickly or slowly. The water table, or the depth at which percolating water sits, is also an important part of percolating water rights. Appurtenances Appurtenances are rights that run with real property ownership, most often transferred with the property, but possible to sell separately. Rights associated with real property that usually convey (transfer) when property ownership changes include: Rights of access Air and water rights Mineral and gas rights Oil rights Other rights Example- Let's say an oil company obtains rights to the oil accessible beneath a piece of property. Should that property be sold again in the future, the property owner would convey all rights to the buyer EXCEPT the oil rights that were no longer the landowner's to sell. The new buyer would have to honor the pre-existing oil rights of the oil company. Example- Though appurtenances secure a right for one party, an appurtenance may also limit the right of another party. REAL ESTATE NOTES [email protected]. Let's say Linda owns the surface rights of a property and Maura owns the subsurface rights. When Linda sells the property to Kent, Maura's rights are protected and Kent's rights are slightly limited. Because rights can also be sold individually and separately from the land, it's important to note that selling those rights earlier or separately can impact later real estate transactions. A property sold with all rights would differ in value from a property sold with only subsurface or only surface rights. Air rights have to do with the area above the property, and can be sold separately. Surface rights govern what happens on the surface of the land, and include natural elements and improvements. Subsurface rights or mineral rights deal with what's beneath the surface, and can also be sold separately. Subsurface right holders have priority over surface right holders, so long as the surface isn't being disturbed. Supporting rights are a property owner's right to not have their land slide around because of what a neighbor is getting up to. Lateral support comes from adjacent properties and subjacent support is from below. Water rights are broken into riparian rights (for flowing bodies of water) and littoral rights (for still bodies). These rights are determined by states and even municipalities. Chapter 7: Estates After completing this chapter, you will be able to: Define an estate in terms of possessory interests Differentiate between the different types of freehold estates REAL ESTATE NOTES [email protected]. Key Terms conventional life estate curtesy dower elective share encumbrance estate fee simple absolute fee simple condition subsequent fee simple defeasible fee simple determinable fee simple estate freehold estate freehold tenant homestead laws legal life estate life estate pur autre vie remainder interest reversionary interest Interests in Real Property When someone holds a possessory interest in real property, it is said that they have an estate. Possessory implies that a possession exists REAL ESTATE NOTES [email protected]. Possessory An interest in property is possessory if it includes the right to possess and occupy the property, now or in the future. If you own a home, you have a possessory interest in it. Non-possessory An interest in property is described as non-possessory if it does NOT include the right to possess or occupy the property; it is the right to restrict the use of a property. Examples of non-possessory interest are encumbrances, easements, and restrictive covenants. EXAMPLE- Farmer Frank has a possessory interest in his squash farm, but the county has a non-possessory interest – in the form of an agricultural conservation easement – that prevents him from building condos on the land. Not that he would ever do that! He loves growing squash! Freehold Estates vs. Leasehold Estates Interests, or estates, may be classified as either: A freehold estate- When a land or real estate interest is described as a freehold estate, it means that the individual with the interest has some degree of ownership for an undetermined or unspecified (and therefore unlimited) period of time. These are also called inheritable freehold estates, because they're easy to inherit. A leasehold estate When deciding whether or not an estate is a freehold estate, ask yourself a few questions: How long can the estate-holder actually own the estate? Are there limits of duration? Who owns the estate, and (if there are multiple parties) what is their relationship to each other? REAL ESTATE NOTES [email protected]. Are there specific interests granted (or NOT granted) in the estate? What are they? Freehold Tenant The owner of a freehold estate is called a freehold tenant. Depending on the type of freehold estate, the freehold tenant may also have a right of disposition, or right to convey, the interest they own. There are two basic types of freehold estates: 1. Fee simple estate- A fee simple estate grants the most unlimited, most absolute interest in real property. This means that there are NO conditions on the title. (It is also known as a fee interest or simply fee estate.) A fee simple estate is: Of indefinite duration Freely transferable Freely inheritable When a grantor conveys a fee simple estate, the grantor conveys (to the grantee) full ownership of a property for the grantee’s lifetime. An estate in fee simple is the highest or fullest type of interest in real estate recognized by law. It is one in which the holder is entitled to the full bundle of rights connected to the property. The grantee then has the right to use, occupy, and/or dispose of the property as they see fit. A fee simple estate may also descend to heirs. Example- Let's say Saide owns a lovely 10-acre property with rolling, green hills. He owns this property for an indefinite period of time, meaning that he will own that property until he decides he doesn't want to own it anymore. Theoretically, there is no lease or other condition that will kick Saide off of his property before he is ready. REAL ESTATE NOTES [email protected]. Saide is free to transfer his property to whomever he pleases. He can sell it, he can keep it – the choice is his! Saide also has the right to choose an heir. If Saide wants his second-cousin-twice-removed with 349 cats to inherit it, it's his right to make that happen. Considering all of these conditions, it is fair to say that Saide's estate is a fee simple estate. Fee simple estates can be further broken down into absolute and defeasible estates. Absolute An absolute estate is an estate without restrictions that is freely given to heirs (this is the most common type of residential real estate). This is also called a fee title estate. Defeasible A defeasible estate (or fee simple defeasible) is an estate characterized by perpetual ownership on the condition that the property is used for a certain purpose or under specific conditions. Ownership reverts back to the original owner if these stipulations are violated, but the condition runs with the land. This is also called a qualified fee estate. Defeasible Estates Defeasible is a term used to indicate that something is capable of being annulled or made void. Example- Let's say your best friend is arguing that cake is better than pie (this is ridiculous, as we all know that pie is far more delicious than cake). Your best friend's REAL ESTATE NOTES [email protected]. case for cake is pretty weak, so you say: "Best friend, your argument that cake is superior to pie is quite defeasible." You are saying that your best friend's argument (though it is impassioned) is capable of being annulled or made void. So, defeasible estates are any estates conveyed by a grantor with conditions that – if violated – could make them null or void. Defeasible Estates and Encumbrances The condition placed on the estate creates an encumbrance that "runs with the land." An encumbrance is a non-possessory interest in a property that burdens the title. This means an encumbrance is against the land or the use of the land; it is NOT a personal vendetta against the owner of the land. Example- Let's say Geraldine has a possessory interest in a property as a fee simple defeasible estate (meaning Geraldine owns the property). However, Geraldine's Uncle Hoover is the one who granted the estate. When he did this, he attached the condition that Geraldine could own the property ONLY IF she cared for his 237 tabby cats. This condition, or encumbrance, is not a personal vendetta against Geraldine – Uncle Hoover just wants to make sure his tabby cats are cared for. The condition is an encumbrance: It runs with the land and it is from a non-possessory (Uncle Hoover doesn't own the land) interest. Just think of an encumbrance as a restriction or limitation on a property that might be annoying or limiting to an owner. REAL ESTATE NOTES [email protected]. Defeasible Estates: Two Kinds There are two kinds of defeasible estates: Determinable Condition subsequent Their qualification as one or the other is determined by the language around the condition attached to the property. Determinable A fee simple determinable is a type of fee simple defeasible estate which causes the title to automatically revert to the original owner if the deed requirements regarding property use are violated. The estate will come to an end automatically and immediately upon the occurrence of a designated event. The time of that occurrence is uncertain (because the occurrence depends on an action, not a date). No legal action is required of the grantor in order to assume recovery of this kind of estate. Example- Jennifer owns acres and acres of property. She grants land to her church “so long as the land is used only for religious purposes." This works great for 37 years, until the church decides to demolish the church building and use the land to start a circus, instead. The church decided to use the land for a non-religious purpose, so the title will revert automatically to Jennifer (or her heirs or successors). REAL ESTATE NOTES [email protected]. Condition Subsequent A fee simple condition subsequent estate is the other type of defeasible fee estate. This is the same as a determinable estate in that it comes with specific requirements (or conditions). The difference is that, for ownership to change, the grantor of the estate must prove (in court) that the defeasible fee estate condition has been violated. This MUST happen within a certain time frame. This change of ownership is NOT automatic, as is the case with a fee simple determinable estate. Once the court is satisfied with an established condition violation, the grantor can exercise their right of reentry, which is the right to retake possession of the property. Example- Benjamin grants his property to Restaurant Owner Randy on the condition that NO alcohol is sold on the premises of the land. But Randy loves brandy and starts selling brandy-based cocktails on the property. Benjamin has the right to reacquire full ownership of the property. However, it will be necessary for Benjamin (or his heirs or successors) to go to court to assert that right 2. Life estate- A life estate is the other type of freehold estate. A life estate is so named because it is limited to the duration of a measuring life (this may be the life of the tenant or the recipient of the life estate). This means that life estates are NOT estates ruled by inheritance. What Makes It a Life Estate? The life tenant enjoys the full bundle of rights of ownership, but they do so ONLY for the duration of the measuring life. Life estates can be created by private parties or by law (under specific circumstances). REAL ESTATE NOTES [email protected]. Life estates create a future interest for the person next in line to receive title to the property. These future interests can be remainder interests or reversionary interests. Reversionary Interest The reversionary interest is the interest in an estate wherein, upon the death of the life estate owner, full ownership reverts back to the original owner (grantor). This may also be referred to as a right of reverter. Example- Benjamin is a young man who owns a fee simple estate. He grants a life estate to his grandmother, Diana. When Diana dies, the estate goes back to Benjamin. Remainder Interest The remainder interest is the interest in an estate that will pass to another party (other than the grantor) at the death of the person upon whom the life estate is based (the recipient of the future remainder interest is referred to as the remainderman). Example- Consider Benjamin, the young man you met in the last example. Benjamin owns a fee simple estate. He grants a life estate to his grandmother, Diana. When Diana dies, Benjamin designates that the estate goes to Creed (Diana's husband). Reversionary Interest Example- Hal is the owner of a fee simple estate. He grants a life estate to Sandra (Sandra's life being the measuring life) and does NOT designate a remainder interest in the property to a third party. So, even though Valerie (Hal's friend) thought she would be receiving the property when Sandra dies, property ownership will revert back to Hal or Hal's heirs, instead. REAL ESTATE NOTES [email protected]. For the duration of Sandra's life, Hal's reversionary interest in the property is a future possessory interest because it relates to the property's future as a possession. Remainder Interest Example- Gary has a fee simple estate. He grants a life estate to Margarita (for the duration of her life) and designates a remainder interest to Manuel. When Gary dies, property ownership passes to Manuel (or his heirs) as the heirs are the remainderman. For the duration of Gary's life, Manuel's remainder interest is a future possessory interest. Act of Waste While life estate tenants are entitled to the bundle of rights (of ownership), including both possession and the ordinary use and profits arising from ownership, their rights are not absolute. They must take care that the exercise of their present rights do not encroach on the future rights of the remainderman. If the life tenant were to do anything to diminish the value of the property, they would be committing an act of waste, for which they could be held liable. Example- Let's say Angela owns a cabin on the lake in the woods. It is quiet, peaceful, and a pretty fun vacation home. Angela grants a life estate to her son, Brad. One day, the local deli gets Brad's bagel order wrong and Brad, in a fit of rage, burns down the cabin and destroys the jet skis with a hammer. Brad's behavior is not okay for lots of reasons, but one of those reasons is because Brad does NOT have the right to destroy Angela's peaceful cabin. That would be an act of waste. REAL ESTATE NOTES [email protected]. Life Estate: Two Types Life estates come in two forms: 1. Conventional life estate: any life estate created by property owners through a grant 2. Legal life estate: any life estate created by a function of law Conventional Life Estates A conventional life estate is a life estate in which the measuring life is that of the life tenant; it is an estate created by a deed that lasts for the duration of the tenant's life. This kind of estate is made through a grant from a property owner to another party. The two different types of conventional life estates are: 1. Ordinary 2. Pur autre vie Ordinary An ordinary conventional life estate is a life estate in which the measuring life is that of the life tenant. It is an estate created by a deed that lasts for the duration of the tenant's life. This is often referred to simply as a conventional life estate and is NOT always called an ordinary conventional life estate. Example- Timmy has a fee simple estate and conveys the estate to Jody for Jody's lifetime. Jody is the life tenant and his life is the measuring life. Upon Jody’s death, the life estate terminates. Ownership of the property is passed on to Breck, as dictated in the estate's deed. REAL ESTATE NOTES [email protected]. Pur Autre Vie A conventional life estate pur autre vie is a life estate in which the measuring life is based on someone other than the life tenant. When the measuring life ends, the estate is returned to the original grantor or passed on to some other designated person according to the provisions of the conventional life estate. Pur autre vie is a French phrase meaning life of another. Example- Jenny owns a fee simple estate and conveys a life estate in the property to Paula (her niece and private nurse). Paula is the life tenant for the duration of the life of Burt (Jenny’s elderly uncle). Paula is the life tenant. The measuring life is Burt’s. Upon Burt’s death, the life estate ends and subsequent ownership is granted to Elisa, as dictated by Jenny in the deed. I know you're wondering what happens if Paula should die while Burt is still alive. Well, Paula’s heirs may inherit her life estate. However, when Burt dies, Paula's heirs will lose the estate. Legal Life Estates The legal life estate, which can be broken down into: Homestead Dower and curtesy Elective share Augmented Estates Any property (real or personal) that someone owned is known as an augmented estate once that person dies. Think of it this way: Living owner? Just your normal estate. Deceased owner? Augmented estate. REAL ESTATE NOTES [email protected]. A person can die intestate, or without a valid will, or testate, with a valid will. For now, it's only important to understand that augmented estates may or may not be governed by a will (depending on if the owner died intestate or estate). Valuing an Estate Remember, estates address interest, so it makes sense that value is important to augmented estates. When a deceased person dies, relevant parties want to know where, or to whom, that value is going. The value of an estate is found by taking the actual value of the estate and subtracting funeral costs, estate administration expenses (maybe a lawyer is needed), and personal debts. Exceptions But not every piece of property, real or personal, is considered to be part of an augmented estate. Here are a few examples of items that would NOT be part of an augmented estate: The surviving spouse's property. Diana's husband dies. All of her personal possessions (her diamond ring and personal collection of flowered teapots) will not be conveyed with the augmented estate. The deceased spouse's property, IF that property is owned by the deceased spouse and another party. Ravi and his friend Sherman invested in a vacation property together. When Ravi passes, his wife doesn't automatically get full possession of the vacation property (though she will likely inherit Ravi's share). And so it goes. But it's important to note that, while you'll need to know how estate conveyance works both for the exam and during your practice, you should NOT provide legal counsel to clients. Reserve that duty for lawyers. REAL ESTATE NOTES [email protected]. Augmented Estates: A History Augmented estates are part of legal life estates. Legal life estates protect and protection laws mandate how right of survivorship should be handled. It is handled differently in every state! Virginia abolished dower and curtesy laws in 1991 and replaced them with the Augmented Estates and the Elective Share Act. The Elective Share Act dictates what happens if a person dies intestate. Even though dower and curtesy don't apply in Virginia, they're important concepts that may appear on your licensing exam. Legal Life Estates The main difference between a legal life estate and a conventional life estate is that state law creates legal life estates. Its main objective is to look out for a deceased person's survivors. Pro tip: To keep legal life estates separate from conventional life estates, remember the word legal: Legal life estates are mandated by legal action (state law). Homestead Homestead laws: State laws that protect a homeowner from the loss of their principal residence from the claims of most creditors and require both spouses to execute any instruments of conveyance. In other words, they keep a person's primary residence from being forcibly sold to pay debts or the debts of a deceased spouse. Homestead Law Specifics Virginia does recognize homestead protection legislation and stipulates a spouse could get $15,000 of their deceased spouse's augmented estate. Homestead law would be used in place of a will. REAL ESTATE NOTES [email protected]. Dower and Curtesy Dower/Curtesy: The right of a spouse to inherit property held in their spouse's name after that spouse dies; dower is the word used for women, curtesy for men. Dower/Curtesy Specifics Property is transferred if one spouse obtains a release from another spouse. Dower and curtesy are uncommon, as most dower and curtesy laws have been replaced by community property laws or elective share. Virginia does not recognize dower or curtesy. As a license holder, you won't be handling any transactions subject to these laws. Nonetheless, this information may show up on your licensing exam, as dower and curtesy were common practice in the past. Elective Share Elective share laws: State laws that let a spouse make a claim to their deceased spouse's property, despite what is in the will. The surviving spouse has to make a claim to the property and often gets a percentage of the value. If no claim is made, the estate passes per the will or other applicable law. Elective Share Specifics In Virginia, a spouse can claim one third of the value of an augmented estate if there are children involved and half of the value if there are no children. Life Estate Tree Diagram: - Life estate may be conventional or legal. - Conventional may be ordinary or pur autre vie. - Legal may be homestead, dower + curtesy, or elective share. REAL ESTATE NOTES [email protected]. Freehold Estates: Fee Simple Estates: - Also called fee simple absolute or fee title. - The highest form of land ownership. - Of indefinite duration, freely transferable, freely inheritable. - Full bundle of rights. - Most residential real estate is fee simple. Defeasible Fee Estate: - Also called qualified fee - Any estate with a condition attaches to it that could cause it to revert to the grantor. - Condition runs with the land, so stays with the property even if it changes hands. - Can change hands when a condition is violated (land granted to church is no longer used for church) or met (land is only granted if grantee has children). - Two kinds: - Determinable: - Reverts automatically when conditions are violated/met. - No legal action required. - Condition subsequent: - Grantor must prove in court that condition had been violated/met. - Does not revert unless suit is brought. Life Estate: - Full bundle of rights but only for the duration of “measuring life.” - After measuring life ends, can revert to grantor or to another grantee, called the remainderman. - Conventional - Created by individual property owners. - Pur Autre Vie. REAL ESTATE NOTES [email protected]. - Ordinary. - Legal Life Estates - Created by law instead of by a property owner. - Downer/Curtesy. - Elective share. - Homestead laws. Freehold Estates in Land Tree Diagram: Freehold estates may be fee simple estates or life estates: - Fee simple estates may be defeasible or absolute. - Defeasible may be determinable or condition subsequent. Life estates may be conventional or legal: - Conventional estates may be ordinary or pur autre vie. - Legal may be homestead, dower + curtesy, or elective share. REAL ESTATE NOTES [email protected]. REAL ESTATE NOTES [email protected].