Real Estate Principles and Practices

Real Property

• Consists of land, improvements attached to the land, benefits, rights, and ownership interests that go with the land.

Appurtenance

• Rights, privileges, or improvements that belong to and pass with the land.

Improvements

• Man's addition to the land.

Accessories

• Stoves, pool equipment, AC units (not attached).

Fixture

• Item that was personal property but has been attached or installed in a way that it becomes real property (is attached).

Personal Property

• A right or interest in something of a temporary or movable nature and includes anything not classed as real property.
• Also known as chattel or personalty.

Annexation

• The process of attaching personal property (e.g., showerhead or ceiling fan).

Severance

• The process of a fixture being uninstalled and once again becoming personal property.

Bill of Sale

• Ownership is transferred through this.

Trade Fixture

• Fixtures installed by a tenant in order to carry out a business (barber chairs; if left, they become landlord's property).

Emblements

• Crops cultivated annually (not sugar cane, yes barley).

Physical Characteristics of Land

• Non-homogeneity
• Immobility
• Indestructibility

Economic Characteristics of Land

• Scarcity
• Modification
• Fixity
• Situs

Legal Description

• Created and determined by a surveyor.

Metes and Bounds

• Oldest method of land description, uses compass directions, degrees, and minutes.
• Also uses monuments.

Lot and Block

• Most commonly used residential listing agreement; recorded in a map called a plat.

Rectangular Survey System

• Known as the government survey system, and takes into consideration baselines meridians townships and sections.
  • In a section (square) there are 640 acres. 640 \text{ acres}
  • Each acre contains 43,560 square feet. 43,560 \text{ square feet}

PETE (Police Power, Eminent Domain, Taxation, Escheat)

Police Power

• Given to municipalities to regulate and control the use of property for the public good.
• Zoning is the most common example.

Non-conforming Use

• Change in zoning, and now property is out of working place.

Variance

• Requested if the property violates the zoning

Setback

• Space between the lot line and the building line.

Buffer Zone

• Area of land separating one land use from another.

Eminent Domain

• The right of government to take property for the public good. (Processes of Condemnation and reverse condemnation)

Taxation

• Ad valorem taxes; property taxes are the highest priority lien on real property.

Escheat

• Property reverts to the estate when someone dies without a will and no heirs.

Encumbrance

• A limit on a property or a limit on property’s rights that may or may not also be a cloud on the title.

Reservation

• Imposed by the grantor withholds title to a part of the land described in the deed.

Encroachment

• When a structure or improvement overlaps or trespasses onto another property.

Easement

• Allows limited use of another's land; use without possession.
  • Created by: implied, grant, agreement, reservation, necessity, condemnation.
  • Terminated by: merger, release, abandonment.
  • Dominant estate: benefits from easement.
  • Servient estate: limited by the easement.
  • Easement in Gross: belongs to a person or corporation; an example is utility easement.

License

• Permission to do a particular act upon the land or property of another.

Adverse Possession

• Squatter's rights; property is acquired from the rightful owner through the Statute of Limitations.

Lis Pendens

• Recorded notice against a specific property (lawsuit).

Ownership Types

Ownership by One

• Estate in severalty, tenancy in severalty, or sole proprietorship.

Tenancy in Common

• Ownership by two or more without rights of survivorship.

Joint Tenancy

• Ownership by two or more WITH rights of survivorship; poor man’s will.

Partition

• A procedure to divide the co-tenant's interests in real property; this process would divide the property into pieces and end the joint tenancy.

Tenancy by the Entirety

• A specific type of joint tenancy where the co-owners are married to one another; it avoids probate.

Syndicate

• When two or more parties join together to create and operate a real estate investment.

Comparisons

• Tenancy in Common vs. Joint Tenancy
  • Most Common vs. Poor Man’s Will
  • Willable vs. Right of Survivorship
  • Estate of Inheritance vs. Last Man Standing
  • Unequal Interest Allowed vs. Unity of Time, Title, Interest, Possession
  • Title passes at probate vs. Avoids Probate - title passes at death.

Time Shares

• (Interval ownership) gives an individual part ownership of a property coupled with the right to exclusive use for a specified number of days per year without the responsibility of full ownership.

Cooperative or “Co-ops”

• Investment for residents, land and building owned by a corporation, residents buy shares in the corporation in exchange for a proprietary lease on their unit.

Condominiums

• Are established under laws referred to as horizontal property acts.
• Each unit is a separate legal ownership, and each owner arranges his financing.

Estate

• An interest in real property.

Freehold Estate

• Is ownership.

Bundle of Rights

• All the legal rights that attach to the ownership of real property.
  • Disposition: right to sell, will to heirs, encumbrance, or lease.
  • Exclusion: right to exclude others.
  • Possession: the right to use, enjoy, occupy.
  • Quiet enjoyment: the right to use uninterrupted by former owners.

Fee Simple

• The best type of ownership; the owner has all available rights to the property and can pass it to his or her heirs.

Fee Simple Defeasible

• Ownership with conditions or terms which, if violated, could cause the ownership interest to be defeated or terminated.
  • Determinable: if a violation occurs, reversion to the grantor automatically.
  • Condition Subsequent: The grantor must take steps to reclaim the property within a reasonable period if the condition is violated.

Life Estate

• Ownership for the duration of someone’s life.
  • Life Tenant: owner of the life estate.
  • Remainderman: person who gets the property after the life estate is ended.
  • Life Estate with Reversion: life estate setup for the property to go back to the original owner.
  • Life Estate pur autre Vie: when the life estate is based on someone else’s life other than the life tenant.

Leasehold Estate

• Created by lease agreement.
  • Estate for years: A lease with a specific starting and ending date.
  • Periodic Tenancy: A lease with a fixed period that is automatically renewed unless the tenant or landlord acts to terminate it (normally month-to-month).
  • Estate at will: Can be terminated by either party at will without notice.
  • Tenancy at sufferance: Occurs when a lease expires, and the tenant refuses to move out.

Lease Types

• Gross Lease: Landlord pays all of the expenses; tenant only pays rent.
• Net Lease: Tenant pays rent plus some of the expenses of the property.
• Percentage Lease: The rent amount is based on the receipts of the tenant’s business (allows the landlord to participate in the tenant’s success).
• Graduated Lease: A lease with scheduled rent increases often based on expected business growth.
• Lease with an Option to Buy: Gives a tenant the right to purchase at a future date.
• Lease Purchase Agreement: An agreement in which part of the rent payment is applicable toward a set purchase price
• Ground Lease: The tenant usually makes a long-term commitment, and the tenant will build on the leased property.
• Oil and Gas Lease: lease gives tenant the right to extract oil and gas from a specific property. ( in texas, the Texas Railroad Commission regulates oil and gas, but fornational, it isEPA)
• Right of First Refusal: The tenant has the right to match or better any offer before the property is sold to someone else
• Assignment: The transfer of all rights and liabilities to a new tenant under an existing lease.
• Expiration: When the lease comes to the end of the negotiated term or lease period.
• Termination: When the prime period on a lease ends or is cut short.
• Mutual Recession: When a lease is terminated by agreement of the parties; no lawsuit.
• Constructive Eviction: Occurs when the landlord is aware of a property condition and allows deterioration to the point that the building is uninhabitable and the tenants are forced to leave; the landlord must provide a habitable property.
• Sale and Leaseback: A property owner sells the property to an investor or lender and then leases it back. Therefore, the seller occupies the property after closing.

Lien

• A charge against the property as security for a debt (lien is an encumbrance - a limit on your rights).
  • Specific Lien: one or more SPECIFIC named properties.
  • General Lien: attaches to all properties of the debtor
  • Voluntary Lien: Created by the borrower's actions.
  • Involuntary Lien: Created by law.
  • Right of execution: it enforces the payment of the lien when a party wins judgment and is unable to collect payment.

Rights

• Subsurface rights
• Surface rights
• Air rights
• Riparian rights: the right to use water from a river or stream that borders your property
• Littoral rights: the right to use water from a lake or ocean.

Alienation

• A change of ownership of real property.
  • Voluntary alienation: occurs when an owner transfers title to another.
  • Involuntary alienation: usually happens in court as in foreclosure, bankruptcy, condemnation, escheat, adverse possession, reversion of defeasible fee, partition, or inheritance without a will.

Deed

• Legal evidence of ownership.

Requirements of a Valid Deed

• Grantor and grantee, consideration, words of conveyance, execution, delivery, and legal description of the property; deeds don’t have to be dated, signed by the grantee, or recorded.

Deed Types

• General Warranty Deed: Most common deed; guarantees and protects against defects.
• Special Warranty Deed: Guarantees title only against defects arising under the grantor’s period of ownership.
• Bargain and Sale Deed: A deed with only one covenant; doesn’t provide any warranties about the condition of the title.
• Quitclaim Deed: Deed that gives NO warranties or guarantees and offers the least protection; it is used to clear a cloud on the title.
• Patent: When the government transfers title to an individual.
• Dedication: When a developer turns over the streets in a subdivision to the local government.

Testate

• One who has a valid will.

• Executor: the person named in the will to settle the estate.

• Devise: the property given in a will.

• Devisee: the heir who received the property.

Intestate

• One without a will.

• Administrator: court-appointed one to settle the estate of an intestate person.

Foreclosure

• Is the legal process in which the lender begins the foreclosure.

• Deed in lieu of foreclosure: Also called friendly foreclosure; the lender accepts a deed from the borrower.

• Redemption: At any time up to the moment of the foreclosure, the borrower has the right to step in and pay what is owed and reclaim the property forfeited due to mortgage default. The lender must send the notice of foreclosure by certified mail 21 days before the foreclosure sale.

• Short Sale: A sale of secured real property that produces less money than what is owed to the lender.

• REO: Real Estate Owned by the lender; after an unsuccessful sale at a foreclosure auction.

Title

• Both the ownership of something and the legal evidence of that ownership.

• Clear or Good Title: can be transferred to another.

• Marketable Title: Title that a reasonable buyer would accept as clear; seller pays all pending liens.

• Equitable Title: Is an interest created by a legal document, such as that held by a buyer with a signed sales contract who has yet to go to closing.

• Subrogation clause: A clause that allows the title company to assume the rights of a buyer with respect to any claim against a seller if the title company has made payments to that buyer to satisfy that claim. Can’t sue both to get double money.

• Abstract of title: An examination of public records of the title.

• Chain of title: A list of all owners from the first until today.

Market Value

• The most probable price.

DUST

• Acronym for the 4 basic characteristics of value.
  • Demand: there must be a demand for the item and the purchasing power to acquire it.
  • Utility: the item must be needed or wanted.
  • Scarcity: there must be a limited supply.
  • Transferability: the item must be able to be sold; ownership rights must be transferable.

Appraisal

• Opinion; estimate of the value.

Highest and Best Use

• The legal use that gives the greatest return in money and/or amenities.

Principle of Substitution

• Sets an upper limit on the price; maximum value of a property is set by the cost of acquiring a similar substitute property.

Principle of Conformity

• States that maximum value is found when properties are the same or have a reasonable degree of similarity.

Principle of Increasing and Decreasing Returns

• Invest in property whenever each dollar invested will return a dollar or more of increased value and stop when each dollar invested returns less than a dollar in value.

Principle of Contribution

• The value of a part is determined by its contribution to the total value of the property rather than by its cost.

Principle of Regression

• The presence of lower-valued or declining-valued properties in the neighborhood leads to a decline in the value of your property.

Principle of Progression

• The presence of higher-valued properties will increase the value of your property.

Principle of Competition

• An increase in competition will result in decreased priority for current providers; competition lowers prices.

Principle of Change

• Change is constant and is reflected in values; appraisers must make adjustments for changes in market conditions for time.

Principle of Anticipation

• Purchase price is affected by the expectation of future appeal and benefits.

Principle of Balance

• Mixed land use should result in maximum value for all properties involved (Master planned communities).

Cost/Value Added

• There is an increase in property value as a result of fixing a problem.

Appraisal Process

• State the purpose of the appraisal.
• Collect and verify information about the property.
• Estimate value using all three approaches, or as many approaches are needed to get the best result.
• Reconcile the estimates by determining weighted averages; this last step determines the exact value of the property.

Market Data Approach

• Used primarily in residential appraisals; involves comparisons with known sales in the same area.
• Arms-length transactions: appraisal should use 3-5 of these (comparables) no more than 6 months old.

Cost Approach

• Used for unique properties (e.g., churches or government buildings).

• Physical deterioration: ordinary wear and tear and is curable.

• Functional deterioration: brought by factors in the property; often or mostly curable.

• Economic obsolescence: Loss of value due to outside factors (zoning, air pollution, noise, traffic, jobs, crime rates, etc.).

Income Approach

• (Aka capitalization method) used for income-producing properties.
• Highest weighted criteria for this approach is the Net Operating Income (NOI).
• Gross Rent Multiplier: (average price / average monthly rent).

Comparative Market Analysis (CMA)

• Tool used by license holders to help sellers determine a realistic price for their property; compares current listings, recent sales, and even expired listings of unsold properties.

Broker Price Opinion (BPO)

• Basically the same as CMA, broker's written opinion of value.

Assessed Value

• The value of your property for tax purposes.

Special Assessment Tax

• Tax levied to those who benefit from an improvement made by the government.

Municipal Improvement District (MIP)

• If property located in one of these, the property owner will receive a tax bill until the improvement is paid for; can be permanent or temporary.

Contracts

• Can be expressed or implied.
  • Express: written or stated.
  • Implied: by actions or evidence; not written or discussed, just done.
  • Unilateral: binds only one party.
  • Option: right to purchase property within a definite time period at a definite price; buyer isn’t required to buy, but seller is required to sell.
  • Bilateral: exchange of promises, which binds both parties.

Requirements of a Contract

• Competent parties.
• Offer and acceptance.
• Legal purpose.
• In writing.
  • Without this, the contract is valid but can’t be enforced.
• Consideration.

Contract States

• Executed contract: contract that has been performed fully.
• Executory contract: is it in the process of closing but hasn’t finished yet.
• Valid contract
• Void contract
• Voidable
• Unenforceable
• Liquidated damages
• Punitive damages
• Compensatory damages
• Statute of Frauds: all contracts that relate to the transfer of any interest in real estate must be in writing to be enforceable.

Contract Principles

• Time is of the essence
• Offer
  • An offer can be withdrawn.
  • All offers must be presented to the intended party.
  • Can be accepted, rejected, or countered.

Other Terms

• Counteroffer
• Earnest money
• Contingency
• Economic life
• Boot
• The 1031
• Fiduciary relationship
• Universal Agency
• General Agency
• Special or limited agency
• Single agency broker
• Transactional broker
• Dual agency broker
• Statutory Law always takes precedence over Common Law

Duties

Duties of Client to an Agent

• Compensation
• Reimbursement
• Indemnification
• Performance

Duties of Agent to Client

• Obedience

• Loyalty

• Disclosure

• Confidentiality

• Accounting

• Reasonable Care

• Only a broker may earn or sue for a commission.

• Agency coupled with interest: when an agent is also the seller, buyer, landlord, or tenant.