Getting Real
Lets start with dissecting the very word Real Estate. The ‘Real’ part of the word has its origin in the English Common Law; where the word realty meant land and everything tangible that is permanently attached to it, such as buildings and other structures. All other intangible or movable things on the property fell under personalty. example would be automobiles, shares of stock, bank accounts, patents etc. The ‘Estate’ part of the word evolved to mean “all that a person owns,” including both realty and personalty. So, that part of a person’s estate that consists of realty would be ‘Real Estate’ or ‘Real Property’. Personalty is often referred to as ‘Personal Property’.
Real Estate Finance & Investments (Real Estate Finance and Investments)
Ownership
As people lay claims to real property and disputes between claimants reached courts of law, a system evolved with in the administrative framework of many governments of the world whereby land locations and boundaries were more accurately surveyed and described in contracts. An elaborate system of public record keeping was also developed which recorded ownership of all realty within a political jurisdiction. Transactions carried out within these jurisdictions involving realty were then added to this existing record, creating a historical record of all changes in ownership of property. This record of deals helped in providing notice of such changes to the general public and parties contemplating purchasing or lending money on real estate.
Property Rights
When investing in real estate, in addition to acquiring the physical assets of land and all things permanently attached to it, investors also acquire certain other rights. Such rights include the following:
- right to control
- occupy
- develop
- improve
- exploit
- pledge
- lease
- exclude
- sell real estate
These have come to be known as property rights. However, it is to be noted that many of the property rights acquired when investing in real estate are independent and can be separated, i.e. a real estate may be leased in exchange for rent or other benefits and this may be carried out without giving up ownership. A prospective investor should understand the nature of property rights and find ways to bundle and creatively use it to enhance value of the investment.
Single & Multiple Ownership Rights
People generally assume that in investing, selling, or borrowing based on one owner possessing all property rights in the real estate. However, in reality especially in case of large property owned by wealthy (often joint) families or expensive property in dense urban areas, all or a portion of these rights may be restricted or transferred to others. A property owner may lease a property and pledge it as security for a mortgage loan. In most cases the parties generally enjoy their respective rights in relative harmony. However, it is not uncommon to see conflicts arise occasionally concerning the relative rights and priorities among holders of these interests. The potential for such conflicts may also affect rents that individuals may be willing to pay or the ability to obtain financing from lenders and, above all, the value of property.
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It is important to distinguish between physical real estate assets and ownership rights in real property because many parties can have different ownership rights in a given parcel of real estate. Legal systems around the world offer different ways for a person financing or investing in real estate to be creative and to apportion these various interests among parties. Property rights are generally referred to as the right of a person to the possession, use, enjoyment, and disposal of his or her property. But in real estate, an interest can have a much broader legal term when used to denote a property right. The holder of an interest in real estate enjoys some right, or degree of control or use, and, in turn, may receive payment for the sale of such an interest. This interest may also be bought, sold, or used as collateral for a loan. The value of a particular parcel of real estate can be viewed as the total price individuals are willing to pay for the flow of benefits associated with all of these rights.
The Estate
The term estate means “all that a person owns.” The term real estate means all realty owned as a part of an individual’s estate. The term estates in real property is used to describe the extent to which rights and interests in real estate are owned. An estate can be broadly categorised in to two based on the nature of possession:
- Estates in Possession
- Estates not in Possession (or Future Estates)
Estates in possession are by far the more common. When most people think of estates, they ordinarily have in mind estates in possession. An estate in possession entitles its owner to immediate enjoyment of her/his rights to that estate. In contrast, an estate not in possession (or a future estate), does not convey the rights of the estate until some time in the future. An estate not in possession, represents a future possessory interest in property. An estate in possession converts to an estate in possession at the occurrence of a particular event in the future, that has been agreed up on documented in writing in the past.
Types of Estates in Possession
The estates in possession can be further categorized in to two types:
- Freehold
- Leasehold
The variation of these two types is based on definiteness and certainty of duration. A freehold estate lasts for an indefinite period of time; which means there is no definite date on which the estate or ownership ends. A leasehold estate, in contrast, expires on a definite date. A freehold estate connotes ownership of the property by the estate holder, whereas a leasehold estate implies only the right to possess and use the property owned by another for a certain period of time.
Types of Freehold Estates
The freehold estate can be categorized in to two:
- Fee Simple Estate
- Life Estate
A fee simple estate is the most common type of the two; it is the type of estate that investors and lenders encounter in most investment and lending transactions. It is the type of freehold estate that represents the most complete form of ownership of real estate. A holder of a fee simple estate is free to divide up the fee into lesser estates and sell, lease, or borrow against them as he or she wishes, subject to the laws of the state in which the property is located.
A life estate is a type of freehold estate that lasts only as long as the life of the owner of the estate or the life of some other person. Upon the death of that person, the property reverts back to the original grantor (transferor of property), his or her heirs, or any other designated person. Most life estates result from the terms of the conveyance of the property. In this type of freehold estate the owner has fewer ownership rights than a fee simple estate.
Types of Estates not in Possession
Estates not in possession, or future estates, are those which do not convey the right to enjoy the property until some time in the future. The two most important types of future estates are:
- Reversion
- Remainder
A reversion exists when the holder of an estate in land (the grantor) conveys to another person (a grantee) a present estate in the property that has fewer ownership rights than the grantor’s own estate and retains for the grantor or the grantor’s heirs the right to take back, at some time in the future, the full estate that the grantor enjoyed before the conveyance. In this case, the grantor is said to have a reversionary fee interest in the property held by the grantee. A reversionary interest can be sold or mortgaged because it is an actual interest in the property.
A remainder exists when the grantor of a present estate with fewer ownership rights than the grantor’s own estate conveys to a third person the reversionary interest the grantor or the grantor’s heirs would otherwise have in the property upon termination of the grantee’s estate. A remainder is the future estate for the third person. Like a reversion, a remainder is a mortgageable interest in property.
Types of Leasehold Estates
There are four major types of leasehold estates:
- Estates for years
- Estates from year to year
- Estate at Will
- Estate at Sufferance
Estate for Years
It is created by a lease that specifies an exact duration for the tenancy. The duration of tenancy may be less than one year and still be an estate for years as long as the lease agreement specifies the termination date. An estate for years can be as long as 99 years (by custom, leases seldom exceed 99 years in duration; reason for this practice doesn’t have any logical explanation), giving the lessee the right to use and control the property for that period in exchange for rental payments. When a lease covers a term longer than one year it is generally required by the statute of frauds (or depending on the local jurisdiction) to be in writing. The rights and duties of both landlord and tenant, and other provisions related to the lease are stated in the lease agreement.
While a property is leased, the original fee owner is said to have a leased fee estate.The value of the leased fee estate will now depend on the amount of the lease payments expected during the term of the lease plus the value of the property when the lease terminates and the original owner receives the reversionary interest. Hence, a leased fee estate may be used as security for a loan or may be sold. In case of the lessee, when the specified rental payments fall below the market rental rate of the property during the life of the lease, the lease is said to have value (leasehold value) to the lessee. The value of this interest in the property can be borrowed against or even sold. For example, if the lessee has the right to occupy the property for $100 per year when its fair market value is $200 per year, the $100 excess represents value to the lessee, which may be borrowed against or sold (assuming no lease covenants prevent it).
Estate from Year to Year
These estates are generally short-term (a year or less), the agreement can be, and in most cases is, oral. This type of estate can also be created without the express consent of the landlord. A common example is seen when the tenant “holds over” or continues to occupy an estate for years beyond the expiration date, and the landlord accepts payment of rent or gives some other evidence of tacit consent. This estate is also known as an estate from period to period, or simply as a periodic tenancy. It continues for successive periods until either party gives proper notice of its intent to terminate at the end of one or more subsequent periods. If the existing tenants are to remain in possession after the transfer or sale of property, the grantee should agree to take title subject to existing leases. The agreement should provide for prorating of rents and the transfer of deposits to the grantee. Buyers of property encumbered by leases should always reserve the right to examine and approve leases to ensure that they are in force, are not in default, and are free from undesirable provisions.
Estate at Will
It is created when a landlord consents to the possession of the property by another person but without any agreement as to the payment of rent or the term of the tenancy. Such estates are of indefinite duration.
Estate at Sufferance
This occurs when the tenant holds possession of the property without consent or knowledge of the landlord after the termination of one of the other three estates.
References: Brueggeman, William B (2010-02-12). Real Estate Finance & Investments Fisher.—14th ed., The McGraw-Hill/Irwin series in finance, insurance, and real estate