Real Estate Principles

Arthur C. Nelson, Ph.D., FAICP

Presidential Professor & Director of Metropolitan Research

University of Utah

January 2009

Real and Personal Property

Real Property = “real estate” Land Fixtures on the Land

Personal Property Mobile (such as cars, boats) Furniture “Tools of trade” such as computers

Tangible & Intangible Property

Tangible Real property Personal property

Intangible Stocks, bonds, income-producing contracts Promissory notes

Property Taxes

Residential Real Property only

Land Improvements Total value

Tax treatment Sometimes lower tax rate Often “homestead” exemption that reduces taxable value

Business Real property used for business “Business” property such as furniture, cars, computers Often higher tax rate and no special tax status

Variations of Property Air rights

Metro “sells” air rights over some stations Mineral rights

Gas, oil, coal, etc. Can result in mining from the surface down, and

boring/mining under structures Water rights

Littoral – can use water flowing along banks in navigable waters

Riparian – same as littoral only applied to non-navigable waters

Ground – own water under surface

Estates – Forms of Ownership

Concurrent Estates

Tenancy in common Each party owns equal share and can sell it

Joint tenancy Same as tenancy in common but includes “right of

survivorship” on death Tenancy by the entirety

Married couple option; cannot convey share without spousal consent; right of survivorship

Community property In 8 states all property acquired during marriage is

jointly owned regardless of who actually buys it.

Condominiums & Cooperatives Condominium

Unit owned inside-the-walls; pay property tax on it. Common ownership of grounds, exterior surfaces

such as roofs, external wall face Finance common area maintenance, taxes on

common grounds, insurance with condo fees Cooperative

Joint owner of single asset like company stock Taxes, insurance, maintenance, etc. paid jointly.

Time-Sharing Cooperative-type ownership based on units of 52

(one for each week).

Private Ownership Restrictions

Liens Easements Licenses Adverse possession Encroachments Restrictive covenants

Liens Claim by one person of another’s property to

assure payment. Mortgage liens used by lenders to secure

mortgage with property. Mechanics’ liens used by contractors, labor to

secure payment for services and materials. Tax liens used by local, state, federal agencies

(IRS) to secure payment of overdue taxes. Judgment liens issued by courts to secure

court-ordered payments.

Easements Right given by one to allow another to use land

for specific purposes. Dominant estate benefiting property. Servient estate property on which easement

is applied Easement in gross access to specified areas

by anyone for specific purpose such as utility easement (no dominant estate created)

Express grant (to a dominant estate) or reservation (to retain use upon sale)

Terminating Easements

Easements can reduce value of servient estate. Easements can have insurance implications for

servient estate Termination options:

Agreement all relevant parties record termination of easement with local government property records office

Abandonment Servient estate establishes that easement is no longer used; states vary on

time limits and legal procedures.

License

Temporarily allow one party to use property in specific way.

Not recorded easement; usually verbal and often not easily enforced

Allowing children to take a short-cut from school, for example.

Adverse Possession

Someone who uses property for 7-20 years (depending on state) may acquire a deed to it.

“Open and notorious,” “hostile” and “continuous” tests. Owner thus knew or should have known and failed to act/evict.

Often uses in urban areas with blighted property.

Encroachments

Someone’s structure or activity encroaches on or uses another’s property. (Fence, shrubs, out-building.)

Form of trespass. Sometimes result of faulty surveying or

unknown survey lines. If owner fails to act within statutory period

the encroachment can lead to deed by adverse possession.

Restrictive Covenants Seller of property limits buyers’ use and use of

subsequent buyers. Can be used to limit resale (but resale based

on race/ethnicity is no longer legal). Can be used to bind buyer of property into

home owner association and payment of dues.

Can be used to protect developers from opposition until project is finished.

Normally 20-year limit but covenants can have automatic renewal clauses.

Public Restrictions on Ownership

Eminent domain Zoning, land-use controls Police power

Eminent Domain

Land needed for public use or benefit (highways, urban redevelopment, parks, flood control, public buildings, etc.).

Government not acting in malice (such as retribution against individuals).

Money offered must be reasonable Condemnation proceedings if negotiations to

purchase are not successful. Inverse condemnation occurs when owner sues

government to buy land when government action reduces its value.

Police Power Police power Government’s purpose to

protect public health, safety and general welfare.

Zoning to restrict land-uses, prevent adverse impacts of one property on another.

Building codes to assure public safety. Ordinances on noise, odors, pollution, etc. However, cannot restrict all uses of property

unless for substantial public benefit without compensation otherwise “taking” occurs.

Planning Comprehensive plans

Required in about half the states Some states have state-level oversight

Functional elements Transportation Housing Environmental protection

Implementation Zoning controls Subdivision controls Capital improvements programs

Zoning Functions of zoning:

Regulate use of land Manage development density (units per acre) and

intensity (land coverage, square feet per acre) Height limitations (fire protection, views, other) Bulk

land coverage ratio – LCR: percent of land developed floor area ratio – FAR: building area divided by land area

Minimum lot size (density control) Setback from streets, separation between buildings.

Zoning Relief

Zone changes Variances from strict application of regulations Special use permits Judicial relief – court action Nonconforming uses

Use inconsistent with zoning Amortization period Limited ability to rebuild if structure damaged such

as by fire or flood.

Subdivision Regulations Manage how land is developed when it is

subdivided into blocks and lots. Street design, drainage, utilities. Land dedicate for public use such as roads,

parks, utility easements Process:

Pre-application conference Preliminary plat (public hearing) Final plat (sometimes also a public hearing)

Exactions Development impacts on communities so

“impact mitigation” strategies may be used Right-of-way dedications Mandatory dedications of land for parks, school

sites, other purposes Impact fees to cover off-site facility costs of new

development (such as need for more streets elsewhere)

Sometimes affordable housing mandates.

The Real Estate Broker Functions

Market property for sale Negotiate listing agreement may be exclusive so only

the broker can sell it or non-exclusive so other brokers can help sell

Advertising in newspapers, TV, brochures, other. Posting in “multiple listing” services

Act as agent of property owner Identify qualifying buyers Assist seller in negotiating best possible terms

considering objectives of the owner Manage sale and “closing” process

Brokerage Broker is a person licensed by the state to

represent seller, work as seller’s agent, and facilitate marketing and sale

Brokerage is one or more offices, each managed by a broker, that may also employ sales people who are licensed to sell real estate but not licensed to be a broker.

Broker Compensation Commissions:

5-7% for homes 10% for land 2-6% for nonresidential (lower rate for higher value)

Splitting commissions Listing agent gets 50%; broker of listing office gets

half of that. Selling agent gets 50%; broker of selling office gets

half of that. Broker listing and selling gets all the commission. Non-listing selling agent gets 25% -- or less.

Broker Duties

Fiduciary responsibility to seller – keep best interest of seller at all times.

Fraud – cannot mislead, make false statements.

Fair housing compliance – cannot “steer”. “Buyers” brokers represent buyers but

cannot represent seller of same property buyer wants.

Real Estate Contracts

Necessary Elements Offer Acceptance Consideration (usually money) Parties have capacity to buy/sell (they are not

mentally impaired or doing it against their will). Lawful purpose intended with possession. Agreements in writing (few exceptions)

Features of Real Estate Contract Description of property and fixtures to be sold Purchase price

Earnest money deposit (whether refundable noted) Title condition Escrow (who holds earnest money and

transfers title and money at closing) Property destruction before sale Other provisions/conditions of transaction Brokers commission amount, who pays

Options and Right of Refusal Options

Typically done by developers to control land without buying it until “entitlements” to build are

certain “Option to buy” has a price, time limit, and due

diligence requirements of buyer. Sellers often get more when they sell land with an

option because buyers will go through the process of improving land value through rezoning, development approval.

Right of Refusal Seller promises to give buyer the first right to refuse to buy at a price another is willing to pay.

Performance and Breach

Buyer and seller have to perform to conclude (close) the sale.

If one does not perform the other can sue to compel “specific performance”.

Breach of contract can void the contract and sometimes require one party to compensate the other for costs and losses.

Title

Basics Without proper “title” ownership is questionable “Marketable” title is free and clear of all past,

present and future claims by others. “Insurable” title is one that an insurance company

is willing to insure and thus pay the buyer for losses if title turns out to be not marketable.

Title “perfect of record” means public records (county clerks, city recorders, etc.) show no title

defects.

Title

Title search process reviews public records for prior owners, claims, covenants,

restrictions, liens, etc. Title insurance results in an insurance premium

paid once. Title insurance warrants that there are no qualifications to condition of title except those noted in title search. Premium is based on value the buyer wants to insure but not more than the purchase price.

Deeds and Title Closing

Deed Food Chain General warranty deed Seller:

Covenants against encumbrances not on public record and has fee simple interest in the title and no liens.

Has right to convey property (covenant of seisin) Covenants quiet enjoyment meaning title cannot be

disturbed by a third party claim or lien at time of sale. Will execute future documents to perfect title (covenant of

further assurances) Will always defend the title as conveyed (warranty

forever).

Deed Food Chain Special warranty deed Limits sellers warranties

to events occurring during seller’s ownership Bargain-and-sale deed Implies only that the

seller has the right to sell but does not warrant the condition of title. Also known as “warranty deed without covenants.”

Quitclaim deed Transfers interest of seller in a property even if seller has no interest. Often

done to start a title chain on land acquired through adverse possession where there was no

owner of record.

Title Closing Buyer’s Responsibilities:

Obtain financing based on terms disclosed in the contract of sale.

Obtain opinion of title’s validity (needed before closing to assure title can be transferred).

Survey the property. Purchase property insurance (to protect seller from

damages after closing) Inspect the property.

Seller’s responsibilities: Prepare the required deed. Remove all encumbrances except those of public

record (such as easements and covenants of previous owners).

Prepare papers with respect to the seller’s loan if property is purchased on a contract rather

than buying the seller out entirely. Obtain and termite and pest-inspection bond if the

sale involves a structure.

Costs at Closing Buyer’s costs at closing:

Loan originating fee to lender Loan discounts or points Appraisal fee and credit-report fee Lenders (bank’s) inspection fee Mortgage guarantee insurance premium (if down

payment is less than 20% of purchase price) Buyer’s closing attorney’s fee and attorney’s fee of

mortgage lender used by buyer. Hazard (flood) insurance premium if needed. Recording fees

Seller’s costs at closing: Real estate brokerage commission. Attorney’s fees for preparing deed and other

documents. Tax transfer stamps (real estate transfer tax fees). Payment of any property taxes due. Recording fees Typically one-half of escrow closing fees with buyer

paying the other half.