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2nd Edition

Basic Appraisal Principles

Course Objectives

• Recall the fundamentals of the appraisal profession and process.

• Identify real property rights, improvements, characteristics, and legal descriptions.

• Describe the various types of estates associated with real property.

• Explain types of ownership of real property and businesses.

• Describe governmental and private controls over real property.

• Describe the legal instruments used when transferring, conveying, and leasing real

property.

• Recall types of real estate value and forces that influence value.

• Explain economic principles and market fundamentals.

• Recognize the basics of a real estate market analysis.

• Identify ethical principles and acceptable standards of appraisal practice.

Instruction Method

Lecture / Text / Group Participation

Case Study

Attendance:Mandatory to receive credit!

Text: Basic Appraisal Principles

Publisher: Hondros Learning™, © 2011

Chapter 1

Overview of Appraisal

Chapter 1: Objectives

• After completing this chapter, students will be able to:– Explain the appraisal process, who is an

appraiser, and what is an appraisal.– Recognize ETHICS and COMPETENCY

standards set by USPAP.

Key Terms

• Uniform Standards of Professional Appraisal Practice (USPAP)

• Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)

• Appraisal Review• Appraisal• Appraisal Practice

• Appraiser• Client• Confidential

Information• Credible• Intended Use• Intended User• Scope of Work• Valuation Services

Uniform Standards of Professional Appraisal Practice (USPAP)

• Sets forth the minimum standards of appraisal practice for appraisers– Some states may have greater requirements

• Although it is not law:– All jurisdictions that issue licensing and/or

certification credentials require compliance with USPAP

– Many individuals require USPAP compliance

• Contains DEFINITIONS and RULES

The Appraisal Profession

• USPAP was created in the 1980s– Before this, practice among appraisers was

often inconsistent and public trust of appraisers could be diminished

– USPAP’s purpose: To promote and preserve public trust in professional appraisal practice

• The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was passed in 1989

Appraisal Opportunities

· Civil lawsuits · Eminent domain valuations

· Divorces · Feasibility studies

· Bankruptcies · Insurance claims

· Estates · Dispute resolution

· Trusts · Impact studies

· Zoning changes · Consulting

· Tax matters (donations or property exchanges)

· Determining construction or remodeling costs

Note: This list is not all inclusive.

Defining Appraiserand Appraisal

• USPAP DEFINITIONS:– Appraiser: “one who is expected to perform

valuation services competently and in a manner that is independent, impartial, and objective.”

– Appraisal: “(noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services.”

The Appraisal Process

The Appraisal Processcont.

Elements ofProblem Identification

• Client and any other intended users• Intended use of the appraiser’s opinions

and conclusions• Type and definition of value• Effective date of the appraiser’s opinions

and conclusions• Subject of the assignment and its relevant

characteristics• Assignment conditions

Determining Scope of Work

• Appraiser decides:– Extent to which a property is identified– Extent of property inspection– Type of data to be researched and to what

extent– Type and extent of analysis applied in order to

reach opinions or conclusions

Obligations ofEthics and Competency

• Valuation services are performed by a variety of individuals and professionals in addition to appraisers

• Appraisal practice is a valuation service provided by an appraiser

• When an appraiser is acting in the role of an appraiser, there are certain USPAP obligations

The ETHICS RULE

• Sets forth foundational obligations when acting in the role of an appraiser

• Amplifies that an appraiser is required to observe the highest standards of professional ethics

• An appraiser “must not misrepresent his or her role when providing valuation services that are outside of appraisal practice”

The ETHICS RULE

• Appraisers must not communicate in a misleading or fraudulent manner

• Appraisers must promote and preserve the public trust inherent in appraisal practice

• Appraiser must comply with USPAP when obligated by law/regulation or agreement, or when performing service as an appraiser

cont.

The ETHICS RULE

• Appraisers must not engage in criminal conduct

• Appraisers must always be impartial, objective, and independent

• Appraisers must not advertise for or solicit assignments in a manner that is false, misleading, or exaggerated

cont.

The ETHICS RULE

• Regarding obligations for performance in an appraisal assignment:– Appraisers must not perform an assignment

with bias or advocate the cause or interest of any party/issue

– Appraisers must not accept assignments conditioned on the reporting of predetermined opinions or conclusions

– Appraisers must not perform assignments in a grossly negligent manner

cont.

The ETHICS RULE

“Appraisers must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.”

cont.

The ETHICS RULE

• Appraisers must disclose:– Any current or prospective interest regarding

the subject property or the parties involved– Prior services performed for the subject

property as an individual or in any other capacity

– Payment of fees, commissions, or things of value paid in connection with the procurement of an assignment

cont.

The ETHICS RULE

• An appraiser must not accept an assignment, or have a compensation arrangement for an assignment, that is contingent on any of the following:– the reporting of a predetermined result (e.g., opinion of

value);– a direction in assignment results that favors the cause of

the client;– the amount of a value opinion;– the attainment of a stipulated result (e.g., that the loan

closes, or taxes are reduced); or– the occurrence of a subsequent event directly related to

the appraiser’s opinions and specific to the assignment’s purpose. (USPAP 2010-2011 Edition, p. U-8)

cont.

The ETHICS RULE

• An appraiser must not disclose (1) confidential information or (2) assignment results to anyone other than:– the client;– persons specifically authorized by the client;– state appraiser regulatory agencies;– third parties as may be authorized by due process of

law; or– a duly authorized professional peer review committee

except when such disclosure to a committee would violate applicable law or regulation.

– A member of a duly authorized professional peer review committee must not disclose confidential information presented to the committee.

cont.

The COMPETENCY RULE

• Competency could apply to the appraiser’s knowledge and experience regarding:– A specific type of property or asset– A market– A geographic area– An intended use– Specific laws and regulations– An analytical method

cont.

The COMPETENCY RULE

• The COMPETENCY RULE establishes these requirements:– the ability to properly identify the problem to

be addressed; and– the knowledge and experience to complete

the assignment competently; and– recognition of, and compliance with, laws and

regulations that apply to the appraiser or to the assignment.

cont.

The COMPETENCY RULE

• For an appraiser who lacks competency at the onset but would like to accept an assignment, the appraiser must:– disclose the lack of knowledge and/or experience

to the client before accepting the assignment;

– take all steps necessary or appropriate to complete the assignment competently; and

– describe, in the report, the lack of knowledge and/or experience and the steps taken to complete the assignment competently.

cont.

The COMPETENCY RULE

• If during the course of an assignment, facts or conditions are discovered that cause the appraiser to realize that he lacks the required knowledge and experience to competently complete the assignment, the appraiser must:– notify the client, and– take all steps necessary or appropriate to

complete the assignment competently, and– describe, in the report, the lack of knowledge

and/or experience and the steps taken to complete the assignment competently.

cont.

Chapter 1 Quiz

1. Paramount within USPAP is an appraiser’s obligation to promote and preserve

a. adequate compensation for appraisers.

b. appraisal as an honorable profession.

c. his right to advocate for his client.

d. public trust in appraisal practice.

Chapter 1 Quiz

2. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) recognizes which as the current industry standards for appraisals?

a. appraisal organizationsb. Fannie Maec. state regulatory agenciesd. USPAP

Chapter 1 Quiz

3. The act or process limited to the development and reporting of an opinion regarding the quality of another appraiser’s work is an

a. appraisal review assignment.

b. appraisal within an appraisal review.

c. example of advocacy within appraisal practice.

d. unacceptable appraisal practice.

Chapter 1 Quiz

4. Within the definition of an appraiser, which is NOT one of the expectations of an appraiser’s performance?a. advocacy

b. impartiality

c. independence

d. objectivity

Chapter 1 Quiz

5. The appraisal process begins with problem identification and concludes witha. compensating the appraiser.b. determining the appropriate scope of

work.c. reconciliation of the appraiser’s

conclusions.d. reporting of the appraiser’s

conclusions.

Chapter 1 Quiz

6. Which is required in order to establish a person or entity as the appraiser’s client in an assignment?a. employment contract signed by all

partiesb. engagement of the appraiser’s

servicesc. exchange of confidential informationd. payment for the appraiser’s services

Chapter 1 Quiz

7. At what point in the assignment must other intended users be identified by the client?

a. anytime during or after conclusion of the appraisal process

b. at the time of the assignment

c. during the scope of work decision

d. within a reasonable time after completion

Chapter 1 Quiz

8. The scope of work in an assignment must include the research and analysis necessary to produce ____________ results.

a. conclusive

b. credible

c. indisputable

d. reasonable

Chapter 1 Quiz

9. When an individual offers both appraisal and real estate brokerage services, which statement is TRUE in circumstances when he is acting as a real estate broker?

a. The appraiser is acting contrary to the ETHICS RULE of USPAP.

b. He can perform in that capacity provided he does not misrepresent his role.

c. He must always choose to act in the role of an appraiser when providing any valuation service.

d. Regardless, the service would be considered appraisal practice.

Chapter 1 Quiz

10. Which is an obligation of the COMPETENCY RULE of USPAP?

a. decline all assignments for which the appraiser does not initially possess competency

b. disclose the lack of competency to the client prior to accepting the assignment

c. keep the lack of knowledge and experience confidential in the appraisal report

d. refer the assignment to an appraiser who possesses competency

Chapter 2

Real Property Concepts

and Characteristics

Chapter 2: Objectives

• After completing this chapter, students will be able to:– Interpret basic property concepts.– Determine characteristics of real estate.

Key Terms

• Annexation• Appropriative Rights• Appurtenance• Attachments• Bundle of Rights• Demand• Doctrine of

Emblements

• Fixture• Fructus Industriales• Fructus Naturales• Government Survey

System• Immobility• Indestructibility

Key Terms

• Littoral Rights

• Lot and Block

• Metes and Bounds

• Personal Property

• Property

• Real Estate

• Real Property• Riparian Rights• Rule of Capture• Scarcity• Trade Fixtures• Transferability• Utility

cont.

Basic Real Property Concepts

• Real Property: Things attached to the land, rights that go with ownership of the land, and limitations on the use of the land

• Tangible property: Items that can be held or touched (either real property or personal property)

• Intangible Property: Personal property that has value, yet cannot be physically touched or seen

Real Estate vs. Real Property

• Real estate: The actual physical land and everything, both natural and manmade, attached (or appurtenant) to it

• Real property: Refers to not only the physical land and everything attached to it, but also the rights of ownership in the real estate

Real Property vs.Personal Property

• Real property– Not only the physical land and everything

attached to it, but also the rights of ownership (bundle of rights) in real estate

• Personal property– Tangible items that (usually) are not

permanently attached to, or part of, the real estate

– Also called personalty or chattel

Annexation

• Conversion of personal property to real property—most often by attaching or affixing personal property to real property

• If an item is securely attached to real property, it is considered a fixture– Physical attachment is not always decisive

• Items closely associated with the house (e.g., keys, garage door remote control) become real property items

When Does Personal Property Become a Fixture?

• Did the person intend for the item to become part of the real estate?

• Does the item complement the property or is it necessary for the acceptable function of the property?

• Could the item be removed without causing irreparable damage to the real estate?

• Would there be economic loss to the property if the item were removed?

cont.

Natural Attachments

• Natural attachments– Fructus naturales (“fruits of nature”)—Naturally

occurring plants– Fructus industriales (“fruits of industry”)—Plants

planted and cultivated by people

• Emblements: A tenant farmer’s crops• Doctrine of emblements: A tenant farmer is

allowed to re-enter the land to harvest crops that were planted by the tenant farmer even after the tenancy has ended

Trade Fixtures

• Any equipment or items a tenant installs for business purposes

• Always considered to be personal property and not fixtures

• Generally, tenants are allowed to remove trade fixtures before a lease ends, unless the lease terms or other agreement prohibit removal

Class Work Problem

Place the following items in the correct column:

• Door Key • In-ground pool • Built-in range

• Portable dishwasher • Above-ground pool • Window air conditioner

• Garage door remote• Furnace • Light bulbs

• Tacked-down hallway • Storage shed on a • Mirror over

runner over oak floor foundation bathroom sink

• Hot tub on patio

Fixture Chattel

• Portable dishwasher

• Hot tub unit on patio

• Window air-conditioner

• Above ground pool

• Light bulb

• Tacked down hallway runner over oak

floor

• Door key

• Garage door remote

• In-ground pool

• Mirror over bathroom sink

• Built-in range

• Storage shed (if on permanent foundation)

• Furnace

Bundle of Rights

• Real property rights that come with one’s interest or ownership in real property– Right of use– Right of enjoyment– Right of disposal

Land Rights

• Air rights– Also called suprasurface rights

• Surface rights– Riparian rights– Littoral rights– Appropriative rights

• Subsurface rights– Mineral rights

Land Rightscont.

Improvements to the Land

• Land: The surface of the earth—actual dirt on the ground, part of a waterway that is owned, or even a swampy marsh

• Site: Refers to the land with enhancements that make it ready for a building or structure

• Site improvements: Manmade items added to the land to make it useable for a particular purpose

Improvements on the Land

• Attachments and improvements that have legally become part of the real property by virtue of their attachment to or close association with it

• Market value is a reflection of the “typical buyer’s” actions, not just any one person

Real PropertyValue Characteristics

• DUST:– Demand– Utility– Scarcity– Transferability

Real PropertyPhysical Characteristics

• The three unique physical characteristics of real estate are:– Uniqueness– Immobility– Indestructibility

Legal Descriptions

• The three basic legal descriptions that can distinguish between properties so there can be no mistake in identifying one property from another are:– Government survey system– Lot and block system– Metes and bounds system

Government Survey System

• A legal description for land, referencing principal meridians and base lines designated throughout the country

• Uses north-south lines (ranges or range lines) and east-west lines (township lines)

• A township has 36 square miles divided into 36 sections of one-square-mile (640 acres) each

Government Survey Systemcont.

Township Divided into Sections

Legal Description

For Example

• The NW 1/4 is shaded like this:

• The NE 1/4 of NW 1/4 is shaded like this:

• The N 1/2 of the NE 1/4 of the NW 1/4 is shaded like this:

Dimensions in Legal Description

1. The section is 5,280 (linear) feet × 5,280 (linear) feet

2: The NW 1/4 of the section is 2,640 feet × 2,640 feet

3. The NE 1/4 of NW 1/4 is 1,320 feet × 1,320 feet

4. The N 1/4 of the NE 1/4 of the NW 1/4 is 1,320 feet

× 660 feet

The subject parcel (N 1/2 of the NE 1/4 of the NW 1/4)

is 1,320 feet × 660 feet. To find the square footage

of the land area, the dimension is multiplied:

1,320 × 660 = 871,200 square feet

There are 43,560 square feet in 1 acre. To convert

square feet to acres, the square footage in our

example (871,200) is divided by 43,560:

871,200 ÷ 43,560 = 20 acres

Work Problem

1. A parcel is described as the SW 1/4 of the SW 1/4 of

the NE 1/4 of a section. Draw the illustration.

Work Problem

2. How many acres are in a parcel described as the S

1/2 of the NE 1/4 of a section?

80 acres

Work Problem

3. What is the description for the

illustration at right?

SE 1/4 of the NE 1/4 of the SW 1/4

Work Problem

4. What are the dimensions of a property described as the SW 1/4 of the NW 1/4 of the

NW 1/4 of a section?

660 feet × 660 feet

Lot and Block System

• A legal description for platted property– Any property that has been subdivided from a

large tract into smaller lots as referenced on a plat map

Metes and Bounds Systems

• A legal description that:– Starts at an easily identifiable point of

beginning (POB)– Then describes the property’s boundaries in

terms of courses or metes (compass directions) and intermediate points (changes in direction)

– Ultimately returns to the POB

• May also refer to monuments (markers) or pins

Metes and Bounds Systemcont.

Chapter 2 Quiz

1. The term describing the conversion of personal property to real property is

a. annexation.

b. appropriation.

c. capture.

d. platting.

Chapter 2 Quiz

2. Which would most likely be considered real property?

a. area rug

b. built-in window seat

c. lawn furniture

d. sleeper sofa

Chapter 2 Quiz

3. Which would be a natural attachment that would be classified as fructus industriales?

a. grass

b. ornamental tree

c. perennial flowers

d. wheat

Chapter 2 Quiz

4. Which concept elaborates on tenant crops?

a. appropriative rights

b. bundle of rights

c. doctrine of emblements

d. rule of capture

Chapter 2 Quiz

5. Air rights of land ownership are limited by the federal government relating to the

a. horizontal distance to which a building may be constructed.

b. ownership of gasses contained in the air.

c. prevention of interference with air traffic.

d. prohibition of transfer of air rights to others.

Chapter 2 Quiz

6. Water rights dealing primarily with the shoreline of a non-flowing body of water are known as

a. annexation rights.

b. appropriative rights.

c. capture rights.

d. littoral rights.

Chapter 2 Quiz

7. For a landowner possessing riparian rights, which is typically an accompanying right?

a. Building a dam to stop or divert the water flow.

b. Releasing sewage in reasonable amounts into the water flow.

c. Taking water from the property to irrigate non-riparian property the riparian owner also owns.

d. Using water in reasonable amounts to irrigate crops on the riparian property.

Chapter 2 Quiz

8. According to the rule of capture, a property ownera. is permitted to drain oil or gas from under his

own property or from under a neighboring property.

b. may not extract oil or gas that came from under a neighbor’s land.

c. must surrender all of the minerals found under the ground to the federal government.

d. owns none of the oil or gas that was produced on his property.

Chapter 2 Quiz

9. Which is NOT a physical characteristic of real property?

a. immobility

b. indestructibility

c. transferability

d. uniqueness

Chapter 2 Quiz

10. If a site is 152′ x 169′, it contains how many acres?

a. 0.51

b. 0.57

c. 0.59

d. 0.90

Chapter 2 Quiz

11. If a property is legally described using the terms “rod” or “pole,” what is the distance being referenced?

a. 3 yards

b. 12 feet

c. 16.5 feet

d. 66 feet

Chapter 2 Quiz

12. How many linear feet are along one side of the NE ¼ of a township section?

a. 330

b. 660

c. 1,320

d. 2,640

Chapter 3

Estates in Real Property

Chapter 3: Objectives

• After completing this chapter, students will be able to:– Identify the various interests or ownership

rights associated with real property.

Key Terms

• Estate• Estate for Years• Fee Simple Absolute• Fee Simple Conditional

(Defeasible)• Fee Simple Determinable• Fee Simple Estate• Fee Simple Subject to a

Condition Subsequent• Freehold

• Leasehold Estate• Lessee• Lessor• Life Estate• Life Tenant• Periodic Tenancy• Remainderman• Tenancy at Sufferance• Tenancy at Will

Estates

• An estate is an interest or a right in property– Present interest: A right to immediate

possession– Future interest: A right to possession in the

future

• An estate may be classified as a:– Freehold estate (indefinite period of time)– Leasehold estate (specific duration)

Estates

Freehold Estates

• Possession either immediately or in the future

• Indefinite duration of possession

• Property ownership

• Two main categories:– Fee simple estates– Life estates

Fee Simple Estates

• Implies that the property owner possesses the full bundle of rights

• Three types:– Fee simple absolute– Fee simple defeasible– Leased fee interest

Fee Simple Absolute

• The fullest freehold estate that can exist in real property

• Implies there are no conditions on the property title—it is inheritable, transferable, and perpetual

• The right to possess the property for an unlimited/indefinite period of time will pass to the owner’s heirs after death

Fee Simple Defeasible

• Could indicate a possible future interest or possession– Real property ownership may be defeated or

undone if certain events occur or certain conditions are not met

Fee Simple Defeasible

• Could be categorized as:– Fee simple determinable: Estate terminated

automatically if certain conditions occur; former owner has a contingent future interest in the land, called a possibility of reverter

– Fee simple subject to a condition subsequent: There is no automatic reversion of title upon breaking the condition; the former owner has power of termination

cont.

Fee Simple – LeasedFee Interest

• Leased fee interest– The lessor’s (landlord’s) interest in leased

property– Lessor generally has the enjoyment of rent

generated under the lease terms and the right to sell, mortgage, or leave the property to another party while the lease is still in effect

Life Estate

• Freehold estate that lasts only as long as a specified person lives

• The holder of a life estate is the life tenant– Owns an interest in the land that can be sold,

mortgaged, or leased

• May be based on the lifetime of someone other than the life tenant– This is called a life estate pur autre vie

Life Estatecont.

Life Estate

• A life tenant may not use the property in any way that would permanently damage it or reduce its market value– Such abuse is called waste

• A life tenant has a severely restricted right of use

cont.

Leasehold Estates

• Interests that give the holder a temporary right to possession of the estate, without title– Also called tenancy and less-than-freehold

estate

• Involves two parties:– The holder of a leasehold estate (lessee)– An owner who leases property to a tenant

(lessor)

Leasehold Estates

• The four main types of leasehold estates are:– Estate for years– Periodic tenancy

(estate from period to period)– Tenancy at will

(estate at will)– Tenancy at sufferance

(estate at sufferance)

cont.

Estate for Years

• Any leasehold estate for a fixed time period– Term does not have to be a period of years

• Sometimes called term tenancies

• Terminates automatically at the end of the specified rental period– Both parties may mutually consent to ending it

sooner (surrender)

Periodic Tenancy

• A leasehold estate for a duration of time, not a specific date– Month-to-month tenancies are most common

• Sometimes called estate from period to period

• Continues from period to period until landlord or tenant gives the other party notice of termination

Tenancy at Will

• A leasehold estate with no specified termination date or specified period of time

• Either party can end it at any time

• Cannot be assigned to someone else

• Automatically ends on the death of either the landlord or tenant

Tenancy at Sufferance

• Possession of property by a holdover tenant– Someone who came into possession of

property under a valid lease, but stays on after the lease expires, without the landlord’s permission

– Not very different from a trespasser, except that a tenant at sufferance originally had a right to be on the property

Chapter 3 Quiz

1. If Joe leases property that he owns to Susan, what type of ownership interest is held by Joe due to the lease?

a. fee simple absolute

b. fee simple defeasible

c. leased fee

d. leasehold

Chapter 3 Quiz

2. Which is a characteristic of a fee simple defeasible estate?

a. The estate is subject to the termination of a lease.

b. The owner possesses the full bundle of rights with no conditions on ownership.

c. Ownership could be forfeited if certain events occur.

d. Possession terminates upon death of the life tenant.

Chapter 3 Quiz

3. If Stephanie conveyed the fee simple estate subject to a condition subsequent to Larry, Stephanie has

a. created a life estate that is conditioned on the duration of the life tenant.

b. forfeited any rights to a potential future interest in the estate which was conveyed.

c. power of termination to re-enter and possibly begin proceedings to recover the real estate.

d. retained the entire bundle of rights until certain conditions have been satisfied.

Chapter 3 Quiz

4. If Jerry conveys property subject to a life estate to Samuel, who will gain title in fee simple when the party holding the life estate passes away, Samuel is known as the

a. life tenant.

b. measuring life.

c. remainderman.

d. reverter.

Chapter 3 Quiz

5. Which characteristic is common to all freehold estates?

a. Freehold estates do not include future rights of possession.

b. No party possesses the full bundle of rights.

c. Ownership could revert to the previous owner if certain conditions are not met.

d. Possessory interest is of an uncertain duration.

Chapter 3 Quiz

6. Surrender is the action ofa. forfeiting title in a fee simple estate

subject to a condition subsequent.

b. nullifying a life estate.

c. passing title to a remainderman in a life estate.

d. terminating a lease by mutual consent.

Chapter 3 Quiz

7. Which is a characteristic of a tenancy at will that is NOT common to other types of leasehold estates?

a. It automatically terminates at the death of either the landlord or tenant.

b. The landlord must use force to regain possession of the property.

c. Leases are fully assignable.d. The tenant is a holdover without the

landlord’s permission.

Chapter 3 Quiz

8. Felicia has entered into an agreement with her mother allowing her mother to occupy a property owned by Felicia for a specified duration of six months. What type of estate was created?

a. estate for yearsb. life estatec. periodic tenancyd. tenancy at will

Chapter 3 Quiz

9. Christine has a one-year lease with the property owner, William. When the lease expires, Christine continues to pay rent to William at the beginning of each month. What type of arrangement was created when William accepted rent in this manner?

a. estate for years

b. periodic tenancy

c. tenancy at sufferance

d. tenancy at will

Chapter 3 Quiz

10. Craig holds a life estate in a property owned by his stepfather, Charles. Craig may occupy the property for as long as his mother, Charles’ wife, is alive. When Craig’s mother dies, possession of the property goes back to Charles. What type of arrangement is illustrated?

a. life estate pur autre vie

b. life estate with the possibility of reverter

c. life estate with power of termination

d. ordinary life estate

Chapter 4

Real Property Ownership

Chapter 4: Objectives

• After completing this chapter, students will be able to:– Recognize the different ways that ownership

in real property can be held.

Key Terms

• Beneficiary• Community Property

Rights• Condominium• Cooperative• Co-Ownership• Corporation• Curtesy• Dower

• General Partnership• Joint Tenancy• Limited Liability

Corporation (LLC)• Limited Partnership• Ownership in

Severalty• Planned Unit

Development (PUD)

Key Terms

• Real Estate Investment Trust (REIT)

• Survivorship

• Syndicate

• Tenancy by the Entireties

• Tenancy in Common

• Timeshare

• Title

• Trust

• Trustee

• Trustor

• Undivided Interest

• Unity of Interest

• Unity of Possession

• Unity of Time

• Unity of Title

cont.

Ownership in Severalty

• Ownership by one person or entity:– Corporations– Real Estate Investment Trust (REIT)

Co-Ownership

• Form of ownership where 2 or more people share title to real property with each person having an undivided interest in ownership– Also known as a fractional interest

• Four types:– Tenancy in common– Joint tenancy– Tenancy by the entireties– Marital property rights

Survivorship andthe Four Unities

• Survivorship– Allows the fractional interest of one co-owner, when

they die, to automatically pass their interest on to the other co-owner or co-owner(s) without going through the probate process for that interest

• The four unities (PITT)– Possession– Interest– Time– Title

Tenancy in Common

• The most basic form of co-ownership

• If the type of co-ownership is unspecified, this is the form of co-ownership that is presumed– Unless the co-owners are husband and wife

• Does not include the right of survivorship

• Each co-owner has the ability to do as they wish with their fractional interest

Joint Tenancy

• A form of co-ownership that can be formed only when all four unities are present:– Possession– Interest (all parties have the same estate and an

equal fractional share in the property)– Time (interest must be acquired at the same time)– Title (conveyed to joint tenants by a single

instrument)

• Includes survivorship

Tenancy by the Entireties

• An option only for a couple who is married– Each spouse owns an undivided one-half

interest in the property with right of survivorship

– Neither spouse may convey his or her interest without the other’s consent

• Recognized be about half the states in the U.S.

Marital Property Rights

• Some state laws provide certain legal rights to surviving spouses– Community property rights– Curtesy– Dower

Community Property Rights

•Separate property: Real or personal property that was owned by either husband or wife before marriage – Can be transferred without the consent and signature

of the spouse)

•Community property: Property acquired by one of the spouses during the marriage– Consent and signature of spouse is required to

transfer– Surviving spouse is automatically entitled to one half,

the remaining half is distributed according to the deceased’s will)

Curtesy and Dower

• The law entitles a surviving spouse a one-third or more right of use of real property owned by the other spouse when the other spouse dies– The surviving spouse can use the entire

property for as long as he or she lives

Trusts

• Used for holding and controlling property on behalf of someone else

Trusts

• Living trusts (assets and real property)– Property owner establishes the trust while the owner

is still alive

• Testamentary trusts (assets and real property)– Property owner establishes the trust via a will that

takes effect after the property owner’s death

• Land trusts (may address only real estate)– The trustor is also the beneficiary

cont.

Limited LiabilityCorporation (LLC)

• A special type of corporation that may be formed in some states

• Enjoy limited liability of a corporation and (usually) the pass-through benefits of a sub-chapter “S” corporation (thus, avoiding double taxation)

• Have fewer restrictions

General Partnership

• An association of two or more individuals as co-owners of a business run for profit

• Does not have to be formally organized like a corporation

• All partners share in the financial liability for actions of the other partners

• Usually, partnerships are held as tenants in common– Partners may also own partnership property as

tenants in partnership

Limited Partnership

• An association of two or more persons as co-owners of a business

• Has one or more general partners, plus one or more limited partners– Limited partners have no say in partnership

matters

• Partners’ liability is limited to their original investment

Syndicates

• An informal organization usually formed to accomplish limited or even a single task

• Not a recognized legal entity

• Can refer to almost any form of business

Condominiums

• Properties developed for co-ownership, with each co-owner having a separate interest in an individual unit and an undivided interest in the common areas of the property

• Residents must follow declarations• Most are designed for residential use• Owners typically have exclusive

ownership of their units

Planned UnitDevelopment (PUD)

• A development concept– Groups houses in high density clusters that

are surrounded by larger open spaces, which are shared by other residents of the PUD

– Land conservation and land use efficiency

• Created through covenants in a deed

• Owners own the entire structure and the land underlying their house

Cooperatives

• Buildings owned by a corporation, with the residents as shareholders who each receive a proprietary lease on an individual unit and the right to use common areas

• Title is held by a corporation formed for that purpose

• Residents are given a proprietary lease• Cooperative shareholders pay a prorated share

of the building’s expenses

Timeshares

• A form of ownership or the right to use property for a specified period of time

• May be either:– Fee timeshares: A specific condominium or

similar property in a resort setting where numerous co-owners had an undivided interest in a particular unit

– Non-fee timeshares: There is no real property co-ownership but only the right to use and enjoy property

Chapter 4 Quiz

1. John and Suzanne, a married couple, form a corporation in which to hold title of their real estate assets with no provision for survivorship. How is title to the property being held?

a. joint tenantsb. severaltyc. tenancy in commond. tenants by the entireties

Chapter 4 Quiz

2. In co-ownership, reference to an undivided interest emphasizes that the

a. co-ownership provides for survivorship when one of the co-owners dies.

b. exact fractional component of ownership cannot be determined.

c. party holding ownership is an entity rather than an individual.

d. property is not physically divided according to co-owners.

Chapter 4 Quiz

3. Which is NOT one of the four unities of property ownership?

a. investment

b. possession

c. time

d. title

Chapter 4 Quiz

4. Which is a true statement regarding tenancy in common?a. Only one of the four unities is always

present.

b. The ownership includes right of survivorship.

c. Ownership interests cannot be unequal.

d. There may be one or more co-owners.

Chapter 4 Quiz

5. Joseph owns property with his wife, Cassandra, in joint tenancy. Joseph’s will specifies that his undivided interest in the property will go to his children, who are Cassandra’s stepchildren. Which is a true statement?

a. Cassandra will continue to be a joint tenant after Joseph’s death.

b. Joseph’s children will become joint tenants with Cassandra.

c. The property will be physically divided upon Joseph’s death automatically.

d. Survivorship will override Joseph’s will.

Chapter 4 Quiz

6. The primary intent of marital property rights is to protect the rights of a surviving spouse when

a. both spouses are named as joint tenants.

b. property ownership is held as tenants by the entireties.

c. the surviving spouse is not specified in the property title.

d. survivorship is specified in the particular ownership.

Chapter 4 Quiz

7. Fred has conveyed his property to a trust. His attorney will hold the asset on behalf of Fred’s children, who will receive net proceeds from the property. What participant in the trust is Fred’s attorney?

a. beneficiaryb. guardian c. trusteed. trustor

Chapter 4 Quiz

8. How many investors, at a minimum, are required to form a REIT?

a. 30

b. 50

c. 100

d. 300

Chapter 4 Quiz

9. Craig, Jason, and Hugh own real estate as joint tenants. If Craig and Jason die simultaneously, Hugh will

a. become a joint tenant with Craig and Jason’s heirs.

b. hold the entire property interest in severalty.

c. own an undivided one-third interest.d. take title individually as a tenant in

common.

Chapter 4 Quiz

10. If Paula has the right to use and enjoy a timeshare, which is owned in fee by a hotel corporation, Paula has

a. co-ownership with other timeshare owners.

b. a non-fee ownership of the timeshare.

c. ownership in severalty in the timeshare.

d. a proprietary lease for the specified unit.