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2007-01-30 09:00:00

Fundamentals of Property and Estates

By John Reilly and Saul Klein

Buying real estate involves much more than the acquisition of the physical improvements on the land, whether it is a three-bedroom home or an apartment building.  You need to understand the different classes of property as well as the various estates in property so that you maximize your investment – you will want to know what limitations there are on your ownership of the property BEFORE you buy. 

The property describes the rights or interests a person has in the thing owned – commonly called the “bundle of rights” which includes the right to possess, to use, to encumber, to transfer and to exclude.  Property is either personal or real.

PERSONAL PROPERTY (movable) –- Even though your focus is on buying real property, it is important to identify personal property issues to avoid disputes.  Personal property includes things that are tangible and movable --- anything that is not classified as real property is deemed to be personal property; also called “chattel.”

    • Examples:  money; stock; notes; paintings; automobile
    • Transfer of personal property is by way of a “bill of sale” or insertion in the deed
    • Trade fixtures installed by a tenant in a business may be removed by the tenant at end of lease.
    • In some cases, what was once real property can be transformed to personal property: growing crops; mineral, oil and gas when extracted; even a house that is jacked up and moved off the property.
    • Can be sold, used as collateral, assessed for tax purposes.

REAL PROPERTY (Immovable) --  Includes the bundle of ownership rights, as well as the physical improvements, the land and even the air rights.  It is important to distinguish between real property and personal property because the law treats them differently for purposes of transferring ownership, taxes, probate, enforcement of liens, etc.

    • When you buy a house, you are really buying “land” which includes the earth’s surface, air rights, water (riparian) rights,  and those things attached to it such as improvements.
    • Real estate is unique.  Even identical houses in a subdivision involve different rights to possess, to use, to enjoy and to transfer.  Each property may have restrictions placed on its full enjoyment by governmental police power or privately by restrictions.
    • Includes items of personal property permanently affixed such as buildings or natural growth attached by roots (trees, shrubs).
    • Fixtures are articles that were once personal property but have been affixed to the land or building and thus become a part of the real property.  Fixtures, since they are real property, automatically pass with the land whereas personal property must be mentioned in the deed or sold by way of a bill of sale in order to pass with the sale of the property.
    • There are five tests of a fixture (MARIA): Method of attachment; Adaptability; Relationship of parties; Intention of parties; Agreement of parties
    • It is very important to specify in the sales contract what items of personal property are included  or excluded in the sale, especially where there may be doubt whether an item is a fixture (wall coverings, custom screens, washer/dryer, solar devices, mirrors).

ESTATES – The interest you acquire in real property is called an estate, reflecting your “status” of ownership  -- it describes the degree, nature, quantity, and extent of a person’s interest in property.  There are “freehold” and “leasehold” estates. 

    •  Not all interests in land are estates – mortgages and easements give rights in the land but do not vest in possession.
    • The greatest possible estate one can possess in real property is fee simple absolute.  Check out the title report to see if there are any limitations on the control and use of the fee that is founded on public or private restrictions and conditions, including voluntary (mortgage) or involuntary (tax lien) encumbrances.  If so, review a copy of any limitation.
    • A fee simple defeasible title is subject to being divested upon the happening of a specified event; for example, A grants title to B as long as the property is used for church purposes.  If B tried to convert the property into a nightclub, the title would return to A (“reversion”) or pass to remaindermen chosen by A.
    • A life estate is limited in duration to the life of its owner or another. The life tenant may sell, lease or mortgage but the transferee receives no greater interest than the life tenant had.  Often created in a will as an estate planning tool.
    • A leasehold is a less than freehold estate involving the transfer of the exclusive right to possession.  Upon the termination of the lease, the property reverts to the landlord. The four types are Estate for years; Periodic tenancy; Estate at will; and Estate at sufferance.

SUMMARY – You must do your homework before you decide to buy a particular property, even though the location is perfect and the income stream is positive.  Put on your Detective hat.  Will the seller try to remove or substitute anything before closing?  Are there any limitations on what I can do with the property? Could my seller be honestly mistaken and only own a life estate rather than the full fee simple title the seller believes?  Keep asking questions --- and be sure to review the title report before committing to buy the property.

KEY WORDS

AIR RIGHTS - The rights to the use of the open space or vertical plane above a property. Ownership of the land includes the right to all air above the property.

BUNDLE OF RIGHTS - An ownership concept describing all those legal rights which attach to the ownership of real property, including the right to sell, lease, encumber, use, enjoy, exclude, will, etc.

BILL OF SALE - A written agreement by which one person sells, assigns or transfers his right to, or interest in, personal property to another.

CHATTEL - Personal property which is tangible and moveable.

FEE SIMPLE - The largest estate one can possess in real property. A fee simple estate is the least limited interest and the most complete and absolute ownership in land: it is of indefinite duration, freely transferable and inheritable. Fee simple title is sometimes referred to as "the fee.” 

FIXTURE - An article that was once personal property but has been so affixed to the real estate that it has become real property (e.g. stoves, bookcases, plumbing, etc.). If determined to be a fixture, then the article passes with the property even though it is not mentioned in the deed.

FREEHOLD – An ownership estate in real property, the exact termination date of which is unknown.

IMPROVEMENTS - Valuable additions made to the property, amounting to more than repairs, costing labor and capital and intended to enhance the value of the property. Improvements of land would include grading, sidewalks, sewers, streets, utilities, etc. Improvements in land would include buildings, fences, and the like.

INVENTORY - An itemized list of property. Many brokers recommend that their clients attach to the sales contract an inventory of property to be included in the sale of a residential property, including a condominium dwelling.

LAND - The surface of the earth extending down to the center and upward to the sky, including all natural things thereon such as trees, crops, or water; plus the minerals below the surface and the air rights above.

LATERAL AND SUBJACENT SUPPORT - The support received by a parcel of real property from the land adjoining it is called lateral support. Subjacent support is that support which the surface of the earth receives from its underlying strata.

LEASEHOLD - A less-than-freehold estate which a tenant possesses in real property.

LESS-THAN-FREEHOLD ESTATE - An estate held by one who rents or leases property. This classification includes an estate for years, periodic tenancy, estate at will, and estate at sufferance.

LIFE ESTATE - Any estate in real or personal property which is limited in duration to the life of its owner or the life of some other designated person.

MINERAL RIGHTS - Rights to subsurface land and profits. Normally, when real property is conveyed, the grantee receives all right and title to the land including everything above and below the surface, unless excepted by the grantor.

PERSONAL PROPERTY - Things which are tangible and moveable; property which is not classified as real property; chattels; personalty.

QUALIFIED FEE - An estate in fee that is subject to certain limitations imposed by the owner.

REAL ESTATE - The physical land and appurtenances, including any structures; for all practical purposes synonymous with real property.

REAL PROPERTY - All land and appurtenances to land, including buildings, structures, fixtures, fences, and improvements erected upon or affixed to the same; excluding, however, growing crops.

REMAINDER ESTATE - A future interest in real estate created at the same time and by the same instrument as another estate, and limited to arise immediately upon the termination of the prior estate.

REVERSION - A future estate in real property created by operation of law when a grantor conveys a lesser estate than he has. The residue left in the grantor is called a reversion that commences in possession in the future upon the end of a particular estate granted or devised, whether it be freehold or less-than-freehold.

RIPARIAN - Those rights and obligations which are incidental to ownership of land adjacent to or abutting on watercourses such as streams and lakes.

TENANCY FOR YEARS - A less-than-freehold estate in which the property is leased for a definite, fixed period of time, be it for 60 days or any fraction of a year, a year, ten years, etc.

TENANCY AT SUFFERANCE - A tenancy which exists when a tenant wrongfully holds over after the expiration of a lease, without the landlord's consent, as where the tenant fails to surrender possession after termination of the lease.

TENANCY AT WILL - A tenancy in which a person is in possession of real estate with the permission of the owner, for a term of unspecified or uncertain duration, as when an owner permits a tenant to occupy a property until it is sold.

TRADE FIXTURES - Articles of personal property annexed to leased premises by the tenant, as a necessary part of the tenant's trade or business.

WASTE - An improper use or abuse of property by one in possession of the land, who holds less than the fee ownership, such as a tenant, life tenant, mortgagor, or vendee.

 (Saul Klein is CEO of Real Estate Electronic Publishing Company, home of RealTown. John Reilly is Vice-President of Publishing.)

 

 

 

 

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