Real Estate Appraisal

Overview of the Real Estate Appraiser

Real Estate Finance

Financing Real Estate

Property Rights and Legal Descriptions

09/16/2012

Real estate is land and anything reasonably and permanently attached to it. Real property refers to the legal interests tied to real estate, including property rights. It is important to note that real property rights are not constricted to the surface of the land. Property rights also include air rights (the space above the surface of the land), mineral rights (minerals and useful materials that exist below the surface of the land), and water rights (rights to withdraw water from the land).

Traditionally, real property rights have been thought of as pie-shaped, starting at the earth’s center and expanding through the surface into outer space. In modern ideology, the mineral rights, surface rights, and air rights are often divided among different owners. Occasionally, the water rights may be held distinctly from the land itself. It is also common for a surface owner to sell mineral rights or air rights to a third party. For example, one party might own the surface of the land, while another owns the rights to any oil, gas, coal, or other materials located below the surface. Water rights vary from state to state and depend mainly on what type of water the land touches.

It is important to understand that it is not just the land that is of value in real estate. In places such as New York City, prices for the air above real property can be extremely valuable. As the article discusses, in a city that commonly builds up, air rights are development potential. Any building that does not build as high as allotted for in the zoning laws can sell the space above it to a neighboring building for development. 

http://www.ny1.com/content/ny1_living/real_estate/157030/air-rights-can-send-price-of-property-soaring

With landmark buildings, selling air rights can be a huge cash payout. Take for example the Archdiocese of New York, who wants to cash in on a possible upzoning in midtown NY by selling the air rights to its landmark properties, including St. Patrick's Cathedral. Because the air rights would allow for building up, developers would pay big amounts to own the rights. To be able to transfer the rights would allow for competition among developers, which is beneficial is places that want to induce development. For landowners such as the Archdiocese, the sale of the rights could be used to preserve its landmark properties. St. Patrick's Cathedral is currently undergoing an enormous renovation, and the income from the sale could help more easily restore the building. For more on this example, see the article below. 

http://articles.nydailynews.com/2012-09-13/news/33823081_1_air-rights-development-rights-buildings

Estates in land are collections of property rights bundled together. The two basic types of estates in land are freehold estates and leasehold estates. Freehold estates are ownership estates, while leasehold estates include the right to use and possess property owned by someone else. The fee simple absolute estate, a type of freehold estate, is the most complete set of ownership rights one can possess in real property and is most commonly associated with owning real estate. Other types of freehold estates include qualified fee estates and life estates. Freehold estates and leasehold estates are based on the supposition that one person owns the real estate. As discussed, many of the real property rights associated with real estate may be owned by more than one person. Estates owned by two or more people or entities are called concurrent estates.

In addition to comprehensible property rights, accurate legal descriptions are essential when it comes to dealings with the title of real estate. In order to transfer real estate ownership successfully, exact boundaries of the land being considered is vital. The three methods commonly used to compose precise legal descriptions are the metes-and-bounds system, the rectangular survey system, and reference to recorded plats.

For specifics on the three methods used to legally describe real estate, visit http://thismatter.com/money/real-estate/legal-descriptions.htm

Public Restrictions on Ownership

09/16/2012

The government has four basic powers that affect real estate owners: The power of taxation, the power of eminent domain, police power, and escheat.

Property taxes are a significant source of revenues for state and local governments that are used to fund schools, emergency services, and other local government activities. The property tax is easy to administer and difficult to avoid because it is tied to generally immobile property. In addition, property taxes the income stream from property taxes is reasonably stable as it is not subject to wide fluctuations in the business cycle.

http://www.nytimes.com/2012/08/17/us/texas-property-tax-for-homeowners-is-easy-to-hate.html

In Texas, property taxes are the biggest source of financing for school districts. In fact, they account for a whopping 52 percent of their funding. In October, school districts will face the state in court to argue about school financing, opening up the whole taxing system for debate. Taxes in the state of Texas have been a hot topic lately due to the fact that property taxes are much higher than most states. Not only is it a hefty expense for property owner's, it comes due as a lump sum. Some officeholders have suggested replacing them with a larger sales tax, arguing that it is just a way to charge people rent on property they already own. Sales taxes and income taxes float proportionately to what is spent and earned. Property tax, on the other hand, is a gray area because it based on the market and the final word of an appraiser. As stated in the article, it is not science, but rather an art. 

Eminent domain is the government’s power to condemn private property for public use upon just payment of compensation as warranted in the Fifth Amendment to the Unites States Constitution. The power of eminent domain has been extended to the states through due process. In a condemnation proceeding, the government must rationalize that the land is needed for public use and that the amount of money extended to the land owner as compensation is a reasobale amount.  Controversy surrounding the use of eminent domain stems from the determination of adequate compensation.

Through police power, the government can regulate activities to promote the public health, safety, morals, and general welfare. Because of the interdependence of land use, governments rely on police power to enact a variety of constraints over the way owner’s can use their land. A comprehensive general plan is used to outline policies that shape the future development of a community and includes a land-use plan. To implement the land-use plan, governments use tool s such as zoning, business codes, impact fees, and others. The most common method of regulating land use is comprehensive zoning. Zoning is used to divide a community’s land into districts in which only certain uses of the land are allowed. With comprehensive zoning, land is divided into zones and regulations relating to the type and intensity of use are perscribed. For example, comprehensie zoning can include restrictions on the height and use of buildings.

The government can also exercise its power through escheat. Following the death of a property owner, the government retains the right to own the property if no valid will or heirs exist. Escheat is used to prevent real estate from simply being unowned. In 2010, Staples sued the state of Delaware, arguing Delawares method for calculating liabilty of escheat as discussed in the article below.

http://www.cbsnews.com/8301-505245_162-57513307/staples-pays-$8.9m-to-settle-dispute-with-delaware/ 

Private Restrictions on Property Ownership

09/16/2012

Encumbrances are restrictions and limitations on ownership rights. There are several forms of private encumbrances which can either enhance the value of the property or in some cases completely devalue the land to a potential buyer.

Covenants, conditions, and restrictions, collectively known as CC&R’s, are private restrictions that limit the way a property owner utilizes their property. In common practice, CC&R’s are in essence promises or agreements concerning the land. CC&R’s are normally found in the deed accompanying the property and have the legal effect of a binding contract term on all future owners—they run with the land. The majority of planned developments utilize these restrictions for the benefit of all residents. Not surprisingly, areas with properly outlined covenants tend to retain property value better than those with no restrictions. Developments that adequately enforce their covenants and standards are usually safer, look nicer, and better retain and increase investments and improvements that owners have made to the properties. It is important for property buyers to read and understand all CC&R’s associated with the land. Existing CC&R’s may prevent them from doing simple things such as putting a sign up in the front yard, or building a new fence. As mentioned earlier, CC&R’s are binding to the buyer and are enforceable whether or not they have been reviewed.

Liens are another type of private encumbrance on ownership. A lien is a claim on property as security for a debt or fulfilment of some monetary charge or obligation. When a lien is placed on a property, the property owner is limited in what they can do with it. These restrictions can be either voluntary or involuntary. Liens places on the property by the owner are voluntary and typically come in mortgage form to secure payment of some long-term debt. Involuntary liens are used to protect the interests of those who have valid claims against the owner of the property. Mortgage liens and mechanics’ liens are two types of specific liens that are used to secure debts associate with a specific portion of property. Mortgage liens are the most common private encumbrance on ownership and are used to protect lenders by pledging property as collateral for the debt. Mechanics’ liens are used by engineers, suppliers, architects, and those who provide services and materials for property improvements. If any such workers are unpaid by the property owner, they can file a lien on the property and foreclosure proceedings may result. General liens are placed on all of the property that might be owned by a person. They do not represent property ownership but do serve as claims against an owner’s title.

Easements are rights given to one party by a property owner to utilize the land in a certain way. Essentially, the owner coexists with the holder of the easement rather than giving up and portion of the land. Two types of easements exist: easement Appurtenant and easement in gross. Easement appurtenant occurs when an easement is legally connected to an adjoining property and usually runs with the land. For example, party A pays party B to grant an easement to build a road across their land. Party A is the dominant estate—it benefits from the easement. Party B on the other hand is being burdened by the easement and is known as the servient estate. The owner of the servient estate cannot do anything to interfere with the dominant estate’s access to the road. An easement in gross only has a servient estate. A sewage company that obtains an easement to run a sewage line across a property is an example of an easement in gross. The easement is granted to the company rather than portions of land. A new type of easement that has been erected is the conservation easement. Unlike other easements, this is a type of negative easement that prevents the property owner from using the land in a certain manner. They are typically intended to protect land from future development. A profit a prendre is similar to an easement, but it specifically permits the holder to remove certain natural resources from the servient property. 

For more on conservation easements, visit http://www.nature.org/aboutus/privatelandsconservation/conservationeasements/index.htm and view the video below.

Why is real estate important?

09/16/2012

What is real estate? Why is it important? 

Real estate is property in land and buildings. Essentially, people must have places to live and businesses must have locations in order to operate. Residential real estate provides housing for families, while commercial, industrial, and agricultural real estate create spaces for jobs in various industries. Still more, the real estate industry offers many career opportunities within itself.  All in all, real estate income provides a source of revenue for millions of people.

Real estate is a fundamental part of our national economy and comprises a great portion of national wealth.  According to Charles F. Floyd and Marcus T. Allen, authors of Real Estate Principles Tenth Edition, real estate accounts for about 5 percent of the nation’s gross domestic product and about 40 percent of gross private domestic investment. In addition, land and structures comprise about 26 percent of the total assets of households and about 33 percent of the total assets of businesses. Tangible assets aside, many borrow against real estate assets through financial assets known as mortgages and mortgage-backed securities.

To really truly grasp the importance of real estate in the economy, it may be helpful to examine its role in what many consider to be the worst financial crisis since the Great Depression. The United States economy is particularly sensitive to housing values. In the early 2000s, extremely low interest rates stemming from the dotcom bust encouraged millions of people to buy a home on cheap credit. Aggressive investment in mortgage-backed securities and collateralized debt obligations led to pressure from Wall Street for lax lending standards and subprime mortgages. Those that were once unqualified candidates could now easily obtain a loan, causing an increase in demand for housing and rapidly increasing home values. Investors leveraged their returns on these financial instruments tied to real estate, arguing that home prices nationwide had never fallen before. As housing prices and interest rates continued to rise, many subprime borrowers found they could no longer afford their mortgage payments. Many defaulted on their loans and millions of homes went in to foreclosure. Investor demand for MBS’s and CDO’s based on subprime mortgages deteriorated and massive losses forced lenders to tighten their borrower qualifications. Unfortunately, the damage had been done. Demand for housing fell and prices took a nosedive. The value of the mortgage-backed securities plummeted, severely damaging many major financial concerns tied up in these securities and ultimately leading to a global financial crisis. To better understand the ongoing financial crisis and the role that real estate plays in it, see the video below.

Bottom line: Real estate is important. When real estate comes to a halt, so does a multi-billion dollar segment of our economy.

So with all the hullabaloo surrounding the financial crisis and housing bubble burst, you are probably asking yourself "Why should I invest in real estate?" Let us look at some of the advantages of owning real estate as discussed in the articles listed below. 

http://www.investopedia.com/articles/mortgages-real-estate/11/key-reasons-invest-real-estate.asp#axzz26NgpCctv

http://realestate.about.com/od/realestateinvesting/qt/why_invest.htm

http://www.realestatelibrary.com/invest6.html

Advantages:

1. Capital Gains

Real Estate tends to go up in value, or appreciate. While the population continues to rise, more real estate is needed. Every year housing and real estate become more expensive as natural resources and energy become more expensive. Although appreciation can increase too much too fast, real estate tends to follow an upward trend.

2. Cash Flow

Real estate has the potential to generate income through rental properties. 

3. Leverage

Leverage provides greater returns. 

4. Tax Advantages

5. High Tangible Asset Value

Real estate is backed by a high level of tangible assets.