CHAPTER 2 Lecture Outline 9E

Basic Real Estate Appraisal, 9th Edition Chapter 2 Lecture Outline

CHAPTER 2

LEGAL CONSIDERATIONS IN APPRAISAL

STUDENT LEARNING OBJECTIVES The main topics to be covered in this session include: 2.1 Physical and Legal Characteristics of Real Estate 2.2 Use Restrictions 2.3 Property Descriptions 2.4 Real Estate Contracts Class Activities [Instructor: Complete as needed.] Lecture [ ] Discussion [ ] Breakout Groups [ ] Other ______[ ]

2.1 PHYSICAL & LEGAL CHARACTERISTICS OF REAL ESTATE Real Estate, Real Property, and Personal Property 1. Property consists of rights that have value. 2. The rights to physical objects are called tangible property. 3. The rights to non-physical things are called intangible property. 4. Real property refers to the land and everything attached. 5. Personal property consists of property that is movable. Personal property is all property that is not real property. 6. In theory, real estate is the physical thing, and real property, the rights to its use. In common usage, the two terms are used interchangeably. The Components of Real Property The Land Includes the surface, the soil and rocks beneath and the space above. Laws limit the use of airspace, liquids and gases below the surface. Permanently Affixed Objects Permanently fastened objects are part of the real estate. Objects that are not clearly attached to the land may be personal property. When certain legal conditions are met, an object of personal property becomes a fixture, and part of the real estate. Appurtenant Rights An appurtenant right gives the owner of one property (the dominant tenement) a specific limited legal use of another property (the servient tenement) in a specific manner. Three types of appurtenant rights include (1) Water rights, (2) easements, and (3) stocks in a mutual utility company. That Which Is Immovable By Law Personal property that is legally bound to the land becomes real property. [Instructor: Refer to Figure 2.1 on Page 20 to illustrate.]

2-1 Basic Real Estate Appraisal, 9th Edition Chapter 2 Lecture Outline

A Closer Look at Fixtures When certain personal property items become real property, they are referred to as fixtures. The Law of Fixtures Courts have set five tests to determine whether an item is personal or real property. The tests are weighed collectively, and remembered by the acronym “MARIA”: 1 Method of Annexation. How permanently the property is attached to the land or building. 2. Adaptability. The extent to which the property is adapted for use with the land. 3. Relationship. The relationship between the parties. 4. Intent. The intention of the person incorporating the personal property into the land. 5. Agreement. The existence of any agreement between the parties involved.

Using the Fixture Law in Appraisals Preparation of an appraisal requires one to decide what objects to include and/or exclude. 1. Real estate appraisals require the appraiser’s judgment as to whether an object is real or personal property. 2. Details of pending sales or leases can be helpful in determining intent. 3. Difficult items to categorize include carpets, drapes and blinds; cabinets and kitchen equipment; chandeliers, and garden decorations; or trade fixtures. Real Property Rights These include the rights to occupy the property, sell it, exclude others, borrow against it, and convey ownership by inheritance. Fee Ownership 1. The highest form of ownership is called the fee, fee simple, or fee simple absolute estate. 2. Property that is owned subject to certain limitations (e.g., deed restrictions) is said to be held in fee simple qualified.

The Bundle of Rights 1. The right to occupy the property. 2. The right to sell it. 3. The right to exclude others. 4. The right to borrow against it. 5. The right to convey ownership by gift or inheritance. Partial Interests Partial interests are created when an owner keeps certain property rights while conveying other rights to others. Shared interest projects also involve partial interests. Examples of Partial Interests 1. Leased fee estate 6. Timeshare 2. Leasehold estate 7. Cooperative 3. Life estate and remainder interest 8. Ownership subject to financial obligation 4. Undivided interests in commonly held property 5. Easement appurtenant to other properties 2.2 USE RESTRICTIONS 2-2 Basic Real Estate Appraisal, 9th Edition Chapter 2 Lecture Outline

Meaning and Importance 1. The benefits of ownership depend upon the uses that are available. 2. Public and private restrictions and market restrictions affect these uses, and therefore the value of real estate. Categories of Use Restrictions Government Restrictions Remember these by the acronym “PETE”, which has the first letter of each power (restriction): 1. Police power 2. Eminent domain 3. Taxation 4. Escheat How Police Power Affects Real Estate Examples of use restrictions based on the police power of government include: Air and water pollution controls Rent control Building, housing, and electrical codes Seismic safety study areas Coastal preservation zones Sign abatement ordinances Condominium conversion ordinances Solid waste disposal laws Endangered species act Strip mining rehabilitation acts Environmental controls Subdivision requirements Flood zones Underground utility requirements Historical preservation acts Wild river protection acts Master plans Zoning ordinances Park dedications

Private Restrictions 1. CC&Rs (Conditions, Covenants, and Restrictions) 2. Private easements and contracts

[Instructor: The importance of public and private restrictions will be further discussed in Chapter 6.]

Market Restrictions The market encourages only those uses of land that are economically feasible. If a use is economically feasible, but forbidden by zoning and/or deed restriction, there is an economic incentive to have it removed (i.e. rezone or by other means). Potential Use and Value The combination of government, private, and market restrictions determine how land will be used, and thus ultimately determines its value.

2.3 PROPERTY DESCRIPTIONS

Property is accurately identified only by its legal description. Three Basic Types of Legal Description Recorded Lot, Block, and Tract These include boundary maps, parcel maps by licensed surveyors, and other maps that legally subdivide the property. Subdivision maps (tract maps) often divide the land into lots, blocks, and tracts. [Instructor: Refer to Figure 2.4 on Page 33 to illustrate.] Metes and Bounds A metes and bounds description gives the distance and direction (compass bearing) of each boundary line of the property. Metes and bounds descriptions typically start at a point of beginning (survey monuments). [Instructor: Refer to Figure 2.5 (Page 34) and/or Figure 2.6 (Page 35) to illustrate.] Government Survey 1. U.S. government (or government “rectangular”) survey legal descriptions each start with a reference point, such as a prominent mountain peak. 2. A north-south line, called the principal meridian line, goes through the reference point. 3. An east-west line, called the base line, goes through the reference point as well. 4. A series of north-south range lines, spaced 6 miles apart, parallel the principal meridian. 5. Township lines run east-west, parallel to the base line and also 6 miles apart. 6. Each 6-mile square is called a township and is identified by counting from the reference point. (For example, a township might be identified as “township 3 north (T.3N), range 2 east (R.2E), Such and Such a Base and Meridian.”) 7. North-south and east-west lines at 1 mile intervals divide each township into 36 parcels called sections. Each section is numbered, in a serpentine system (back and forth) beginning in the northeast corner of the township. 8. A section is 1 mile in each direction, with an area of 1 square mile, or 640 acres. Sections may be divided into halves, quarters, or lesser fractions. 9. The earth’s spherical shape causes the north 6-mile boundary of each township to be about 50 feet shorter than the south boundary. Thus, the actual dimensions and acreage area of a particular section can vary considerably from the “standard” 1-mile-square section. [Instructor: Beginning at the last paragraph on Page 38 is a simple exercise to help illustrate and apply the basic principles of the government survey system using Figure 2.10 on Page 39.]

2.4 REAL ESTATE CONTRACTS

Contracts are essential to nearly all aspects of real estate. Appraisers need to understand the basics of contracts, and when to ask an attorney to interpret one. Definition and Essential Elements of a Contract A contract is an agreement, involving more than one party, creating an obligation to do a particular act. Essential Elements of a Contract are: 1. The offer 2. The acceptance

Importance of Contracts to Real Estate Any purchase, listing, lease, loan, or option involves a contract. Similarly, all title, ownership rights, or private restrictions on rights involve a contract. Requirements for a Valid Contract 1. Competent parties 2. A subject – an act to be performed 3. Legal consideration 4. Mutual agreement as to the elements – “Meeting of the Minds” – a mutual obligation 5. Obligation of both parties to comply (perform) – Mutuality of Obligation Bottom line - Contracts are very common occurrences in real estate, and appraisers benefit from understanding the elements, importance and requirements of contracts.

CHAPTER SUMMARY [Instructor: Refer back to the beginning of your outline, or review the session with the following important terms and concepts.]

IMPORTANT TERMS AND CONCEPTS Acceptance Leasehold estate Property Appurtenance Legal description Range lines Base line Life estate Real estate Bundle of rights Market restrictions Real property Competent parties Metes and bounds description Recorded lot, block and tract description Consideration Mutual obligation Recorded map Contract Offer Remainder estate Dominant tenement Partial interests Sections Easement Personal property Servient tenement Equity Police Power Subdivision map Fixture Power of eminent domain Tangible property Government restrictions Power of escheat Township Government survey Power of taxation Township Lines Intangible property Principal Meridian Line Tract maps Leased fee estate Private restrictions Trade fixtures REVIEWING YOUR UNDERSTANDING [Instructor: Review questions are found at the end of the chapter; Answers are in the back.] PRACTICAL APPLICATION Students can start entering basic information (address, legal, etc.) on the URAR form if preparing an appraisal. STUDENT EXERCISES [Instructor: Suggested True/False questions are available to use for Chapter 2.] Suggested Practice Exercise:  Created a sample Government Survey legal description so they can practice locating a parcel, deriving the parcel size in acres, and then estimate it’s value (provide a unit value per acre).