Thursday, February 7, 2008

Introduction to Real Estate: Land; Real Estate; Real Property

Any understanding of the legal issues involved with real estate and mortgages must begin with the land and the other key elements of real estate, as well as how real estate is owned.
Real estate in the United States follows the allodial system of property ownership. This system recognizes the right of individuals to completely and fully own a parcel of property. This is no small thing, especially when this system is compared to other systems: Feudal system. All the lands are owned by the sovereign ruler, who then gives certain ownership or usage rights to his or her subjects, who then may allow peasants and other workers to lease land for farming or other use. This was the predominant system in Europe for much of the Common Era.
Communist system. Similar to the feudal system, all the lands are owned by the state-or the "people".
Use of land is dictated by the state, and no individual can ever fully own any property.
Allodial system. The system used in the United States and much of the developed and developing democratic world.
In American-English legal theory, it is important to understand the difference between these elements of land, real property, real estate and associated rights, such as air, mineral and water rights. This chapter will discuss these elements in three categories:
1. Land. The ground surface and the natural elements below and above it.
2. Real Estate. Land and any improvements on it.
3. Real Property. Real estate and the different "rights" involved with it.
Most people treat the terms land, real estate and real property as interchangeable. They are not. Anyone who aspires to invest in real estate or work in the real estate industry must understand the key distinctions between these terms. Fortunately, they are not difficult concepts to grasp.
In the real estate industry, the legal concept of land encompasses more than just the ground that we see or that comprises a parcel of property. Land includes everything natural beneath and above the surface. The operative term here is "natural"; but the concept of land need not be completely tangible.
It may be helpful to view land as an inverted pyramid extending from the center of the earth and projecting outwards into the atmosphere. Land includes, but is not necessarily limited to the following elements: Surface ground. This is what most people think of when they hear the term "land," but it's obviously much more.
Subsurface soil and water. Landowners have traditionally owned the water underneath their land surface and can access it at will. However, many local governments and new regulations have begun to exercise control over aquifers and other subsurface water sources.
Minerals, oil and gas. This is an extension of subsurface land rights. These elements are prime commodities and can give the property owner additional income-if that owner still controls the rights to those subsurface elements. For more information, see the "Subsurface Rights" article.
Airspace above the ground. Believe it or not, air space is part of real estate. For example, your neighbor cannot build an overhanging bay window that extends into your property's air space. An increasingly more common discussion of air space involve condominiums, in which the condo owner often only owns the air space within their units—but not the walls, floors or ceilings.
Permanently attached natural elements (trees, boulders and vegetation). The law does differentiate between permanent vegetation and annual crops. Trees, grass and perennials are called "fructus naturales" and are considered part of larger real estate. Planted annuals and crops are called "fructus industrials" and are considered personal property.
The concept of personal property, as opposed to real property, will discussed later in this article. As you can see, however, the land can contain both real property and personal property. Ownership of land can also be further divided into different facets-which allow for separate uses and manners of possession.
Example: Ownership of Land Sally owns a ranch. She learns that there may be precious minerals under her land. She would like to take advantage of this fact, without jeopardizing her ranch operations. So, Sally sells the rights to the mineral under her land without surrendering her land. The mining company that purchases the mineral rights is allowed to mine for it, within strict limits, while Sally is free to continue with her ranch operations.
Real Estate
The concept of real estate begins with land, but typically includes more. Real estate also includes all the artificial improvements to land, such as buildings, sewers, pavements, fences and wells.
When discussing real estate, we are talking about the entire property as a physical entity—soil, minerals, air space and all improvements. The real estate industry sees all of these as commodities that can be quantified, bought, sold and transferred.
In short, the term "real estate" starts with the land, but then includes all improvements made to that land.
Real Property
The term "real property" normally applies to the legal concept of property ownership. In our system of property law, there are different elements to ownership, especially with ownership of real estate.
When using the term real property, you should try to avoid thinking of the tangible, physical elements of real estate. Instead, you should view the term "real property" as a concept or idea. The key issue here is ownership, and the rights involved with ownership.
In this sense, what you own is not as important as how you own it. These elements or facets of property ownership are often grouped into a "bundle of rights" that include the following five: Possession. This facet of ownership pertains to the right to occupy the property. For example, a landlord gives the renter the right to temporarily possess, enjoy and exclude the property, but the landlord keeps the right to control its usage and the right to dispose the property to another person.
Enjoyment. This facet pertains to the right to possess the property without interference.
Control. This facet pertains to the owner's right to determine how the property may be used.
Disposition. This facet pertains to the owner's right to give, sell or transfer the property (either in whole or in separate "rights") to another individual. This right to dispose is one of the cornerstone of the real estate market.
Exclusion. This facet pertains to the owner's right to restrict other individuals from accessing or using the owner's property. Trespassing laws arise from this right.
When many people talk about property rights, it takes on an almost majestic set of rights. This goes hand in hand with American principles (or myths) about self-reliance, privacy rights and individualism. We may find an historical basis for this view of property rights in monarchial Europe, where landowners were essentially royalty and had near-absolute power over their dominions, no matter how small.
Even in America's allodial system, however, ownership is never infinite or unlimited. The government reserves the right to "take" any or all of the ownership elements from any private individual. However, the government must justify any such "taking" as being for the public good and the owner must be compensated the fair market value of the property taken. As long as the government meets these two conditions and follows due process, the property owner cannot prevent such a taking.
For example, when the state, county or city must build a new highway or street, they will need to buy the homes and properties in the path of the proposed road through a taking.
Another, more limited example, would be if the local county wanted to build a river-walk and took an easement through the property of the riverfront owners. The property technically still belongs to the property owner, but the easement gives the government full usage and control of the river's shore.
For more information about the government's ability to limit or take real property from their private owners, see the "Eminent Domain" article.
Real vs. Personal Property Most physical items can normally be classified into either real or personal property. This is an important distinction in the real estate industry and can translate into serious money.
The quick way to understand the difference between the two types of properties is to think of personal property, as everything not permanently attached to the real estate.
As noted above, real estate is land (with its included rights) and anything permanently attached to that land.
Personal property is legally called "chattel," most probably because defining the concept of personal property became a legal need when cattle became big business.
Attachment. The permanency of an item's attachment to the real estate determines whether it is real or personal property. For example, a pile of wooden posts would be considered personal property until they are driven into the ground to create a fence, at which time, they become part of the real property.
Transfer. Real property is transferred with a deed; personal property is transferred with a bill of sale.
With most home purchases, the deed transfers the land and house, while the bill of sale handles the transfer of the washer and dryer.
Per the preceding example, personally property can be converted into real property through the process of attachment. Fixtures are objects that were previously personal property but have been attached to real estate, thus making them real property. Note: try not to confuse regular fixtures with trade fixtures; trade fixtures, sometimes called chattel fixtures, are considered personal property. By the same token, real property can be converted into personal property through the process of severance.


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