UNIT 2-1 LAND, REAL ESTATE, AND REAL PROPERTY
Learning Objective: describe the concepts of land and ownership rights in real and personal property.
The words land, real estate, and real property are often used interchangeably. To most people, they mean the same thing. The terms originated to describe different aspects of ownership interests in land. To fully understand the nature of real estate and the laws that affect it, real estate professionals must be aware of the subtle yet important differences in the meaning of these words.
Land
For the real estate professional, land is more than just a handful of dirt. is defined as the earth’s surface extending downward to the center of the earth and upward to infinity. Land includes naturally attached objects, such as trees, as well as bodies of water found on or under it. (See Figure 2.1.)
Physical characteristics of land
Land has three physical characteristics: immobility, indestructibility, and uniqueness.
Three physical characteristics of land
- Immobility
- Indestructibility
- Uniqueness
Immobility
It is true that some of the substances of land are removable and that topography can be changed, but the geographic location of any given parcel of land can never be changed. It is fixed and therefore immobile.
Indestructibility
Land is considered indestructible, even though it is subject to both natural and human forces. Land and the vegetation it supports can be removed to allow for a variety of mining operations, from a gravel pit to a strip mine to remove coal or an open-pit copper mine. Land can be paved over for a highway or building, or eroded by a flood or dust storm. The geographic location will still remain, whatever its condition. This permanence of land, coupled with the long-term nature of most improvements to land, such as structures, tends to stabilize investments in real property.
The fact that land is indestructible does not, however, change the fact that the improvements on land depreciate (deteriorate) or can become obsolete, which may dramatically reduce the land’s value. In addition, the economic desirability of a given location can change.
Uniqueness
Uniqueness, which is also known as , is the concept that no two parcels of property are exactly the same or in the same location. The characteristics of each property, no matter how small, differ from those of every other, and each property has its own geographic coordinates. An individual parcel has no true substitute because, by definition, each is unique.
Real estate
can be defined as the interests, benefits, and rights that are automatically included in the ownership of real estate. (See Figure 2.1.) In many states, the terms real estate and real property are synonymous and are used to refer to both the physical property and the rights of ownership. Other states still make a distinction between the physical land and the rights of the land owner.
Traditionally, ownership rights of real property are described as a . These rights include the
- right of possession,
- right to control the property within the framework of the law,
- right of enjoyment (to use the property in any legal manner),
- right of exclusion (to keep others from entering or using the property), and
- right of disposition (to sell, will, transfer, or otherwise dispose of or encumber the property).
The concept of a bundle of rights comes from old English law. In the Middle Ages, a seller transferred property by giving the purchaser a handful of earth or a bundle of bound sticks from a tree on the property. After accepting the bundle, the purchaser became the owner of the tree from which the sticks came and the land to which the tree was attached. Because the rights of ownership (like the sticks) can be separated and individually transferred, the sticks became symbolic of those rights. (See Figure 2.2.)
The word title, as it relates to real property (real estate), has two meanings: (1) the right of ownership of the property, including the owner’s bundle of legal rights; and (2) evidence of that ownership by a deed. Title refers to ownership of the property, not to a printed document. The document by which the owner transfers title to the property is the deed.
Real property is often coupled with the word appurtenance. An (something that is transferred with or “runs with” the land) is a right or privilege associated with the property, although not necessarily a physical part of it. Typical appurtenances include parking spaces in multiunit buildings, easements that allow utility companies to bring service lines onto property, and water rights to a source not on the property. An appurtenance is connected to the property, and ownership of the appurtenance normally transfers to the new owner when the property is sold.
IN PRACTICE
When people talk about buying or selling homes, office buildings, and land, they usually call these things real estate. For all practical purposes, the term real estate is synonymous with real property as defined here. Thus, in everyday usage, real estate includes the legal rights of ownership specified in the definition of real property. Sometimes people use the term realty instead.
Property may be classified as either real or personal. , sometimes called personalty, is all the property that can be owned and that does not fit the definition of real property. An important distinction between the two is that personal property is movable. Another distinction between real and personal property is their method of transfer. Real property is transferred by deed, while personal property is transferred by a bill of sale. Items of personal property, also called , include such tangibles as chairs, tables, clothing, money, bonds, and bank accounts.
Factory-built housing
Factory-built housing is defined as dwellings that are not constructed at the site but are built off site and trucked to a building lot where they are installed or assembled. Factory-built housing includes modular, panelized, precut, and mobile homes. Use of the term mobile home was phased out with the passage of the National Manufactured Housing Construction and Safety Standards Act of 1976, when manufactured homes became federally regulated. is that which is built specifically to the standards of the Department of Housing and Urban Development (HUD), although the term mobile home may still be used. Most states have agencies that administer and enforce the federal regulations for manufactured housing. State and local building codes regulate the construction and installation of other types of factory-built housing. A useful resource is the Manufactured Housing Institute: www.manufacturedhousing.org.
The distinction between real and personal property is not always obvious. Factory-built components are found in virtually every building and become part of the real estate once installed. Manufactured housing may be considered personal property, even though its mobility may be limited to a single trip to a park or development to be hooked up to utilities. Any type of factory-built or manufactured housing may, however, be considered real property if it becomes permanently affixed to the land. The distinction is generally one of state law. Real estate professionals should be familiar with local laws before attempting to sell factory-built housing of any type.
Plants
Trees and crops generally fall into one of two classes: (1) Trees, perennial shrubbery, and grasses that do not require annual cultivation are known as fructus naturales. These items are considered real estate. (2) Annually cultivated crops such as fruit, vegetables, and grain are known as , or fructus industriales, and are generally considered personal property. The current owner or tenant is entitled to harvest the crops that result from that individual’s labor. For example, when farmland is sold, the seller won’t have to dig up growing corn plants and haul them away unless the sales contract says so. The young corn remains on the land. The seller may come back and harvest the corn when it’s ready. Perennial crops, such as orchards or vineyards, are not personal property and so transfer with the land.
The legal term for plants that do not require annual cultivation (such as trees and shrubbery) is fructus naturales (fruits of nature). Plants or crops that require annual cultivation are legally known as or fructus industriales (fruits of labor).
An item of real property can become personal property by , which is the act of separating it from the land. For example, a growing tree is part of the land until the owner cuts it down, literally severing it from the property. Similarly, an apple becomes personal property once it is picked from a tree.
It is also possible to change personal property into real property through the process known as . For example, if a landowner buys cement, stones, and sand and mixes them into concrete to construct a sidewalk across the land, the landowner has converted personal property (cement, stones, and sand) into real property (a sidewalk).
Real estate professionals need to know whether property is real or personal. An important distinction arises, for instance, when the property is transferred from one owner to another. Real property is conveyed by deed, while personal property is conveyed by a bill of sale or receipt.
Fixtures
In considering the differences between real and personal property, it is necessary to distinguish between a fixture and personal property.
A is personal property that has been so attached to land or a building that, by law, it becomes part of the real property. Examples of fixtures are heating systems, elevator equipment in highrise buildings, radiators, kitchen cabinets, light fixtures, and plumbing. Almost any item that has been added as a permanent part of a building is considered a fixture.
During the course of time, the same materials may change their classification as real or personal property several times, depending on their use and location.
Legal tests of a fixture
In determining whether an item is a fixture, and thus part of the real estate, courts use the following five basic tests, which can be remembered by the acronym MARIA:
- Method of attachment. How permanent is the method of attachment? Can the item be removed without causing damage to the surrounding property, or can any damage caused by the removal be easily repaired?
- Adaptability of the item for the land’s ordinary use. Is the item being used as real property or personal property? For example, a refrigerator is usually considered personal property. However, if a refrigerator has been adapted to match the kitchen cabinetry, it may be considered a fixture.
- Relationship of the parties. In general, a court will favor a tenant over a landlord, and a buyer over a seller.
- Intention of the person in placing the item on the land. This should be the most important consideration, but the actions of the tenant may not be consistent with the tenant’s earlier intention. If an installation is intended to be temporary, it should not be attached in a way that appears to be permanent.
- Agreement of the parties. Have the parties agreed on whether the item is real or personal property in the provisions of an offer to purchase or lease?
Legal tests of a fixture:
- Method of attachment
- Adaptability of item to land’s use
- Relationship of parties
- Intention in placing item on the land
- Agreement of the parties
Although these tests may seem simple, court decisions have been complex and inconsistent. Property that appears to be permanently affixed has sometimes been ruled to be personal property, while property that seems removable has been ruled a fixture. It is important not only for an owner to clarify what is to be sold with the real estate at the very beginning of the sales process but also for a tenant to make certain that items installed for personal use be removable at the conclusion of the lease term.
IN PRACTICE
At the time a property is listed, the seller and the listing agent should discuss which items to include in the sale. Any item that would usually be considered part of the real property (such as a light fixture) and which the seller wishes to remove should be clearly labeled as remaining with the seller and so noted on any promotional materials, including property listing forms. A separate bill of sale should be used for all items that are not fixtures but are to be included in the sale, such as exterior or interior furnishings.
Trade fixtures
A special category of fixtures includes property used in the course of business. An article owned by a tenant, attached to a rented space or building, and used in conducting a business is a , or a chattel fixture. Some examples of trade fixtures are hydraulic lifts in an auto repair shop, lanes and pin-setting equipment in a bowling alley, and dining booths in a restaurant. Agricultural fixtures, such as chicken coops and tool sheds, are also included in this category. Trade fixtures must be removed on or before the last day the property is rented. The tenant is responsible for any damage caused by the removal of a trade fixture. Trade fixtures that are not removed become the real property of the landlord. Acquiring the property in this way is known as (this is related to the legal principle of constructive annexation).
IN PRACTICE
A pizza parlor leases space in a small shopping center, and the restaurateur bolts a large iron oven to the floor of the unit. When the pizza parlor goes out of business or relocates, the restaurateur will be able to remove the pizza oven if the bolt holes in the floor can be repaired. The oven is a trade fixture. On the other hand, if the pizza oven was brought into the restaurant in pieces, welded together, and set in concrete, the restaurateur might not be able to remove it without causing structural damage. In that case, the oven might become a fixture and the real property of the building owner.
Trade fixtures differ from other fixtures in the following ways:
- Fixtures belong to the owner of the real estate, but trade fixtures are usually owned and installed by a tenant for the tenant’s use.
- Fixtures are considered a permanent part of a building, but trade fixtures are removable. Trade fixtures may be attached to a building so they appear to be fixtures.
In general, fixtures are real property, so they are included in any sale or mortgage. Trade fixtures, however, are considered personal property and are not included in the sale or mortgage of real estate, except by special agreement.
Surface, subsurface, and air rights
Surface rights
Ownership rights in a parcel of real estate that are limited to the surface of the earth are called .
Subsurface rights
The rights to the natural resources below the earth’s surface are called . An owner may transfer subsurface rights without transferring surface rights, and vice versa. In oil-producing states, real estate is commonly transferred without including the rights to minerals found below ground level. Recently, natural gas found in shale rock beneath the surface that is removed in the process called hydraulic fracturing (“fracking”) has become economical and created new interest in subsurface rights in many states. Fracking also has resulted in environmental concerns.
IN PRACTICE
A landowner sells the rights to any oil and gas found beneath the owned farmland to an oil company. Later, the same landowner sells the remaining interests (the surface, air, and limited subsurface rights) to a buyer, reserving the rights to any coal that may be found. This buyer sells the remaining land to yet another buyer but retains the farmhouse, shed, and pasture. After these sales, four parties have ownership interests in the same real estate: (1) the original landowner owns all the coal; (2) the oil company owns all the oil and gas; (3) the first buyer owns the farmhouse, shed, and pasture; and (4) the second buyer owns the rights to the remaining real estate. (See Figure 2.3.)
Air rights
The rights to use the space above the earth may be sold or leased independently, provided the rights have not been limited by law. can be an important part of real estate, particularly in large cities, where the air rights over railroad tracks may be purchased or leased to construct office buildings. Examples include the MetLife Building (formerly the PanAm Building) in New York City and One Prudential Plaza (formerly the Prudential Building) in Chicago. To construct such a building, the developer must purchase not only the air rights but also numerous small portions of the land’s surface for the building’s foundation supports.
Before air travel was possible, a property’s air rights were considered unlimited, extending upward into the farthest reaches of outer space. Now that air travel is common, however, the federal government, through laws, regulations, and court decisions, has put limits on air rights. Today, reasonable interference with these rights is permitted, such as that necessary for aircraft (and presumably spacecraft), as long as the owner’s right to use and occupy the land is not unduly lessened. Government and airport authorities often purchase adjacent air rights to provide approach patterns for air traffic.
With the continuing development of solar power, air rights—and, more specifically, light or solar rights—are being closely examined by the courts. A new highrise building that blocks sunlight from a smaller existing building may be found to be interfering with the smaller building’s right to sunlight, particularly if systems in the smaller building are solar powered. Air and solar rights are regulated by state and local laws and regulations.
Water rights
are common-law (historical) or statutory rights held by owners of land adjacent to rivers, lakes, or oceans and are restrictions on the rights of land ownership. Water rights are particularly important in arid western states, where water is a scarce and valuable public commodity, but are also of concern in agricultural areas and population centers.
Whether for agricultural, recreational, or other purposes, waterfront real estate has always been desirable. Each state has strict laws that govern the ownership and use of water as well as the adjacent land. The laws vary among the states, but all are closely linked to climatic and topographical conditions. Where water is plentiful, states may rely on the simple parameters set by the common-law doctrines of riparian and littoral rights. Where water is scarce, a state may control all but limited domestic use of water, according to the doctrine of prior appropriation.
Riparian rights
Common-law rights granted to owners of land along the course of a river, stream, or similar flowing body of water are called . Although riparian rights are governed by laws that vary from state to state, they generally include the unrestricted right to use the water. As a rule, the only limitation on the owner’s use is that such use cannot interrupt or alter the flow of the water or contaminate it in any way. In addition, an owner of land that borders a nonnavigable waterway, (i.e., a body of water unsuitable for commercial boat traffic) owns the land under the water to the exact center of the waterway. Land adjoining commercially navigable rivers, on the other hand, is usually owned to the water’s edge, with the state holding title to the submerged land. (See Figure 2.4.) Navigable waters are considered public highways in which the public has an easement or right to travel.
Littoral rights
Closely related to riparian rights are the of owners whose land borders commercially navigable lakes, seas, and oceans. Owners with littoral rights enjoy unrestricted use of available waters but own the land adjacent to the water only up to the average high-water mark. All land below this point is owned by the government.
In some states, riparian and littoral rights are appurtenant to (run with) the land and cannot be retained when the property is sold. The right to use the water belongs to whoever owns the bordering land and that right cannot be retained by a former owner after the land is sold.
Accretion, reliction, erosion, and avulsion
The amount of land an individual owns may be affected by the natural action of water. An owner is entitled to all land created through —increases in the land resulting from the deposit of soil by the water’s action.
A navigable body of water may permanently recede, uncovering land that was once under the water, which then becomes the property of the adjoining landowner by the process called . Reliction also may be the result of a shift in the course of a river or stream.
On the other hand, an owner may lose land through the action of the elements. is the gradual and sometimes imperceptible wearing away of the land by natural forces, such as wind, rain, and flowing water. Fortunately, erosion usually takes hundreds or even thousands of years to have any noticeable effect on a person’s property. Flash floods or heavy winds, however, can increase the speed of erosion.
If erosion is a slow natural process, avulsion is its opposite. is the sudden removal of soil by an act of nature. It is an event that causes the loss of land in a much less subtle manner than erosion. An earthquake or a mudslide, for instance, can cause an individual’s landholding to become much smaller very quickly.
Doctrine of prior appropriation
In states where water is scarce, ownership and use of water are often determined by the doctrine of . Under this doctrine, the right to use any water, with the exception of limited domestic use, is controlled by the state rather than by the landowner adjacent to the water.
To secure water rights in prior appropriation states, a landowner must demonstrate to a state agency that the owner’s plans are for beneficial use, such as crop irrigation. If the state’s requirements are met, the landowner receives a permit to use a specified amount of water for the limited purpose of the beneficial use. Although statutes governing prior appropriation vary from state to state, the priority of water rights is usually determined by the oldest recorded permit date.
Under some state laws, water rights, once granted, attach to the land of the permit holder. The permit holder may sell a water right to another party; however, issuance of a water permit does not grant access to the water source. All access rights-of-way over the land of another (easements) must be obtained from the property owner.
Coastal waters
The United Nations Convention on the Law of the Sea, signed in 1982, is the most recent agreement affecting coastal waters to which the United States is a party. The Law of the Sea identifies territorial waters as those extending up to 12 nautical miles (equivalent to 13.8 land miles) from a base line that is the mean low-water line of a coastal country. The law also recognizes Exclusive Economic Zones that extend 200 nautical miles from the coastal base line. All other ocean waters are considered international waters and are also referred to as the high seas.
The Office of Coastal Survey of the National Oceanic and Atmospheric Administration (NOAA) is a part of the U.S. Department of Commerce. NOAA Electronic Navigational Charts (NOAA EOC) offer detailed information on nautical features and can be viewed at www.nauticalcharts.noaa.gov.
Economic characteristics
The four economic characteristics of real property that affect its value as a product in the marketplace are scarcity, improvements, permanence of investment, and area preference.
Four economic characteristics of real estate:
- Scarcity
- Improvements
- Permanence of investment
- Area preference or situs
Scarcity
While a considerable amount of land has not been developed, the supply in a given location that is suitable for a particular use is finite. There is also value in leaving land in its natural condition. Doing so helps preserve species that might otherwise be extinguished and benefits the earth’s environment overall.
Improvements
Building an improvement on one parcel of land can affect the land’s value and use, as well as that of neighboring tracts and whole communities. For example, constructing a new business center or selecting a site for toxic waste storage can dramatically change the value of land in a large area.
Permanence of investment
The capital and labor used to build an improvement represent a large fixed investment. Although a well-built structure can be razed to make way for a newer building, improvements such as drainage, electricity, water, and sewerage remain. The return on such investments tends to be long term and relatively stable.
Area preference
Also known as (“place”), is commonly referred to as “location, location, location.” This economic characteristic refers not only to geography but also to the preference for a specific area. Area preference is based on several factors, such as convenience, reputation, and history. It is the unique quality of these preferences that results in the different price points for similar properties. Location is often considered the single most important economic characteristic of land.
IN PRACTICE
A river runs through a town, dividing it more or less in half. Houses on the north side of the river sell for an average of $170,000. On the south side of the river, identical houses sell for more than $200,000. The two areas have equally desirable amenities, but the south side of the river provides a somewhat better view of the downtown area to the east, which may account for the price differential.
