1 Chapter 1 An Introduction to Real Estate Investments: Legal Concepts

2 Overview Definitions Property Rights and Estates Interest, Encumbrances, and Easements Assurance of Title Method of Title Assurance Recording Acts Limitations on Property Rights

3 Definitions Real Estate: Land and the improvements constructed on it Real Property: Ownership rights associated with real estate, including the rights to possess, use, enjoy, and dispose real estate, as well as the right to exclude others from these rights Real estate finance is the study of the institutions, markets, and instruments used to transfer money and credit for the purpose of developing or acquiring real property

4 Property Rights Property Rights: the right of a person to the possession, use, enjoyment, and disposal of his or her property Without ownership some of the rights can be acquired on real estate – lessee A lender who does not possess the rights of real estate, his or her interest is secured by it

5 Estates Estate: All that a person owns Real Estate => Real property owned Classifications of Estate Estates in possession – Immediate rights to estate Freehold estate: Indefinite use as wished. Freehold estate may have limits. For example, Life Estate lasts as long as the life of the owner Leasehold estate: Expires at a particular date Estate not in possession – Future rights to estate Reversion: The holder of an estate in land (the grantor) conveys to another person (a grantee) a present estate in the property that has fewer ownership rights than the grantor’s own estate and retains for the grantor or the grantor’s heirs the right to take it back, at some time in the future, the full estate that the grantor enjoyed before the conveyance Remainder: A remainder is the future estate for the third person

6 Interest, Encumbrances, and Easements Interest: A right or claim on real property, its revenues, or production Encumber / Pledge: An owner can pledge his property as a condition to obtain a loan (mortgage – dead pledge (gage)) Easement: The right to use land that is owned or leased by someone else for some special purpose

7 Assurance of Title Title: Links an individual or entity who owns property to the property itself Abstract of Title: A historical summary of the public recorded documents that affect a title Title exists for freehold estates. Leasehold estate is created by a contractual agreement Deed: A document that conveys the title from one person (the grantor) to another (the grantee) Title assurance is a way of making sure that 1) the sellers have and can convey the quality of title they claim to posses and 2) receive compensation of the title, after transfer, turns out not to be as represented

8 Method of Title Assurance Warranty: General warranty deed: The grantor warrants that the title is free and clear of any claims other than those listed in the deed Special warranty deed: The grantor makes the same warranty except that it is limited to defects and encumbrances that occurred only while grantor held the title to the property Quitclaim deed: Offers the least protection. No warranties made Opinion: Opinion of a lawyer regarding quality of title after a title search is conducted. Lawyer is not responsible for defects in the title not disclosed therein

9 Method of Title Assurance Title Insurance: Provide protection for defects that were not known at the time of title transfer. It costs one time insurance premium payment.

10 Recording Acts Provide a publicly accessible system for assessing and establishing claims or interest in real estate as against all other parties They also provide set of rules for resolving disputes Mechanics’ lien is not publicly disclosed. These lines are for unpaid contractors, workers, and material suppliers

11 Limitations on Property Rights Government Restrictions: Land use regulations at the state and local level – zoning ordinance (allowable uses, height restrictions, parking requirements, building permits-codes-inspections) Private Deed Restrictions: Property owners may incorporate certain deed restrictions that limit the use of property by all owners, including future owners