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Unit 3: Real Estate and Its Appraisal

What is the definition of an appraisal, and what factors influence an opinion of value?
What are the four legal tests used to determine whether an item is a fixture or personal property?
What is the difference between real property and personal property?
What are the four main government restrictions on real estate ownership?
What are the three main types of land description systems, and how do they differ?

Unit Outline

I. Overview

II. Basic Concepts

A. What Is a Real Estate Appraisal?

Definition: The act or process of developing an opinion of value for a property based on market data and professional judgment.

B. Real Estate and Real Property

Real estate refers to the land itself and all things permanently attached to it.

1. Land

Mineral rights Ownership rights to underground minerals such as oil, gas, or coal.
Water rights Rights to use surface or underground water sources.
Air rights Rights to the airspace above a property.
Improved land When land is developed with structures or utilities, it becomes a site.

2. Fixtures

Items affixed to land that are considered real property.
Five tests for determining a fixture (MARIA):
- Method of attachment
- Adaptability of the item for the lands ordinary use
- Relationship of the parties
- Intention of the person placing the item on the land
- Agreement of the parties

3. Trade Fixtures

Items installed by a tenant for business use (e.g., display cases, restaurant equipment).
Unlike regular fixtures, trade fixtures remain personal property and must be removed by the tenant when vacating.

4. Bundle of Rights

Definition: The rights of ownership of real property, including:
- The right to use the property.
- The right to sell or lease the property.
- The right to exclude others.
- The right to transfer ownership.

5. Public Restrictions on Land Use (Government Powers)

Taxation Property taxes fund schools, roads, and public services.
Eminent domain The government can seize private property for public use with compensation.
Escheat If a property owner dies without heirs, the property reverts to the state.
Police power Government authority to enforce zoning, health, and safety regulations.

6. Private Restrictions

CC&Rs (Covenants, Conditions, and Restrictions): Rules set by a homeowners association (HOA) or developer that regulate property use.

Exercise 3-1

III. Legal Descriptions of Land

Appraisers use legal descriptions to accurately define property boundaries.

A. Lot and Block System

Also called subdivision system or recorded plat system.
Uses a subdivision map to define lot boundaries.
Commonly used for residential and commercial properties.

Example: “Lot 5, Block 2, Lakeside Subdivision, City of San Diego, County of San Diego, State of California.”

B. Metes and Bounds System

Definition: Uses physical landmarks and measurements to define property boundaries.
Key terms:
- Point of Beginning (POB): The starting point of the property description.
- Metes: Measured distances.
- Bounds: Natural or artificial boundaries (e.g., trees, fences, rivers).
- Monuments: Fixed markers (e.g., iron rods, stone markers).

C. Rectangular Survey System

Also called the Section and Township System or U.S. Government Survey System.
Used for large tracts of land, especially in rural areas.
Key terms:
- Townships: 36-square-mile areas, divided into 36 sections.
- Base Lines: Run east to west.
- Principal Meridians: Run north to south.
- Range Lines: Vertical lines that define townships.
- Sections: 1-mile-square parcels, containing 640 acres each.

Exercise 3-2

IV. Legal Rights and Interests

A. Freehold Estates (Ownership Rights)

Fee Simple Estate The highest or most complete form of ownership.
- Fee Simple Absolute: No restrictions, inheritable.
- Fee Simple Defeasible: Subject to conditions (e.g., “must remain a park”).
Life Estate Ownership lasts for the lifetime of an individual.

B. Nonfreehold Estates (Leasehold Interests)

Leasehold Estate A tenant’s rights to occupy a property for a fixed term.
Leased Fee Estate The landlord’s interest in a leased property.

Exercise 3-3

V. Other Interests in Real Estate

A. Easements

A right to use another persons property for a specific purpose (e.g., driveways, utility lines).

B. License

A temporary permission to use land (e.g., hunting, parking).

C. Encroachment

Unauthorized intrusion onto anothers property (e.g., a fence built across a property line).

Example: A neighbors garage extends two feet into your property.

VI. Forms of Property Ownership

A. Individual Ownership

Also called “ownership in severalty” (one person owns the property).

B. Co-Ownership (Concurrent Ownership)

Tenancy in Common (TIC) Each owner holds an undivided interest, but shares dont have to be equal.
Joint Tenancy Includes right of survivorship (if one owner dies, their share passes to the surviving owners).
Community Property Used in some states where spouses own property equally.
Tenancy by the Entirety Special form of joint ownership for married couples.

Exercise 3-4

VII. Business and Trust Ownership of Real Estate

A. Corporate Ownership

A corporation owns the property, and shareholders own stock in the company.

B. Limited Liability Company (LLC)

Provides the liability protection of a corporation but allows profits to be taxed like a partnership.

C. Trusts

Land Trusts The trustee holds legal title, but the beneficiary controls the property.
Living Trusts Created during a persons lifetime to manage assets.

D. Special Forms of Ownership

Condominium Individual ownership of a unit with shared ownership of common areas.
Cooperative (Co-Op) Residents own shares in a corporation that owns the building.
Planned Unit Development (PUD) A mix of residential and commercial properties with shared amenities.

Exercise 3-5

Summary

This unit covered the fundamentals of real estate and ownership, including:

Different types of legal descriptions.
Forms of property ownership and interests.
How public and private restrictions impact real estate.

Requirements: 1h

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