1-1Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved

Chapter 01: Real Estate Investment: Basic

Legal Concepts

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

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Property Rights and EstatesProperty Rights and Estates

Real property vs. personal property Estates

– Based on Rights: Possession vs. Not in Possession– Based on Possession and Use: Freehold vs.

Leasehold

Possessory estates– Freehold

Fee Simple Estates Life Estates

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EstatesEstates

Nonpossessory Estates: Future Estates– Reversion– Remainder

Leasehold EstatesEstate for YearsEstate from Year to Year

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Additional InterestsAdditional Interests

An interest is a right or claim on real property, its revenues, or production.– A common example of an interest is when an owner

of real estate pledges or encumbers his property as a condition for obtaining a mortgage. The lender is said to have a secured interest.

An easement is a nonpossessory interest in land. The right is for the use of the land for a special purpose. – Examples include rights of way for road access and

utility lines.

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Title AssuranceTitle Assurance

Title Assurance The Meaning of Title

– Abstract Term– Quantity of Rights Conveyed– Abstract of Title– Title Chain

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Title AssuranceTitle Assurance

Deeds– Grantor & Grantee– General Warranty Deed

Covenant that the grantor has good titleCovenant that the grantor has the right to convey

the propertyCovenant to compensate the grantee for loss of

property or eviction as a result of a superior claimNo encumbrances on title except those noted

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Title AssuranceTitle Assurance

Deeds– Special Warranty Deed

Limits the covenants to the ownership duration of the current grantor.

No guarantees on the ownership of prior grantors.

– Bargain and Sale DeedConveys property without seller warrantiesSometimes called an “as-is” deed

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Title AssuranceTitle Assurance

Deeds – Sheriff’s Deed-Trustee Deed

Bargain and sale deed received by a buyer from a foreclosure or other forced sale by sheriff or trustee

No warranties are added

– Quitclaim DeedNo CovenantsThe least protection to the granteeGrantor conveys whatever right “may exist”

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Title AssuranceTitle Assurance

Abstract & Opinion– Title search– Study of relevant records– Lawyer’s opinion on title

Is it good and marketable?Are there any clouds on title? Is there a break in the chain of title?

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Title InsuranceTitle InsuranceWhy Title Insurance and not Abstract and Opinion?1. Definite contract liability to the premium payer2. Reserves sufficient to meet insured losses3. Supervision by an agency of the state4. Protection to the policyholder against financial

loss because of any kind of title defect, disclosed or hidden

While an abstract and opinion method may still be used because of cost considerations, in general title insurance is used. As a general rule, lenders will require that a buyer use title insurance.

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Title AssuranceTitle Assurance

Title Insurance– One time premium – Unseen Hazards in the Public Record

Risk is spread among many property owners

– Owners’ Policy Insures the interest of a new owner

– Lender’s Policy Insures the interest of the lender

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Recording ActsRecording Acts

Recording protects the interest of the owner

Constructive Notice– A person is deemed to have whatever

information is in the public record Mechanics Liens

– May be recorded “after the fact” – Seller’s affidavit– Lien waiver

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Limitations on Property RightsLimitations on Property Rights

Government Restrictions– Police Power

Zoning, building codes, etc.

– Eminent DomainEminent domain is relatively expansive; depending

on the state, government has relatively broad powers on what property they may take possession of through eminent domain and for what purpose.

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Limitations on Property RightsLimitations on Property Rights

Private Restrictions– Deed restrictions– Subdivision restrictions