Chapter 01:

Real Estate Investment: Basic

Legal Concepts
Copyright ©2008 by The McGraw-Hill Companies, Inc. All 1-1
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Rights Reserved
Learning Outcomes:
After the lesson, students will be able to -
understand the elementary concepts of real estate.
understand the basic concepts of land and real estate
understand the legal rights of ownership and limitation of
land ownership

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 What is Real Estate?

Real estate includes the definition of land as well as all-

natural and man-made improvements that are affixed
(permanently attached) to the land. In practice, the term
“real estate” is used synonymously with the term “reality”
and “real property” to describe the land, improvements,
rights, and incidents of ownership.

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 Land
What is Land?
The land is the solid material of the Earth in whatever natural
form it may be found. This includes the soil, rocks, and other
substances permanently attached by nature (streams, ponds,
plants, etc…).
As an investment perspective, land has both economic and
physical characteristics which give value and enhance
desirability.
- The economic characteristics are based upon scarcity,
demand, utility, and transferability.
- Physical characteristics define land as immovable, permanent,
and non-homogenous (not parcels of land are alike).

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 Land continue…

Although land is generally thought to be only the surface of

the land; in modern practice, ownership includes the rights
to the soil and mineral deposits below the surface, as well
as the air space above the land.

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 CHARACTERISTICS OF LAND/REAL ESTATE

Real estate possesses seven basic characteristics that

define its nature and affect its use. These seven
characteristics fall into two broader categories-- economic
and physical;

ECONOMIC CHARACTERISTICS:
The four characteristics of the land that affect its value as a
product in the marketplace are
-scarcity,
-improvements,
-permanence of investment, and
-area preference:
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 ECONOMIC CHARACTERISTICS: continue…

1. Scarcity: Land, as we know it is scarce, and usability, is

determined by habitability and productiveness. Our planet is
made up of, roughly ¾ open water and ¼ dry land. While a
considerable amount of land remains unused or uninhabited,
the supply in a given location, or of a given quality, is generally
considered to be finite (limited).

2. Improvements: This aspect of real estate can explain how

land can become valuable in any area on Earth. Usually, the
cost of building an improvement will be very expensive, and
today most investors rely on this aspect of investment for real
estate profits. However, as one builds improvements on a
parcel of land, this can reverse affect the value of a different
parcel of land.

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ECONOMIC CHARACTERISTICS: continue…

For example:
The construction of a new shopping center or the selection
of a site for a nuclear power plant can dramatically change
the value of land in any area.
3. Permanence of Investment: Investments can be
structured in all areas of real estate. The capital and labor
costs to build an improvement represent a large fixed
investment. Returns on these types of investments tend to
be long term and relatively stable i.e Padma Bridge.

4. Area Preference: This preference for location is a major

aspect in the appraisal business and is commonly referred
to as situs (meaning “site”). This economic aspect refers
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 ECONOMIC CHARACTERISTICS: continue…

to natural geography as well as people’s preference for a

specific area of real estate. Area preference is based on
several factors such as convenience, reputation, and
history.

Physical Characteristics:
The three physical characteristics of land are
-immobility,
-indestructability, and
-non-homogeneity,

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 Physical Characteristics: continue…

1. Immobility: Land is immovable and stationary, meaning

the geographic location is rigidly fixed.

2. Indestructability: Land is durable and can potentially

last forever. Despite natural or man-made changes that
vary the land, the basic elements will always be there and
remain the same.

3. Non-homogeneity: Land is unique, individual, and no

two parcels are the same. The seller could not switch a
parcel of land purchased by a buyer for a (seemingly)
identical plot of land.
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 Personal vs. Real Property
All property is classified as either real property or personal
property. An important distinction between the two is that -

- real property can become personal property through the

process of severance. i.e. a tree growing on the land is
considered real property or this lumber is later used to
construct a house, then it will once again be considered real
property, as it is affixed to the land

- personal property is movable, and it includes all property

that is not land or improvements. i.e. when the tree is cut down
and turned into lumber it is now considered personal property

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 Personal property continue….

Personal property is transferred with a bill of sale, whereas

real property is transferred by deed. Personal property
may be tangible (corporeal) or intangible (incorporeal):

• Tangible Personal Property: Has physical substance

(furniture, cars, clothing, jewelry, etc…) and also known as
a chattel.

• Intangible Personal Property: No intrinsic value or

material being, the value is derived from what it represents
(stocks, bonds, checks, promissory notes, etc…).

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 Law of affixation (annexation)

Ownership of real property includes everything that is

permanently affixed or annexed to the land. An item is
considered real property when it is permanently attached to
the property. When title to real estate is conveyed; it
includes all buildings, structures, and fixtures, even though
they may not be specifically mentioned in the deed. Unless
there is a written agreement to the contrary, all
improvements automatically pass with title.

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 MANUFACTURED HOUSING
Manufactured housing defines dwellings that are not
constructed on the property, but are built off-site and then
shipped to the location for installation and/or assembly.
The other terms used synonymously with manufactured
housing include “modular,” “panelized,” and “precut.” When
we refer to mobile homes, we refer to personal property as
it is not permanently attached (affixed) to the land. In all
cases before 1976, the term mobile home was used to
describe the factory-constructed or housing-constructed
property.

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 CONCEPTS OF OWNERSHIP
Feudal system and allodial system:
Under early English law, absolute ownership of all land was
vested in the king or sovereign, with the subjects having
only a right to use the land in return for services provided.
This was known as the feudal system and was abolished in
favor of the allodial system, which recognizes the right of
individuals to own land subject to no proprietary control of
the government. The allodial system is used in the People’s
Republic of Bangladesh.
In Singapore, the feudal system is used in land ownership.
The feudal

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 PROPERTY RIGHTS - TENEMENTS,
APPURTENANCES, AND HEREDITAMENTS
Real property is defined as the ownership of the land as well
as interest, benefits, and rights which are related to the
property.
-Tenements are property rights of a permanent nature which
are related to the land and pass with conveyance of the title.
These rights may be tangible (building, fixtures) or intangible
(an easement over a neighbor’s land).
-Appurtenances are rights and privileges that belong to,
and pass with, the title of the property (water rights,
easements, improvements).
-Hereditaments are property, real and personal, which are
conveyed to heirs upon the death of the owner.

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 Bundle of legal rights theory

The inherent rights of owning land are referred to as the

bundle of legal rights. According to the bundle of legal
rights theory, ownership of real estate is compared to a
bundle of sticks (individual yet still tied-together), with each
stick representing an individual right. These rights are:
-possession,
-control,
-quiet enjoyment,
-exclusion, and
-disposition:

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 Bundle of legal rights theory continue…

1. Possession: The owner may live on the land, move

away, or come and go as they please.
2. Control: The owner may control the way in which the
land is used. They may build on the land, leave it vacant,
farm it, mine it for minerals, or lease it to others.
3. Quiet Enjoyment: The owner’s right to use and enjoy the
property without interference from other parties.
4. Exclusion: The owner has the right to keep others from
entering or using the property.
5. Disposition: The owner has the right to sell, will, give
away, dedicate, or otherwise dispose of the land in any
way they choose.

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 Limitations on ownership
Government Powers: An individual’s right, to use and enjoy
a property they own, is limited by certain government powers
to protect the common good of the community. These
powers include taxation, escheat, eminent domain, and
police power:
• Taxation: The government has the right to tax property to
receive revenue to finance necessary public expenditures
(schools, fire stations, hospitals, public employees, etc…).
• Escheat: The government has the right to take title to
property of a deceased person who dies intestate (without
will) and has no heirs. This is to prevent property from
becoming ownerless.

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 Limitations on ownership continue…
• Eminent Domain: The government has the right to take
property from an owner, upon just compensation, for
public purposes. The procedure for taking property
through eminent domain is called condemnation.
• Police Power: The government has the inherent right to
restrict the use of the land to preserve order and to protect
the public health and safety (rent control, zoning laws,
building codes, environmental protection laws, etc…).

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 Private Ownership Or Contractual
Owners may enter into contracts or arrangements which
restrict the use of the land or limit their bundle of rights.
These limitations include leases, mortgages, easements, and
licenses:
[Link]: The owner gives up possession of the property for
a temporary time period.
[Link]: Title to the property is pledged as security for
a loan.
[Link]: A right of way given to another to use the
land for a specific purpose.
[Link]: A privilege to use the land without exclusive
control (lease, tenancy-at-will,

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Flowchart: Ownership of Real Property

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 Title of the Property
 The Meaning of Title
- Title is an abstract term frequently used to link an
individual or entity who owns property to the property
itself. When a person has “title,” he is said to have all of
the elements, including the documents, records, and acts,
that prove ownership.
- Title establishes the quantity of rights in real estate being
conveyed from seller to buyer.

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 Title assurance of the Property
Title assurance refers to the means by which buyers of
real estate “
(1)learn in advance whether their sellers have and can
convey the quality of title they claim to possess, and
(2)receive compensation if the title, after transfer, turns out
not to be as represented.

Title insurance was developed to cure the inadequacies of

title validation accomplished through an abstract and legal
opinion. Title insurance does all that a carefully drawn
abstract and a well-considered opinion by a competent
lawyer are expected to do. In addition, it adds the principle
of insurance to spread the risk of unseen hazards among
many property owners.
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 Title assurance of the Property continue…

What title insurance is supposed to add to the abstract

system and the opinion of skilled lawyers summarized as
follows:
(1) definite contract liability to the premium payer,
(2) reserves sufficient to meet insured losses,
(3) supervision by an agency of the state in which the title
insurance company operates, and
(4) protection to the policyholder against financial losses that
may show up at any future time because of any kind of title
defect, disclosed or hidden.

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 Title assurance of the Property continue…

Kinds of Title Insurance Policies:

There are two kinds of title insurance policies.

The owner’s policy insures the interests of a new property

owner. The owner’s policy is payable to the owner (or to the
heirs of the owner).

The lender’s (or mortgagee) policy insures the interests of

the mortgagee. The lender’s policy is payable to the
mortgagee.

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 Few definitions

- Abstract : An abstract of title is a historical summary of

the publicly recorded documents that affect a title. The
quality of the title conveyed from seller to buyer depends
upon the effect these documents have upon the seller’s
rightful possession of his or her property.
- Deeds: deeds Usually title is conveyed from one person
(the grantor) to another (the grantee) by means of a
written instrument
- Encumbrances on a title, such as easements, leases,
and mortgages (secured interests), do not automatically
make it unmarketable.
- A general warranty deed is the most commonly used
deed in real estate transactions and the most desirable
type of deed from the buyer’s perspective. It offers the
most comprehensive warranties about the title.
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 Title 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 Deed
 Conveys property without seller warranties
 Sometimes called an “as-is” deed

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 Title 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 Deed
 No Covenants
 The least protection to the grantee
 Grantor conveys whatever right “may exist”
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 Recording 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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