Re appr unit 3

Unit 3: Legal Considerations in Appraisal

 Interests in Real Property
• Introduction
o An interest includes any of the various rights, privileges,
powers, and immunities with respect to any kind of property,
including real property.
o A possessory interest means the present right to physically
occupy land and to exclude others from that same land.
o A non-possessory interest is one that cannot presently be
exercised today but which may or will become possessory in
the future or under appropriate circumstances.
o A present interest in land is one that can be exercised by the
owner today.
o A future interest is one that cannot be exercised today, but
which might be exercised in the future.

 Interests in Real Property (continued)
• Estates
o An estate is an interest that is (or may become)
possessory and that can be measured in terms of
duration.
o An estate with indefinite duration or that is measured
by the length of someone’s life is classified as a
freehold estate.
o Whereas, an estate with a fixed or determinable
duration is classified as a nonfreehold estate.

• Estates
o Freehold Estates
 Most complete form of ownership and includes the most
rights
 The types of freehold estates are fee estates and life estates.
 A fee simple estate, sometimes known as a fee simple or
estate in fee, is the most complete form of ownership.
• A fee simple absolute is a freehold that includes all the rights
to sell, exclude others, finance, and do any other thing with
real property that the law allows.
• A property owner may impose qualifications, conditions, or
restrictions when transferring title to property by deed or
written agreement.
o These freehold estates with property conditions or
restrictions are known as fee simple defeasible estates or
defeasible fees.

• Estates
o Freehold Estates
 A life estate is a present interest that gives its owner (the life tenant)
a possessory interest for the length of a measuring life.
• The measuring life is usually the grantee’s life—but it does not have to
be. It can even be created on the life of a designated person who has
no interest in the property as the measuring life—known as pur autre
vie.
• An estate in reversion is a life estate in which the property owner
(grantor) retains a future right to the property after the life tenant’s
death (or the death of a designated person).
• Instead of keeping a reversionary interest, the grantor can identify
someone to receive the property when the life tenant dies. That
interest is known as a remainder and the person who owns the estate in
remainder is the remainderman.
o A remainder is a future interest that takes effect upon the expiration
of a life estate when the life tenant dies.

• Estates
o Freehold Estates
 Life estate
• The grant reserving a life estate is probably the most commonly used
life estate. In this type of life estate, the grantor sells the property but
reserves the right to live on the property until his or her death.
o Nonfreehold Estates
 A nonfreehold estate is also known as a less-than-freehold estate or
a leasehold, which is a tenant’s possessory estate in land or
premises.
 The owner of the leased property is called the lessor, and the tenant
is called the lessee.
 A lease creates two types of estates. The owner’s fee estate becomes
a leased fee estate and the tenant owns a leasehold estate.
 During any leasehold, the lessor has a reversionary interest because
at the end of the lessee’s term, the property reverts to the lessor.

• Estates
o Nonfreehold Estates - Types of Leaseholds
 A periodic tenancy (estate from period-to-period) refers to a
leasehold interest that is for an indefinite time.
• The most common version of a periodic tenancy is the month-
to-month tenancy, which requires 30 days notice to quit.
 A tenancy for years lease has a fixed term and definite end
date.
• A tenancy for years does not actually have to be for a term of
years, but refers to any rental of property with a specific
beginning and ending date.
 A tenancy at sufferance is often referred to as a holdover
tenancy.
• It typically occurs when the tenant’s original lease expires and
there is no agreement for an extension or the conversion of
that lease to a month-to-month tenancy.

• Estates
o Nonfreehold Estates - Types of Leaseholds
 When there is no written agreement between the owner
and tenant, the tenancy is known as a tenancy at will.
• A tenancy at will has no specified term and often no rent is
paid or the rent is offset by some form of service.
• The tenancy may be ended by the unilateral decision of
either party.

• Estates
o Nonfreehold Estates - Lease Provisions
 A gross lease means that the tenant pays a fixed amount of
rent, and the owner pays all the expenses of ownership, such
as maintenance, insurance, taxes, and assessments.
 A net lease means that the tenant pays rent plus at least
some of the ownership expenses.
 In a percentage lease, the tenant pays a minimum monthly
amount plus a percentage of the gross receipts from the
business.
 The amount over the minimum that the tenant pays is called
overage rent.
 Another alternative is to establish a graduated lease that
contains an escalator clause that allows for increases in rent
based on increases in the consumer price index or some
other economic indicator.

• Encumbrances
o Financial Encumbrances
 A financial encumbrance is one that affects the title to
property.
 A financial encumbrance that creates a legal obligation to
pay is known as a lien.
 A specific lien is one that is placed against a certain
property, such as a mechanic’s lien, deed of trust, and
property tax lien.
 A general lien affects all property of the owner, such as a
judgment lien or federal or state income tax liens.

• Encumbrances
 Voluntary Liens
• An owner may choose to borrow money, using the property as security
for the loan, creating a voluntary lien.
• A voluntary lien does not have to be recorded, but if it is not recorded,
then other parties (such as purchasers and lenders) may not be bound
by it.
• Security instruments are the most common voluntary liens.
• A security instrument is a legal document that is given by the borrower
to hypothecate (pledge) real property to the lender as collateral for a
loan.
• Deeds of trust and mortgages are the most common types of security
instruments used in real estate financing.
• A deed of trust involves three parties—the borrower (trustor), the
lender (beneficiary), and a neutral third party (trustee). A mortgage
involves two parties—the mortgagor (borrower) and the mortgagee
(lender).

• Encumbrances
 Involuntary Liens
• If an owner fails to pay taxes, assessments, or other debts, a lien may
be placed against his or her property without permission, creating an
involuntary lien.
• A judgment is the final determination by the court of the rights of the
parties in a lawsuit.
o A judgment does not automatically create a lien.
o A summary of the court decision, known as an abstract of judgment,
must be recorded with the county recorder.
o The court may force a sale of the property to satisfy the judgment by
issuing a writ of execution. The sale is called an execution sale.
o If the judgment debtor pays off the lien or reaches an agreement
with the judgment creditor, the judgment creditor will record a
document known as a notice of satisfaction of judgment
acknowledging payment of the judgment.

• Encumbrances
 Involuntary Liens
• A writ of attachment is used by the court to hold the real or personal
property of a defendant as security for a possible judgment pending the
outcome of a lawsuit.
• A lis pendens (also called a pendency of action) is a recorded notice that
indicates pending litigation affecting the title on a property.
o It acts as notice to prospective lenders or buyers that title to the property
is disputed.
• A tax lien is an involuntary, financial encumbrance placed upon property as a
claim for payment of a tax liability.
o When a property tax is assessed against a property, a property tax lien for
that amount is placed on the property.
o Special assessments are levied against property owners to pay for local
improvements, such as underground utilities, street repair, or water
projects.
 Payment for the projects is obtained through a special form of borrowing called
bonds.
o A mechanic’s lien is a statutory lien that secures payment for labor or
materials supplied in improving, repairing, or maintaining real property.

• Encumbrances
o Non-Financial Encumbrances
 A non-financial encumbrance is one that affects the physical use or
condition of the property, such as easements, profit-à-prendres, and
restrictions.
 An easement an interest owned by one person in the land of another
person.
• An appurtenant easement is an easement that is connected to a
particular property and is transferred along with that property.
o The dominant tenement is the land receiving the benefit of the
easement.
o The servient tenement is encumbered by the easement and the land
is being used by someone other than the owner.
o An affirmative easement is one that requires the owner of the
servient estate to do something to benefit the dominant estate.
o An easement is called a negative easement if it prohibits a property
owner from doing something on his or her estate because of the
effect it would have on the dominant estate.

• Encumbrances
 A non-financial encumbrance is one that affects the physical
use or condition of the property, such as easements, profit-
à-prendres, and restrictions.
 An easement an interest owned by one person in the land of
another person.
• An easement in gross is a personal right of one person (or
company) to use land owned by another.
• Underground easements lie below the surface of the ground.
They include pipeline easements of all types, such as storm
drainage, sewer, water, and underground conduits for
electrical cable.
• Overhead easements include power line easements.
• Surface easements include road easements.
• A conservation easement is an interest in real property
voluntarily conveyed by the owner of the property to qualified
nonprofit organizations.

• Encumbrances
 Easement
• An encroachment is the intrusion into, under, or over the
property of another without that person’s permission.
 Profit-à-Prendres
• A profit-à-prendre is the right to enter another’s land to
remove soil or substances of the soil (water, minerals, timber,
fruit, game, or other resource).
 Private Restrictions
• A restriction placed by a private owner, a developer, or the
government, is a limitation placed on the use of the property.
• A covenant is a promise to do or not do certain things.
• A condition is a limitation imposed by a grantor in a deed that
can cause the ownership of the property to revert to the
grantor who imposes the condition if the condition is not
satisfied.

• Encumbrances
 Public Restrictions
• Public restrictions on use of real property are those associated
with government intervention.
• Most cities and counties have a general or comprehensive plan
to control land use and growth within their boundaries.
o The general plan is the starting point for land use and
determines the physical development of the city or county.
• Zoning is the foundation of contemporary planning.
o A zoning ordinance divides a city or county into different
geographic zones, identifying what uses can and cannot be
made on each parcel.
o A typical zoning code will first contain a list of different
zoning districts, which are all of the possible classifications
that might be given to any particular parcel of land.

• Encumbrances
• Zoning is the foundation of contemporary planning.
o Special types of zoning:
 Aesthetic zoning regulates the appearance of buildings in the
area.
 Historic zoning helps protect historic buildings within a
specified area referred to as a historic district.
 Cumulative zoning allows so-called higher uses (residential)
to exist in lower use zones (industrial), but not vice versa.
 Bulk zoning controls density and prevents overcrowding.
 Incentive zoning allows a developer to exceed the limitations
set by a zoning law if the developer agrees to fulfill conditions
specified in the law.

• Encumbrances
• Land Uses – Permitted and Conditional.
o Permitted uses meet the current use requirements within the district.
o Conditional uses do not meet the current use requirements; however,
a conditional use may be allowed by obtaining a special permit.
o A conditional-use permit or special-use permit allows a land use
that may be incompatible with other uses existing in the zone.
o Any uses that are not listed as either allowed or conditional are
presumptively prohibited uses by the zoning code.
o If a city or county changes the zoning of a parcel so that the existing
uses are no longer allowed by the new zoning, those existing
activities are known as nonconforming use.
o A variance is a local land use decision allowing a use that is not
strictly in compliance with local zoning or building regulations.
o Rezoning is converting the use of a property from one zoning
category to another.

 Ownership of Real Property
• Introduction
o Title is the evidence that the owner of land is in lawful
possession; it is the proof of ownership.
o Tenancy refers to a mode or method of ownership or holding
title to property.
o An undivided ownership interest is an interest held under
the same title by two or more people, whether their rights
are equal or unequal in value or quantity.
• Separate Ownership
o Ownership by one person or one entity, such as a
corporation
 Property owned by one person or entity is known as sole and
separate ownership or ownership in severalty.

 Ownership of Real Property (continued)
• Fractional Ownership Interests
o When two or more persons or entities own property at the
same time with undivided use, fractional ownership interests
are created because each owner has a fraction of the whole.
o Concurrent ownership, or co-ownership, refers to the
ownership of real property by more than one person. Types
of concurrent ownership include tenancy in common, joint
tenancy, and marital property (community property or
tenancy by the entirety).
 A tenancy in common exists when two or more persons are
owners of an undivided interest in a single estate.
• Undivided interest means that, although their ownership
interests are not necessarily equal, they each have the right to
use the whole property.

o Concurrent Ownership
 When two or more parties own real property as co-owners,
with the right of survivorship, it is called joint tenancy.
• The right of survivorship means that if one of the joint tenants
dies, the surviving joint tenant automatically becomes sole
owner of the property.
• Four Unities of Joint Tenancy.
o Unity of time (created among all owners at the same time)
o Unity of title (acquired on the same deed or will)
o Unity of interest (equal as between or among all joint
tenants)
o Unity possession (rights of use are co-equal)

o Concurrent Ownership
 Forms of marital property ownership vary from state-to-
state.
 The two most common forms are community property and
tenancy by the entirety.
• Separate property is property either spouse owned before
marriage and property either spouse acquires by gift or
inheritance during marriage.
o Community property is all other property acquired by
either spouse during a valid marriage.
• Tenancy by the entirety is another form of marital
ownership in which each spouse has an undivided interest
in the entire property and the right of survivorship.

o Business Ownership
 A sole proprietorship exists when a single individual files with the
state and then operates a business with no other owners.
 If the owner decides to operate under a different type of name, such
as Best Bakery, then the owner would have to file an Assumed Name
Certificate or a DBA—doing business as certificate with the county
clerk.
 A partnership is one form of business organization.
 A corporation is a legal entity, which has a separate legal identity
from its owners or members.
 An S-corporation is a business entity that operates as a corporation,
has the tax advantages of a partnership, and passes along any profits
or losses through to shareholders.
 A limited liability company (LLC) is a business entity that combines
the tax advantages of a partnership and the limited liability of a
corporation, but does not require any advanced financial reporting or
the complicated structuring that a corporation normally requires.

• Common Interest Developments
o A common interest development (CID) is a development involving a
combination of individually owned lots or units coupled with common
area parcels or spaces.
o Common interest developments include planned developments,
condominium projects, cooperatives, and community apartment
projects.
 A planned unit development (PUD) is a community of clustered single-
family detached residences, townhouses, garden apartments, and other
types of residences, with ample open space, community recreational
facilities, and sometimes local shopping and employment centers.
 A condominium consists of a separate fee interest in airspace and
everything contained within (the unit), plus an undivided interest in all
common or public areas of the development.
 A cooperative (stock cooperative) is different from most other ways of
owning real property because a corporation holds title to all of the real
property of the cooperative.
 A community apartment project is a development in which an undivided
interest in land is coupled with the right of exclusive occupancy of any
apartment located in the project.

• Timeshares
o A timeshare is the common ownership of a single piece
of property by an association of people with each
owner having the exclusive right to occupy a unit for a
specified period each year.
o Timeshare ownerships, which are also known as
interval ownerships, are usually for specific blocks of
time per year.

 Transfer of Ownership
• Introduction
o The act of transferring or conveying property to
another—voluntarily or involuntarily—is called
alienation.
o Property is acquired by transfer when, by an act of the
parties or of law, title is transferred from one person
to another by means of a written document.
 Real property is most commonly transferred from one
person to another by a voluntary transfer, such as the sale
of a home.
 Involuntary alienation is the transfer of property against
the wishes of the owner.

 Transfer of Ownership (continued)
• Introduction
o The act of transferring or conveying property to
another—voluntarily or involuntarily—is called
alienation.
o Property is acquired by transfer when, by an act of the
parties or of law, title is transferred from one person
to another by means of a written document.
 Real property is most commonly transferred from one
person to another by a voluntary transfer, such as the sale
of a home.
 Involuntary alienation is the transfer of property against
the wishes of the owner.

• Deeds
o A deed is a written instrument that is used to transfer title to
real property from one person to another.
o The grantor is the person conveying the property, and the
grantee is the person receiving the property or to whom it is
being conveyed.
o Deeds commonly used for private grants include warranty
deeds, grant deeds, quitclaim deeds, and gift deeds:
 A warranty deed is a document containing five implied
warranties from the grantor to the grantee.
• After-acquired title means any benefits that come to the
property after a sale must follow the sale and accrue to the
new owner.

• Deeds
o Deeds commonly used for private grants include warranty
deeds, grant deeds, quitclaim deeds, and gift deeds:
 The grant deed is another frequently used instrument to
transfer title. A grant deed contains two implied warranties
by the grantor.
• One is that the grantor has not already conveyed title to any
other person, and the other is that the estate is free from
encumbrances other than those disclosed by the grantor.
 A quitclaim deed has no warranties.
• The grantor of a quitclaim transfers any interest the grantor
may have at the time the deed is signed.
 A gift deed is used to make a gift of property to a grantee,
usually a close friend or relative.

• Operation of Law
o Sometimes property is transferred by the operation of law or
court action.
 It is usually an involuntary transfer involving foreclosure or is
the result of a judgment or some other lien against the title.
o Foreclosure is the legal procedure lenders use to terminate
the trustor or mortgagor’s rights, title, and interest in real
property by selling the property and using the sale proceeds
to satisfy the liens of creditors.
o A partition action is a court proceeding to settle a dispute
between co-owners (joint tenants or tenants in common)
about dividing their interests in real property.
o A quiet title action is a court proceeding to establish an
individual's right to ownership of real property against one
or more adverse claimants.

o A tax sale is the forced sale of real property (usually
via an auction) by a taxing authority (usually the
county) to satisfy delinquent taxes along with any
penalties and costs.
 Persons who buy such property receive a tax deed.
o An execution sale is a forced sale of property under a
writ of execution with the proceeds used to satisfy a
money judgment.
 A sheriff’s deed is issued by the sheriff of the county
where real property is located when the property goes
through a sheriff’s sale to satisfy a civil court judgment
against the property owner.

o Eminent domain is the power of the government to
take private property for public use after paying just
compensation to the owner.
 Just compensation is fair and reasonable payment due to a
private property owner when his or her property is
condemned under eminent domain.
 Condemnation is the process by which the government
acquires private property for public use, under its right of
eminent domain.
 Inverse condemnation is the process in which a private
party can argue that activity by a public entity has
effectively caused a “taking.”

 Importance of Recording
• Recording Process
o Acknowledgment is a formal declaration before a notary public or
certain public officials, by the person (grantor) who signed (executed)
the instrument (deed) that he or she in fact did execute (sign) the
document.
 To be valid, documents must be recorded by the county recorder in the
county within which the property is located.
• Effect of Recording
o Recording any conveyance pertaining to real property (deed or lien)
gives constructive notice of its contents to subsequent purchasers and
mortgagees.
o Constructive notice is imputed by law, which means that everyone is
presumed to have knowledge about a particular recorded document,
because it can be looked up in the public records.
o If a person has direct, express information about the ownership interest
of a property, it is called actual notice.
o The chain of title is a sequential record of changes in ownership
showing the connection from one owner to the next.

 Importance of Recording (continued)
• Priorities in Recording
o Recording laws are meant to protect citizens against fraud
and to give others notification of property ownership.
o Priority means the order in which deeds are recorded.
o To obtain priority through recording, a buyer must be a
good faith purchaser and record the deed first.
• Contracts
o A contract is a legally enforceable agreement made by
competent parties, to perform or not perform a certain act.
o Contracts may be classified as express or implied, bilateral
or unilateral, and executory or executed.

• Contracts
o In an express contract, the parties declare the terms of
the agreement and put their intentions in words, either
orally or in writing.
o An implied contract is demonstrated by conduct rather
than by words.
o A bilateral contract is an agreement in which each
party promises to perform an act in exchange for the
other party’s promise to perform his or her part of the
agreement.
o A unilateral contract is a contract in which a party
promises to perform without the expectation that the
other party will perform.

• Contracts
o A contract that remains to be performed by one or both
parties is referred to as an executory contract.
 In an executed contract, all parties have performed according
to the agreement.
 An executed contract is a sales agreement that has been
signed by all parties involved in the transaction.
o In order for a contract to be legally binding and enforceable,
there are four requirements: (1) legally competent parties,
(2) mutual consent between the parties, (3) lawful object,
and (4) sufficient consideration.
 Parties entering into a contract must be legally capable of
contracting or competent.

• Contracts
there are four requirements: (1) legally competent parties, (2)
mutual consent between the parties, (3) lawful object, and (4)
sufficient consideration.
 Mutual consent (or mutual assent) is sometimes called a “meeting of
the minds.”
• It is an offer by one party and acceptance by the other party.
• Both parties must genuinely consent to the contract.
• An offer shows the contractual intent of the offeror, or the person
making the offer, to enter into a contract.
• That offer must be communicated to the offeree, the person to whom
the offer is being made, and the offer must be definite and certain in its
terms.
• An acceptance is an unqualified agreement to the terms of an offer.
• If the original terms change in any way in the acceptance, the offer
becomes a counteroffer, and the first offer terminates.

• Contracts
there are four requirements: (1) legally competent parties,
(2) mutual consent between the parties, (3) lawful object,
and (4) sufficient consideration.
 Even though the parties are capable, and mutually agreeable,
the object of the contract still must be lawful.
 Legally, all contracts require sufficient consideration or
payment.
• Consideration may be a promise for a promise, money for a
promise, money for property, or goods for services.
• Terms that denote acceptable consideration include valuable,
adequate, good, or sufficient consideration.

• Contracts
o Void and Voidable Contracts
 A void contract refers to a “contract” that is not really a
contract at all.
 A valid contract is a contract that has all required
elements and is therefore binding and enforceable.
 An unenforceable contract is valid, but for some reason
cannot be proved by one or both of the parties.
 A voidable contract is a contract that is valid and
enforceable on its face, but may be rejected by one or
more of the parties.

• Contracts
o Interpreting Contracts
 The statute of frauds, a law in every state, requires that
certain contracts be in writing to prevent fraud in the sale
of land or an interest in land.
 Parol evidence refers to the oral discussions that precede
the parties’ reduction of those discussions into a written
agreement.
• The parol-evidence rule relates to when such oral promises
can and when they cannot, be considered by a court when
it interprets a contract.
o Discharge of Contracts
 Discharging a contract refers to the cancellation or
termination of a contract.

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