Real Estate Principles
Arthur C. Nelson, Ph.D., FAICP
Presidential Professor & Director of Metropolitan Research
University of Utah
January 2009
Real and Personal Property

Real Property = “real estate”
Land
 Fixtures on the Land
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Personal Property
Mobile (such as cars, boats)
 Furniture
 “Tools of trade” such as computers

Tangible & Intangible Property

Tangible
Real property
 Personal property

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Intangible
Stocks, bonds, income-producing contracts
 Promissory notes
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Property Taxes

Residential

Real Property only
 Land
 Improvements
 Total

value
Tax treatment
 Sometimes
lower tax rate
 Often “homestead” exemption that reduces taxable
value

Business

Real property used for business
Variations of Property

Air rights


Metro “sells” air rights over some stations
Mineral rights
Gas, oil, coal, etc.
 Can result in mining from the surface down, and
boring/mining under structures

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Water rights
Littoral – can use water flowing along banks in
navigable waters
 Riparian – same as littoral only applied to nonnavigable waters

Estates – Forms of Ownership
Concurrent Estates

Tenancy in common
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Joint tenancy


Same as tenancy in common but includes “right of
survivorship” on death
Tenancy by the entirety


Each party owns equal share and can sell it
Married couple option; cannot convey share without
spousal consent; right of survivorship
Community property

In 8 states all property acquired during marriage is
jointly owned regardless of who actually buys it.
Condominiums & Cooperatives

Condominium
Unit owned inside-the-walls; pay property tax on it.
 Common ownership of grounds, exterior surfaces
such as roofs, external wall face
 Finance common area maintenance, taxes on
common grounds, insurance with condo fees


Cooperative
Joint owner of single asset like company stock
 Taxes, insurance, maintenance, etc. paid jointly.

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Time-Sharing

Cooperative-type ownership based on units of 52
(one for each week).
Private Ownership Restrictions
Liens
 Easements
 Licenses
 Adverse possession
 Encroachments
 Restrictive covenants

Liens
Claim by one person of another’s property to
assure payment.
 Mortgage liens used by lenders to secure
mortgage with property.
 Mechanics’ liens used by contractors, labor to
secure payment for services and materials.
 Tax liens used by local, state, federal agencies
(IRS) to secure payment of overdue taxes.
 Judgment liens issued by courts to secure
court-ordered payments.

Easements
Right given by one to allow another to use land
for specific purposes.
 Dominant estate  benefiting property.
 Servient estate  property on which easement
is applied
 Easement in gross  access to specified areas
by anyone for specific purpose such as
utility easement (no dominant estate
created)
 Express grant (to a dominant estate) or
reservation (to retain use upon sale)

Terminating Easements
Easements can reduce value of servient estate.
 Easements can have insurance implications for
servient estate
 Termination options:

Agreement  all relevant parties record termination
of easement with local government property
records office
 Abandonment  Servient estate establishes that
easement is no longer used; states vary on time
limits and legal procedures.

License
Temporarily allow one party to use
property in specific way.
 Not recorded easement; usually verbal and
often not easily enforced
 Allowing children to take a short-cut from
school, for example.

Adverse Possession
Someone who uses property for 7-20 years
(depending on state) may acquire a
deed to it.
 “Open and notorious,” “hostile” and
“continuous” tests. Owner thus knew or
should have known and failed to
act/evict.
 Often uses in urban areas with blighted
property.

Encroachments
Someone’s structure or activity
encroaches on or uses another’s
property. (Fence, shrubs, out-building.)
 Form of trespass.
 Sometimes result of faulty surveying or
unknown survey lines.
 If owner fails to act within statutory period
the encroachment can lead to deed by
adverse possession.

Restrictive Covenants
Seller of property limits buyers’ use and use of
subsequent buyers.
 Can be used to limit resale (but resale based on
race/ethnicity is no longer legal).
 Can be used to bind buyer of property into
home owner association and payment of
dues.
 Can be used to protect developers from
opposition until project is finished.
 Normally 20-year limit but covenants can have
automatic renewal clauses.

Public Restrictions on Ownership
Eminent domain
 Zoning, land-use controls
 Police power

Eminent Domain
Land needed for public use or benefit
(highways, urban redevelopment, parks,
flood control, public buildings, etc.).
 Government not acting in malice (such as
retribution against individuals).
 Money offered must be reasonable
 Condemnation proceedings if negotiations to
purchase are not successful.
 Inverse condemnation occurs when owner sues
government to buy land when government
action reduces its value.

Police Power
Police power  Government’s purpose to
protect public health, safety and general
welfare.
 Zoning to restrict land-uses, prevent adverse
impacts of one property on another.
 Building codes to assure public safety.
 Ordinances on noise, odors, pollution, etc.
 However, cannot restrict all uses of property
unless for substantial public benefit without
compensation otherwise “taking” occurs.

Planning

Comprehensive plans
Required in about half the states
 Some states have state-level oversight
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Functional elements
Transportation
 Housing
 Environmental protection

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Implementation
Zoning controls
 Subdivision controls
 Capital improvements programs

Zoning

Functions of zoning:
Regulate use of land
 Manage development density (units per acre) and
intensity (land coverage, square feet per acre)
 Height limitations (fire protection, views, other)
 Bulk

coverage ratio – LCR: percent of land developed
 floor area ratio – FAR: building area divided by land area
 land
Minimum lot size (density control)
 Setback from streets, separation between buildings.

Zoning Relief
Zone changes
 Variances from strict application of regulations
 Special use permits
 Judicial relief – court action
 Nonconforming uses

Use inconsistent with zoning
 Amortization period
 Limited ability to rebuild if structure damaged such
as by fire or flood.

Subdivision Regulations
Manage how land is developed when it is
subdivided into blocks and lots.
 Street design, drainage, utilities.
 Land dedicate for public use such as roads,
parks, utility easements
 Process:

Pre-application conference
 Preliminary plat (public hearing)
 Final plat (sometimes also a public hearing)

Exactions
Development impacts on communities so
“impact mitigation” strategies may be used
 Right-of-way dedications
 Mandatory dedications of land for parks, school
sites, other purposes
 Impact fees to cover off-site facility costs of new
development (such as need for more streets
elsewhere)
 Sometimes affordable housing mandates.
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The Real Estate Broker
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Functions

Market property for sale
listing agreement  may be exclusive so only
the broker can sell it or non-exclusive so other
brokers can help sell
 Advertising in newspapers, TV, brochures, other.
 Posting in “multiple listing” services
 Negotiate
Act as agent of property owner
 Identify qualifying buyers
 Assist seller in negotiating best possible terms
considering objectives of the owner
 Manage sale and “closing” process

Brokerage
Broker is a person licensed by the state to
represent seller, work as seller’s agent,
and facilitate marketing and sale
 Brokerage is one or more offices, each
managed by a broker, that may also
employ sales people who are licensed
to sell real estate but not licensed to be
a broker.

Broker Compensation

Commissions:
5-7% for homes
 10% for land
 2-6% for nonresidential (lower rate for higher value)


Splitting commissions
Listing agent gets 50%; broker of listing office gets
half of that.
 Selling agent gets 50%; broker of selling office gets
half of that.
 Broker listing and selling gets all the commission.
 Non-listing selling agent gets 25% -- or less.

Broker Duties
Fiduciary responsibility to seller – keep best
interest of seller at all times.
 Fraud – cannot mislead, make false
statements.
 Fair housing compliance – cannot “steer”.
 “Buyers” brokers represent buyers but
cannot represent seller of same property
buyer wants.

Real Estate Contracts

Necessary Elements
Offer
 Acceptance
 Consideration (usually money)
 Parties have capacity to buy/sell (they are not
mentally impaired or doing it against their will).
 Lawful purpose intended with possession.
 Agreements in writing (few exceptions)

Features of Real Estate Contract
Description of property and fixtures to be sold
 Purchase price


Earnest money deposit (whether refundable noted)
Title condition
 Escrow (who holds earnest money and
transfers title and money at closing)
 Property destruction before sale
 Other provisions/conditions of transaction
 Brokers commission amount, who pays

Options and Right of Refusal

Options
Typically done by developers to control land without
buying it until “entitlements” to build are certain
 “Option to buy” has a price, time limit, and due
diligence requirements of buyer.
 Sellers often get more when they sell land with an
option because buyers will go through the process
of improving land value through rezoning,
development approval.


Right of Refusal  Seller promises to give
buyer the first right to refuse to buy at a
price another is willing to pay.
Performance and Breach
Buyer and seller have to perform to
conclude (close) the sale.
 If one does not perform the other can sue
to compel “specific performance”.
 Breach of contract can void the contract
and sometimes require one party to
compensate the other for costs and
losses.

Title

Basics
Without proper “title” ownership is questionable
 “Marketable” title is free and clear of all past,
present and future claims by others.
 “Insurable” title is one that an insurance company
is willing to insure and thus pay the buyer for
losses if title turns out to be not marketable.
 Title “perfect of record” means public records
(county clerks, city recorders, etc.) show no title
defects.

Title
Title search process reviews public records for
prior owners, claims, covenants, restrictions,
liens, etc.
 Title insurance results in an insurance premium
paid once. Title insurance warrants that
there are no qualifications to condition of title
except those noted in title search. Premium
is based on value the buyer wants to insure
but not more than the purchase price.

Deeds and Title Closing

Deed Food Chain

General warranty deed  Seller:
 Covenants
against encumbrances not on public record
and has fee simple interest in the title and no liens.
 Has right to convey property (covenant of seisin)
 Covenants quiet enjoyment meaning title cannot be
disturbed by a third party claim or lien at time of sale.
 Will execute future documents to perfect title (covenant of
further assurances)
 Will always defend the title as conveyed (warranty
forever).

Deed Food Chain
Special warranty deed  Limits sellers warranties
to events occurring during seller’s ownership
 Bargain-and-sale deed  Implies only that the
seller has the right to sell but does not warrant the
condition of title. Also known as “warranty deed
without covenants.”
 Quitclaim deed  Transfers interest of seller in a
property even if seller has no interest. Often done
to start a title chain on land acquired through
adverse possession where there was no owner of
record.

Title Closing

Buyer’s Responsibilities:
Obtain financing based on terms disclosed in the
contract of sale.
 Obtain opinion of title’s validity (needed before
closing to assure title can be transferred).
 Survey the property.
 Purchase property insurance (to protect seller from
damages after closing)
 Inspect the property.


Seller’s responsibilities:
Prepare the required deed.
 Remove all encumbrances except those of public
record (such as easements and covenants of
previous owners).
 Prepare papers with respect to the seller’s loan if
property is purchased on a contract rather than
buying the seller out entirely.
 Obtain and termite and pest-inspection bond if the
sale involves a structure.

Costs at Closing

Buyer’s costs at closing:
Loan originating fee to lender
 Loan discounts or points
 Appraisal fee and credit-report fee
 Lenders (bank’s) inspection fee
 Mortgage guarantee insurance premium (if down
payment is less than 20% of purchase price)
 Buyer’s closing attorney’s fee and attorney’s fee of
mortgage lender used by buyer.
 Hazard (flood) insurance premium if needed.
 Recording fees
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Seller’s costs at closing:
Real estate brokerage commission.
 Attorney’s fees for preparing deed and other
documents.
 Tax transfer stamps (real estate transfer tax fees).
 Payment of any property taxes due.
 Recording fees
 Typically one-half of escrow closing fees with buyer
paying the other half.
