Welcome! What we will learn today includes the concept of real estate as well as titles and their attributes; types of tenancy and types of properties; and definition by measurement using the township as the standard; possession of property; Deeds and their conveyance from giver to receiver; restrictions use imposed both privately and publicly; and mortgages; how they are transferred and how they affect the larger financial markets.
First, we will start with the concept of real estate. How can we define it? The elemental concept of real estate–the American tradition of property rights–is derived largely from the Anglo-Saxon tradition.
This concept of real estate begins with Nordic cosmology, early informal English tradition, Saxon common law, and the English Magna Carta.
Starting along a shoreline, we can visualize property by looking at a point on the horizon. To the right, we view the Sea; to the left, the Earth; above we view the Air; and by focusing downward beneath the surface, the Core.
Next, we face inland and draw a horizon line. Above the horizon we view the Sky that helps us to determine air rights, the height of buildings, etc. Then, we view the Ground as the surface of all the Earth, whereas, the Core below helps to define mineral rights.
As we face away from land out to Sea, we can mark a horizon line with the Sky above and the Sea below. Generally speaking, we can see about twelve to fifteen miles out to Sea on a clear day because the curvature of the earth. This application of line of sight helps to define the delineation between sovereign states and international waters.
Next, let’s talk about Titles and the various attributes of these documents. We start with the Title known as a “Fee Simple.” This Title is the most common one. Generally, ownership of residential property is by Fee Simple.
This Title reflects a bundle of rights, the right to: 1) dispose of the property, to use sell or give it away; 2) the use of the property; 3) possession of that property, which is what the Title’s about and; 4) the ability and right to exclude others from using the property.
The Differences between Real Estate and Real Property
Real Estate plus the Title equals what we call Real Property and Freehold Tenancy. This tenancy has an indefinite duration of time.
Freehold-Estate Tenancy can extend perpetually and can be passed from one party–one generation–to another. The Freehold may be Fee Simple.
Alternately, the tenancy could be a Life Estate for which someone has the right to remain on a property (in a house) until s/he passes away. Then, it is turned turned over to another party, by prearranged agreement. This party is referred to as the Remainder Man (a traditional term).
Title is equal to the Estate minus the tenancy. Therefore, we can define Real Estate as a Bundle of Rights that includes the rights of Disposition, Use, Possession, and Exclusion. We can abbreviate these rights with the acronym D. U. P. E.
A Non-Freehold extends for a limited duration of time, the length of time that a person may hold it. Therefore, it is Non-Freehold. Generally, this Estate is referred to as a Leasehold that requires a lease contract, which specifies a duration of time.
This lease is similar to the Title except there is one of the four property rights in Bundle of Rights which is excluded. This excluded right is the right to Dispose of the property, to sell or give it away. However, the rights to Use, Possess, and Exclude others from using it still apply under this lease.
Below, we have a comparison chart. The key feature is that a Freehold has an indefinite duration.
The Non-Freehold enjoys only a limited duration of time because the lease, the Leasehold, excludes the right of Disposition. In contrast, a Freehold Bundle of Rights includes all four: Disposition, Use, Possession, and Exclusion. Therefore, the Estate is equal to the Title is equal to this bundle of our rights to the property.
Let’s talk about the types of tenancy along with the types of properties. This tenancy in Severalty involves a number people. In common, it is often with the married couple and specified heirs for that tenancy. In Joint Estate, there is a Right of Survivors. Anyone with this tenancy who survives has the right to continue the tenancy and to have that Fee Simple with its four-fold Rights of Property. By Entireties, the Right of Survivors are the same.
The types of property include business property–service sector, industrial (generally manufacturing), commercial property (both wholesale and retail), residential property, and agricultural property.
Residential properties are defined as properties of four or less units or vacant land that is zoned for residential use. Also, it includes ten or less acres of agricultural land (commonly, acreage that small lacks the natural conditions to provide a sustainable working farm.
Definition by Measurement
For definition by measurement, we use the Township as our basic standard of measurement. The Township is six miles by six miles square (36 square-miles encompassing 23,040 acres).
To measure a Township, let’s use an example of an uncharted island of irregular form. We start by drawing a Baseline and Meridian line upon it, striving to center it as well as possible (for simplicity’s sake, whatever is practical).
Let’s use an island for our example. We use the full Township plan, carrying it over onto the water around this island. We measure the island down to measurement of quarter miles.
As we measure the entire island, we can determine how many square miles are contained on the island or irregular shape. We are not concerned with the water area at this time.
If we use square quarter miles in order to do the estimation of area and determine that the island is 368.75 square miles. For a symmetrical island, it may measure 23.5 miles long by 23.5 miles laterally.
Let’s continue to use the Township as our standard unit of measurement. We recall that it is which is 6 miles by 6 miles (36 square miles) and contains 23,040 acres. We are going to consider how we can further subdivide this Township. If we subdivide a township, we have 36 square-mile Sections.
Therefore, each Section is one-square mile and includes 640 acres. If we subdivide this square mile into quarter sections, each section must be a quarter of a square mile containing 160 acres. The boundaries of these quarter-sections are one-half mile by one-half mile.
If we subdivide further, we have acreage that is one-quarter mile by one-quarter mile. This is a sixteenth of a Section, a sixteenth of a square mile and 40 acres in size. Traditionally, this has been considered as the size of a workable family farm. These forty acres can be divided further as subdivisions for residential and business property.
Possession of Property
Let’s discuss Voluntary Alienation, the giving up of the right to possess land voluntarily through an instrument of conveyance (transfer) of these rights through a Deed or Will.
Involuntary Alienation occurs when a person dies without a Will. In this case, the property goes to probate and the court decides. Also, if a person dies without a Will and without heirs, this case is called Escheat. As a result, the property is deeded over to the state government.
Involuntary Alienation can include situations such as Eminent Domain and Condemnation by Eminent Domain, in which a government can take over a property if it pays a fair value for the property. The government may do this regardless of whether or not the present owner wants to keep the property. Usually, this action is taken for some larger public good, such as the construction of an expressway.
Adverse Possession may be hostile or simply can be Open Possession without permission. It may also include taxation. If taxes are not paid on the property, the municipality or the county can take over the property for the lack of back taxes being paid.
Clear Adverse Possession may occur if there is a legitimate claim on the Title. Flagrant Possession can occur by a party moving in and occupying the land. However, it could be that if there is property to which there is no apparent claim and a person resides on that property for seven years (common-law), then that person can claim ownership to what would otherwise be abandoned property.
Voluntary Alienation requires an Instrument of Conveyance, a transfer, usually a Deed, but often times a conveyance of a Title. On this chart here (and when it’s complete you may want to pause the video and take a look at it, what we have is the instruments which may be transferred from the giver to the receiver.
The giver (many different names for them, but they are all represent the origin and so their names end with an “OR”).
The receiver is the end-recipient. Therefore, that name ends with an “EE” (an easy way to remember this). The instrument of a Title or Deed is given by a grantor to a receiver known as the grantee.
Deeds and Their Conveyance
The Deed is an Instrument of Conveyance for transfer between two parties. One party is the giver, the other the receiver.
The giver (who is the Grantor [most likely the seller]), gives the Deed to the Grantee (who is the buyer). For example, the transaction may involve a Sale-by-Owner property. In such a case, that For-Sale-by-Owner gives the Deed or Title (or both) to the borrower who is the receiver.
In different states, there is application of one of two distinct theories as to who has the predominant right over the property–Lien Theory or Title Theory.
In a Lien Theory state, the Grantee (the mortgagor or buyer of the property) maintains legal control. In a Title Theory state, the mortgagee (the lender) maintains that control.
The Deed is a recorded Constructive Notice. As a result, a Constructive Notice is a written document that is filed as a public record.
An Actual Notice is more traditional. A person would stand in the middle the town, all the neighbors would gather about, and s/he would say “I now own this piece a property” and describe it to the town folk. This kind of notice is neither written nor filed. Therefore, an Actual Notice is an informal notice.
A number of different types of Deeds exist. The following are some that we consider and that we see most often:
1. Bargain and Sale Deed, or a Quit claim deed that clarifies what the nature of the property.
2. Special Warranty Deeds and General Warranty deeds, Free and Clear, or Free of All Encumbrance Deeds.
These instruments are what the names suggest. Deed requirements state that there must be a premise. In other words, there must be a Grantor and a Grantee and there must be some interchange between them.
In addition, there exists what we know as the Habendum Clause or Seisin Clause (which goes back to the Middle Ages). This clause means to have and to hold the property.
With this clause, there must be consideration given: money or other valuables, or something as simple as love and affection. (This concept goes back many centuries when wives were considered chattel property.)
In essence, a valid Deed is one that is signed by the Grantor along with two witnesses and must be offered voluntarily by the Grantor, and accepted voluntarily by the Grantee.
Encumbrance or Lack Thereof
If no Encumbrances exist, then the property–the Deed–is free and clear. This means that there are no Liens upon it. In other words, no financial obligation remains when the property is sold. As a result, no one can claim a portion of the sales price in order to pay off a Lien.
As we have seen, a Deed is an Instrument of Conveyance between two parties and the two parties are the giver and the receiver.
Now, let us look at the transaction that occurs between giver and receiver. The giver is a Grantor and also the seller. Contrastingly, the receiver is the Grantee and buyer of the property.
Therefore, the giver tenders a note to the receiver who is the mortgagor–the borrower. By doing this, there is recognition of Entitlement for those basic rights that include Disposition, Use, Possession, and Exclusion.
In addition, there are conditions of a Title that need to be considered. The first condition is referred to as the Chain of the Title, which sometimes traces back to an original Land Grant.
An uninterrupted chain must be established for the Title that is being passed from one party to the next. This assurance is accomplished through a Title Search, summarized in a document known as the Abstract of Title, and accompanied by an Opinion as to the quality of the search in respect to the cleanliness of the Deed and the passage of Title.
In addition, Title Insurance plays an important role in all of this business because it protects both parties. For owners, the insurance protects them for the amount of the purchase price that they are paying. For lenders, it protects them in terms of the loan amount.
Furthermore, Title Insurance protects both parties in cases of forgeries that may have occurred in the present or even the distant past in respect to both the Deed and the Title.
Restrictions of Use for a property can be either private or public. The private restriction may be a Deed Restriction that is written into the Deed or some Restrictive Covenant that is added to it. For example, there may be a restriction listed in a lease in respect to how many people may reside at a property or whether or not pets can be kept on the property.
Liens constitute an obligation that cannot be collected immediately. However, we are looking for Deeds that that essentially are as free and as clear as possible.
Government restrictions may involve something as simple as zoning laws that determine how a property may be used. In addition, government actions can include the use of Eminent Domain in order to acquire property as well as the ability to tax property. These actions put restrictions on a property. If a person does not pay the property taxes, s/he forfeits the property to the government.
Encroachment and Easement
Encroachment and easement involve adjacent property and the rights of adjacent property owners. Encroachment occurs when one person uses a property belonging to someone else, such as moving a fence on to that property without permission of the owner.
An Easement is just the opposite. A simple example would involve a person who opens a car door and gets out onto a strip of lawn that belongs to their neighbor. Generally, a one-foot easement is allowed in such cases.
Now, let us look at Mortgages in a little more depth. A Mortgage tells us that the Mortgagor is the Grantee who is giving the Mortgage to the borrower who is the buyer.
For the two parties involved in such transactions, we again have a giver and a receiver. One party gives a Promissory Note and Mortgage to the Mortgagee, the lender that often is a bank. This second party is the note holder who gives loan money to the note giver, the party that is the buyer.
If we look at the monthly payment for a piece of property, it usually is a fixed amount. Of this amount, part of the payment is Principle and part of it is Interest. At the beginning of a Mortgage, most of that monthly payment is Interest. Very little of the payment reduces the Principle and pays down the balance of the loan on the property.
As time goes on and we get to the years near the end of the mortgage, most of that fixed payment becomes Principle paid and very little of it is Interest.
A mortgage is made up of different payments. Together, the Principle and the Interest are referred to as to as Debt Service. However, in most mortgages, there are taxes, which are paid along with insurance which is paid.
Both of these are paid into an Impounded Fund called an Escrow Account and they’re included as part of the monthly payment. They’re held in Escrow and then dispersed.
Therefore, we have Debt Service and we have Escrow Impounds. Together, these two items make up the total amount which is paid monthly. Commonly, this total is called P. I. T. I (pity). It includes Principal, Interest, Taxes, and Insurance.
A Promissory Note (an obligation to pay) is signed by the mortgagor who borrows money with the promise of paying it back. The mortgage is recorded and becomes a security instrument in respect to the property.
The Mortgage is a Voluntary Lien that the lender will get paid. It’s signed by the mortgagor. As a document, it facilitates the act of foreclosure. When mortgages enter the financial market in clusters, they often get bundled into other financial instruments.
What we have found in the first decade of the 21st century is that lenders were turning (to a very large degree) to the issuance of Sub-Prime mortgages–very high-risk mortgages with very little security. Potentially, because of the risk, they can earn a higher amount of interest.
However, most of these securities collapsed and caused a downfall of Lehman Brothers and vast problems for other Wall Street firms in September 2008.
Also, there are Prime mortgages. This is the standard low-risk mortgage that is liked by lenders because of the low risk. However, it doesn’t carry the highest rate of interest. Therefore, in terms of the gamble involved, it’s not necessarily the best for the lender. In addition, there are Alt-A mortgages which form a kind of in between mortgage.
What began to rise in the middle of the first decade of the 21st century were option Adjustable-Rate Mortgages (ARMs) for which the mortgage interest rate goes up or down with the prevailing baseline interest rates set by the London Inter-bank Offer Rate (LIBOR).
These ARMs have that potential put borrowers and their properties below water (where the value the property is decreased to below what is owed on the property as the interest rate increases because it’s tied to (pegged to) the general interest rates.
In these circumstances, there is a greater tendency for buyers to walk away and abandon their properties.
This episode has carried us into the second decade of the 21st century. In recent decades, the issuing and servicing of mortgages have moved away from a single bank that issues a mortgage and then services it for its lifetime.
The trend for banks has been to issue mortgages, earn a fee, and then step away by selling them very quickly to some other institutions that will service them. In large, this has been due to pressures in the financial markets to use mortgages as ingredients for other securities, like hedge funds.
The first one that we see on the left, RMBS, is a Real Estate Mortgage-Backed security that is a fairly good one.
Most of the mortgages in this security have Triple-A ratings. These are Prime mortgages. However, what began to happen in the first decade of the 21st century is that these Collateralized Debt Obligations (collateralized by the real property) began to be filled with Sub-prime mortgages. Hence, they became very risky.
However, the bond-rating services (Moody’s in particular) rated these mortgages as very good mortgages in very good securities, even though they were filled with highly toxic assets. In part, this led to the collapse of the mortgage-backed securities market in 2008.
So, what have we covered? We’ve covered the concept of Real Estate and what it is; We’ve looked at Titles and the attributes of these documents and the types of Tenancy and types of Properties; We defined and measured property in terms of the unit of the Township; We discussed possession of property by different means and looked at Deeds and their conveyance from giver to receiver; We discussed the Restrictions of Use of property; and, finally, we addressed mortgages and the role that mortgages play in the wider financial market