Real Estate Concepts shows that if you viewed the U.S. Bureau of Land Management’s website you should have a good sense of the importance of land ownership. The earliest settlers came to this country to live in freedom, own land to help them make a decent living and to be free from oppression from any source. Accordingly, laws were enacted to protect these rights. In the U.S. this is referred to as the allodial system that gives individuals the right to own land.
An individual may enjoy all the benefits of land ownership and, most importantly, to be able to pass their ownership interest to their children. However, many issues arise when land is developed and rented to others. For example, if I build an apartment building and rent out units, the renter has possession and enjoys the benefits from its use. But what happens if the renter builds a swimming pool in the backyard? Who does the pool belong to? Or, what if the renter installs a built-in gas range? Or, hangs a picture on a wall? When the renter moves out do these items go with them or do they become a part of the property?
Real Estate Concepts in order to answer these questions, we have to distinguish between real property, personal property and/or trade fixtures. If it is classified as real property, it stays with the property; if it is classified as personal, the renter may take it with him/her. As you read Unit 2, it is important to understand what constitutes real from personal property, fixtures from trade fixtures, and tangible from intangible properties.
Real World Example
Here’s a real-world example about how a change in a properties zoning by the local authority resulted in several thousands of dollars in lost property value to the investors. Obviously, this was an expensive way to learn a lesson, but you get this knowledge for a fraction of their costs! A few years ago, three of my friends purchased a mixed-use property with 4 apartment units on the second floor and 4 retail units on the ground floor. The 4 apartments were rented and only one of the 4 retail units was rented with a month-to-month lease. Their initial investment analysis projected a positive cash flow if all retail units were rented. Immediately after they purchased the property they attempted to advertise for retail tenants. They were then contacted by the zoning commission and advised that the property was not zoned for commercial use. They initially assumed that since one of the retail units was rented that the zoning code allowed this. However, the zoning code was changed but the old code was grandfathered for the present owner until the property was sold. After considering different alternatives, they realized that this property would not be able to generate a positive cash flow based on their total investment and decided to sell it for a $60,000 loss. This entire situation could have been avoided with one call to the village zoning office. I don’t think they ever again underestimated the importance of verifying the zoning codes.
Other government powers are classified as eminent domain and escheat laws. As you read through Unit 2, I think you will find these laws interesting to know and to understand how they may add value or reduce the value of the property. Finally, let’s not forget the most important power delegated to the government is the authority to tax property. It is important to understand how these taxes are assessed and billed to the property owner.