LEARNING OBJECTIVES
When you've finished reading this Chapter, you should be able to:

► identify the rights that convey with ownership of real property and the characteristics of real estate.

► describe the difference between real and personal property, and the various types of personalty.

► explain the types of laws that affect real estate.

► distinguish among the concepts of land, real estate, and real property.

► define the following key terms:  accession , fixture, severance , air rights, heterogeneity, situs, annexation , improvement, subsurface rights, area preference, land, surface right, appurtenance, nonhomogeneity, trade fixture , bundle of legal rights, personal property, water rights, chattel, , real estate emblements, , real property. 

I would encourage you to take this “Match quiz” now as a pre-chapter challenge to see how many of these key words or phrases you are familiar with. At the end of each chapter I recommend that you take the quiz again to reinforce these important keywords. Each page contains four words or phrases and you need to drag and drop the correct definition into the puzzle key. Each page is considered as a question, but there is no scoring and you can return to each chapter quiz as many times as needed to reinforce your memory. 

Real estate is a market like any other one. Real property is a product, and the licensee is the salesperson. As any successful salesperson will tell you, product knowledge is the key to success. You need to know enough about your product to be able to educate and guide your clients and customers, whether they are buyers, sellers, renters, or investors. Also, you are dealing with a product that has very specific and often very complicated legal issues involved. This Chapter will help you understand the most basic, fundamental principles of the product you will be handling for the rest of your career. 

The words land, real estate, and real property are often used interchangeably. To most people, they mean the same thing. Strictly speaking, however, the terms refer to different aspects of the same idea. To fully understand the nature of real estate and the laws that affect it, licensees must be aware of the subtle yet important differences in meaning of these words.

Land is defined as the earth's surface extending downward to the center of the earth and upward to infinity, including permanent natural objects such as trees and water.

Land, then, means not only the surface of the earth but also the underlying soil. It refers to things that are naturally attached to the land, such as boulders and plants. It includes the minerals and substances that lie far below the earth's surface. Land even includes the air above the earth, all the way up into space. These are known respectively as the subsurface and the airspace. Most of the surface of the earth, of course, is not land at all, but water. Special state and local laws govern the ownership of the wetter part of the earth, including lakes and rivers, as discussed in Chapter 7.

Real estate is defined as land at, above, and below the earth's surface, plus all things permanently attached to it, whether natural or artificial. 

The term real estate is similar to the term land, but it means much more. Real estate includes not only the natural components of the land but also all man-made improvements. An improvement is any artificial thing attached to the land, such as a building or a fence. The term improvement, as used in the real estate industry, refers to any addition to the land. The word is neutral. It doesn't matter whether the artificial attachment makes the property better looking or more useful; the land is still said to be improved. Land also may be improved by streets, utilities, sewers, and other additions that make it suitable for building.

Real Property
The term real property is the broadest of all. It includes both land and real estate. Real property is defined as the interests, benefits, and rights that are automatically included in the ownership of land and real estate.

Real property includes the surface, subsurface, and airspace, any improvements, and the legal rights of ownership that attach to ownership of a parcel of real estate.

Traditionally, ownership of real property is described as a bundle of legal rights. In other words, a purchaser of real estate actually buys the rights of ownership held by the seller. These rights include the

► right of possession;

► right to control the property within the framework of the law;

► right of enjoyment (that is, to use the property in any legal manner);

► right of exclusion (to keep others from entering or using the property); and

► right of disposition (to sell, will, transfer, or otherwise dispose of or encumber the property).

The concept of a bundle of rights comes from old English law. In the Middle ages, a seller transferred property by giving the purchaser a handful of earth or a bundle of bound sticks from a tree on the property. The purchaser, who accepted the bundle, then owned the tree from which the sticks came and the land to which the tree was attached. Because the rights of ownership (like the sticks) can be separated and individually transferred, the sticks became symbolic of those rights.

The word title to real property has two meanings: (1) the right to or ownership of the land as represented by the owner's bundle of rights and (2) evidence of that ownership by a deed. Title refers to ownership of real property, not to a printed document. The document by which the owner transfers title to the real property is the deed.

Real property is often coupled with the word appurtenance. An appurtenance is a right or privilege associated with the property, although not necessarily a part of it. Typical appurtenances include parking spaces in multiunit buildings, easements, water rights, and other improvements. An appurtenance is connected to the property, and ownership of the appurtenance normally conveys to the new owner when the property is sold.

When people talk about buying or selling homes, office buildings, and land, they usually call these things real estate. For all practical purposes, the term is synonymous with real property as defined here. Thus, in everyday usage, real estate includes the legal rights of ownership specified in the definition of real property. Sometimes people use the term realty instead.

Subsurface, air, and water rights. The right to use the surface of the earth is referred to as a surface right. However, real property ownership can also include subsurface rights, which are the rights to the natural resources lying below the earth's surface. Although it may be difficult to imagine, the two rights are distinct. An owner may transfer his or her surface rights without transferring the subsurface rights.

FOR EXAMPLE      Anne sells the rights to any oil and gas found beneath her farm to an oil company. Later, Anne sells the remaining interests (the surface, air, and limited subsurface rights) to Bob, reserving the rights to any coal that may be found in the land. Bob sells the remaining land to Charles, but Bob retains the farmhouse, stable, and pasture. After these sales, four parties have ownership interests in the same real estate: (1) the oil company owns all the oil and gas; (2) Anne owns all the coal; (3) Bob owns the farmhouse, stable, and pasture; and (4) Charles owns the rights to the remaining real estate.
 

The rights to use the air above the land, provided the rights have not been pre-empted by law, may be sold or leased independently. Air rights can be an important part of real estate, particularly in large cities, where air rights over railroads must be purchased to construct office buildings, such as the MetLife Building in New York City and the Prudential Building in Chicago. To construct such a building, the developer must purchase not only the air rights but also numerous small portions of the land's surface for the building's foundation supports.

Before air travel was common, a property's air rights were considered to be unlimited, extending upward into the farthest reaches of outer space. However, now that air travel is common, the courts and the U.S. Congress have put limits on air rights. Today, the courts permit reasonable interference with these rights, such as that necessary for aircraft (and presumably spacecraft), as long as the owner's right to use and occupy the land is not unduly lessened. Governments and airport authorities often purchase adjacent air rights to pro-vide approach patterns for air traffic.

With the continuing development of solar power, air rights—and, more specifically, light or solar rights—are being closely examined by the courts. A new tall building that blocks sunlight from a smaller existing building may be held to be interfering with the smaller building's right to sunlight, particularly if systems in the smaller building are solar powered. Air and solar rights are established by laws and ordinances that vary widely from state to state and community to community.

Water rights are special common-law rights held by owners of land adjacent to rivers, lakes, or oceans and are restrictions on the rights of land ownership. Water rights are a particularly important issue in drier western states, where water is a scarce and valuable public commodity. Issues related to water rights are discussed in Chapter 7.

Personal property, sometimes called personalty, is all property that does not fit the definition of real property; that is, if it's not real property, it's personal property.

An important distinction between the two is that personal property is movable. Items of personal property, also referred to as chattels include such tangibles as chairs, tables, clothing, money, bonds, and bank accounts. Trade fixtures, discussed below, are included in this category.

The distinction between real and personal property is not always obvious. Manufactured housing (or mobile homes), for example, is generally considered personal property even though its mobility may be limited to a single trip to a park or development to be hooked up to utilities. Manufactured housing may, however, be considered real property if it becomes permanently affixed to the land. The distinction is generally one of state law. Whether manufactured housing is characterized as real or personal property may have an effect on how it is taxed. Real estate licensees should be familiar with local laws before attempting to sell manufactured housing. Some states permit only specially licensed dealers to sell such housing; other states require no special licensing.

Trees and crops generally fall into one of two classes: (1) Trees, perennial shrubbery, and grasses that do not require annual cultivation, known as fructus naturales, are considered real estate; (2) annual plantings or crops of wheat, corn, vegetables, and fruit, known as emblements or fructus industriales, are generally considered personal property. As long as an annual crop is growing, it will be transferred as part of the real property unless other provisions are made in the sales contract. For example, a farmer won't have to dig up growing corn plants and haul them away unless the sales contract says so: The young corn remains on the land. The farmer may come back and harvest the corn when it's ready. The former owner or tenant is entitled to harvest the crops that result from his or her labor. Perennial crops, such as orchards or vineyards, are not personal property and so convey with the land.

An item of real property can become personal property by severance. For example, a growing tree is real estate until the owner cuts it down, literally severing it from the property. Similarly, an apple becomes personal property once it is picked from a tree.

It is also possible to change personal property into real property. If, for example, a landowner buys cement, stones, and sand, mixes them into concrete, and constructs a sidewalk across his or her land, the landowner has converted personal property (cement, stones, and sand) into real property (a sidewalk). This process is called annexation.

Licensees need to know whether property is real or personal for many reasons. An important distinction arises, for instance, when the property is transferred from one owner to another. Real property is conveyed by deed, while personal property is conveyed by a bill of sale. Transfers of property are discussed in Chapter 12.

In considering the differences between real and personal property, it is necessary to distinguish between a fixture and personal property.

Fixtures. A fixture is personal property that has been so affixed to land or a building that, by law, it becomes part of the real property. Examples of fixtures are heating systems, elevator equipment in highrise buildings, radiators, kitchen cabinets, light fixtures, and plumbing. Almost any item that has been added as a permanent part of a building is considered a fixture.

During the course of time, the same materials may be both real and personal property, depending on their use and location.

Legal tests of a fixture. The overall test that is used in determining whether an item is a fixture (real property) or personal property is a question of intent. Did the person who installed the item intend it to remain permanently on the property or to be removable in the future? In determining intent, courts use the following three basic tests:

1)   Method of annexation: How permanent is the method of attachment? Can the item be removed without causing damage to the surrounding property?

2)   Adaptation to real estate: Is the item being used as real property or personal property? For example, a refrigerator is usually considered personal property. However, if a refrigerator has been adapted to match the kitchen cabinetry, it becomes a fixture.

3)   Agreement: Have the parties agreed on whether the item is real or personal property in an offer to purchase?

Although these tests may seem simple, court decisions have been complex and inconsistent. Property that appears to be permanently affixed has sometimes been ruled to be personal property, while property that seems removable has been ruled a fixture. It is important that an owner clarify what is to be sold with the real estate at the very beginning of the sales process.

IN PRACTICE:   At the time a property is listed, the seller and listing agent should discuss which items to include in the sale. The written sales contract between the buyer and the seller should specifically list all articles that are being included in the sale, particularly if any doubt exists as to whether they are personal property or fixtures (for instance, built-in bookcases, chandeliers, ceiling fans, or exotic shrubbery). This will avoid a misunderstanding between the parties that could result in the collapse of the transaction and expensive lawsuits. The most common disputed items between buyers and sellers are draperies, light fixtures, and appliances.

 

Trade fixtures. A special category of fixtures includes property used in the course of business. An article owned by a tenant and attached to a rented space or building or used in conducting a business is a trade fixture, or a chattel fixture. Some examples of trade fixtures would be bowling alleys, store shelves, and bar-room and restaurant equipment. Agricultural fixtures, such as chicken coops and toolsheds, are also included in this category. Trade fixtures must be removed on or before the last day the property is rented. The tenant is responsible for any damage caused by the removal of a fixture. Trade fixtures that are not removed become the real property of the landlord. Acquiring the property in this way is known as accession (this is related to the legal principle of constructive annexation).

FOR EXAMPLE   Paul's Pizza leases space in a small shopping center. Paul bolted a large iron oven to the floor of the unit. When Paul's Pizza goes out of business or relocates, Paul will be able to take his pizza oven with him if he can repair the bolt holes in the floor; the oven is a trade fixture. On the other hand, if the pizza oven was brought into the restaurant in pieces, welded together, and set in concrete, Paul might not be able to remove it without causing structural damage. In that case, the oven might become a fixture.

Trade fixtures differ from other fixtures in the following ways:

► Fixtures belong to the owner of the real estate, but trade fixtures are usually owned and installed by a tenant for the tenant's use.

► Fixtures are considered a permanent part of a building, but trade fixtures are removable. Trade fixtures may be attached to a building so they appear to be fixtures.

Legally, fixtures are real property, so they are included in any sale or mortgage. Trade fixtures, however, are considered personal property and are not included in the sale or mortgage of real estate, except by special agreement.

Real property possesses seven basic characteristics that define its nature and affect its use. These characteristics fall into two broad categories—economic characteristics and physical characteristics.

The four economic characteristics of land that affect its value as a product in the marketplace are scarcity, improvements, permanence of investment, and area preference.

 

Scarcity. We usually do not consider land a rare commodity, but only about a quarter of the earth's surface is dry land; the rest is water. The total supply of land, then, is not limitless. While a considerable amount of land remains unused or uninhabited, the supply in a given location or of a particular quality is generally considered to be finite.

Improvements. Building an improvement on one parcel of land can affect the land's value and use as well as that of neighboring tracts and whole communities. For example, constructing a new shopping center or selecting a site for a nuclear power plant or toxic waste dump can dramatically change the value of land in a large area.

Permanence of investment. The capital and labor used to build an improvement represent a large fixed investment. Although even a well-built structure can be razed to make way for a newer building, improvements such as drainage, electricity, water, and sewerage remain. The return on such investments tends to be long term and relatively stable.

Location. Most people are familiar with the popular saying that the three most important characteristics of a property are location, location, and location. Sometimes referred to as area preference or situs, this economic characteristic does not refer only to geography. Rather, it refers to people's preferences for one area over another, based on a number of factors. Area preference is based on such factors as history, reputation, convenience, and scenic beauty—as well as simple geography. It is the unique quality of these preferences that result in the different values for similar properties. Whatever it's called, however, remember: Location is the single most important economic characteristic of land.

FOR EXAMPLE A river runs through Bedford Falls, dividing the town more or less in half. On the north side of the river, known as North Town, houses sell for an aver-age of $150,000. On the south side of the river, known as Southbank, identical houses sell for more than $200,000. The only difference is that homebuyers think that Southbank is a better neighborhood, even though no obvious difference exists between the two equally pleasant sides of town.

Immobility. It is true that some of the substances of land are removable and that topography can be changed, but the geographic location of any given parcel of land can never be changed. It is fixed, immobile.

Indestructibility. Land is also indestructible. This permanence of land, coupled with the long-term nature of improvements, tends to stabilize investments in real property.

The fact that land is indestructible does not, however, change the fact that the improvements on land depreciate and can become obsolete, which may dramatically reduce the land's value. This gradual depreciation should not be confused with the knowledge that the economic desirability of a given location can change.

 

Uniqueness. No two parcels of land are ever exactly the same. Although they may be substantially similar, all parcels differ geographically because each parcel has its own location. The characteristics of each property, no matter how small, differ from those of every other. An individual parcel has no substitute because each is unique. The uniqueness of land is also referred to as its heterogeneity or nonhomogeneity.

The unique nature of real estate has given rise to an equally unique set of laws and rights. Even the simplest real estate transaction involves a body of complex laws. Licensees must have a clear and accurate understanding of the laws that affect real estate.

The specific areas important to the real estate practitioner include the law of contracts, the general property law, the law of agency, and his or her state's real estate license law. All of these will be discussed in this text. Federal regulations, such as environmental laws, as well as federal, state, and local tax laws, also play an important role in real estate transactions. State and local land-use and zoning laws have a significant effect on the practice of real estate, too.

Obviously, a real estate practitioner can't be an expert in all areas of real estate law. However, licensees should know and understand some basic principles. Perhaps most important is the ability to recognize problems that should be referred to a competent attorney. Only attorneys are trained and licensed to pre-pare documents defining or transferring rights in property and to give advice on matters of law. Under no circumstances may a broker or salesperson act as an attorney unless he or she is also a licensed attorney representing a client in that capacity.

All phases of a real estate transaction should be handled with extreme care. Carelessness in handling the negotiations and documents connected with a real estate sale can lead to disputes and expensive legal actions. The result can be a financial loss, a loss of goodwill in the community, a loss of business, or, in some cases, the loss or suspension of a real estate license.

Real estate license laws.
Because brokers and salespersons are involved with other people's real estate and money, the need for regulation of their activities has long been recognized. The purpose of real estate license laws is to protect the public from fraud, dishonesty and incompetence in real estate transactions. All 50 states, the District of Columbia, and all Canadian provinces have passed laws that require real estate brokers and salespersons to be licensed. Although state license laws are similar in many respects, they differ in some details, such as the amount and type of prelicense education required.

In all states, applicants must meet specific personal and educational qualifications. In addition, they must pass an examination to ensure at least a minimum level of competency. To qualify for license renewal, licensees must follow certain standards of business conduct. Many states also require that licensees complete continuing education courses.

 

It is extremely important that anyone planning to become a licensed real estate professional be fully aware of his or her state's specific license laws, licensure requirements, and rules and regulations governing the conduct of real estate agents in the state. When a licensee's practice is likely to extend into other states, he or she must be aware of these laws and regulations as well.

 

Although most people think of land as the surface of the earth, land includes the earth's surface, the mineral deposits under the earth, and the air above it. The term real estate further expands this definition to include all natural and human-made improvements attached to the land. The term real property describes real estate plus the bundle of legal rights associated with its ownership.

The various rights to the same parcel of real estate may be owned and controlled by different parties, one owning the surface rights, one owning the air rights, and one owning the subsurface rights.

All property that does not fit the definition of real estate is classified as person-al property, or chattel. When articles of personal property are affixed to land, they may become fixtures and, as such, are considered part of the real estate. However, personal property attached to real estate by a tenant for business purposes is classified as a trade, or chattel, fixture and remains personal property.

The special nature of land as an investment is apparent in both its economic and physical characteristics. The economic characteristics are scarcity, improvements, permanence of investment, and area preference. Physically, land is immobile, indestructible, and unique.

Even the simplest real estate transactions reflect a complex body of laws. A buyer of real estate actually purchases from the seller the legal rights to use the land in certain ways.

Every U.S. state and Canadian province has some type of licensing requirement for real estate brokers and salespersons. Students must become familiar with the real estate laws and licensing requirements not only of their own states but of those into which their practice may extend as well.