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Real Estate You Need to Know: Property Ownership
In this short article I am going to explore with you the extent
to which you can own property. Not all types of ownership are
created equal, and you must, absolutely, understand the
different types, if you are going to be a successful real estate
investor. So sit back and relax, and let's take this tour
together.
Bill of Rights
The character and extent of your ownership interest in real
property is called an estate in land. Owning land is so
important to our way of life, our freedoms and our way of life
that the right to own land is embedded in our constitution. The
Bill of Rights in the U.S. Constitution establishes the right to
own land privately, as a direct and clear rejection of the
feudal system that our founding fathers escaped from in England.
But even in the land of the free, the government retains certain
rights concerning your land.
Four Powers of Government
The government has powers that affect (and limit) your ownership
rights in four distinct areas: taxation, police, eminent domain
and escheat. These are worth looking at a little more closely.
Power of Taxation. Anybody who owns real estate is painfully
aware of the power of the government to tax real property. Funds
from property taxes help support the operating costs of
government, and are often tied directly to funding for schools
in many counties.
Power to Police. A basic function of any government is to
preserve order and promote general welfare. In order to provide
the government with the means of meeting this obligation, the
founding fathers gave our government, and state governments,
certain limited police powers. These powers are the basis for
enforcing laws relating to real estate ownership, including
zoning and environmental laws, and regulations that govern the
use, occupancy, size and location of buildings. In theory, one
important limitation on police powers is that they must be
uniformly applied, and, more specifically, must not be such that
the powers are to the advantage or disadvantage of a particular
owner. If you ever call upon the sheriff to evict a tenant, you
will be relying directly on the government's police powers.
Power of Eminent Domain. For many owners, this is the most
frightening of government powers. Eminent domain gives
government the power to acquire privately owned property "for
the use and benefit of the general public." Ostensibly, two
conditions must be met for the government to exercise this
power. First, the government's proposed use for your land must
be deemed by the courts to be "public use." Second, you, the
owner, must be given "fair compensation" as determined by the
courts. But some governments have become quite aggressive about
applying this power, with extremely broad definitions of "public
use." For example, one municipality condemned an entire block of
perfectly good waterfront homes, well maintained in a nice
middle-class neighborhood in Groton, Connecticut, in order to
tear them down for a commercial development. The rationale was
that the newly installed businesses would generate more tax
revenue for the city. In other words, the city condemned the
properties simply because an alternative use would generate more
money. Astonishingly, this ruling held up through appeal to the
Supreme Court, meaning that virtually any property is vulnerable
to what is essentially arbitrary taking. Your protection will
now be found only in local ordinances, so when buying property
you will want to know the city's and county's laws concerning
eminent domain.
Power of Escheat. This government power only comes into play
when an owner dies without heirs and without a will. Something
has to happen to the property, and without instructions from the
deceased owner, the state has really no choice but to take
possession. So when a property becomes ownerless, it reverts
(escheats) to the state or county. This is one government power
that you have absolute control over; simply execute a valid,
enforceable will, and the government's power of escheat becomes
moot.
Land Estates
While the government clearly has four powers that can affect
your ownership, only the power of taxation is typically felt by
the average property owner. Beyond that, you must define the
extent of your ownership interest by declaring in the deed of
conveyance the type of estate in land that you possess. Estates
in land fall into two broad categories: freehold and leasehold.
The biggest distinction between the two concerns the duration of
the estate. Freehold estates last for an indeterminable length
of time: indefinitely in the case of fee simple estates, and
during the life of a person with a life estate. In contrast,
leasehold estates last for a fixed, defined period of time.
Since nothing is simple in life, under each of the two main
categories of freehold and leasehold estates, we find numerous
and subtle variations, which are described in detail in my book.
What most people think of "ownership" is more formally known as
a fee simple absolute estate. This is the gold standard of
defining the degree, quantity, nature and extent of ownership in
real property. Fee simple absolute is absolute ownership,
absolute title to land, and the highest interest in real estate
that is recognized by law. The owner is entitled to all rights
to the property, limited only by the four government powers and
by relevant covenants and restrictions, if any exist. The estate
is considered to be of unlimited duration. Therefore, upon death
of the owner, the property passes to the owner's heirs, or as
directed in the owner's will. The property can be held like this
forever into the future, or until the property is sold or
otherwise transferred. In deeds transferring fee simple absolute
title, the wording is usually along the lines of: "Mary grants
to John title in fee simple..." or something similar.
As you can see from the charts above, there are many other types
of ownership other than a "fee simple absolute" estate. Again,
this is not just some theory being thrown out by a professor
with patches on his elbow. You have to know and understand the
different types of ownership if you want to invest successfully
in real estate. In my book, I walk you through each ownership
type in clear, easy-to-understand language. You will be an
expert in no time.
If you want to learn more about Beyond No Money Down, go to:
www.realpropertymillionaire.com
About the author:
Dr. Schneider is a recognized expert in building personal
wealth, with his best selling books "Beyond No Money Down" and
"Trading Futures: Only One Way to Win". Practicing what he
preaches, he now lives in a beautiful waterfront home in central
Texas, owns and operates his own jet, and travels the world
first class giving lectures across the country and across the
globe.
Thomas Kinsey Schneider, Ph.d.
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