Real Estate Law, Property Rights, and Interests
Domain 5: Real Estate Law, Property Rights, and Interests
This domain tests the legal interests that appraisers value: estates, leases, easements, liens, restrictions, and government powers. The key is to identify exactly which rights the appraisal covers.
Core rules
- Fee simple absolute is the most complete ownership interest, subject to government powers.
- A leased fee interest is the owner's interest subject to a lease; a leasehold interest is the tenant's interest.
- Easements can be appurtenant or in gross; they may benefit or burden a parcel.
- Encumbrances include liens, mortgages, easements, encroachments, and deed restrictions.
- Government powers: police power, eminent domain, taxation, and escheat.
- Zoning regulates use; a nonconforming use may continue but cannot generally expand without approval.
Worked example
A property has market rent of $60,000 per year, but a five-year lease sets contract rent at $45,000. Using a 8.0% cap rate for simplicity, the fee simple value based on market rent is $750,000, while the leased fee value based on contract rent is $562,500. The difference reflects the leasehold advantage to the tenant, subject to reversion and lease terms. Valuing the leased fee at market rent would overstate the owner's interest.
Traps
- Valuing a leased fee as if the lease did not exist.
- Confusing an easement with a lien.
- Ignoring a deed restriction because current use conforms.
- Treating a leasehold as ownership in fee simple.
- Forgetting that government powers limit even fee simple title.