Property Rights, Restrictions, and Valuation Standards

Chapter 3: Property Rights, Restrictions, and Valuation Standards

A. Property Rights

1. Definition and Scope of Real Property Rights:

Real property rights represent the legal interests associated with the ownership, possession, and use of land and its permanent improvements. These rights are often described as a “bundle of rights” that include:

• Right to Possess: The right to physically occupy and control the property.
• Right to Use: The right to utilize the property for any lawful purpose.
• Right to Transfer: The right to sell, lease, or otherwise convey the property to another party.
• Right to Encumber: The right to mortgage or otherwise use the property as security for a debt.
• Right to Exclude: The right to prevent others from entering or using the property.

2. Types of Real Property Rights:

a. Fee Simple Ownership: This represents the highest form of ownership, granting the owner complete and unrestricted rights to the property, subject only to governmental powers such as taxation, eminent domain, police power, and escheat.

b. Leasehold Interest: This grants the lessee (tenant) the right to possess and use the property for a specified period, subject to the terms of the lease agreement. The lessor (landlord) retains the fee simple ownership and receives rent payments. The value of a leasehold interest can be calculated as the present value of the difference between the market rent and the contract❓ rent, discounted over the lease term:

*VL = Σ [ (MRt – CRt) / (1 + r)^t ]*

Where:
*VL* = Leasehold Value
*MRt* = Market Rent in period t
*CRt* = Contract Rent in period t
*r* = Discount Rate
*t* = Time period

c. Mineral Rights: These grant the owner the right to extract minerals from the subsurface of the property. Mineral rights can be severed from the surface rights, creating separate ownership interests.

d. Water Rights: These determine the right to use water from a particular source. Water rights are subject to complex legal doctrines, which vary by jurisdiction. Riparian Rights❓❓ grant landowners adjacent to a water source the right to use the water, while appropriative rights grant the right to use water based on a permit or historical use.

e. Air Rights: These grant the owner the right to use the airspace above the property. Air rights can be valuable in urban areas where land is scarce.

f. Rights of Co-Owners: When property is owned by multiple parties, each co-owner has specific rights and responsibilities. Common forms of co-ownership include:

i. Tenancy in Common: Each co-owner owns an undivided interest in the property, which can be sold or inherited independently.

ii. <a data-bs-toggle="modal" data-bs-target="#questionModal-305223" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container"><a data-bs-toggle="modal" data-bs-target="#questionModal-78544" role="button" aria-label="Open Question" class="keyword-wrapper question-trigger"><span class="keyword-container">Joint Tenancy</span><span class="flag-trigger">❓</span></a></span><span class="flag-trigger">❓</span></a>: Co-owners have equal rights to the property, and the surviving co-owner(s) automatically inherit the deceased co-owner's interest (right of survivorship).

iii. Tenancy by the Entirety: A form of joint tenancy available only to married couples, providing additional protection from creditors.

g. Easement Rights: An easement grants one party the right to use another party’s property for a specific purpose.

i. Appurtenant Easement: Benefits a specific parcel of land (dominant estate) and is attached to that land. The land burdened by the easement is called the servient estate. As mentioned in the PDF, an appurtenant easement enhancing beach or docking privileges can significantly enhance the value of water-related residential property.

ii. Easement in Gross: Benefits a specific individual or entity, rather than a parcel of land.

3. Appurtenant Rights and Their Impact on Value: Appurtenant rights are rights or privileges that belong to, and pass with, the transfer of real property. The PDF correctly notes that appurtenant rights and interests that transfer with real estate can significantly affect value. These can include:

   • Rights in common ownership of amenities (community pool, golf club membership).
   • Water rights.
   • Easements.

B. Restrictions

1. Types of Restrictions on Property Rights:

a. Zoning Ordinances❓❓: Regulations imposed by local governments that control land use, density, and building design. Zoning ordinances can restrict the types of activities that can be conducted on a property and the size and configuration of buildings.

b. Public and Private Easements: As described above, easements grant specific rights to others to use the property. Public easements are typically for utilities or public access, while private easements are created by agreements between landowners.

c. Rights-of-Way: A type of easement that grants the right to pass over another person’s property. This may include roads, pipelines, or utility lines. The PDF gives the example that a property crossed by a public right-of-way may have a lower value because the right-of-way limits the use of the property.

d. Private Deed Restrictions (Covenants, Conditions, and Restrictions - CC&Rs): Limitations on the use of property imposed by developers or previous owners, which are typically recorded in the deed. CC&Rs can regulate architectural styles, landscaping, and other aspects of property use.

e. Property Taxes: A government levy on property, which is a form of restriction on property rights, as stated in the PDF. Failure to pay property taxes can result in the loss of the property through foreclosure.

2. Impact of Restrictions on Value: Restrictions on property rights can either enhance or detract from value, depending on the nature of the restriction and its impact on the property’s potential uses.

   • Restrictions that limit the property’s development potential or restrict its use will typically decrease its value.
   • Restrictions that protect the property’s amenities or maintain the quality of the neighborhood may increase its value.
   • Negative easements, prohibiting another from blocking a favorable view, can add value as mentioned in the PDF.

3. Identifying Restrictions:

a. Deeds and Title Documents: Legal descriptions within the deed, title abstracts, or title insurance policies will outline many of the rights and restrictions that apply to a property.

b. Zoning and Planning Offices: Local zoning or planning offices maintain public records of zoning ordinances and other land use regulations.

c. Tax Authorities: Local tax authorities maintain records of property tax assessments, which can provide information about the property’s legal description and ownership.

C. Valuation Standards

1. Standard of Value Definition:

The standard of value specifies the type of value that is being estimated in an appraisal❓. Different standards of value reflect different perspectives on the property’s worth.

2. Common Standards of Value:

a. Market Value: The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. As the PDF notes, this is a common standard of value in lending contexts. This definition is crucial for appraisals intended for Fannie Mae/Freddie Mac (FHLMC/FNMA). Relationship, terms, and conditions must be identified by the appraiser.

b. Investment Value: The value of a property to a specific investor, based on their individual investment criteria and financial goals.

c. Insurable Value: The value of a property for insurance purposes, typically based on the cost to replace the improvements.

d. Value in Use: The value of a property to a specific user, based on its contribution to their business or operations.

e. Liquidation Value: The probable price that a property would bring in a forced sale, such as a foreclosure or bankruptcy auction.

3. Importance of Defining the Standard of Value: It is critical for the appraiser and the client to agree on the standard of value that is to be utilized in the appraisal. This ensures that the appraisal report provides the information that the client needs to make informed decisions. As the PDF emphasizes, the type of value the client expects must be clearly defined in the appraisal report.

4. Effective Date of the Appraisal (Valuation Date): Value estimates are always made as of a specific date, known as the effective date of the appraisal or the valuation date. Market conditions and the physical condition of the property are subject to constant change, both of which affect value.

a. Current Date: In most cases, the client will want to know the value as of the current date.

b. Past Values: Appraisals of past values are possible if adequate data (comparable sales, etc.) exist for the period of time in question. As the PDF mentions, these are often required in connection with legal proceedings.

c. Future Value: Appraisals of future value are always speculative because it is impossible to predict future market conditions. These appraisals rely on Extraordinary Assumption❓❓s and Hypothetical Conditions, which must be clearly documented in the report. An Extraordinary Assumption is an assumption that, if found to be false, could alter the value opinion. A Hypothetical Condition is one that is contrary to what actually exists but is supposed for the purpose of the individual assignment.

5. Date of Appraisal Report: The appraisal report date is the date on which the appraisal report is issued and does not directly affect the value estimate. The valuation date is the date as of which value is estimated, commonly the date that the appraiser inspects the subject property. The report date is the date the appraiser completes and signs the report.

6. Intended Use and Intended User:

The appraiser must know why the client wants the appraisal; that is, what the appraisal will be used for. This is important because appraisals are used to help the client make a particular decision. As the PDF states, to limit potential liability, the appraiser should clearly specify that the value estimate is valid only for its intended use by the client, and is not valid for any other use or any other user. The appraiser must also clearly define the intended user of the appraisal report.