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What is Real Estate?
Many people think they are buying a house when they buy real estate. In fact, what you are doing is buying a fee,or piece of land, and the house or other structure comes along because it is appurtenant to the land. There’s a legal definition to appurtenant, a definition I’m not even certain is the same in all fifty states, but the essential meaning is that it is attached to the land in such a way as to make removal a non-trivial process. Real estate requires land or an interest in land. A share of a common interest in land – as in condominiums – is still land. A leasehold where you only have title for a set period of time after which it reverts to the feeownership, is still land, and therefore real estate, although no lender will loan you money for a longer term than the remaining term of the leasehold. A dwelling, whether mobile or not, that sits on rented land is not real estate – it’s personal property, same as an automobile. A mobile home can be permanently attached to land that is owned, and thereby become appurtenant and part of real estate. A mobile home that sits on a rented space somewhere is personal property, not real property, and is not eligible for real estate loans.
There is one more type of real property: an easement, which is a right to use a given piece of property in a given way. An easement can be thought of as irrevocable permission of that easement for that use. There can also be easements running across your fee. For instance, many properties have utility easements for the utility lines running across them. If you build across those easements, or in any way impair the easement holder’s access, the easement holder is within their rights to destroy the impairment. Easements exist for many purposes. Utility easements are probably the most common, followed by access easements, where one or more of the nearby properties has the right to use it to access their own properties. Access easements (along with others) usually pass with ownership of a given parcel. If your property has no public right of way crossing or adjacent to it, and no easement for access to a right of way, most people call that landlocked, and that’s a big issue. If you don’t have permission to move to and from a public right of way, how are you going to get any use out of the property?
What is Residential Real Estate?
The most favorable type of property to get loans on is ‘stick built’, which is the industry name for a dwelling built on site from the most basic components – concrete foundation poured on site, framing assembled from individual boards, plumbing and wiring run by hand through the walls, drywall and taping and sinks and faucets all individually attached to the appropriate place on site. Once such a dwelling is complete, it’s not going anywhere without being completely destroyed. In California, it’s been illegal to build new construction on piers for decades now, but the existing ones are still considered fully stick built, and for all I know, there are still states that permit new construction on piers – they are not without their advantages.
One small step away from stick built is modular, where perhaps an entire wall or entire room was assembled in a factory somewhere, then brought in and attached to other such modules. Pretty much everybody considers these to be fully equivalent to ‘stick built’. Although a few lenders may have additional charges to fund loans on such properties, it’s rare to encounter such lenders.
Condominiums are physically stick built, and the differences between condominiums and true single family housing has nothing to do with the construction, but rather the common interest nature of the condominiums. Developments do not have to be built one on top of another, or even have shared walls, in order to be legally condominiums. The essential feature of condominiums is the existence of a shared interest in land. So-called planned unit developments are legally condominiums – you own your own prescribed bit of land, and have an undivided common interest in community facilities. Some shared interest developments take another form – the co-op, where everyone owns a common interest in the whole piece and only has the right to occupy a given unit. Condominiums have association dues and a board elected by the owners under an agreement usually set in place by the developer when it was being built. The association has the right set dues and make assessments to maintain common interests, to enforce common restrictions with fines, and if things get severe enough, they even have the right to foreclose in pursuit of debts owed. If there is an association, or association dues, then any representation that the property is ‘fee simple’ is a deliberate lie. Condominium is a legal status that is not fee simple or anything close.
Condominiums have additional requirements in the loan world. Your dues to the association will be counted against monthly obligations when you apply for a loan. Many loans require that a given complex have a sixty percent owner occupancy ratio (sixty percent of units are occupied by their legal owners) in order to be funded. This means that complexes with below sixty percent owner occupancy are more difficult to sell, and therefore command a lower price. If you need one of the loan types requiring a given occupancy ratio, you can expect to pay a higher price for the complexes that are eligible than for complexes that are not. At this writing, that’s basically every loan requiring less than twenty percent down payment. So called ‘high rise’ condominiums of more than four floors vertically will typically carry an additional loan surcharge, which will apply even if your particular unit is on the first or second floor.
The next step away from ‘stick built’ is manufactured housing on owned land. The home was manufactured elsewhere, and brought onto the site generally in one or two pieces. Many lenders will not loan on these properties unless they are convinced the dwelling has been permanently attached to the land. Most lenders will only extend loans of up to twenty years duration for this category of property, rather than the more common thirty year loan. Since a twenty year loan requires bigger payments than a thirty year loan, this means prices are lower, as most potential buyers can only afford so much in terms of payment. Those are a matter of individual lender policy, but two things are universal: If the dwelling was manufactured before 1978, regulated lenders cannot lend on them as real estate, and for all manufactured homes there will be a loan surcharge of at least one point. A point is one percent of the final loan amount. It’s acceptable to add one percent (or a percentage equal to the number of points) to the base loan amount to get a rough idea if you’re just standing out in the yard without a calculator, but any formal paperwork should note that an actual point is slightly more expensive. The general formula is add up all the other loan charges, then multiply that amount by 100 and divide it by the quantity (100-p), where p is the total number of points.
Manufactured housing – any housing for that matter – on which you will not own the underlying land or an interest in the underlying land is not real estate. End of discussion. The essential item in a real estate transaction is land, not a dwelling. In most states, transactions concerning dwellings without an interest in the underlying land are handled through their equivalent of the Department of Motor Vehicles. Residential real estate is land, or an interest in land, that includes at least one but no more than four habitable dwellings. Individual parcels with five or more dwellings are considered to be inherently commercial. Residential real estate is what the vast majority of readers are interested in books like this for. From this moment forward in the book, unless otherwise specified, I’m talking about residential real estate.
Copyright 2016 Dan Melson. All Rights Reserved.
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