1
BASIC REAL ESTATE CONCEPTS
KEY TERMS
appurtenance
bill of sale
chattel
deed
hereditaments
highest and best use
immobility
improvements
indestructibility
land use controls
land
nonhomogeneity
personal property
personalty
real estate
real property
REALTOR®
realty
scarcity
situs
specific performance
tenements
LEARNING OBJECTIVES
At the conclusion of this chapter, you should be able to:
1. Describe the characteristics of real estate, including classes of property, physical characteristics of
land, and economic characteristics of land.
2. Describe the concepts of land use and investment, including highest and best use, land use
controls, investment objectives, scope of the real estate business, and the real estate market.
IN THIS CHAPTER
This text is designed to help you master the fundamentals of real estate by introducing information
in a step-by-step format that requires no real estate background. This chapter provides an overview of
the entire real estate business. Each topic introduced in this chapter is discussed in more detail in the
following chapters.
You should use this chapter to become familiar with the format of the book, including objectives,
summary of important points, and questions. Each of these sections is designed to help you study the
CHAPTER
1
2
CHAPTER 1 Basic Real Estate Concepts
material efficiently to master this information. Finally, this text offers advice on
preparation for the North Carolina Real Estate Licensing Examination.
BASIC REAL ESTATE CONCEPTS
Real property has certain physical and economic characteristics that set it apart
from other marketable commodities. These characteristics are so interrelated that
they have a definite effect on one another and are sometimes difficult to separate
in a practical sense. This chapter discusses these characteristics and their effects
on real property value.
Basic Terminology and Definitions
Real estate, real property, realty, and land—These terms often are used inter-
changeably to describe the combination of land, improvements, and rights and
privileges. Title (ownership) is conveyed by deed.
Personal property, personalty, or chattel—Anything that is not considered to be
real property. Title is conveyed by bill of sale.
The first thing students will have to master in this course is the concept that
all property is either real or personal. The concept of real property is made up of
three components: land, improvements, and rights and privileges. (These compo-
nents are addressed in more detail in the forthcoming chapters, but the following
gives a brief introduction.)
Land—The surface of the earth with the boundaries extending downward to the
middle of the earth extended back upward to the highest heavens. Land consists
of three components: surface, subsurface, and airspace.
This concept shows us that much of what is considered “land” is, in fact, made
up of air. In common usage, the term “land” often is used in much the same way
as the terms real estate, real property, and realty.
Improvements—Anything used to better or “improve” the use of the land. These are
artificially attached items and are considered to be real property and not personal.
Appurtenance—Any right or privilege that is considered to run with the land.
Not all rights and privileges are considered to run with the land and may be
“personal” in nature. The concept of runs with the land is that the right or privi-
lege is an integral part of the property, much like structures or other improve-
ments, and are conveyed as a normal part of the deed transferring title to the real
property. For example, municipal water and sewer lines are an example of a right
or privilege the government has to place the pipes to provide utility service to the
property and likely others. When the title is conveyed to a subsequent owner, that
© OnCourse Learning.
3
Basic Real Estate Concepts
right remains intact. The same would apply if a property owner has the right to
cross over adjoining property to access theirs. Most likely, this would be a perma-
nent right that would convey upon transfer.
Tenements—Ownership interest in anything immobile and is considered part of
the real property.
Hereditaments—Any rights capable of being inherited.
Economic Characteristics of Land
Scarcity
An important economic characteristic of real property (Figure 1.1) is its availabil-
ity or scarcity. Land is a commodity that has a fixed supply base. No additional
physical supply of land is being produced to keep pace with the ever-increasing
population. The problems created by an ever-increasing demand for the limited
supply of land, however, have been eased substantially by an increase in the eco-
nomic supply of land. This increase has come about as a result of the greater utili-
zation of the existing physical supply of land. Farmers are continuing to increase
the use of land in the agricultural area. Greater crop yields per acre are being
achieved as a result of scientific and technological advances. Today, the agricul-
tural industry is producing more cattle per acre and more bushels of crops per
acre than it did just a few years ago.
In urban areas, land is being utilized to a greater extent through high-
density development. Advances in science and technology result in the creation
of high-rise office buildings, apartment complexes, and multilevel shopping cent-
ers. Consequently, 1 acre of land serves many times the number of people who
could use the land in the absence of these improvements.
Modification by improvement is another factor that has increased the economic
supply of land. These modifications can include the construction of highways,
bridges, water reservoirs, purification plants, and public utilities. The improve-
ments and expansions of public air and land transportation systems also make
a significant contribution in this regard. These accomplishments in the fields of
1. Scarcity
2. Permanence of investment
3. Location
FIGURE 1.1 Economic characteristics of real property.
Source: © 2019 OnCourse Learning
© OnCourse Learning.
4
CHAPTER 1 Basic Real Estate Concepts
construction and transportation have converted land that had not been acces-
sible and useful in a practical sense into land that can now be used. A substantial
increase in the economic supply of land has resulted from these improvements to
the land (rather than improvements on the land).
Permanence of Investment
Because of the physical characteristics of immobility and indestructibility of
land, the investment of capital and labor to create improvements to the land and
improvements on the land is a long-term investment. It takes many years to recoup
the investment made to improve the value and quality of land. If a developer mis-
judges the demand for land-specific improvements or if economic conditions,
including real estate market conditions, change dramatically, the developer may
never recoup his full investment.
Location (Situs)
The location of land, or situs, is an extremely important economic (or more pre-
cisely, socioeconomic) characteristic of land, and it is the characteristic that has
the greatest effect on property value. The physical characteristic of immobility
dictates that the location of a parcel of land is permanent. Therefore, if the land
is located in an area where demand is high, the land will have a substantially
increasing value. Conversely, if the land is inaccessible from a practical stand-
point or is located in an area with little or no demand, its economic value will be
depressed.
Although the location of land cannot be changed, the value of the location
(and consequently, the value of the land) can be increased by improvements to
access and other modifications. Additionally, the value of the location can change
as the result of the changes in preferences of people. In the 1950s there was a
great flight from the urban centers to the suburbs. This resulted in property value
reductions in urban areas. This trend has moderated in recent years. People are
rediscovering the inner cities, rehabilitating older properties, and restoring lost
urban property values.
Physical Characteristics of Land
Immobility
An essential physical characteristic of land (Figure 1.2) is its immobility. That
land cannot be relocated from one place to another is an obvious feature of land as a
commodity and is the primary distinguishing feature between land and personal
property. The physical characteristic of immobility is the reason the economic
characteristic of location significantly affects land value, thus making the market
for land a strictly local market. This requires brokers and agents to have specific
© OnCourse Learning.
5
Basic Real Estate Concepts
knowledge of their local real estate market to serve buyers and sellers in their
respective market areas.
Permanence (Indestructibility)
Another unique feature of land is its physical characteristic of indestructibility.
Land is a permanent commodity, and it cannot be destroyed. It may be altered sub-
stantially in its topography or other aspects of its appearance, but its geographic
coordinates remain. Land values can change positively or negatively as a result of
changing conditions in the surrounding area and are said to suffer from economic
obsolescence when such changes adversely affect the value of land. For example,
the construction of an interstate highway can radically affect land values. Do not
confuse economic obsolescence with physical depreciation, which is a loss in value
from deterioration of the improvements on the property itself (see Chapter 13).
The permanence or indestructibility of land makes it attractive as a long-term
investment, but an investor should be alert to changing conditions that can affect
the value of the investment.
Uniqueness (Nonhomogeneity)
An important feature of the land is that no two parcels are identical, in either a
physical or a legal sense. For example, two tracts of land are quite different from
two cars that come off an assembly line. Two cars may be nearly identical, and one
could be substituted for the other; this is clearly not the case with real estate. Even
two apparently identical adjoining parcels differ in aspects such as soil, drainage,
view, and vegetation, to name a few.
This uniqueness, or nonhomogeneity, of each parcel of land gives rise to the
concept of specific performance. If a seller contracts to sell her real property, the
law does not consider money a substitute for this duty. Thus, if a seller tried to
breach the contract and pay financial damages instead, the buyer could refuse to
accept the money and insist on taking title to the land as the only acceptable per-
formance of the contract. For example, one might sign a purchase agreement for
a home in a particular neighborhood because it was next to friends, family, or
schools. If the seller changed her mind and offered another, better home on the
other side of town, the buyer could hold the seller to specific performance of the
original contract for the unique advantages of that property.
1.
Immobility
2. Permanence
3. Uniqueness
FIGURE 1.2 Physical characteristics of land.
Source: © 2019 OnCourse Learning
“Other textbook
resources list four
economic charac-
teristics of land:
scarcity, location,
improvements, and
permanence and three
physical character-
istics: immobility,
indestructibility, and
uniqueness.”
—Tim Terry, DREI
© OnCourse Learning.
6
CHAPTER 1 Basic Real Estate Concepts
GENERAL CONCEPTS OF LAND USE AND INVESTMENT
The Highest and Best Use Concept
The concept of highest and best use is of extreme importance and considers all the
physical and economic factors affecting the land. The highest and best use of land
is that use that will provide the property owner the best possible return on an invest-
ment over a specified time period, resulting in the highest possible present value of
land. Present value is defined as the value at the time of the appraisal; therefore,
highest and best use can and does change with time. The use must be legal and
must comply with zoning ordinances, government regulations, legally enforce-
able private deed restrictions, and restrictive covenants. The highest and best use
of land is attained by the intelligent use of capital, labor, and other resources to
improve the land and its productivity.
The task of coordinating and combining capital, labor, and resources to create
an improvement is performed by an expert in real estate. The expert may be an
individual developer or may be a general partner in a limited partnership with
the other investors providing the capital as limited partners. The expert must
determine the use of the land that will provide the necessary income from the
land after labor and capital have been paid. For example, the expert will establish
the optimum size of a building to be constructed on a particular site. The space
should not be overimproved or underimproved. The building must not contain
more space than can be rented in the market, nor should it fail to provide the
space that the market demands. An overimprovement or an underimprovement
does not provide the optimum income to the land, and as a result, the land is not
put to its highest and best possible use.
A particular parcel of land has only one highest and best use at any particular
time. The loss of residual income to the land resulting from failure to employ the
land to its highest and best use causes the value of the property to diminish.
Public and Private Land Use Restrictions
Even though most land in the United States is privately owned, there is a vested
public interest in land because the type of property use affects surrounding prop-
erty owners and the general public. Because of this interest of the general public
and of other property owners, the use of land requires regulation for the benefit of
all. The need for land use controls has existed since the country’s founding. This is
especially true in areas of extremely dense population, where land uses radically
affect a great number of people.
Public land use controls exist in the form of city planning and zoning, state and
regional planning, building codes, suitability for occupancy requirements, and envi-
ronmental control laws. Additionally, there is substantial public control of land
use as a result of government ownership. Examples of government ownership
include public buildings, public parks, watersheds, streets, and highways.
© OnCourse Learning.
7
General Concepts of Land Use and Investment
Regulation of land use in the private sector exists in the form of protective or
restrictive covenants established by developers, restrictions in individual deeds (pri-
vate deed restrictions) requiring the continuation of a specified land use or prohibit-
ing a specified land use, and use restrictions imposed on a lessee in a lease contract.
Real Estate Investment Objectives
Real estate investors come in many varieties, ranging from the individual who
buys one rundown property and fixes it up for resale or rental to the individuals
or corporations who buy large commercial complexes such as shopping centers
and factories.
The primary purpose of any investment is to produce income or profit, bal-
ancing the profit the investor desires against the risk he is willing to take. Real
estate offers the opportunity to make a profit in three ways: appreciation, positive
cash flow, and tax advantage.
Appreciation is the increase in market value during the time the investor holds
the property. If an investor buys a property for $100,000 and it increases 3% in
value annually, and he holds the property for 10 years, the property will have
appreciated to a value of $134,391.46.
A positive cash flow exists when the gross effective income produced by the
property exceeds the total of operating expenses. (See Chapter 13, “Real Property
Valuation,” for the discussion of gross effective income and expense.)
Tax advantages may result from appreciation or gains being taxed at a capital
gain rate lower than the investor’s marginal tax rate when the property is sold and
from deductions of property taxes, insurance, and other expenses during the time
the investor owns the property. Depreciation may provide an annual tax reduc-
tion, postponing the tax on the depreciated amount until the property is sold.
While appreciation, positive cash flow, and tax advantage are ways to make
money on real estate investments, leverage allows more money to be made on less
investment. For a simplified example, suppose an investor buys a $100,000 prop-
erty with an initial investment of $10,000 for down payment and closing costs.
The property appreciates $3,000 the first year, has a positive before-tax cash flow
of $50 a month, and produces a tax savings of $400 for the year. This $4,000 is
only 4% of $100,000, which is not a very good return on an investment. However,
it is 40% of $10,000, which is an excellent return on an investment.
Real estate, like any investment, has risks. The real estate’s market value can
decline, the property can deteriorate, or the area surrounding the property can
change, adversely affecting the property value. Rent or income may not meet
expectations. Plants or military installations nearby can close. An “oil glut” can
change to an “oil bust,” leaving an overabundance of office space, homes, and so
on. Environmental problems may adversely affect the property. If any of these
things occurs, the effect may be compounded by the real estate’s lack of liquidity.
The investor most likely cannot sell the property instantly for its full value.
© OnCourse Learning.
8
CHAPTER 1 Basic Real Estate Concepts
SCOPE OF THE REAL ESTATE BUSINESS
The real estate business is extensive in scope and is a complex industry. Usually,
when people think of the real estate business, they think only of residential bro-
kerage. This is just one of several specializations within the real estate business,
however. In fact, within the field of brokerage, there are several specializations,
including farm and land brokerage, residential property brokerage, and commercial
and investment property brokerage. In addition to brokerage, other specializations
in real estate include property management, appraising, financing, construction,
property development, real estate education, and government service.
Real estate transactions can be traced to early written records from biblical
times, but those transactions were between the seller and buyer directly, without
the participation of a real estate broker. The business of real estate brokerage is a
product of the twentieth century. In the early 1900s, states began enacting licens-
ing law legislation, and today all states in the nation require real estate brokers or
salespeople to be licensed. North Carolina adopted its Real Estate License Law
statute in 1957.
The establishment of the National Association of Real Estate Boards in
1908 was a major factor in the development of real estate brokerage. During the
1970s, the name of this trade group was changed to the National Association of
REALTORS® (NAR). The term REALTOR® is a registered trademark of NAR, and
it identifies licensees who are also members of the local, the state, and the national
association.
It is important to remember that all licensees are not REALTORS® and that
only the active members of these associations may use the term REALTOR® or
REALTOR ASSOCIATE®. One of the most important accomplishments of NAR
and its predecessor organization was the creation of a Code of Ethics in 1913.
This code has contributed significantly to the professional stature of real estate
brokerage. Strong parallels exist between licensing laws and this original Code
of Ethics.
Defining Broker and REALTOR®
The general public has a poor understanding of the distinction between a broker
and a REALTOR®.
The North Carolina Real Estate Commission issues real estate broker licenses
and regulates broker’s practices. The term REALTOR® designates a licensee (bro-
ker) who is also a member of the local association of REALTORS® at the city
or county level, a state association of REALTORS®, such as the North Carolina
Association of REALTORS® (NCAR), and NAR. The REALTOR® association is
in no way associated with or regulated by the Real Estate Commission, although
the two groups work together for the advancement of professionalism in the real
estate business.
© OnCourse Learning.
9
Scope of the Real Estate Business
Not all licensees are REALTORS®. North Carolina has approximately 94,500
licensees, of whom only roughly about one-third are REALTORS®. In addition
to being answerable to the Real Estate Commission and to the civil and crimi-
nal courts for wrong-doing or failure of duty, the REALTOR® is also accountable
under the Code of Ethics to the local association of REALTORS®.
Other significant contributions of NAR include efforts that have resulted
in licensing laws being enacted in all states, legislative activity on the federal
level to prevent unnecessary and harmful legislation from diminishing rights
of private ownership in real property, and excellent programs of continu-
ing education for members and nonmembers through NAR and its affiliated
organizations.
Relocation is a growing part of the real estate business. A vast relocation
network exists. Many corporations offer transferring employees generous relo-
cation packages, including paying the closing costs for selling old homes and
purchasing new homes. Some corporations have in-house relocation depart-
ments to assist employees with every aspect of their move. Others contract with
third-party relocation companies to provide these services. Many corporations,
relocation companies, real estate brokerage firms, appraisers, attorneys, and
others who work with relocation belong to the Employees Relocation Coun-
cil, which provides networking, research, education, and so on, to its mem-
bers. In-depth coverage of relocation is beyond the scope of the text; however,
new agents are advised to become familiar with the wants, needs, and expecta-
tions of relocating individuals, families, and employers, as well as relocation
companies.
Real estate brokerage is the bringing together of buyers and sellers or land-
lords and tenants for the temporary or permanent transfer of an interest in real
property owned by others through purchase, sale, lease, or rental by a real estate
broker for compensation. In North Carolina, such brokerage activities require a
North Carolina broker’s license.
The fact that real estate represents a growing percentage of the wealth in the
United States illustrates the extremely broad scope and importance of the real
estate business. The complexity of this business requires that agents have con-
tinual interaction with people in a variety of other professions. Today’s real estate
practitioner needs a basic knowledge of the many functions performed by other
members of the real estate and allied professions.
Real estate professionals must work with mortgage bankers or brokers to
secure financing for their clients; appraisers to validate the value of the property;
home inspectors and wood-destroying insect inspectors to determine the condi-
tion of the property; developers and contractors when selling new construction;
attorneys, surveyors, and insurance agents when closing properties; and govern-
mental officials, such as tax assessors, environmental health specialists, and city
and county planners when necessary.
© OnCourse Learning.
10
CHAPTER 1 Basic Real Estate Concepts
Successful real estate practitioners are also counselors and educators who
must recognize the limits of their knowledge and guard against giving legal,
accounting, or tax advice.
The Real Estate Market
A free market is one in which the buyer and seller negotiate a purchase and sale
without undue pressure, urgency, or outside influence other than the principle of
supply and demand. Although government regulations may indirectly affect the
price of real estate or the costs of borrowing money to buy real estate, the govern-
ment does not set real estate prices. The principle of supply and demand deter-
mines real estate prices; thus, the real estate market is an excellent example of the
free market concept. Market value, which is discussed in Chapter 13, depends on
the free market concept.
Special Characteristics
The physical characteristics of land create special characteristics of the real estate
market that do not exist in other markets. As noted previously, the immobility of
real estate causes the market to be local in character, requiring local specialists
who are currently familiar with local market conditions, property values, and
availability. The nonhomogeneity, or uniqueness, of each parcel of real estate also
requires that the market be local. Each parcel of real estate is unique, primarily
because of its location.
The physical characteristic of immobility also results in a market that is slow
to react to changes in supply and demand. When supply substantially exceeds
demand, existing properties cannot be withdrawn from a local market area and
relocated to an area in which there is a higher demand. Conversely, when the
demand exceeds supply, new supplies of housing and business properties cannot
be constructed quickly. Therefore, after a recession, it takes many months for the
supply to equal or exceed demand in the real estate market.
Factors Affecting Supply and Demand
Several factors affect supply and demand in the real estate market, on both the
local and national levels. Examples of these factors include interest rates; avail-
ability of financing for purchase and construction; population migrations; varia-
tions in population trends and family formations; government regulations; local
and national economic conditions; and the availability and cost of building sites,
construction materials, and labor.
Historical Trends
Just as the economy as a whole is subject to peaks and valleys of activity that have
recurred over the years with fairly reasonable regularity, the real estate industry,
© OnCourse Learning.
11
Scope of the Real Estate Business
as a part of this economy, is similarly subjected to recurring periods of recession
and prosperity.
The real estate industry is often the first industry to feel the adverse effects
of depressed conditions in the national and local economies. It may take the
real estate industry longer than the economy as a whole to climb out of a reces-
sion because of the inability of the real estate industry to react quickly to radical
changes in supply and demand. But that is not always the case. In recent times,
real estate has sometimes remained strong during a recession or led the recovery
from an economic downturn.
Another characteristic of the real estate cycle is that the real estate industry
usually attains a much higher level of activity in prosperous times than does the
economy in general.
The Real Estate Practitioner
North Carolina defines only one real estate license category, broker, since it
became an all-broker state on April 1, 2006, eliminating the “salesperson” license
category. All individuals or entities who want to engage in real estate broker-
age activities in North Carolina must first be licensed as brokers. Many current
brokers have received their licenses under previous criteria of either education
and experience (criterion one) and the passing of a state examination (criterion
two). Some have been licensed based on reciprocal licensing arrangements in
other states. Those who met the criteria for and were licensed as brokers before
April 1, 2006, can remain brokers with no provisional status attached to their
licenses. Those who were licensed as salespersons as of that date were licensed
automatically as brokers at that time, although with provisional status. All new
brokers licensed after April 1, 2006, were granted licenses on provisional sta-
tus. To remove provisional status, all provisional brokers must complete three
30-hour post-licensing courses and pass the course exams.
A broker without provisional status is able to practice independently. A broker
with attached provisional status is not. She must work under the supervision of a
broker who is a broker-in-charge (BIC) until she has completed all post-licensing
requirements to remove the provisional status and to practice independently. A
provisional broker cannot become a BIC. A BIC must have a minimum of two
years’ full-time real estate experience, which may be met as a broker regardless of
provisional status or lack thereof; however, provisional status must be removed
before becoming a BIC. Although the broker-in-charge is ultimately responsible
for all actions of the provisional brokers she supervises, the provisional broker
cannot escape responsibility for her duties and actions.
Relationships between brokers and clients/customers, as well as relation-
ships among brokers, are discussed extensively in Chapter 7. They are men-
tioned in this chapter only to clarify the terminology used in this text. The word
© OnCourse Learning.
12
CHAPTER 1 Basic Real Estate Concepts
broker or agent is used when the text is referring to a broker or a provisional
broker when differentiation between the two is not required. The terms broker
and provisional broker are used to differentiate the two categories of licensees,
when necessary.
The successful real estate practitioner is not engaged in applying techniques
of the “hard sell.” Rather, he is a counselor or an adviser working diligently to
solve the problems of buyers, sellers, and renters of real estate. Everyone who
contacts a real estate office has a problem. The problem involves real property—
the need to buy, sell, or lease. The real estate practitioner’s ability to solve these
problems for the benefit of others results in a successful career. Like any good
counselor, the real estate practitioner provides information to, but does not make
decisions for, the clients and customers. What information can and cannot be
provided depends on several factors, but especially on the law of agency, which is
discussed in Chapter 7.
A career in real estate can provide the practitioner with satisfaction from
serving the needs of people and with accompanying financial rewards. Success
in the real estate business is built on knowledge, service to others, and ethical
conduct in all dealings.
The real estate practitioner must be knowledgeable in a variety of other sub-
jects necessary to satisfactorily perform one’s obligations in real estate trans-
actions. These other subjects, which are discussed in depth in later chapters,
include property ownership and interests, transfer of title to real property, fun-
damentals of residential construction, valuation of real estate, land use controls,
fair housing laws, property management, insurance, and federal income tax
implications of real estate ownership and sale. The real estate practitioner also
must understand the meaning of the various real estate and legal terms used in
real estate transactions. Finally, the practitioner must have a basic understand-
ing of the various arithmetic problems that are common in the activities of real
estate brokerage.
Summary of Important Points
1. Real property includes the surface of the land, all improvements that are
attached to the property, everything beneath the surface, and the airspace
above the land.
2. Personal property (also called personalty or chattel) is the opposite of real
property—that is, everything that is not real property is considered per-
sonal property. Things that are readily movable—that is, not attached to the
land—are personal property.
3. Real property has the physical characteristics of immobility, permanence,
and uniqueness.
© OnCourse Learning.
13
Summary of Important Points
4. Real property has unique economic characteristics based on its physical
location (situs).
5. The principle of highest and best use of land is an all-important concept in
land use. Failure to make the highest and best use of land results in a lower
value.
6. Controls of land use are necessary to protect the vested interests of the gen-
eral public as well as the interests of surrounding landowners. Land use
controls can be private, such as private deed restrictions and restrictive cov-
enants, or public, such as zoning ordinances.
7. The real estate business involves many specialties besides residential bro-
kerage and requires knowledge of many fields, including finance, housing
codes, government regulations, contract law, and appraisal.
8. A real estate market is local and is an example of the free market concept
wherein buyers and sellers have adequate time and information to reach
a purchase and sale agreement without undue pressure, and with factual
knowledge of all important aspects of the transaction. The physical and eco-
nomic characteristics of land create a market that is local and slow to react
to fluctuations in supply and demand.
9. The effects of depressed economic conditions are sometimes felt by the real
estate industry before other segments of the economy. Traditionally, the real
estate industry has been slower to pull out of depressed economic periods,
but typically it reaches higher peaks of activity and prosperity during pros-
perous times than many other segments of the economy. In recent times,
however, the real estate market has remained strong during a recession and
sometimes has led the recovery from an economic downturn.
10. The real estate agent acts as an advisor or problem solver for the benefit of
one’s clients and customers. Because the purchase of a home involves the
seller’s most important financial asset and creates long-term financial obli-
gations for the buyer, the agent must be thoroughly knowledgeable, compe-
tent, and responsible.
11. Real estate investment offers the opportunity to earn profits through
appreciation of the property value, tax advantages, and positive cash flow.
Leverage allows an investor to earn a greater return on a smaller initial
investment. Some of the risks involved in real estate investments are market
value declines, property deterioration, and adverse changes in the surround-
ing area.
© OnCourse Learning.
14
CHAPTER 1 Basic Real Estate Concepts
Review Questions
Answers to the review questions are in the Answer Key at the back of the book.
1. All of the following are separable ownerships
in land EXCEPT:
A. surface of the land.
B. area below the surface.
C. nonhomogeneity.
D. air rights.
2. The characteristic of land that causes the real
estate market to be essentially a local market
is the physical characteristic of:
A. indestructibility.
B. immobility.
C. availability.
D. natural features.
3. The nonhomogeneity of land:
A. is the basis for the legal remedy of specific
performance.
B. results from the uniqueness of every par-
cel of real estate.
C. is a physical characteristic of land.
D. all of the above.
4. An increase in the economic supply of land
has resulted from:
A. increased utilization of the physical supply
of land.
B. modification by improvements to the land.
C. high-density development.
D. all of the above.
5. The quality of the location of land and,
consequently, the value of the land can be
changed by:
A. the principle of nonhomogeneity.
B. relocation of the land.
C. changes in the national scope of the real
estate business.
D. improvements to the land that result in
accessibility not previously available.
6. The employment of the concept of highest
and best use:
A. includes consideration of the physical and
economic factors affecting land use.
B. results in the greatest present value of the
land.
C. must be a use feasible in the near future.
D. all of the above.
7. An example of public land use controls is:
A. restrictive covenants.
B. zoning laws.
C. deed restrictions.
D. protective covenants.
8. Real estate investment offers the opportunity
to produce a profit in the following ways
EXCEPT:
A. appreciation.
B. positive cash flow.
C. specific performance.
D. tax advantages.
9. The real estate market may be described in all
the following ways EXCEPT:
A. a free market.
B. a local market.
C. a movable market.
D. a market that is slow to react to changes in
supply and demand.
10. The function of a real estate agent in dealings
with buyers and sellers in the real estate
market may best be described as which of the
following?
A. financier
B. counselor or advisor
C. contractor
D. salesperson
© OnCourse Learning.
15
Review Questions
11. The real estate agent must have specialized
knowledge of a variety of subjects that
include all of the following EXCEPT:
A. financing.
B. contracts.
C. legal advice.
D. valuation of property.
12. Economic characteristics of real property
include which of the following?
A. location
B. immobility
C. indestructibility
D. nonhomogeneity
13. Which of the following has the greatest effect
on real property value?
A. tax rates
B. location
C. availability
D. indestructibility
14. Which of the following is an example of the
private control of land use?
A. zoning
B. restrictive covenants
C. building codes
D. environmental controls
15. The term REALTOR® designates:
A. any real estate licensee.
B. a real estate licensee who is a member of
the national, state, and local association of
REALTORS®.
C. only licensees who hold broker’s licenses.
D. all of the above.
16. Physical characteristics of land include all of
the following EXCEPT:
A. location.
B. nonhomogeneity.
C. permanence.
D. immobility.
17. The National Association of REALTORS® is:
A. a government organization.
B. a trade group.
C. an organization for buyers and sellers of
commercial real estate.
D. all of the above.
18. Factors affecting supply and demand in real
estate include all of these items EXCEPT:
A. government regulations.
B. interest rates.
C. local economic conditions.
D. real estate investment trusts.
19. Scarcity and location are examples of:
A. physical characteristics of the land.
B. highest and best use.
C. permanence of investment.
D. economic characteristics of the land.
20. All of the following are public land use
restrictions EXCEPT:
A. building codes.
B. protective covenants.
C. zoning.
D. regional planning.
© OnCourse Learning.
KEY TERMS
air rights
alienation
appurtenance
appurtenant easement
bundle of rights
condemnation
condominium
cooperative
co-ownership
curtesy
declaration of restrictions
defeasible fee
dower
easement
easement in gross
emblements
eminent domain
encroachment
encumbrance
estate
estovers
fee simple absolute
fixture
foreshore
freehold estate
fruits of industry (fructus
industriales)
fruits of the soil
(fructus naturales)
hereditament
intestate succession
joint tenancy
judgment lien
land
lateral support
leasehold estates
levy
lien
life estate
life tenant
lis pendens
littoral rights
marital life estates
mineral lease
nonfreehold estate
North Carolina Condominium
Act
partition
party wall
prescription
profit or profit à prendre
pur autre vie
remainderman
reversionary interest
riparian rights
severalty
subjacent support
survivorship
tenancy by the entirety
tenancy in common
tenements
time sharing
townhouse
Uniform Commercial
Code (UCC)
PROPERTY OWNERSHIP
AND INTERESTS
2
CHAPTER
16
© OnCourse Learning.
17
The Concept of Property
LEARNING OBJECTIVES
At the conclusion of this chapter, you should be able to:
1. Define and give examples of real property and personal property.
2. Define and give examples of fixtures, as well as describe tests for determining whether an item
is a fixture.
3. Define and list the freehold estates.
4. Define severalty and concurrent property ownership, including condominiums, townhouses,
cooperatives, planned unit developments (PUDs), and time-share property.
5. List and define types of lien.
6. List and define types of easement.
7. Define encroachments and appurtenances such as water, air, and subsurface rights.
8. Describe real property taxation and special assessment systems in North Carolina.
IN THIS CHAPTER
This chapter begins the discussion of the various forms of real property ownership. Real
estate is defined by (and is subject to) a complex and unique body of laws. Although
you will be exploring a variety of legal terms, you should not give legal advice. Pro-
viding legal advice or opinions is defined as the practice of law, which only attorneys
are authorized to do. It is, however, the duty of real estate agents to recognize basic
concepts of law as they affect clients and customers and to see that they are properly
informed of their rights and obligations through appropriate legal counsel.
THE CONCEPT OF PROPERTY
Property is an individual’s, a group’s, or an entity’s ownership rights, interest, and
legal relationship to something, tangible or intangible, to the exclusion of other
individuals, groups, and entities. Property, therefore, may be considered a legally
created and protected bundle of rights, which an individual, a group, or an entity
has in a tangible item or an intangible concept. A bundle of rights includes the
right to possession of the property; the right of quiet enjoyment of the property; the
right to exclude others; the right to dispose of the property by gift, by sale, or by
will; and the right to control the use of the property and profits within the limits of
the law. The components of the bundle can belong to one owner or can be sepa-
rated with rights or groups of rights belonging to different owners. Examples of
separate ownership of various rights in the bundle abound. For example, Hertz,
a corporate entity, owns cars (tangible property) but rents the right to use those
cars (intangible property) to individuals; an owner of an office building leases
office space (right to possess and use) to a corporation; and a landowner sells the
mineral rights to his property while retaining all other rights. Note that owner-
ship and lease rights may coexist within the same property at the same time.
“When you purchase
a property, you get a
bundle of rights. The
items in the bundle
can be remembered by
the acronym DEEPC:
Disposition, Enjoy-
ment, Exclusivity, Pos-
session, and Control.”
—Terry Wilson, DREI
© OnCourse Learning.
18
CHAPTER 2 Property Ownership and Interests
Property is divided into real property and personal property. Real estate practi-
tioners must have a thorough understanding of the differences between real and
personal property. Different laws apply to each type of property. Most items of
personal property do not require written documentation of transfer of owner-
ship, but all transfers of ownership of an interest in real property must be in writ-
ing. Personal and real property are taxed differently. Owners’ and creditors’ rights
differ depending on whether the property is real or personal.
Real Property
In Chapter 1, real property, also called real estate and realty, was defined as land
and everything permanently attached to the land. A concept of the law of real
property is that real property consists of lands, tenements, and hereditaments;
therefore, everything included in the following definitions of these terms is a
component of the property owner’s bundle of rights.
Land is the surface of the earth; the area below the surface to the center of the
earth; and the area above the surface, theoretically, to the highest heavens.
Plants are either annuals or perennials. Annuals must be planted each
year and are considered personal property. Annuals are also called fructus
industriales.
Perennials do not require annual cultivation and are considered real
property unless planted in a moveable container. Perennials are also called
fructus naturales.
Land includes structures and other improvements (such as fences, swimming
pools, flagpoles, and retaining walls) that have been placed there with the inten-
tion that they be a permanent part of the land.
Tenements and Hereditaments
Tenements include all those things that are included in the definition of land and
include both corporeal and incorporeal rights in land. Corporeal rights are tangible
things—things that can be touched and seen. Incorporeal rights are things that
are intangible. Tenements include buildings (corporeal). Tenements also include
rights in the property of another, such as an easement (incorporeal). In addition,
tenements include intangible rights in the land of another, such as the right to take
minerals, soils, timber, fish, or game from that land. This right is called profit à
prendre, or simply profit.
Hereditament is a term that includes everything in the term land and everything in
the term tenements that is capable of being inherited. The land and buildings are
© OnCourse Learning.
19
The Concept of Property
capable of being inherited and are therefore hereditaments. Some personal rights
in land, such as the right to fish and some easements, may not be inheritable. If
these rights are not inheritable, they are not hereditaments.
Things that grow in the soil may be included in the definition of real prop-
erty. Growing things that do not require planting or cultivation but that grow
naturally and are perennial are fruits of the soil (fructus naturales) and are desig-
nated in law as real property. Examples include forest trees, native shrubs, and
wild berries. Growing things that require planting and cultivation are fruits of
industry (fructus industriales) or emblements and are defined as personal prop-
erty. These are usually annual crops, and examples include corn, wheat, melons,
and soybeans. The term emblements also is used to denote the right of a tenant
to reenter the property and harvest the emblements after the termination of
the tenancy.
Appurtenances
An appurtenance is any right or privilege that is said to “run with the land.”
Therefore, it transfers with title to the land. Several of the items discussed next
are examples of common appurtenances, such as subsurface, air, and riparian
(water) rights. These three examples illustrate that an appurtenance cannot exist
by itself; that is, the easement must attach to the primary item, the land that it
affects. Other examples of appurtenances include appurtenant easements and the
benefits of restrictive (protective) covenants (discussed later in this chapter).
Subsurface Rights
A subsurface right, or mineral right, is an interest in real property that allows the
owner to take minerals from the earth. The owner may conduct mining opera-
tions or drilling operations personally or may sell or lease these rights to others
on a royalty basis. A mineral lease permits the use of land for mineral exploration
and mining operations. (The Statute of Frauds, discussed in Chapter 4, requires
that such a lease be in writing to be enforceable.) The lease may be for a definite
term or for a period as long as the land is productive. A mineral royalty is income
received from leases of mineral land.
Air Rights
Ownership of land includes ownership of and the rights to the area above the sur-
face of the earth (air rights). The right of ownership of the airspace enables the
landowner to use that space to construct improvements, to lease, or to sell to
others.
The right of ownership and control of the airspace is limited, however, by zon-
ing ordinances and federal laws. Zoning ordinances often restrict the height of
improvements constructed on the land, and federal laws permit the use of the
“Mineral, oil, gas and
subsurface leases must
be in writing in North
Carolina.”
—Melea Lemon, DREI
© OnCourse Learning.
20
CHAPTER 2 Property Ownership and Interests
airspace by air traffic flying at an altitude specified by the government. As a prac-
tical matter, a property owner is entitled to claim only the area above his land that
he might reasonably be expected to use.
Water Rights
The appurtenant rights of an owner of property bordering a flowing body of water
are riparian rights. Riparian rights attach to the land but cannot exist by
themselves. Generally, property adjacent to a river or watercourse affords the
landowner the right to access and use the water for purposes such as drawing
water for personal use and entering the water via a boat pier. Actual owner-
ship of the water depends on a number of factors. North Carolina recognizes
the distinction between a navigable and a nonnavigable watercourse. In the
former, adjacent owners are limited to the banks of the watercourse, whereas
the state owns the body of water and the right to use it. If one owner owns all
of the land surrounding a nonnavigable body of water, that owner owns all of
the land under the water. If more than one owner owns property surrounding
a nonnavigable body of water, ownership extends to the center of the water,
unless the deed states otherwise.
Littoral rights are the rights of landowners whose property borders an ocean or a
lake. If the water levels fluctuate, as with ocean tides, the landowner owns to the
mean high watermark. The state owns the foreshore, which is the land between the
mean high watermark and low watermark.
An owner’s riparian property and property rights can be affected by changes in
boundaries caused by the natural forces interacting with land and water. Although
the geographic coordinates of land do not change, the part of the surface covered
by the land and water can and do change over time.
The real estate practitioner should understand the following four natural pro-
cesses that affect riparian boundaries.
1. Accretion is a gradual process in which the boundary of riparian land is
extended by natural forces, usually water from a river, a lake, or an ocean
depositing soil, sand, or rock onto areas previously covered by water. This
acquired land becomes the property of the riparian property owner.
2. Reliction is also a gradual process and results from the permanent receding
of the water that leaves the ground under it dry and exposed. This acquired
land becomes the property of the riparian property owner.
3. Erosion, the reverse of accretion, is a natural process in which the flow or
movement of water gradually produces a loss of riparian land—for example,
beach erosion. The riparian property owner loses title to the land.
4. Avulsion, unlike accretion, reliction, and erosion, is not a gradual process.
It is a rapid or sudden change in riparian land, either loss or gain, result-
ing from violent natural forces. There is no legal boundary change for land
“When the river or
stream is navigable,
you own to the water’s
edge. When it is non-
navigable, you own to
the center of the river
or stream.”
—Tim Terry, DREI
© OnCourse Learning.
21
The Concept of Property
affected by avulsion. The owner can reclaim the lost land. Theoretically, an
owner retains title to and can reclaim land lost through avulsion; however,
environmental laws may limit or void his right to do so.
5. Doctrine of prior appropriation is based on the theory that the first person
to use the water has a continued right to do so and the later owners can make
reasonable use of what is left.
Lateral and Subjacent Support
Land previously was defined as the surface of the earth; the area below the sur-
face to the center of the earth; the air above the earth, theoretically, to the high-
est heavens; and everything permanently attached to the earth. For purposes of
understanding lateral and subjacent support, consider only the solid surface of
the earth. The ground is surrounded by more ground or by water. Riparian rights,
the rights of landowners whose property borders water, are well defined in law.
The solid surface of land can be gained or lost by forces of nature or by man’s
activity. What would happen if your neighbor decided to excavate the dirt from
her land bordering your property for a project elsewhere? Unless your land is
solid rock, the solid surface could shift, perhaps destroying or undermining the
support of improvements on your land. Your neighbor cannot remove the dirt
because you have a right of lateral support, which means the right of land to be
supported in its natural state by adjacent land.
Now consider the part of the land that is below the surface of the earth. Sup-
pose you sell the mineral rights. The owner of those subsurface rights can mine
beneath your surface, but she must support your surface rights from below. She
cannot cause the surface of your land to collapse. Subjacent support is the right to
have one’s land supported from below.
Personal Property
Personal property (also referred to as chattel or personalty) is anything that is
not real property; therefore, it is not land or anything permanently attached to
land. Unlike real property, it is readily, although not necessarily easily, movable.
Some personal property can be severed, or removed, from the property (such
as crops) and other property becomes a part of the real property by attaching
or annexation (such as planting trees obtained from a nursery). Once attached,
it becomes part of the real property unless excluded. Factory-built homes are
another example of personal property unless steps have been taken to perma-
nently affix it to the land including the requisite paperwork needed to convert it
to being considered real property. Its “bundle of rights” is not identical to that
of real property. Some property can be classified as real or personal property,
depending on circumstances. Ownership of personal property is conveyed by a
bill of sale.
© OnCourse Learning.
22
CHAPTER 2 Property Ownership and Interests
Fixtures
Intent is the major determinant in deciding if an item is a fixture.
A fixture is an item of personal property that is attached to the land or a perma-
nent improvement on the land in such a manner that the law deems it to be part
of the real property to which it is attached. Fixtures cause many problems because
of misunderstandings by the parties involved. Real estate practitioners can avoid
problems by thoroughly understanding the criteria for a fixture and paying care-
ful attention to detail when listing and selling property.
Total circumstance test. This test, composed of four criteria or factors, may be
used to determine an item’s identification as a fixture in the absence of a contrac-
tual agreement by the parties.
1. Intention: Did the person making the attachment intend to make a perma-
nent improvement? Would it be evident to a reasonable, rational person that
the annexor’s intention was that the improvement be permanent? For exam-
ple, the owner of a property installs a ceiling fan in the family room. This
criterion should be used in conjunction with the other criteria. If the owner
expressly states her intention that the attachment is permanent, such as the
sales contract stating the item is considered a fixture, and all parties involved
are aware of the express intention, the express intention will rule without
regard to the other three criteria.
2. Relation of the attacher: An owner is presumed to make a permanent improve-
ment, whereas a renter may be presumed to make a temporary attachment.
However, the real estate agent should not presume anything about the
annexor’s ownership but should ask questions if a tenant is involved. If the
real property owner has permanently attached personal property to his real
property during his ownership, the attached property is usually considered
real property. (See the paragraph “Effect of the Uniform Commercial Code”
for an exception.) Once the item becomes real property, its ownership passes
to the new owner when the present owner sells or otherwise disposes of the
property, absent a contract or an agreement to the contrary. Take the exam-
ple regarding the ceiling fan. If a tenant instead of the owner of the property
were to install the fan, would his intention be that the ceiling fan remain
with the property or would he plan to take down the ceiling fan he had pur-
chased and replace it with the original fixture?
3. Method: Does the method of attachment mean that removal of the item will
damage the property? Answering this question is a bit tricky. What consti-
tutes damage? Is a small nail or screw hole damage? What is “permanently
attached”? It may not actually need to be attached. This criterion absolutely
© OnCourse Learning.
23
The Concept of Property
must be used in conjunction with the other circumstances. A small picture
hanger on a wall likely does not constitute substantial or permanent attach-
ment, but a pair of thousand-pound statues sitting on custom-made concrete
pillars may.
4. Adaptation: How is the item being used? Is the item adapted to the real prop-
erty to which it is attached? An example would be blinds custom made to fit
nonstandard windows. The more “site specific” an item is the less obviously
attached it needs to be in order to be considered an attachment.
Courts have not been consistent in their application of the total circumstance
test. If the courts cannot agree, buyers, sellers, and real estate agents are unlikely
to always agree. Although real estate agents must understand these criteria, they
should not give legal advice as to what is or is not a fixture in a given circum-
stance. That would be practicing law without a license. They can avoid, how-
ever, most problems in this area by using and understanding the North Carolina
Bar Association/North Carolina Association of REALTORS® (NCBA/NCAR)
Standard Form No. 2-T, Offer to Purchase and Contract, found in Chapter 10,
page 276. Familiarizing the seller with this form at the time of listing and the
buyer at the initial buyer interview, or at least by the time of the offer, is an excel-
lent way to prevent misunderstandings.
Test Tip!
For an excellent list of fixtures that are important for testing purposes,
refer to paragraph 2 of the Offer to Purchase and Contract (Chapter 10,
Figure 10.2).
The practitioner must ensure that all parties understand all contracts. This can be
accomplished by clearly identifying fixtures and personal property in both the list-
ing and the sales contracts. Real property can become personal property by contract.
For example, a chandelier is personal property until it is installed in the house and
then becomes a fixture upon installation. If the contract provides for the chandelier
to be replaced with a less expensive one, the original chandelier again becomes per-
sonal property upon removal according to the contract, and the new, less expensive
chandelier, which is personal property when it is purchased, becomes real property
when it is installed according to the contract. If the contract were silent about the
chandelier, the buyers could reasonably expect the chandelier to be a fixture and to
convey as real property. In some instances, something is considered a fixture simply
because the contract states that it is a fixture even though the item does not appear
to meet the standards for a fixture listed previously, such as a stove. Simply stated, if
the contract says that an item is a fixture, then it is a fixture.
© OnCourse Learning.
24
CHAPTER 2 Property Ownership and Interests
Trade fixtures. A special category of fixtures is recognized for the items of per-
sonal property that are used in the course of a business operating in a leased
property. For example, a merchant may rent a store and install shelves to display
merchandise. These shelves are a temporary attachment necessary for the opera-
tion of the business. A more complex situation would arise in the operation of
a restaurant in a rented space. Consider all the items required in this operation,
including stoves, ovens, grills, chairs, tables, and so on. Such attachments are rec-
ognized as trade fixtures, and they retain their personal property classification
such that the restaurant tenant can remove them at the termination of the lease.
The tenant remains liable for any damages caused by the removal of the trade
fixture at the expiration of the lease.
Again, the agent must ensure that all understandings of the parties are sup-
ported by terms of a rental contract. Recall, however, that only attorneys can draft
contracts. Real estate practitioners would exceed their authority and be entering
the prohibited practice of law if they attempted to write legal clauses in a contract.
Agricultural fixtures. Agricultural fixtures are those fixtures installed by a prop-
erty owner for the purposes of agricultural use. Although historically treated dif-
ferently, they are now treated the same as trade fixtures.
Effect of the Uniform Commercial Code. A special situation occurs when an
owner has financed the purchase of an item installed in her property. The Uni-
form Commercial Code provides for the lender to retain a security interest in a
chattel (personal property) until the lender is paid in full. An instrument called
a security agreement, which is put on the public record by the filing of a notice
called a financing statement, creates the security interest. This notice is filed in the
office of the Register of Deeds. The filing of the financing statement provides con-
structive notice to the world that a security interest exists in the item. As a result,
the attached item is not legally classified as a fixture, or a part of the real property,
until the security agreement has been satisfied by full payment. It is treated as
personal property of the homeowner until such time as it has been paid for in
full. Before that time it can be repossessed by the creditor to satisfy repayment.
Consequently, the lender can remove the item in the event the buyer/borrower
defaults in payment, even though the item has been attached to real property.
Subsequent purchasers, as well as a subsequent lender, are bound by the filing of
the financing statement. Therefore, a purchaser of the home or a lender accept-
ing the property as security for a mortgage must complete the payments or per-
mit the removal of the item by the lender in the event the property owner does
not satisfy the debt.
Improvements
Numerous improvements must be made to and on raw land to make it accessible
and suitable for the various uses people have for it. An improvement is anything
of value that is added to real property or anything that alters real property in
“At the end of a lease,
trade fixtures remaining
after the lease term
are considered aban-
doned by the tenant
and become the
real property of the
landlord through the
process of ‘accession.’”
—Tim Terry, DREI
“The application of
the UCC to fixtures
keeps these items as
personal property or
personalty until the
debt has been repaid.”
—Tim Terry, DREI
© OnCourse Learning.
25
The Concept of Property
such a way as to increase its utility or value; however, these improvements do
not include repairs and replacements. The definition has two parts: (1) private
improvements, usually done on the land by the property owner; and (2) public
improvements such as streets, sewers, water, and sidewalks done to the land by
government or quasi-government organizations. From a practical point of view,
the agent should make certain that all parties understand the meaning each party
intends to convey when using the terms improvements, improvements to the land,
improvements on the land, improved land, or improved lot.
Improvements on the land done by property owners include structures such as
buildings, paved driveways and walkways, tennis courts, fences, walls, and swim-
ming pools. They do not include routine maintenance, repairs, or replacements.
Improvements to the land done by government or quasi-government entities
may include the following:
1. Roads, highways, and bridges built to make the land accessible.
2. Utilities such as electric power, water, sewer, gas lines, and phone lines
brought to the site.
3. Modifications or improvements such as clearing, grading, and draining to
make it suitable for its intended use.
“Improved land” or “improved lot” could mean the land or lot has had improve-
ments to it to prepare it for a building, or it could mean that improvements such
as buildings have already been constructed on it. The important thing is for the
agent to make certain that the meaning is clear when listing, advertising, and
negotiating offers to purchase and in all other aspects of the transaction.
Test Tip!
For the National Exam section, the student should treat an improvement as
an appurtance.
Factory-Built (Manufactured) Housing
Just like many components of a house today that are manufactured in a factory
so is the case for entire homes. Although historically these type homes have been
viewed as “less desirable” than a stick-built home, the reality is that manufactur-
ing tolerances and conditions are superior to that of many site-built structures.
The absence of weather-related delays, reduced theft, and the ability to literally
work around the clock make this type of construction attractive in many ways.
The reference to a “manufactured” home is a modern term for what many peo-
ple traditionally have called a mobile home or house trailer. Today’s manufactured
home is built according to rigid U.S. Department of Housing and Urban Develop-
ment (HUD) standards and will have a HUD certification label affixed to the exte-
rior of the structure. This type of housing can be considered either personal or real
property depending on the steps taken by the owner. Initially the manufactured
© OnCourse Learning.
26
CHAPTER 2 Property Ownership and Interests
home is considered personal property and will be titled with the North
Carolina Department of Motor Vehicles (DMV) much the same as an automobile
is registered. One of the characteristics of the manufactured home is that it will be
constructed on a permanent nonremovable steel chassis, although brokers need
to be aware that some modular homes may utilize a steel chassis as well.
The owner can convert a manufactured home to real property status by remov-
ing the wheels, axle, and moving hitch and affixing the structure to a permanent
foundation owned by the homeowner. Once this work has been completed, the
owner can file an affidavit of conversion that cancels the title with the DMV, which
will finalize the conversion from personal to real property. Once this is done, the
owner will need to change the tax listing to show the unit is now real property
and the bill of sale and lien will need to be changed to a deed and deed of trust as
applicable. Unlike many other situations involving attaching personal property so
that it may be considered real property, the manufactured home does not auto-
matically convey to real property merely upon attachment. Until the appropriate
paperwork has been completed and filed, the unit will remain personal property.
Many people confuse modular housing as merely a type of manufactured hous-
ing. Although both examples are clearly built in a factory, the modular home is
built in accordance with state building codes and once constructed on the per-
manent foundation will be considered real property. These type of units also will
have an identifying label, including a serial number, that typically is affixed next
to the electrical panel, under the sink area, or on the back of the unit.
Most subdivision protective covenants that prohibit the construction of a man-
ufactured home will not affect the ability of the property owner to construct a
modular home on the lot.
ESTATES IN REAL PROPERTY
Definition of Estate
An estate in real property is an interest in the property sufficient to give the owner
of the estate the right to possession of the property. It is essential to understand
the difference between the right of possession and the right of use. The owner of
an estate in land has the right of possession of the land in addition to the right to
use it. An easement owner, in contrast, has the use of the land but not the right to
possess it; therefore, the easement is a nonpossessory interest in land. The Latin
translation for the word estate is “status.” This indicates the relationship in which
the estate owner stands with reference to rights in the property, and it establishes
the degree, quantity, nature, and extent of interest a person has in real property.
Types of Estate in Land
Estates in land are divided into two groups: estates of freehold and estates of less
than freehold (also called leasehold estates and nonfreehold estates). Two estates
© OnCourse Learning.
27
Estates in Real Property
can exist simultaneously in land. The owner (lessor) of a property has a freehold
estate. If she leases the property, the tenant (lessee) has a leasehold estate. Each of
these two major divisions contains various groupings or subheadings.
Freehold Estates
Freehold is defined as an interest in land of at least a lifetime and therefore gener-
ally is identified with the concept of title or ownership. Freehold estates may be fee
simple estates or life estates (see Figure 2.1). Fee simple estates are inheritable;
most life estates are not.
Freehold estates are divided into two categories: estates of inheritance and
estates not of inheritance.
I. ESTATES OF INHERITANCE
Estates of inheritance last a lifetime and continue after the death of the title-
holder as they are passed on to one’s heirs.
A. Fee simple estates
1. Fee simple absolute. The estate of fee simple absolute provides the great-
est form of ownership available in real property.
This estate may be described as fee simple absolute, fee simple, or owner-
ship in fee. Ownership in fee simple absolute provides certain legal rights
usually described as a bundle of rights. The owner in fee simple absolute
may convey a life estate to another, may pledge the property as security
for a mortgage debt, may convey a leasehold estate to another, may grant
FREEHOLD ESTATES
I. Inheritable
A. Fee simple estates
1. Absolute
2. Determinable
3. Conditional
B. Life estate pur autre
vie (inheritable during
measuring lifetime)
II. Not inheritable
A. Conventional life estate
B. Marital life estate
Note: Freehold estates
provide title.
NONFREEHOLD ESTATES
(LEASEHOLD ESTATES)
A. Estate for years
B. Estate from year to year
C. Estate at will
D. Estate at sufferance
Note: Provide possession and
control, but not title.
RIGHTS IN THE LAND
OF ANOTHER
A. Easements
B. Profits
Note: Provide a right, but not
title or possession.
FIGURE 2.1 Estates and rights in real estate property (in descending order of importance).
Source: © 2019 OnCourse Learning
“‘Freehold’ means
that you are ‘free to
hold’ the property.
You are the owner of
it. A leasehold estate
is anything less than
ownership.”
—Jim Hriso
© OnCourse Learning.
28
CHAPTER 2 Property Ownership and Interests
an easement in the land to another, or may give a license to conduct some
activity on the property to another. Some of these rights may be removed
from the bundle, leaving the other rights intact. For example, if the owner
conveyed a lease or an easement to another, the owner’s remaining rights
would be a fee simple subject to the lease or easement. Fee simple owner-
ship should not be confused with the quality of title. Ownership in fee
means that the grantee owns it forever, not that it is free of title defects.
Certainly an owner cannot expect to live forever, so the ownership con-
sists of two periods of time, from receipt of title until the owner dies, and
the period of time after the owner dies. The owner has the rights of owner-
ship and use during his lifetime and then the ownership shall convey to his
heirs (either by will or by the law of descent.).
The word “fee” denotes ownership that is inheritable. Fee simple
absolute, also known as fee simple or fee, means ownership forever
or for at least a lifetime. Because the ownership is considered “for at
least a lifetime” the use of the term “fee” does not mean that owner-
ship is free and clear of any liens. It speaks more to the quantity of
title (at least a lifetime) than to the quality (free of liens).
2. Fee simple determinable. This defeasible fee or qualified fee estate is
also an inheritable freehold estate in the form of a fee simple estate;
however, the grantor can terminate the title under certain conditions.
An example of a fee simple determinable is a situation in which a gran-
tor conveys title to a college and in the conveyance stipulates that the
title is good “so long as” the property is used for scholastic purposes.
Title received by the college can be for an infinite period of time. If the
property is not used for the purpose specified in the conveyance, how-
ever, the title will automatically terminate and revert to the original
grantor or the grantor’s heirs.
3. Fee simple subject to a condition subsequent. The fee simple subject to
a condition subsequent can continue for an infinite period, as is the
case with the fee simple absolute. The fee simple subject to a condition
subsequent also can be defeated and, therefore, is a defeasible title. The
fee simple subject to a condition subsequent is created by the grantor
(the one conveying title), who restricts the future use of the property
in some way. For example, a grantor may convey property with the
condition that it can never be used as a landfill. As long as the prop-
erty is never used for this purpose, the title will continue indefinitely
in the name of the initial grantee or any subsequent grantee. Any use
of the property for a landfill will violate the covenant in the deed and
the original grantor or her heirs may reenter the property and take
“Fee simple defeasible,
sometimes known as
a fee with a condition
subsequent or a fee
simple determinable,
can be defeated and
taken away.”
—Terry Wilson, DREI
© OnCourse Learning.
29
Estates in Real Property
possession or go to court and sue to regain possession. By doing so,
the titleholder’s estate is terminated.
A grantor may want to convey a title this way for several reasons. In
the case of the landfill, the owner may be protecting the property he owns
that is close to the landfill. In the case of the college, the grantor may be
highly committed to education but may not want to give up ownership
of the property for any other reason. Notice that in the case of a fee sim-
ple determinable, the estate in the grantee automatically terminates in the
event the designated use of the property is not continued or a prohibited
use is undertaken. This is contrasted with the fee simple subject to a condi-
tion subsequent, in which the termination is not automatic. In the latter
case, the grantor and/or the heirs must either reenter the property or go to
court to obtain possession of the property and to terminate the estate in
the grantee. It should be noted that qualified fee or use conditions based
on race, color, sex, national origin, familial status, handicap, or religion are
void because they are against public policy; therefore, if a qualified fee or
use condition based on any of these factors appears as a condition of title,
the title is really a fee simple absolute.
B. Estates pur autre vie (for the life of another). These estates are measured by
the lifetime of a person other than the person receiving the title. They may
be willed or inherited by heirs of the life estate grantee if the grantee dies
before the person who is the measuring life. These rights should not be
confused with the more traditional, and noninheritable, conventional life
estates. The pur autre vie is an inheritable right, should the life interest per-
son die before the measuring life person deceases.
For example, Dad may grant title to his son for as long as Mom (his
widow) is still alive. If the son dies before Mom, the title to the life
estate pur autre vie would pass to the son’s heirs, such as a grandson
or a granddaughter. Therefore, the life estate is not only for the dura-
tion of the son’s life, but will last until Mom’s death, as hers is still the
measuring life. At Mom’s death, the life estate terminates.
II ESTATES NOT OF INHERITANCE
Estates not of inheritance are good only for the life of the tenant (free-
hold) and do not pass on to his heirs, but rather are disposed of by some
other method.

In addition to being created by an intentional conveyance, life estates
also can be created by operation of law. Life estates created by act of the
parties are called conventional life estates, whereas life estates created by
operation of law are called marital life estates.
A. Conventional life estates (estate for tenant’s own life). A life estate is a non-
inheritable freehold estate. It is created only for the life of the named life
© OnCourse Learning.
30
CHAPTER 2 Property Ownership and Interests
tenant; that is, one who holds a life estate. The question arises as to what will
happen to the estate at the death of the life tenant. If nothing else is specified
in the conveyance of the life estate, it will revert to the grantor or to his heirs
at the death of the life tenant. The grantor or his heirs thus would have a
reversionary interest in this case (see Figure 2.2). Alternatively, the convey-
ance of the life estate could specify that the estate pass on to someone other
than the grantor or his heirs. This person would be called a remainderman
and has a remainder, or future, interest in the property. After the death of
the life tenant, the remainderman would then have title in fee simple abso-
lute (see Figure 2.3).
B. Marital life estates. A marital life estate is created in North Carolina by
the intestate succession statutes governing the distribution of prop-
erty of one who dies intestate, that is, dies without leaving a valid
Testator/Grantor
Grantee (life tenant)
Heirs
Upon grantee’s death, title reverts
to grantor or testator’s estate
when no remaindermen are named.
Escheat
(if no will and
no heirs)
FIGURE 2.2 Life estate in reversion.
Source: © 2019 OnCourse Learning
Grantor (in a deed)
or
Testator (in a will)
Grantee
Remaindermen
Example:
Grandfather
To son
for life
(life tenant)
Then to grandson
(remainderman)
in fee simple
To heirs if remainderman
predeceases life tenant
Escheat to the state
if no heirs
FIGURE 2.3 Life estate in remainder.
Source: © 2019 OnCourse Learning
“Do not memorize
that a remainderman
means a 3rd party. It
is better to remember
that any time a life
estate ends and the
reversionary interest
does not return to the
grantor then a remain-
der interest exists.”
—Len Elder, DREI
© OnCourse Learning.
31
Estates in Real Property
will. This statute allows the surviving spouse to choose a life estate in
one-third of the real property owned in severalty (sole ownership) by
the deceased spouse at any time during the marriage under certain
conditions. If the surviving spouse is entitled to any property of the
deceased spouse through a will or intestate succession statutes and
the surviving spouse has not joined in the transfer of such property
by signing the deed, the surviving spouse must forfeit any interest in
the deceased spouse’s property resulting from a will or an inheritance
to claim her marital estate. Few surviving spouses elect the marital
life estate option because it is seldom advantageous for them to do so.
Several important points pertain to marital life estates:
• A will cannot defeat the marital interest of a surviving spouse.
• Statutes do not apply to property owned as tenants by the entirety.
• A surviving spouse has a choice of either marital life estate or
property of the deceased spouse willed to the surviving spouse.
From these requirements, you can see that it is extremely important for both
husband and wife to join in the conveyance of any property owned by either of
them while they are married. Otherwise, the grantee’s title could be affected by a
marital interest of the surviving spouse.
Some states still provide dower and curtesy rights to a surviving spouse. Dower
is the wife’s right and curtesy is the husband’s right to a life estate in the property
owned by a deceased spouse during the marriage. North Carolina’s intestate suc-
cession statutes abolished dower and curtesy rights and provided a substitute,
which sets forth the manner in which the property of an intestate (one who has
died without leaving a valid will) is distributed to the heirs.
Rights and responsibilities of life tenants. A life tenant has the right of alienation.
That is, the life tenant can transfer her title to another person or pledge the title as security
for a debt. Of course, the individual cannot give a title for a duration longer than her
life or the life of the person named in the creation of a life estate to establish its dura-
tion. The life tenant also has the right to the net income produced by the property,
if any. The life tenant can legally mortgage the life estate. It is unlikely that a lend-
ing institution would accept a life estate as security for a mortgage, however, because
the estate terminates on the death of the life tenant. If the life tenant were able to do
this, however, she would be responsible for the principal and interest on that mortgage
note. An outstanding mortgage on the property is the responsibility of the grantor or
the remainderman, and the life tenant must pay the interest but not the principal.
A life tenant has certain responsibilities. He must not commit waste and
must preserve the estate for the benefit of the remainderman or for the person
who holds the reversionary interest. Otherwise, the life tenant is not answer-
able to the future holder of the estate. The life tenant has a legal right called
the right to estovers, which allows him to cut and use a reasonable amount of
© OnCourse Learning.
32
CHAPTER 2 Property Ownership and Interests
timber from the land to repair buildings or to use it for fuel, but does not allow
the tenant to cut and sell the timber for profit. A violation of the right of esto-
vers is called an act of waste.
A life tenant has an obligation to pay the real property taxes on the property
in which he has a life estate. The tenant also has the duty to pay any assessments
levied against the property by a county or municipality for improvements to the
property. Assessments are levied against land for improvements made to the land,
such as paving streets and laying water and sewer lines.
The life tenant also has a duty to make repairs to the improvements on the land.
He cannot permit the property to deteriorate because of lack of repairs and thus
cause depreciation to existing improvements.
Many states recognize the primary home as a sort of life estate that can pro-
vide some degree of protection from creditors. The North Carolina Home-
stead Exemption Law protects an amount of interest, or equity, in the debtor’s
personal residence, whether it is real or personal property, from creditors in
the event of lawsuits, including bankruptcy filings. The current amount of
protection is $35,000, which was increased from $18,500 in December 2009.
Additionally, this act increases the amount of protection to a maximum of
$60,000 in cases in which the resident is over the age of 65 and the property
was previously owned in tenancy by entireties, or in joint tenancy with rights
of survivorship, in which one of the former co-owners is now deceased. The
property owner is helped by this act in the event of judgment liens obtained
against her. The owner still would be obligated to pay property taxes and any
mortgage balances due.
Homestead exemptions in other states are relatively similar, although many are
more extensive than those in North Carolina.
Nonfreehold Estates
The nonfreehold estates, also known as less-than-freehold or leasehold estates,
confer a rental interest in real property. Four estates are recognized:
1. Estate for years is for any fixed period of time and automatically terminates
at the end of that period.
2. Estate from year to year is a periodic estate that automatically renews at the
end of its period if the parties do not provide otherwise.
3. An estate at will is for an indefinite time and may be terminated by either
party instantaneously by giving notice to the other party.
4. An estate at sufferance is not truly an estate but rather a holdover situa-
tion created when the tenant’s lease has expired and she fails to vacate the
premises.
These nonfreehold estates are described in more detail in Chapter 15.
© OnCourse Learning.
33
Ownership of Real Property
OWNERSHIP OF REAL PROPERTY
Ownership in Severalty
When title to real property is held in the name of only one person or entity, it is called
ownership in severalty. Not to be confused with the word several, the concept of
severalty is actually a derivative from the word “sever.” The person holding title is
the sole or only owner. This is the form of ownership that a corporation likely would
have even though the corporation has many owners or stockholders (i.e., IBM Cor-
poration). The fact that title is held in severalty does not eliminate the possibility
of marital rights. This is the case when a single person acquires title to a property
in severalty and later gets married. Even though the new spouse does not have his
names on the title to the property, he still would obtain marital rights upon marriage.
Concurrent (Joint) Ownership
Simultaneous ownership of real property by two or more people is called concur-
rent ownership or co-ownership. There are various types of co-ownership, and
the rights of the owners depend on the type of ownership they have. The types of
co-ownership are tenancy in common, joint tenancy, and tenancy by the entirety.
The co-owners may hold title in the same manner as owners in severalty—for
example, fee simple absolute, fee simple subject to a condition subsequent, and
fee simple determinable.
Tenancy in Common
Tenancy in common is characterized by two or more persons holding title to a prop-
erty at the same time, with no right of survivorship. Anyone can hold title as a
tenant in common. The concept of unity of possession means that each owner
holds an undivided interest in the entire property, rather than one specific part of
it. Upon the death of a tenant in common, the deceased’s share goes to his heirs.
A tenant in common may sell his share to anybody without destroying the ten-
ancy relationship. Each tenant in common may also pledge her share of the prop-
erty as security for a loan. This creates an encumbrance against that share only,
not against the entire property. Tenants in common do not need to have the same
amount of interest in the property. For example, one tenant may hold a 50% inter-
est, with two other tenants holding 25% each. If the deed does not specify the
interest each holds, their interest will be considered equal.
A tenant in common may bring legal action to have the property partitioned
so each tenant has a specific portion of the property exclusively. If this can be done
fairly with a piece of land, each tenant receives title to a tract according to his
share of interest. If the land cannot be divided to the satisfaction of the co-owners,
the court may order its sale, with appropriate shares of the proceeds distributed
© OnCourse Learning.
34
CHAPTER 2 Property Ownership and Interests
to the tenants. Tenancy in common is also the form of concurrent ownership that
is recognized when either a joint tenancy, or tenancy by entireties, is destroyed
but when there are still multiple owners, such as the case when a married couple
obtains a divorce but remains in a co-ownership position.
Joint Tenancy
This form of co-ownership requires the four unities of time, title, interest,
and possession. People with joint tenancy must have the same interest in the
property, must receive their title at the same time from the same source, and
must have the same degree of undivided ownership and right to possession in
the property. For example, if there are three joint tenants, each must own an
undivided one-third interest in the property, they must all receive their title
from the same source at the same time, and they must continue to hold pos-
session concurrently.
If a joint tenant sells her share of ownership, the sale violates the requirement of
unity of time, title, interest, and possession as far as the new buyer is concerned.
Upon the sale of an interest by a joint tenant, the person buying this share does
not become a joint tenant with the other tenants, but rather joins them as a tenant
in common.
Other states, but not North Carolina, provide the concept of automatic rights of
survivorship in joint tenancies, wherein the surviving partners automatically take
over the share of a deceased partner. Today, the automatic right of survivorship is
not favored in law except in joint ownership by husband and wife as tenants by
the entirety.
As indicated in the previous paragraph, North Carolina tends not to rec-
ognize the automatic rights of survivorship, but rather requires the parties to
specifically indicate in the deed that it is to be joint tenancy with the rights
of survivorship. A common illustration might be “to Sam Smith and Tracy
Jones as joint tenants with rights of survivorship,” which shows a specific
intent. Examples such as “to Robert Bellamy and Sally Browne jointly” or to
“Angie Smith and Stephanie Clark as joint tenants” fail to expressly provide
for survivorship and therefore will not be recognized as joint tenancy but
rather tenancy in common. Additionally, in contrast to the more “national”
interpretation of joint tenancy, in 2009, North Carolina provided for the abil-
ity to have unequal ownership interests in joint tenancy as long as the right of
survivorship was clearly addressed.
The concept of joint tenancy, with rights of survivorship, is increasing in popu-
larity among unmarried couples, many of whom are not able to partake in tenancy
by entireties, as a means to acquire title and have the ownership automatically go
to the surviving member of the couple and therefore avoid the risks, costs, and
consequences of an inheritance.
“Joint Tenancy exists
where there are four
fundamental unities;
time, title, interest and
possession. Remember
TTIP.”
—Derrin Dunzweiler
© OnCourse Learning.
35
Ownership of Real Property
Test Tip!
Joint tenancy ownership requires the following four unities:
• Time—Must acquire interests at the same time
• Title—Must acquire title on the same document (deed)
•
Interest—Considered equal shares unless stated otherwise
• Possession—Has the right to use and possess the entire property
Tenancy by the Entirety
Ownership through tenancy by the entirety is limited to husband and wife. To
receive a title as tenants by the entirety, there must be a legal marriage at the time
that the husband and wife receive title to the property. It is not necessary for the
deed to read “to husband and wife as tenants by the entirety” to create a tenancy
by the entirety. The deed only needs to convey the property “to John A. Jones and
Mary A. Jones, who are husband and wife,” and a tenancy by the entirety is auto-
matically created. Tenancy by the entirety does contain the right of survivorship.
The surviving spouse receives title to the property automatically by operation
of law. Creation of tenancy by the entirety requires the five unities of time, title,
interest, possession, and marriage.
A husband or wife owning land as tenants by the entirety may not legally con-
vey property to a third party without the other spouse joining in the deed. There
can be no partition of real property held by tenants by the entirety.
Tenancy by the entirety exists as long as the tenants hold title to the property
and are legally married. Tenancy by the entirety is abolished by decree of divorce
or in the event of death of one of the owners. A mere legal separation is not suffi-
cient. When a final decree of absolute divorce is obtained, however, the ownership
is automatically changed to tenancy in common by operation of law, eliminating
the right of survivorship. In the event of death, the remaining spouse will now be
considered to hold title in severalty.
Married people may, if they elect to do so, own property as tenants in common.
It is not necessary for them to take title as tenants by the entirety.
In North Carolina, one spouse can purchase a property, but it usually takes the
signature of the husband and the wife to convey and give a clear title to a grantee,
regardless of how the property is held. If a mortgage or deed of trust is given
to secure a note for a property being purchased by one spouse, the lender usu-
ally requires the other spouse to sign the deed of trust or mortgage but does not
require the nonpurchasing spouse to sign the note unless that spouse’s income is
used to qualify for the loan.
Many times a property is owned by one spouse before the marriage. Upon mar-
riage, title will remain in severalty but coupled with a marital right. In another
“In North Carolina a
married individual can
take title in his or her
name alone without
the spouse having an
interest in the prop-
erty. The document
which waives and relin-
quishes the spouse’s
interest is called a Free
Trader Agreement.”
—Tim Terry, DREI
© OnCourse Learning.
36
CHAPTER 2 Property Ownership and Interests
situation, a couple may have acquired title to a property together as co-owners,
such as tenancy in common or joint tenancy, before their marriage. As in the
illustration regarding severalty ownership just mentioned, the ownership does
not convert to tenancy by entireties upon marriage. The deed would have to
be conveyed by the couple, to the couple, after marriage to make it tenancy by
entireties.
Combination (Hybrid) Forms of Ownership
Condominiums
Condominium ownership is a form of ownership in real estate that is now recog-
nized in all states. North Carolina statutes define this type of ownership, set forth
the requirements for the creation of a condominium, and set special restrictions
on the offering of a condominium for sale.
A condominium purchaser receives a fee simple title to an apartment. Condo-
minium unit owners can hold ownership of their units in the same ways owners
of any freehold estate hold ownership—that is, in severalty, as tenants in com-
mon, as joint tenants, or as tenants by the entirety. Individuals, groups, and busi-
ness entities can hold ownership in condominium units in the same ways they
can hold ownership in other freehold estates, providing they meet the criteria for
the specific type of ownership. For example, only a married couple can own real
estate as tenants by the entirety. The owner can convey title by deed or leave it to
an heir by will. Condominium ownership includes ownership of the airspace of the
individual unit as well as co-ownership in the common areas of the condominium
along with the other unit owners. This co-ownership is as a tenant in common
in the common areas, including the corridors, grounds, parking areas, and rec-
reational facilities. The right to partition is waived in this tenancy in common
ownership of common areas (see Figure 2.4).
North Carolina statutes prescribe the manner in which a condominium is
to be created. This includes a declaration, bylaws, and a copy of the construc-
tion plans. To be valid, the declaration, articles, and bylaws must be recorded
on the public record in the Register of Deeds office in the county where the
property is located.
The declaration includes a legal description of the property; a plat of the prop-
erty with the location of the buildings, plans, and specifications for the build-
ings and the various units; a description of the common areas; and the degree
of ownership in the common areas available to each unit owner. It also includes
covenants, conditions, and restrictions affecting the property. It also may include
a “right of first refusal” clause, giving the association the first opportunity to pur-
chase a unit if the owner wishes to sell.
The articles of association establish an association to provide for the main-
tenance and management of the common areas and other services for the
© OnCourse Learning.
37
Ownership of Real Property
owner-members. Owners, as members of the association, are assessed to pay for
these necessary services. Such assessments are usually in the form of monthly
dues, but periodic special assessments also can be levied. The bylaws set forth the
various officers in the association and the way they are elected, and they set forth
the requirements for amending the bylaws.
The creation of a condominium is not limited to residential purposes. Virtually
anything can utilize the condominium form of ownership. Other purposes may
include office space, parking space, and an industrial park. Indeed, it would seem
as the potential uses of a condominium form of ownership are limited only by the
developer’s imagination. The purpose of the condominium must be set forth in
the declaration as required by state statute.
Condominiums can also be one-story, attached, or detached units, but the indi-
vidual owner still owns only the airspace that constitutes his unit. It is not uncom-
mon that an owner may be granted exclusive use of some limited common areas
such as balconies, assigned parking spaces and storage units. All ground and
common areas are still owned as tenants in common.
A condominium unit can be mortgaged just as any other property. Federal
Housing Administration (FHA) financing has been available for condominiums
since 1961, and the Department of Veterans Affairs (VA) guarantees mortgage
LAND SURFACE
Owned as ten-
ants in common
AREA BELOW SURFACE
Owned as tenants in common
AIR RIGHTS
Owned as tenants
in common
Building owned as
tenants in common
Units
exclusively
owned
Condominiums can also be one-story, attached, or detached units, but the individual owner
still owns only the airspace that constitutes his unit. All ground and common areas are still
owned as tenants in common.
FIGURE 2.4 Condominium ownership.
© OnCourse Learning.
38
CHAPTER 2 Property Ownership and Interests
loans for the purchase of condominiums. A condominium project must have
FHA or VA approval before FHA will make loans on any of the units. FHA fur-
ther requires that condominium projects have a specified percentage of owner-
occupancy before FHA will make a loan on any of the units. The occupancy rate
is monitored. That percentage can vary by region.
The North Carolina Condominium Act (1986) sets specific requirements on offer-
ing for sale or resale a condominium created on or after October 1, 1986, although
these rights can be waived, and typically are, when the condo is used for nonresiden-
tial purposes. Essentially, the act offers the following consumer protections (these
protections apply only to condominiums, not to townhouses or PUDs).
1. Public offering statement: The developer must provide a public offering state-
ment to the prospective buyer of a new condominium before the contract
is signed. The North Carolina Condominium Act requires that the devel-
oper disclose certain information pertaining to the condominium project,
including the purchaser’s right to cancel. The public offering statement is not
required for resale of units.
2. Purchaser’s right to cancel: A purchaser has the right to cancel, absolutely
and without penalty, the purchase of a new condominium unit from the
developer for any reason during the first seven days after signing the con-
tract. Title cannot pass during this seven-day period. Like the public offer-
ing statement, the purchaser’s right to cancel does not apply to resale units.
3. Escrow of deposit: Any deposits made by the purchaser must remain in the
developer’s or his agent’s escrow account the full seven days, unless the pur-
chaser cancels the contract earlier. In that case, the money is to be refunded
to the purchaser. All escrow accounts must be held in an insured bank or
savings and loan in North Carolina.
4. Resale certificates: When reselling a condominium built on or after October
1, 1986, the unit’s owner or owner’s agent must provide a resale certificate to
the purchasers that discloses monthly assessment for the common areas and
other fees for which unit owners are responsible. A public offering statement
or a right to cancel is not required for resale of a unit.
5. Warranties: There is an implied warranty that the unit is constructed in an
acceptable manner, free from defects, and suitable for the purpose intended
unless there is an agreement to the contrary or the warranty has been dis-
claimed in such a manner as to make it void.
The agent must provide his client with a public offering statement if the client
is purchasing a new condominium or a resale certificate if reselling a unit subject
to this statute. Failure to do so violates the agency relationship and, therefore, the
Real Estate License Law. It also leaves the agent potentially liable to the purchaser
in civil court.
© OnCourse Learning.