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