Acquisition and Disposal of Land and Real Estate - Case Study Example

Topic: Acquisition and Disposal of Land and Real E INTRODUCTION The acquisition of land and real e is a high risk,uncertain and often very complex venture. There are many risks that are associated with the acquisition of land and these include subsidence, pollution and legal issues. But if a person can manage these risks, it is a value creating opportunity for the investor. The acquisition of land and real estate requires an official process that is based on risk analysis, and financial analysis. LITERATURE REVIEW Real estate refers to things which are not movable for example land and improvements permanently attached to it. There is a difference between real estate and real property. The ownership rights that are associated with the real estate are called real property. During acquisition of real estate, the investor acquires the land, all the physical assets of the land and all the things which are permanently attached to it. The investor also gets property rights which include the right to control, occupy, develop, exploit, lease, improve, and sell the real estate. It is important to differentiate between real estate and real property because different parties have different rights on a given part of real estate. Property rights can also be described as the right of a person to use, dispose, possess and enjoy his property. (Fisher & Brueggeman 2004) The value of real estate is the total price that an individual is willing to pay so as to acquire the benefits associated with all the property rights. It is important to note that it is not necessary for a person to be the owner of the property so as to have rights to it. A person who rents a piece of land is not the owner but he has the exclusive right to use the land as he wishes for a certain period of time. In exchange for the right to use the land, the tenant/lessee is willing to pay a certain amount of money. (Fisher & Brueggeman 2004) There are certain interests that an investor can acquire from a piece of property. An interest in real estate can be defined as a right or claim on property, production or its revenues. The interest in property is created by the possessor who can pledge the property in order to attain a certain objective with out giving up the property. An example of this is where a person pledges his land as security when he wants a loan from a bank. An easement is an interest in land whereby a person has the right to use the land leased for some special purpose. (Fisher & Brueggeman 2004) The legal aspect of a real estate acquisition is very important. It can assist in knowing the benefits of other persons who have some rights over the property. Often conflict arises concerning the rights to be given to the people who are holders of interests in the property. (Fisher & Brueggeman 2004) Classification of Estates There are certain categories of estates that can be differentiated in terms of the nature of rights that come with the ownership of an estate. An estate in possession allows the owner of the land immediate enjoyment of the land. An estate not in possession is a future estate in land and it doesn’t give the buyer any rights to the estate until some time in the future. It will not change to an estate in possession until some future occurrence takes place. (Fisher & Brueggeman 2004) Estates in possession are of two varieties: leasehold and freehold estates. They are differentiated on the basis of the certainty of their duration. A freehold estate lasts for an indefinite period of time which means there is no date that the possession to the estate ends. Leasehold estate ends after a certain amount of time. It is a right to possess and use the property owned by another for a period of time. Examples of leasehold estates include the renting a residential estate whose contract is to be signed every year. A freehold estate can be the purchase of a home in the suburbs which can be leaved in generation after generation. (Fisher & Brueggeman 2004) Property Title When a person is considering purchasing real estate property, he or she should be able to access the quantity and quality of the property rights they are going to acquire. Title assurance is the means by which buyers of real estate know in advance if their sellers have and can transfer the quality of the title allege to own. It can also assist in maintaining a refund should the title turn out not to be as it was presented. This document is important to the lenders because the quality of the title determines the amount of money they can borrow in form of a loan. Title is used to establish the right of the transferred from seller to buyer. It is important for a person receiving a title to verify that it is actually valid and marketable. He can perform a search for the relevant documents to see if it is okay. This is usually done by a lawyer. (Fisher & Brueggeman 2004) Risk and Acquisition Legal considerations should be kept in mind when deciding the risk associated with an investment can be of an investment. The real estate dictionary describes risk as uncertainty or variability and the possibility of loss. It is important to carry out a risk analysis of the property to be purchased. Risk analysis considers the probability of a certain event actually occurring. According to Connie, Price L and Price R, purchasing a residential property can be a good investment but it involves risk. Natural disaster such as floods, hurricanes, tornadoes and fire are one of the main problems faced by home owners. Fire and vandalism are other common risks associated with the home. Another risk that is rarely considered is the chance that there will be social and economic decline in the area of the home. This will mean that the house can only be sold for less than what it was bought for (Connie, Price L and Price R 2002). Restrictive covenant This is a legal obligation that is imposed in a deed by the seller to the investor of a real estate to do or not to do something. The restrictions usually go with the land so all subsequent buyers will have it enforced on them. Most of the covenants are supposed to protect the neighbor hood from people who would destroy valuable things like historic things or trees. Some restrictive covenants state when a homeowner can put up holiday decorations. Some are extreme as they even say that a person has to seek permission before painting his house. (Reilly 2000) Restrictive covenants also called deed restrictions are promises by the buyer. The covenants are actually recorded as part of the deed in the country’s public records. The person developing a certain area for residential purposes can put the restrictions so as to maintain and even increase the value of the whole neighbor hood. They do this by restrict establishing businesses on the property, domestic animals or big antennas. (Allen & Floyd 2002) The covenants cannot be unreasonable or unlawful. For instance if it prohibits selling the property to people of a certain ethic group, creed or race, it cannot be enforceable. Because the restrictive covenants are like a contract, it is possible sue and get injunction for damages if the buyer breaches it. (Allen & Floyd 2002) There is a potential risk of getting conned. There are many con artists who swindle unknowing people. They pretend to be agents of the owner of the real estate. He or she will even take the potential investor to a house for viewing. They often insist that the person has to pay the full amount of the payment before the ownership is transferred. Once the cash is given to the person he disappears forever. The buyer ends up with no money and no house. For those who take loans to buy the property they get even in more trouble as they have to pay the loan. Many such cases have been reported and investors of residential property need to be very careful. (Novotny 2008) Insurance is one of the ways that a person can deal with the risks associated with the purchase of the real estate investments. Hazard insurance is a property home owner’s insurance policy. It usually doesn’t cover all events. The banking dictionary defines it as a type of property insurance that protects against losses such as fire, some natural causes and vandalism to the home. A risk that is specified for an insurance policy is a contingent risk which means it may take place or not. The policy assures the insured that he or she will be reimbursed in the event that there is a loss due to the occurrence of the destructive event. (Reilly 2000) Defective title A defective title is one which is unmarketable. When it is to do with land, it means that the land sold by a person claiming to have a good title is actually owned either partially or completely by someone else. With negotiable instruments, it means a title obtained using illegal means which amount to fraud. (Law dictionary) A rental void is when the property stands empty. Such a situation mean there is a loss in revenue that the land lord or property owner could have received. This can be avoided by getting agents who are able to find another tenant immediately. (Manningstation 2008) Maintenance and repair When the acquisition of a residential property is thorough a lease, it is the responsibility of the landlord to take care of repairs. However, when the property is bought on a lease hold or freehold, then it is the owner who takes care of all the repairs in the property. There are two types of maintenance. The first is the maintenance designed to conserve the property. The second is renovating and rehabilitation so as to make the property more competitive in the changing market. If an owner does not pay attention to the maintenance of his property it will soon loose its marketability. Even if the property is maintained very well, it is still necessary to carry out renovations in the interior and exterior of the property. (Floyd & Allen) Indemnity Agreement In real estate affairs, an indemnity agreement is used to decide the financial responsibility of either party. Indemnification is where a person is not held responsible or for is not liable to another party. This means that he or she is protected from costs. Tenants signing a lease agreement have to consent to indemnify the owner of the property from costs and also damages that are associated with being harmed on the property. It usually has an additional clause that says that the owner has to repair any damaged parts that could be dangerous for the tenant. For example any faulty electric cables should be repaired before the tenant moves in to the property. (Salmon 2007) Therefore this means that accidents that take place will not have the land lord liable for the expenses. For example, if a tenant falls down the stairs because they were not repaired and the land lord was not informed of this problem, an indemnity will prevent the tenant from suing the land lord. The tenants also agree to be held responsible if there is any damage to the property. When the tenant has agreed with the terms of the indemnity agreement, he must comply with there failure to which he can suffer repercussion. If he or she was to bear the costs of repairs and he moves out with out taking care of the repairs, the land lord can refuse to give him/her the deposit tenants are supposed to get when they are leaving the leased property. (Reilly 2000) Drop in Capital values With time real estate property usually increase in value. However, some investments reduce in their value. The real estate is occasionally subjected to various appraisal activities. This can assist to find out whether the property has appreciated or depreciated in value. The drop in capital values can be due to changes in the economic environment. A real estate investment can reduce in value if the surrounding area has become substandard or if people are not willing to stay in the area anymore due to various reasons such as insecurity. Bad maintenance and lack of repairs can also result in a reduction of the worth. (Allen & Floyd) Illiquidity The problem of illiquidity in the residential real estate market starts when people who borrowed loans depend on refinancing and price appreciation so as to give there loan repayments. The interest rates that were used by the lenders were too high for the residential property. The borrowers may have been able to pay their loans in the beginning of the loan repayment period but soon found it very difficult to repay the loans. They could not refinance and were unable to afford their loans. In such a case both the lenders and the borrowers made financial future estimates which were wrong and unsustainable. The borrowers relied on the apperception of the rents so that they can be able to pay their loans. Unfortunately the opposite happened and they found themselves in big problems. (Salmon 2007) Recommendations Real Estate Acquisition of land and real estate is an opportune investment to many peoples and companies due to the high returns associated such business enterprise. Before venturing in this area it is paramount to consider the restrictive covenants that have been put in place for the real estate that is to be bought. This is important because they will inform the person how they can use the property. The investor should ensure that he is issued with a copy of the restrictive covenants before he makes an offer on the property. This is better than getting a surprise after purchasing. He can seek the services of a lawyer to help him interpret the clauses in the deeds and restrictive covenants. A buyer of a residential investment should make sure he is very careful so as not to have his money stolen by fraudulent swindlers. He should not accept to pay any amount of money before he has seen the property and found it to be acceptable for his needs. He should not make the full payment before the title has been passed to him. (Wickell 2008) An investor should ensure that the residential property is in the vicinity of useful amenities that he and his family need. It should be near shopping centers, hospital, schools and close enough to his or her place of work or business. (Reilly 2000) References: Allen MT & Floyd CF 2002, Real Estate Principle, Dearborn Real Estate Education, Chicago. Fisher, JD & Brueggeman WB 2004. Real estate finance and investment, McGraw-Hill Manningstation 2008, Landlords – your rental questions answered, viewed on 5th September 2008 http:www.manningstation.co.uk/lettings/your questions answered property rent in lead Price CJ, Price R, Price RL 2005, 20 questions to ask before buying a home, Career Press, Franklin Lakes. Professional, New York. http://www.portfolio.com/views/blogs/market- movers/2007/12/17/illiquidity-and- insolvency-in-the-commercial-real-estate-market Rowland PV, Cooper R, Smith J & Sayce S 2006, Real Estate Appraisal: From Value to Worth, Blackwell Publishing, 2006. Salmon F 2007, Illiquidity and Insolvency in the commercial Real Estate Market, Portfolio.com, viewed on 5th September 2008. Wickell J 2008, Restrictive Covenants, About.com, viewed 5th September 2008, http://homebuying.about.com/od/realestateglossary/g/covenants.htm Read More