The Difference Between Real Estate and Real Property
The Land + Physical Improvements + Legal Rights
The terms real estate and real property are used interchangeably all the time, but they are not the same thing. So now is a good time to take a look at what real property means and especially the importance of the legal rights and restrictions associated with it. Smart investors need to be mindful.
The land and its’ physical improvements are Real Estate. The legal rights provided, along with the land and physical improvements together, are Real Property. Understanding these three distinct aspects of real property ownership brings the true potential into better focus.
As mentioned before, land and its’ physical attachments are real estate. The physical attachments can be naturally occurring such as forestation, or man-made like buildings. Ownership of land extends below the earth’s surface to its center, and up in the air to infinity. But like the land itself, the use of resources under the surface such as oil, gas, minerals, or the air rights above, may be subject to the legal rights or interests of others.
2. Physical Improvements
These are man-made improvements operating under the theory that they add value to the land. Roads, waterlines and electrical service are all typically value-added physical improvements. Sometimes the value of physical improvements is related to their useful life. A shed built in 1955 was probably a value-added enhancement for a while, but now may be a tear-down liability that incurs cost. Nonetheless, improvements that are physically attached to the land are real estate and are sold or purchased with the land unless provisions for removal are made prior to closing.
3. Legal Rights
When we buy a piece of land we are not only buying the real estate as defined above, but also the legal rights and obligations that are associated with it. The rights include possession, use, enjoyment, control, exclusion, the right to sell, lease, license, mortgage or will it in an estate. As mentioned before, these legal rights may be subject to the additional rights and interests of others, so it is very important in real property acquisition and ownership to understand what these encumbrances are.
Example #1: “Use” as a legal right of ownership
At first glance if one owns the land to the center of the earth as defined above, then one could think that digging below the surface to mine minerals of value is an unobstructed and given right of use. Not so fast. Besides getting fully permitted to mine the minerals, the land may be encumbered by mineral rights that were reserved by, and for the benefit of, another.
In the western United States, back in the day, railroads would acquire or purchase rights of way (often mistakenly called “right of ways” ) for laying track out to the Pacific Coast. The rights of way were typically reserved as easements and provisions were made for not just the active track, but also maintenance easements, telegraph lines, work and staging areas… etc.
Good rock was needed as ballast for laying the roadbed for the ties and rails. Ballast rock needed to be mined as nearby possible. Proximity to the road bed under construction was essential since the bulk, weight and distance involved required a lot of man and animal labor. Remember, there were no “Mac & a Pup” dump trucks back then, so mining and man-handling ballast was a huge effort.
Therefore, railroads often acquired mineral rights within, along, or outside of the rights of way and many still hold them. So, if Uncle Jed owns a farm out in North Dakota, he may not have the right to mine the minerals under his land since the mineral rights might be held by Burlington Northern Railroad to this very day. And don’t think this applies to just North Dakota farmland, it happens in urban areas all the time. Why? Because the urban areas of today were plains or forest land back then.
Example #2: Upstream Rights
Native American Tribes in the Pacific Northwest typically have Reservation Land dedicated to them by the Federal Government. Since they were totally screwed by the very same Federal Government, starting back in the 1800’s, more care is taken in modern times to preserve their tribal interests. One of those interests are migratory salmon that some tribes have rights to harvest when the salmon return from the ocean to their home rivers. By nature, salmon start as smolt in small tributaries far upstream from the main rivers and sure enough, that’s how far the adults go to spawn. All the way up to the head of the small tributaries because the future little guys have a better chance of survival after they hatch. So, what does this have to do with anything?...
Rivers that run through reservations have to start somewhere and it is miles upstream. If private land developers are impacting tributary water flow through on-site grading, water taking, or other activities, then hydrology, surface runoff, underground aquifers and ultimately downstream water flow can be negatively affected. These changes can impact the ability of salmon to migrate upstream, or to find suitable gravel beds for their nests in the tributaries. For these reasons Native American Tribes have asserted upstream rights. They have worked closely with non-tribal permitting authorities to have a significant say in upstream land development projects that could affect salmon bearing streams of any size. So, in the Pacific Northwest if I am looking to buy land, I better know if any of its surface or underground water is charging even the smallest tributary of a salmon bearing stream. Understanding the rights of others, even off-site, is essential.
Getting a handle: Fully Understand the Title Report:
One can easily find out about the legal rights and restrictions of ownership during the Inspection Period prior to closing and I can’t emphasize enough the importance of reviewing and fully understanding the title report. I know guys that have developed land for years and make only a superficial effort to review the title report prior to closing. They find out later when they try to sell an easement in a location that is already for the benefit of another. Big mistake.
Another pitfall to avoid is failing to understand who has an interest in the permitting process. In addition to the Tribal example given above, would there be a Federal Interest in the project permitting? The Army Corp of Engineers has a say on any body of water that is considered navigable by the federal definition. This can include some bodies of water that a novice would consider to be totally unnavigable by simple visual observation. So, in this example I would review to make certain that I know what permitting authorities might govern a body of water that my development activities might affect, either directly or indirectly.
I will write more about these and other examples in my blog on acquisition, but I never proceed to closing if I have any questions about the nature of the legal rights or the permitting interests of others that are associated with my development plans. Also, I clear up any title problems that might interfere with my intentions as a pre-condition of closing.
Real Property is generally much easier to buy than to get rid of, especially if it is tainted with a problem. It is imperative that when I develop or look to buy real property that I clearly understand not only the easily observable, but also the aspects that are not. That means understanding all of the rights held, or to be held by me, as well as the rights reserved for others. I need to be mindful of all entities that hold permitting interests for my project, even though they might be miles away or seemingly unrelated. So, I always remember that there is no substitute for thorough homework before a purchase, since Real Property with warts is tough to manage or sell. It’s the kind of headache that causes a lot of lost sleep… and I really do like my sleep.