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Freehold Estate

So how do estates work and what are they? Well, estates can be divided into two different sections: freehold estates, and leasehold estates. In this article, we will cover freehold estates.

A freehold estate is an estate in which you have an exclusive right to enjoy the possession of a property indefinitely. Contrast to a leasehold estate, where possession is limited by time period.

The three types of freehold estates that are on the real estate exam are:

  • Fee Simple Absolute
  • Fee Simple Defeasible
  • Life Estate

Fee Simple Absolute

Fee simple absolute, or fee simple for short, is an estate in land. It is the highest form of real estate ownership that is recognized by law, in which the owner can enjoy the property to its fullest extent and is only limited by government powers. Fee simple absolute is the greatest interest in a parcel of land that one can possibly own. The fee simple estate has unlimited duration and can be passed on to heirs.

Fee Simple Defeasible

A defeasible estate is created when a condition is added on a fee simple estate. If the condition is met, the estate may be lost. The estate then goes to the original owner, his or her heirs or a third party depending on the deed.

A good example is if an estate is made under the condition the property is used for religious services. For example, maybe someone wants to give their faith land to build a new church.  If the property ceases to be used for religious purposes, then the previous owners or their heirs have a reasonable amount of time to declare their rights and retake possession of the property.

Life Estate

A life estate is an interest in real property which is held for the duration of the life of a designated person. It may be limited by the life of the person holding it or by the life of another person. This designated person is called a life tenant.

This is a pretty easy concept. When you see or hear the word Life Estate just think of life. The estate only lasts for the duration of the tenant’s life. Interestingly a life tenant may sell, mortgage or lease the property for the duration of the estate. However, all contracts would be terminated upon the death of the life tenant.

Another important note is the life tenant cannot leave property to anyone in their will. Because it’s not theirs to give.

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Puffing

When you hear agents say “Check out this beautiful house. It’s MASSIVE,” and it’s actually not. It’s called puffing.

What is Puffing?

Definition: The term puffing refers to “extravagant claims made by sellers in order to attract buyers.” In plain terms, puffing is an exaggeration of a fact.

Many people including real estate agents are guilty of puffing.

Agents will say things like “wow look at this beautiful yard it’s the nicest I have ever seen,” and maybe they are not directly lying but are close to it.  Who knows, perhaps to them it is a beautiful yard, and the nicest they have ever seen, but more than likely the agent is exaggerating. They are doing this to make the property seem nicer.

Puffing is usually common for a lot of sales people. Real estate agents included. It’s one of those things that occur often. It happens in ads, stores, and pretty much everywhere sales happen. I am sure you’ve been to a clothing store before, where someone offers you some perfume stating it is the best they’ve ever smelled. Like before who knows? It could be true? More than likely not.

So is it legal? The answer is yes because it is more of an opinion rather than a fact. This is why it is usually not considered illegal. Puffing is legal as long as the statements are not fraudulent.

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Economic Obsolescence

If a new highway is built right next to a home, the noise could disincentivize people from wanting to live there. This is an example of Economic Obsolescence.

What is Economic Obsolescence?

Definition: Refers to the loss of property value due to external factors, meaning things off the property affecting the properties value. Examples of causes of economic obsolescence can include:

  • Flight patterns
  • A busy highway
  • Rise in local crime
  • And More

Economic obsolescence can be caused by larger factors as well. For example economic factors, such as a recession or depression. Or when a factory nearby closes and hundreds of people lose their jobs and locals properties drop in price. This is an example of economic obsolescence.

Economic obsolescence is usually unfixable by the homeowner. For example, if there is crime in the neighborhood no one is expecting homeowners to dress up like a superhero and clean up the streets.

 

Economic Obsolescence is a form of depreciation. It commonly shows up on the real estate license exam. To read about another form of depreciation read about Functional Obsolescence here.