Real Estate Appraisal in California

PREFACE

This book is intended to provide the reader with a thorough understanding of the appraisal process. After studying the covered topics, you will be able to incorporate this information into your business.

For your assistance, this book is divided into three sections. Section one discusses the various principles associated with real estate appraisal. Section two examines the different appraisal procedures. Section three applies the information as they pertain to the many types of real estate.

While every effort has been taken to insure that the enclosed information is current, laws and techniques are constantly being revised. Therefore, do not use this book as a substitute for professional assistance. Also, masculine pronouns are utilized in the book. This practice is only an editorial device and not intended to actually imply gender.

Chapter 1

REAL PROPERTY

INTRODUCTION

The real estate appraisal process places a value upon real property. It is imperative that you understand the differences between real property and personal property. A real estate appraiser normally only deals with real property.

REAL PROPERTY V. PERSONAL PROPERTY

Before examining the various types of real property, we need to differentiate between real property and personal property. Real estate is merely another term for real property. Therefore, for the purposes of the remainder of this book, real estate appraisal only includes real property.

Personal property is sometimes called chattel. It includes all property which is not classified as real property. This negative definition does not initially provide much assistance for you. However, after our subsequent discussion on real property, it should be clear what property constitutes personal property. As an immediate general rule, personal property is usually that property which is movable. Real property is generally immovable.

As an historical note, property was originally thought of as a bundle of rights. The rights that a party had in property constitutes what was considered real property. The current view of real property is substantially different. Real property is the thing of which there may be ownership. The rights to the subject property is now related to ownership. The topic of property ownership is not germane to a discussion on real estate appraisal. Therefore, this book will not delve into it any further.

It is important to understand that property can change classifications. It depends upon the use of the property. Soil is initially considered to be real property. If it is dug up and transported as top soil, it becomes personal property.

Conversely, if lumber is utilized to construct a house, it changes from being personal property in the form of pieces of lumber into real property in the form of a structure.

TYPES OF REAL PROPERTY

There are many types of real property. The various elements include land, anything incidental to the land, any permanent attachment to the land, and anything immovable by law.

(I)Land

The most basic element of real property is the land. Buildings may come and go, but the land is for the most part permanent. There are several components to land. They include the ground, water and air.

(A) The ground- Most people associate land with the ground. While there are other elements, the ground is an integral portion of land. There is more to ground than just the dirt. A very important component of the ground is mineral composition. A large presence of a valuable mineral can greatly increase the worth of real property. As such, an appraisal must include this when making a value determination. It is important to remember that once minerals are extracted from real estate, they convert to personal property.

Oil and gas are technically categorized as minerals in any discussion on property. However, they do deem special attention. The vast majority of minerals are stationary in nature. They do not normally move very much. If a party purchases real estate with the intention of extracting these stationary, solid minerals in the future, there is a great likelihood that the minerals will be there for the excavation. Oil and gas, on the other hand, present a problem for speculators. Since oil and gas are not solid and subject to shifting, a buyer may find that the reason for his purchase has moved to another location.

(B) Water- Water plays an important role in association with real property. You need to be familiar with the topics of riparian water rights, underground water, surface water, and the right of appropriation.

(1) Riparian water rights- Real estate often borders a river or water-course. When this occurs, the owner of the subject property normally has the right, in common with all other landowners who have bordering land, to the reasonable use of the water.

(2) Surface water- Surface water is that water which disperses itself over the earth’s surface following no definite course. Water positioned on the surface of real estate often presents a real hazard to the landowner. An excess can prove to be disastrous. Therefore, it is the responsibility of the owner of real property to not divert surface water to the property of another person.

(3) Underground water- Water is often located beneath the surface of the earth. The landowner usually has the right to use a fair share of the water underground in common with other landowners.

(4) Right of appropriation- This right is often associated with state governments. Specifically, it is the right of the state to take excess underground water away from the landowner for the beneficial use of nonowners.

(5) Air- Most people don’t associate air with real property. However, airspace is essential to enjoying full property rights.

The historical view on air rights stated that the air directly above a given parcel of property was the possession of the landowner for an indefinite distance. This outmoded concept had to be revised with the advent of modern air travel. The right to an indefinite amount of airspace would make air travel impossible. The present theory states that a landowner has the right to use as much airspace as can be used and that others cannot use airspace that would interfere with the landowner’s use of the land.

(II) Anything Incidental to the Land

Something which is incidental to property is by right used with the land for its benefit. It is commonly referred to as an appurtenant. An example of this is an easement. An easement is the right of a landowner to use the land of another for a special purpose. Easements include such things as the right to pass through someone’s property to get to their own property or to a watercourse. An easement cannot be sold separate from the land.

(III) Any Permanent Attachment to the Land

We previously stated that personal property can be converted to real property. When movable personal property is permanently attached to land, it becomes a fixture.

Personal property can be permanently attached in a number of manners. There are many possible methods. Something can be attached to real property by roots, such as with vegetation. Something can permanently rest on property, as in the case of a building. Something can be embedded in property, such as with a wall. Finally, personal property can be permanently attached to something that is permanent, such as with cement, plaster, nails, bolts or screws.

(A) Types of attachments- There are many different types of attachments to real estate. By far the most important one to our discussion, though, is the presence of a building, bridge, or some types of man-made physical improvements. Most pieces of property have some type of structure on it. Also, such an addition can greatly increase the value of the real estate. This is of particular importance in a real estate appraisal. The property tax on one piece of property can fluctuate dramatically from an adjoining one by the presence or absence of expensive structures.

While the above improvements are the most important considerations for an appraisal, other types of attachments need to be evaluated in the appraisal process. This includes natural vegetation and industrial vegetation.

Vegetation which is solely the product of nature is known as natural vegetation. It is also called fructus naturales. Natural vegetation is classified as real property until it is severed from the land. Once this occurs, the vegetation converts to personal property. The conversion takes places when the vegetation becomes movable. An important consideration to fructus naturales is that it may be owned separately from the land. Timber is often owned in this manner.

Industrial vegetation consists of crop production produced annually by labor, such as grain, vegetables, fruits, or other growing crops. Industrial crops are sometimes termed emblements or fructus industriales. They can be real property or personal property, depending upon the situation. When industrial vegetation is planted, it is classified as real property. When it is severed, mortgaged or sold, it converts to personal property.

(B) Fixture determination- Most items can easily be categorized as fixtures. However, some items defy such an easy determination. As an example, if a property owner installs a stained glass window with the intention of removing it and taking it with him when he moves, is it considered real property or personal property?

To assist disputes surrounding this issue, five general tests can be applied by the courts. The ones actually used in a case is determined by the individual circumstances and the preference of the court.

(1) Intention- Fixture determination can best be resolved by investigating the intention of the person who originally incorporated the personal property into the land. Does this party intend to remove the item and take it with him when he leaves? Does this party intend to leave the improvement with the land? Original intention may not always be clear. When this problem arises, the following two tests can be helpful.

(2) Method of annexation- Intention can usually be ascertained by examining the way an improvement is attached. This can outline the degree of permanence which was originally desired. As a general rule, the determination would normally be that the intention was for installing a fixture if the article was attached with a substance such as cement. On the other hand, if the method of annexation was with a thumbtack, the intention was probably that the improvement was to be removed.

(3) Adaptability- The courts may also analyze the degree of adaptability of the improvement. How adaptable is the item for the ordinary dweller. An ordinary table lamp can be used by any property owner. However, an expensive chandelier is not normally utilized by the average homeowner.

The operative terms in determining adaptability are ordinary use.

(4) Existing agreement- The parties involved in a property transfer can contractually determine how certain improvements are to be treated. Their will can supersede traditional legal interpretation. A buyer can insist that a detachable stained glass window remain attached in order for the transaction to be completed. Conversely, a seller can insist that a fence that was permanently attached be removed.

(5) Relationship between the parties- Occasionally, the preceding tests are inadequate to determine whether an improvement is a fixture. The relationship between the involved parties then becomes critical. The buyer is normally favored in a relationship between a buyer and seller. If an improvement is necessary for the normal use of the real property, it will usually be declared to be a fixture. The above rule also applies to relationships between mortgagor/mortgagee and trustor/trustee.

You should be aware of an important exception to this test. In a relationship between a landlord and tenant, certain improvements are classified as trade fixtures. A trade fixture is an item affixed for the purposes of domestic use, ornament, trade or manufacture. The tenant can remove trade fixtures. The item must be removed during the term of the tenant’s occupancy, though. A gas pump is an example of a trade fixture.

A general legal guideline can be made which applies to most situations. A fixture stays with the land. Exceptions will also be possible. It does normally apply, however.

(IV) Anything Immovable by Law

Legal requirements often mandate that a certain item must remain with the land. In these circumstances, it is categorized as real property regardless of what may seem fitting.

IMPORTANCE OF DISTINGUISHING BETWEEN REAL PROPERTY AND PERSONAL PROPERTY

There are several reasons for separating real property from personal property.

Effects on the Value of the Property

When appraising a parcel of property, it is critical to know exactly what items can be transferred. If the seller is going to take a lot of the improvements to the property with him, an appraisal which includes these items will be unjustifiably inflated. The value included in all documents will be inaccurate and misleading.

(II) Items for Sale

The following reasons do not specifically apply to appraisals. However, they fit our current discussion.

All parties to a real estate transaction need to be fully informed as to what items are included in a sale. Otherwise, future conflicts are certain to occur. There may be no orderly means to resolve them.

(III) Means of Title Transfer

Title transfer of real property normally requires a written agreement. Many types of personal property can be transferred without such a written instrument.

(IV) Recording Requirements

Instruments that affect the title to real property should be recorded in the County Recorder’s office. Personal property normally does not face this necessity.

(V) Taxation of Property

The type of taxation that property faces depends upon the type of property which is being taxed. Personal property is generally taxed one time at the place of the original purchase. Real property, on the other hand, faces annual taxation mainly from local governments. Real property is therefore taxed much more frequently than personal property. Also, certain tax exemptions depend on the type of property being taxed.

(VI) Subject Governing Laws

Real property normally falls under the exclusive jurisdiction of the state where the property is located. Personal property, however, doesn’t have to remain in the jurisdiction of any one state. It all depends on where the present owner of the property lives.

TYPES OFREAL PROPERTY AND PERSONAL PROPERTY

PERSONALPROPERTY

All property that is not real property.

REALPROPERTY

(I) Land

(A) The ground

(1) Soil and minerals

(2) Water

(a) Riparian water rights

(b) Surface water

(c) Underground water

(d) Right of appropriation

(3) Air

(II) Anything Incidental to the Land

(III) Any Permanent Attachment to the Land

(A) Buildings, bridges, and certain other man-made improvements

(B) Natural vegetation

NOT INCLUDING

(1) Trade fixtures

(2) Industrial crops

(IV) Anything Immovable by Law

LAND DESCRIPTIONS

In order to be able to conduct an appraisal, the appraiser needs to exactly identify what area of real property to include in the appraisal. If too much property or the wrong property is appraised, the appraisal will be grossly inaccurate. Land descriptions greatly facilitate this process. They are also known as legal descriptions.

There is no single, uniform method of legally identifying real property. Several systems can be employed. This includes the recorded tract, map or lot and block system; the U.S. Government section and township system; the metes and bounds system; and the informal legal description system.

(I) Recorded Tract, Map or Lot and Black System

As the name implies, this system incorporates the use of a map or plat. The legal description is accomplished by reference to the tract name and number. An example of the recorded tract, map or lot and block system follows: Lot 27, Block F, Glenn Oak (as recorded June 5, 1985, Book 1, Page 59 of maps). City of Orange, County of Los Angeles, State of California.

(II) U.S. Government Section and Township System

This system of land description was originally created in 1785. It is still utilized today. It is also called the rectangular survey system or the Government survey system.

The basis for this system is a series of principal meridians and base lines. Description of property is achieved by the division and redivision of these two lines. Principal meridians are lines which run north and south. Base lines are lines which run ease and west. Principal meridians and base lines provide intersecting lines.

The area of land between principal meridians is further divided every six miles with range lines. The areas of land which are located between range lines are known as ranges. Consecutive numbers designate each range. As an example, the strip of land which runs 6 to 12 miles east of its principal meridian would be described as Range 2 East.

The division process continues by dividing land between base lines every six miles with township lines. The areas of land located between township lines are known as townships. Consecutive numbers designate each township. As an example, the area of land located 12 to 18 miles north of its base line would be described as Range 3 North.

Intersecting range and township lines form township squares. The standard township square measures six miles on each side. Therefore, the standard township square contains 36 square miles. You should not confuse a township square with a township. They are two different units of measurement.

This system of land description continues the division process even further. Each township square is divided into 36 squares. Each resulting square is called a section. The section is the most important element to the U.S. Government section and township system. In theory, each section contains one square mile. As will be discussed subsequently, this is not precisely true in reality. Each section is consecutively numbered. Section number one is located in the upper right-hand corner of the township square. Section number six is located in the upper left-hand corner. Section number seven is located directly under section number six. This numbering system continues in this manner with section number 36 being located in the lower right-hand corner.

As stated above, the area of a section is not exactly one square mile. The size of the standard section must be approximated. This is caused by the shape of the earth. To compensate for the curvature of the earth, correction lines are used. Correction lines running every 24 miles east and west of the principal meridian are called guide meridians. Correction lines running every 24 miles north and south of the base line are called standard parallels.

(III) Metes and Bounds System

There are times when a parcel of land is not covered by a proper map and the Government survey system is impractical. For these cases, the metes and bounds system can be utilized. Because it incorporates landmarks, it can become inaccurate in the future. This is because landmarks can change at some later time. This legal description system is also very confusing to most people.

The land description process of the metes and bounds system is initiated at a point of beginning. This is known as the POB. The legal description is taken from this POB around the perimeter of the subject property using metes and bounds. Metes are measurements of length. They include inches, feet, yards and rods. Bounds are measurements of boundaries.

They can be natural, such as a river. They can also be artificial, such as a highway. The system can also employ landmarks. Examples of possible landmarks include trees, boulders and fences.

The metes and bounds system can also utilize the angular line method. This method incorporates angles and directions originating from a north and south line which are derived from a compass. The following principles of angular measurement are used in the application of the angular line method.

1. A circle contains 360 degrees.

2. A half-circle contains 180 degrees.

3. A quarter-circle contains 90 degrees.

4. There are 60 minutes (divisions) in each degree.

5. There are 60 seconds (divisions) in each minute.

6. The measurement in an easterly or westerly direction from the north and south line provides the bearing of a course. The best way to explain this system of land description is to give an example. The following is a legal description which would be provided by this method.

Beginning at the intersection of the east line of Main Street and the south line of First Street; thence east along the south line of First Street 300 feet; thence south 10 degrees, 28 minutes, 176 feet to the center of the Newland River; thence northwesterly along the Newland River to its intersection with Main Street; thence north 137 feet along the east line of Main Street to the point of beginning.

(IV) Informal Legal Description System

The vast majority of real property is legally described with one of the three systems previously discussed. However, there is an alternative. While the other three systems have clearly defined methodologies, the informal system does not. It uses nontechnical information such as street addresses or property names. Legally, this technique is adequate. However, it is not acceptable for title insurance purposes. For the appraiser, it can greatly complicate the appraisal if the identification process is unclear.

UNITS OF MEASUREMENT

In any appraisal, units of measurement are utilized. A thorough knowledge of these units is essential. This section will examine the units most pertinent to our present discussion.

(I) Linear Measurement

1. 12 inches = 1 foot.

2. 3 feet = 1 yard.

3. 5.5 yards = 1 rod.

4. 40 rods = 1 furlong.

5. 8 furlongs = 1 mile.

(II) Square Measurement

1. 144 square inches = 1 square foot.

2. 9 square feet = 1 square yard.

3. 43,560 square feet = 1 acre.

4. 640 acres = 1 square mile.

(III) Cubic Measurement

1. 1,728 cubic inches = 1 cubic foot.

2. 27 cubic feet = 1 cubic yard.

3. 128 cubic feet = 1 cord.

4. 24.75 cubic feet = 1 perch.

(IV) Board Measurement