Buying a house was supposed to be easy, right? You just pick a house and the rest would fall into place — poof! Unfortunately, that dream isn’t exactly how it works, nor should it be. Your home will be the largest purchase you’re likely to make during your lifetime, so it won’t hurt you to learn a few things about the process. After all, you should understand what you’re reading when you sign on that dotted line at closing.
Today we’re covering forms of property ownership. There’s a lot more to buying a home than just the buying — how you buy is just as important and what, when or with what mortgage instrument you buy. Because of the large monetary values that typically accompany a real estate transaction, over time several forms of ownership have developed to give you certain protections, depending on how you choose to take title.
Let’s Start Simple
More likely than not, you’re going to be purchasing your home as a Fee Simple Estate or a Fee Simple Absolute Estate. Even though this is by far the most common estate form, it’s really important to pay attention to this designation because it will dictate what sort of rights you’ll have as the property owner. In real estate school, they called these your “bundle of rights,” and each stick represented a right you possessed as a property owner. Let’s look at those bundles.
A fee simple estate is the most complete form of ownership, it grants you the right to free disposal of any or all parts of your ownership. When you buy using fee simple (without any optional alterations), you purchase the ground your home sits on, all the way to the Earth’s core and all the way up to the atmosphere. You can choose at any time to sell off different parts of your property, like the air rights (if you want to sell condos upstairs, for example) or the mineral rights (so your buddy next door can freely mine for gold in your backyard).
So, to put it more basically, under fee simple, you own it all and can sell, give away or leave any or all of your real estate to whomever you please. It does get a little trickier when you figure in the lien your bank holds against the property, but when in doubt, call them and ask if it’s ok to do whatever it is you want to do. Pay attention to this next part, it’s an important caveat to that statement.
If you wilfully destroy, seriously damage or allow your property to fall into major disrepair, your bank WILL accelerate your note. Acceleration is when the bank says, “That’s it, we’re done — cough up the dough.” Your loan documents will outline under what circumstances your note can be accelerated, but they all basically come down to making the property uninhabitable or refusing to make payments. As long as you have a mortgage, your rights to unhindered ownership end where the bank’s right, to ensure they can resell your home if you stop making payments, begin.
Life estates are the other type of estate you may encounter. They grant the owner the right to possess and use their property during their lifetime, but they don’t have any say in what happens to it after their death. If the life estate is your own, you’ve already named the beneficiary in a legal instrument like a deed, trust or will, so in that essence, it worked similarly to a fee simple estate. It gets twitchy if you decide at the last minute to change the beneficiary or the life estate is established on your behalf by someone else.
Parents use life estates to ensure children are allowed to remain in their homes even if there’s a new spouse. Spouses use them to protect their partners from children or former spouses who may have a valid claim to ownership when the spouse who made the arrangement dies. These aren’t extremely common situations, but you may come across a life estate as you’re shopping or choose to set one up for a family member.
What About Easements and Liens?
Easements and Liens are also forms of property ownership, this is why you can be forced from your home under limited circumstances by these owners. Let me explain them briefly — most people never have trouble with their lien or easement holders, so try not to panic prematurely.
Easements are created in a number of ways, but it generally goes back to the consistent usage of a section of property. The most common easements belong to your utility companies. They usually file an easement so they can easily access their buried lines, underground pipes or overhead wires without anyone’s interference. This is normal. Don’t panic unless the easement runs through your garage or takes up more of your yard than the grass does.
The second most common reason for an easement is a little more tricky. Because it is, in fact, illegal for any real estate in this country to be inaccessible by road (known as landlocking), easements are sometimes created across adjoining land to provide a driveway for a landlocked property owner. This is somewhat common in rural areas, but you still might run into driveway easements if you’re buying in a very old section of your town.
If someone else’s road runs across a property you’re interested in buying, ask your Realtor if they have a recorded easement. The amount of space allotted to this easement owner can affect how you use your property. Besides the inconvenience, you’ll have to respect their easement when you install a fence or build on to your property. If you live in a city or town with building regulations, you may find that easement limits the size of any patios, decks or outbuildings you want to install by reducing the actual square footage of your lot.
Liens are another thing entirely, but sometimes can be as big a pain as a non-utility easement. If you’ve taken out a mortgage, you’ve put a lien on your property by promising the house as collateral for the money you borrowed to buy it. Other types of liens can be filed, too, and these can be trouble. If you failed to pay your taxes, a tax lien may be placed on your property; when you don’t pay your air conditioning installer, he can place a mechanic’s lien against your property.
When you sell your home, all liens must be satisfied either beforehand or with the proceeds from the sale. Otherwise, your home has a clouded title, which means that other parties may have a some right to ownership. No one will buy a house with a clouded title, so keep an eye on those bills and make sure that when you do go to sell that you price your home to cover all the outstanding liens you may have collected.
What About This Tenancy Stuff?
I was just getting to that. Now that you’ve got an idea about the most common property ownership types you’ll see at the closing table, we need to talk about how you want to own your home. If you’re going to take title as a Fee Simple Estate (and you really should), you’ve got a lot of options about how to form that ownership.
Sole Ownership. When you’re the only person involved in the buying side of a real estate purchase, you’re the sole owner. That’s pretty simple — you have all those rights to yourself, you can pass your property to anybody you like, sell it or whatever you want to do. It’s all up to you alone. It may end up in probate, but it won’t really affect you.
Tenancy in the Entirety. Once you start bringing other people into the equation, tenancy gets harder. Tenancy in the Entirety is a type of ownership only available to people who are legally married (although a few states now include civil unions under this type of tenancy) and live in states that allow this form of ownership. What it presumes is a little weird, but basically, the two spouses are treated as a single “marital unit.” So, if your husband buys a piece of rental property and you live in an Entireties state, you did, too. Both parties are considered to have 100 percent ownership in the property and it automatically passes to the surviving spouse in case of death, probate court isn’t necessary.
Joint Tenancy. If you’re not married, but you’d like to buy property with someone else, you’ll become joint tenants. This only applies to properties that you purchased together, not properties that might have had one party added to the deed later. Under joint tenancy, you both own an equal and indivisible share of the property — neither can sell or mortgage without the other. This property will also have to go to probate court upon the death of an owner.
Joint Tenancy with Rights of Survivorship. Married people in community property states or those who plan to cohabit over the long term, regardless of the relationship, should purchase using this modified form of joint tenancy. Like in standard joint tenancy, you both own the property fully, but instead of having to prove your right to the other half of the property upon the other party’s death, you automatically inherit the whole thing.
Tenancy in Common. You’re a lot less likely to use this one — it’s more of a business thing — but once in a while you’ll come across tenants in common. These people own a property jointly, but unlike in other forms of property ownership, any party can sell their interest at any point along the way. They also can have unequal shares, which isn’t allowed in other forms of ownership. Tenants in common have to deal with probate court upon one party’s death, too.
The Bottom Line: Pay Attention to Ownership
More often than not, you’ll be taking Fee Simple title as a sole owner or tenants in the entireties (depending on your marital status), especially if you’re only on your first or second home. However, and I can’t stress this enough, you still need to check the loan documents to make sure you’re taking ownership in a way that you can handle. This is extra important in the Common Property states: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Understanding the different types of ownership can save you a lot of pain later on, especially if something tragic were to happen. No one wants to have to go to probate court just to get the right to their own home restored, but it can also be a headache to have to track down joint owners when you need to sell, especially if there has been a messy divorce. Know your options and you’ll be able to make the right property ownership decision when the time comes.