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What You Should Know about Estates for the Real Estate License Exam

There will be questions involving estates on the Real Estate License Exam. Simply stated, the term estate, or estate in land, describes the extent and type of interest or rights that someone has in a piece of land. It essentially means the same thing as the bundle of rights theory.

The bundle of rights

A concept that long has been associated with real estate ownership is the bundle of rights. Picture a bundle of sticks or logs, each of which represents a specific right associated with real estate ownership. One key element of this theory is that you can remove one of the rights (one of the sticks) and separate it from the rest of the bundle.

One right of ownership of property is the right to actually possess or occupy it. However, if you own an office building, you can give that right of possession or occupancy to a tenant through a lease. In doing so, you’ve separated a part of your right to occupy the building from your bundle of ownership rights. Doing so severely limits your right to occupy that part of the building.

The bundle of rights includes the rights to use and occupy, mine, farm, develop the property, the rights to will, give, and restrict others from using the property, and the right not to do any of these things with the property.

Freehold estates

The essential characteristics of a freehold estate are that it must include ownership of real estate and that it lasts for an indefinite or indeterminate period of time that can be forever or for the lifetime of the person with the interest in the real estate. Fee estates and life estates are the two main types of freehold estates.

Fee estates

Several fee estates exist. Each of the ones you need to be aware of for exam purposes is described in the list that follows. The term “fee estate” is really a general umbrella term for unlimited ownership rights subject to different limitations.

  • Fee simple: Also called fee simple absolute or indefeasible fee, this fee estate is the most complete form of ownership without limitations on rights of ownership, except for public and private restrictions on what can be done with the property.

  • Fee simple qualified estate: Also called a fee simple defeasible estate, this fee simple estate has some limitations on it. The three types of qualified fee estates are

    • Fee simple condition precedent: In this case, ownership, commonly referred to as title, won’t pass from one person to another until a particular condition is met.

    • Fee simple condition subsequent: This form of estate is a situation in which the grantor can reclaim property if some condition isn’t met after title has passed to the next owner. The right to reclaim the property is known as the right of reentry.

    • Fee simple determinable: In this situation, title remains with the new owner as long as any conditions of ownership are being met.

Life estates

A life estate grants possession and limited ownership of a property to a person for the duration of the recipient’s life or the life of another person. The main difference between a fee estate and a life estate is that a fee estate has no time limit and a life estate does. The two types of life estates are

  • Ordinary life estate: An ordinary life estate is a life estate in which the length of time of the estate interest is the lifetime of the person receiving the life estate.

  • Life estate pur autre vie: The French words “pur autre vie” mean “for another life.” As opposed to an ordinary life estate, the length of the life estate in this case is for the lifetime of a third party rather than the person actually receiving the life estate.

Some states have what are called legal life estates, which are life estates in one form or another that are created by state law. You need to check out whether your state has adopted any of these rights and find out details of how they work. General descriptions of four common examples of these legal life estates are

  • Community property, which is a right of a spouse, entitling him or her to one half interest in real property that was acquired during a marriage.

  • Curtesy, which is the right of a husband to a portion of real property that is owned by his wife — after she dies and even if she leaves it to someone else in her will.

  • Dower, which is the right of a wife to a portion of real property that is owned by her husband — after he dies and even if he leaves it to someone else in his will.

  • Homestead, which grants the family home a certain level of protection from creditors during the owner’s lifetime.

Leasehold estates

Leasehold estates are considered interests in real estate because they give some rights to the tenant, such as a right to exclusive possession and use of all or some portion of the property, while the owner retains some rights, such as ownership, the right to collect rents, and the right to sell the property. As estates, however, you need to remember two terms and whose interest they represent:

  • The leasehold interest or estate is the tenant’s interest in the real property. Remember, the tenant holds the rights assigned by the lease.

  • The leased fee interest or estate is the owner’s or landlord’s interest in the real property. Remember, the landlord holds the fee or title to the property.

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