Chapter 7
Understanding Forms of Real Estate Ownership
IN THIS CHAPTER
Finding out about owning real estate alone and with others
Checking out special ownership of cooperatives, condominiums, and more
Real estate ownership comes in many forms. You can own real estate by yourself. You can own it with your spouse. You can own it with partners. You can be part of a corporation that owns real estate. You also may own real estate in the form of a condominium or cooperative. In each of these situations, ownership issues and forms are slightly different. Attorneys usually handle the form of ownership of a property. In some states, especially those where attorneys are less involved in real estate transactions, you may, as an agent, have to deal more directly with these issues. And speaking of states, there may be slight differences from state to state with respect to some of these forms of ownership. Pay attention in class and note anything that might be unique to your state.
Regardless of how much or how little you’re involved in form-of-ownership issues in a real estate transaction, state examiners expect you to know something about the various types of ownership. In this chapter, I give you some basic terminology and key features of the various forms of real estate ownership, such as owning property by yourself, with others, with a spouse, in a trust, and in a business. I also cover special types of ownership, such as cooperatives and condominiums.
Even in states where real estate agents do most of the work associated with buying and selling property, agents always need to be aware of the things with which they’re not familiar. When ownership matters get the least bit complicated with regard to form, they need to and can refer clients and customers to attorneys skilled in real estate matters.
Real Estate Ownership: A Solo or Group Activity
That real estate can be owned by one person, two or more people, a married couple, or some type of business is obvious, because as real estate law evolved, it had to deal with these various forms of ownership with different terminology and sometimes different conditions.
In this section, pay particular attention to the terminology and key differences among the various forms of ownership. Exam questions on this subject are likely to focus on recognizing these differences.
You see the word “tenancy” throughout this section. Tenancy means having an interest in a piece of real estate. Most of us associate the word with being a tenant, which essentially is what it means; however, it also means having an ownership interest in a property. On a state exam you see the word used in both of its meanings. By the way, the word tenancy comes from a Latin word that means “to hold.”
One is the loneliest number: Owning real estate by yourself
Owning real estate by yourself is called sole ownership or tenancy in severalty. I know, the law has done it again. Right about now you’re asking, “How can you use the word ‘severalty’ when you mean only one person?” The answer’s actually pretty logical if you remember one thing. The word “severalty” doesn’t come from “several” but rather from “sever,” meaning to cut off. Sole ownership cuts off all other interests in the property. In other words, no one has an ownership interest in the property except the one owner.
Join the crowd: Owning real estate with other people
Two or more people who aren’t married can own property together in a form of ownership known as concurrent ownership or co-ownership. I describe two forms of co-ownership: tenancy in common and joint tenancy. Although these two similar forms of ownership are available to married couples, they may serve specific purposes of ownership for people who are not married but want to own property together.
Tenancy in common
Tenancy in common is a form of ownership in which two or more people own property together. The fact that two or more people are buying property together as tenants in common is stated in the deed. In some states, if the form of ownership isn’t otherwise specifically stated in the deed, tenancy in common automatically is assumed when two or more people buy property together. (For general information about deeds, check out Chapter 9.) Probably the most common form of ownership where tenancy in common takes place is condominium ownership. See the section “More individuality: Condominium ownership,” later in this chapter.
The principal features of tenancy in common are
- Undivided ownership: The land itself is not physically divided into or split between multiple owners, but rather percentages or shares of interest are granted in the property as a whole.
- Equal or unequal shares: The percentage of ownership interest of each party need not be equal, so one person can have a 50 percent share, and two others can each have a 25 percent share in the same property, and so on.
- Sale without permission: Any owner can sell his or her share without having to receive permission to do so from the other owners. The new owner is a tenant in common with the previous owners.
- No right of survivorship: If one owner dies, she leaves her share to her heirs. The other owners don’t have any right to her share of the property.
Tenancy in common might be the way two married sisters buy a vacation home to share. If one dies, her husband or children would inherit her part of the property. If one sister has more money invested than the other, there would be no problem because one would own, say, 60 percent of the property whereas the other owned 40 percent.
Joint tenancy
Joint tenancy is a form of ownership with special features for two or more people. Joint tenancy is said to be created with these four unities:
- Unity of interest: Unity of interest means that each owner has the same interest in the property. If there are four owners, each has a 25 percent share in the whole property. If there are two owners, each has a 50 percent share. Some states now permit unequal shares in a joint tenancy. You should check out what the law is in your state.
- Unity of possession: Like tenancy in common (see the previous section), each owner’s interest is in an undivided property. Although interest in the property may be divided, the land and building, if any, may not be divided. In other words, no physical division of the property exists. Each owner essentially owns a share in the property as a whole.
- Unity of time: Joint owners all take title (or ownership) to the property at the same time. A later owner can’t be added to the joint tenancy as a joint tenant unless new documents are executed, effectively creating a new joint tenancy. If one of the joint tenants sells her interest without this happening, that new owner becomes a tenant in common. A joint tenant also may sell his individual interest without the permission of the other joint tenants.
- Unity of title: Unity of title means that all the joint tenants names are on the deed together.
Any brother and sister who want to own a home together could buy a property as joint tenants. If one dies, the other automatically takes title (ownership) of the whole property.
Perhaps the most important difference between joint tenancy and tenancy in common is the right of survivorship that you have as a joint tenant and that you don’t have as a tenant in common. The right of survivorship in a joint tenancy means that if one of the joint tenants dies, the other tenant(s) automatically take title to the deceased tenant’s interest in the property. For example, if four joint tenants each own a 25 percent share of a piece of property, and one joint tenant dies, the three remaining tenants each has a 331⁄3 percent share. That’s why joint tenancy is a form of ownership that married couples sometimes use when they buy property. When one spouse dies, the other spouse automatically gets full title to the property.
You may want to check whether your state still recognizes the right of survivorship in a joint tenancy. Some states are doing away with that aspect of this type of co-ownership unless it is specifically stated.
Getting hitched: Owning real estate when you’re married
The law over time has developed special forms of real estate ownership for married couples. I describe the two common forms: tenancy by the entirety and community property, one or both of which may be available in your state.
Tenancy by the entirety
Tenancy by the entirety is a form of co-ownership specifically geared toward protecting the interests of married couples by providing a right of survivorship. A form of joint tenancy (see the previous section for the full scoop), the theory behind tenancy by the entirety is that a couple is treated as if it was one person owning property insofar as each spouse has an undivided and equal interest in the property. Upon the death of one spouse, the deceased spouse’s interest automatically goes to the surviving spouse without having to go through the process of probating a will or other inheritance issues.
Another unique feature of tenancy by the entirety is that neither spouse can sell his or her share without doing so together. The entire property must be sold by the combined actions of both parties signing the deed. In the event of a divorce, a tenancy by the entirety is changed to a tenancy in common. (See “Tenancy in common,” earlier in this chapter, for details.)
Community property
Some states operate under community property laws. Under these laws, all property that a couple acquires during their marriage is considered jointly owned and equally owned by both spouses, regardless of whose actual income was used to purchase the property. Property acquired by one or the other spouse before the marriage is called separate property and is not subject to community property requirements. Property inherited during the marriage by one or the other spouse is also considered separate property. The essential elements of community property law are
- Community property may be sold or mortgaged only by joint action of both spouses.
- Separate property may be sold or mortgaged by the person owning it (or bringing it to the marriage).
- No right of survivorship exists. Upon the death of one spouse, the surviving spouse retains title to his or her half of the property. The deceased spouse’s half interest can be willed to anyone else.
You need to check how real estate ownership of married couples is treated in your state. Laws may vary from one state to another, particularly with respect to the specific implementation of laws protecting the rights of married couples in real estate ownership and whether community property is a recognized concept. Some states, for example, may use joint tenancy with a right of survivorship for married couples.
Who do you trust? Ownership in trust
A third party can hold real estate for the benefit of someone else. The main players are the trustor (the person who owns the property and conveys it to the trustee); the trustee (the person who receives the property and administers it on behalf of the beneficiary); and the beneficiary (the person who receives the benefits of the property, like rent on an apartment house, as a result of the administration of the property by the trustee).
You leave your apartment buildings to your brother in trust for your favorite nephew. You are the trustor, because you created the trust. Your brother is the trustee, and he administers the buildings according to the terms of the trust, which in this case would likely be that the income from the buildings goes to your nephew because he is the beneficiary.
Ownership in trust requires a special type of deed called (you guessed it!) a trust deed or a deed in trust. For more, see Chapter 9.
All business: Ownership by a business
Ownership of real estate by business organizations is not so much about the forms of ownership as it is about the organizational structures of the businesses. You’re not likely to be involved very often with this type of transaction in your everyday real estate practices, unless you work a great deal with commercial real estate and developers. State exam writers, however, expect you to know something about different business organizations and how they can own property.
You may hear the word “syndicate” in connection with business projects. A syndicate isn’t a form of ownership. It’s a term that generally describes two or more people or companies joining together to work on a project or form an ongoing relationship to own and manage buildings or other real estate.
Businesses (and syndicates) often purchase properties as investments. For more about investment properties and forms of investment ownership, see Chapter 17.
Corporations
A corporation, for legal purposes, is treated the same as an individual owner when it comes to real estate ownership. Generally speaking, unless a corporation is involved in co-ownership arrangements with other corporations, it owns property in sole ownership or tenancy in severalty. I discuss tenancy in severalty in “One is the loneliest number: Owning real estate by yourself,” earlier in this chapter. A few key features of real estate ownership by a corporation follow:
- People own shares in a corporation, but no direct ownership exists for individual shareholders in property owned by the corporation.
- Shareholders have neither authority over nor responsibility for management of corporation property.
- Shareholder liability generally is limited to the value of the shareholder’s shares. For instance, if a shareholder owns $1,000 worth of stock in a real estate investment corporation, and the company loses a lawsuit for millions of dollars, regardless of whether the corporation has the money, the shareholder can lose only his $1,000 investment and no more than that. It should be noted that this protection is subject to court rulings in the event of a lawsuit.
- Profits that the corporation receives from the property are taxed before they’re distributed to shareholders, who then pay taxes again on amounts they receive. The so-called S corporation is a form of corporation with modified tax liabilities and is permitted by the government under strict rules.
Partnerships
A partnership is two or more people or companies combining to do business. A partnership may be short-term for one project like buying, renovating, and selling a building, or long-term for ongoing investment and management of real estate holdings. Many states have adopted the Uniform Partnership Act and the Uniform Limited Partnership Act, which allow real estate to be owned in general or limited partnerships.
Partnerships are either general or limited. In a general partnership, all the partners share in the management and operational decisions over the business of the partnership. They also share in the liability for any actions the partnership takes without limit. The respective partners pay taxes according to their respective interests and liabilities, so that double taxation is avoided. On the other hand, in a limited partnership, one general partner usually manages the operations of the business, and a number of other limited partners have no management responsibilities. The liabilities of the limited partners are determined by and limited to the amounts of their respective investments in the company.
Limited liability corporations
The limited liability corporation (LLC), or limited liability company, as it’s sometimes called, is a hybrid organizational structure that has elements of a partnership and a corporation. Similar to a corporation, the liability of the individual members within the corporation is limited. Meanwhile, they pay taxes as if they’re part of a general partnership (see the previous section). Management by members of the LLC also may be along the more direct lines allowed in a general partnership.
Joint ventures
A joint venture is the joining together of two or more people or companies to do a single project like buy a house, renovate it, and sell it for a profit. A joint venture is somewhat like a syndicate in that it can own property in any of several forms, like tenancy in common, joint tenancy, or a corporation, among others (see the sections on these forms earlier in this chapter). However, ownership probably will include an ending date, because joint ventures aren’t designed to be ongoing business relationships. A joint venture, like a syndicate, is really a name for two or more people or companies who want to cooperate in a real estate investment. The difference between a joint venture and a syndicate is that a joint venture brings people together for one real estate investment or project, whereas a syndicate usually does multiple real estate investments or projects at the same time or a series of individual projects over a period of time.
Special Types of Ownership: Cooperatives, Condominiums, and More
Cooperatives and condominiums are popular forms of ownership for a variety of reasons, but primarily because they
- Usually are built to a higher density (more units per acre or in high-rise buildings), and they’re often somewhat less expensive than a single-family house in the same area.
- Provide some of the advantages of homeownership, such as building up equity by paying off a mortgage, and tax advantages like being able to deduct real estate taxes and mortgage interest. (I cover mortgages in Chapter 15 and taxes in Chapter 16.)
- Provide the advantage of no outside maintenance, because the dwellings usually are maintained by a homeowners association in the case of condominiums or a board in the case of a cooperative.
These forms of ownership are unique because they involve ownership by more than one person, but the owners aren’t known to each other nor are they in a business venture together. I cover cooperatives and condominiums, plus planned unit developments and time shares, in the following sections.
Share and share alike: Cooperative ownership
Strictly speaking, you don’t own real estate when you’re part of a cooperative. You own shares in a corporation that owns the real estate. As a shareholder, you receive a proprietary lease that enables you to occupy your apartment. For all intents and purposes, your ownership interest in a cooperative is treated like real estate, including the ability to finance your purchase just like a mortgage, except that your shares (and not the property itself) are pledged as collateral for the loan. In other words, if you can’t pay off the loan, the bank can claim your cooperative shares in payment. (For more about mortgages, see Chapter 15.) Some of these expenses are deductible from annual personal income taxes, such as the cooperative owner’s share of the property taxes.
A board of directors of the corporation makes rules and policies for the building, collects monthly fees from shareholders and maintains the building, and pays the taxes and any other expenses that may exist, like emergency repairs and a mortgage on the building itself. This mortgage on the building is generally referred to as the underlying mortgage and can sometimes make the monthly common charges a little more expensive than in a condominium because the share owners are responsible for payments on the underlying mortgage.
Two issues that frequently are considered disadvantages of cooperative ownership are
- Shared liability: Whenever shareholders default on their common charges (the payments all shareholders make to maintain the building and pay taxes), the other (paying) shareholders are liable. This issue can become serious whenever too many shareholders default on their payments and the other shareholders have to pay the share of the money that wasn’t paid by the defaulting shareholders.
- Cooperative board approval of newcomers: This issue may be viewed as a negative or a positive, depending on your point of view. Requiring board approval of new cooperative buyers whenever someone sells shares in a cooperative is fairly common practice. The requirement allows new owners to be screened for financial ability to pay their loans and common charges, but it also may hold up the sale of a unit while a prospective buyer undergoes the board approval process.
Cooperative boards in many places may not be required to reveal the reasons they turn down a specific buyer. Insufficient financial ability is generally the best reason to turn a buyer down, but other reasons — including illegal ones such as fair housing violations — may exist despite the fact that cooperative boards are subject to these laws.
More individuality: Condominium ownership
Condominium ownership is a form of group ownership that involves actually getting a deed to your individual ownership interest. In general, the deed describes the airspace you own (in other words, the unit), which you own as a tenant in severalty, and your share as a tenant in common of the land under and around your unit. (See the “Tenancy in common” section earlier in this chapter for details.) A homeowners association usually collects set monthly fees, which pay for maintenance of the condominium building and complex.
Individual condo owners are responsible for paying their own property taxes, so defaulting on your tax obligations can result in a foreclosure on the unit but not on the entire complex. (For more about foreclosures, see Chapter 15.) Condominiums often are associated with complexes in the suburbs and are thought of as low-rise one- and two-story attached housing units. Condominiums, however, may also be found in high-rise buildings in urban areas.
You need to find out what the term “townhouse” means in your home state. Originally a term used to describe two- or three-story attached housing in urban areas, townhouses now are usually located in planned unit developments. Typically a townhouse owner owns the unit and the land under it and may even have ownership of small lawn or patio space. Because many early condos were built in a two-story townhouse style, in some areas common usage occasionally mixes the terms, calling condominiums townhouses regardless of the style.
Mix it up: Planned unit developments
The planned unit development (PUD) is a somewhat hybrid form of ownership. In theory, a PUD is a large development often having mixed uses, such as different types of residential and commercial uses, and built by a single developer. In practice, a PUD may have only residential uses. Like a condominium, PUDs often are overseen by a homeowners association, and common charges paid by the homeowners go for outside maintenance.
How a PUD often differs from a condominium is that the owner of a PUD unit also owns land beneath it. In a condominium, you own the unit individually but the land under and around it as a tenant in common with others. (See the section on tenancy in common earlier in this chapter.) You generally don’t own land individually in a condominium. You usually do in a PUD. You also usually own so-called common areas like recreation facilities, walking paths, and the internal roads as a tenant in common with others, just like a condominium. You should find out how the term PUD is used in your home state with respect to developments and property ownership.
Check your watch: Time shares
In a time share, a person has either a fractional ownership in a property or the right to use a property for a limited period of time each year or both.
Ownership in a time share may actually convey a fee simple ownership interest in the property. In other words, you have unlimited rights to the extent of your ownership interest, even if that ownership interest is the last two weeks in August every year. (For more about fee simple ownership, see Chapter 6.) A time share owner may only have a use interest, which is permission to use the unit on a periodic basis, such as the first week in June each year. A person with a time share use interest (in other words, the right to use a dwelling for a defined amount of time) leaves ownership of the property in the hands of a corporation or an individual.
Review Questions and Answers
Exam questions on the subjects in this chapter are about terminology and knowing the characteristics of the different kinds of ownership and their main characteristics. Concentrate on key words and characteristics, and you’ll do fine.
1. Ownership by one person is called
(A) tenancy by the entirety.
(B) tenancy in severalty.
(C) tenancy in common.
(D) joint tenancy.
Correct answer: (B). All the other answers involve two or more people owning a single property.
2. Joint tenancy requires unity of interest, unity of possession, unity of time, and unity of
(A) ownership.
(B) deed.
(C) finance.
(D) title.
Correct answer: (D). See the “Joint tenancy” section and remember the descriptions of the four unities. (I made up the other answers.)
3. The type of ownership available only to married couples that has the right of survivorship is
(A) joint tenancy.
(B) tenancy by the entirety.
(C) tenancy in common.
(D) community property.
Correct answer: (B). Joint tenancy and tenancy in common aren’t specific to married couples, and community property has no right of survivorship, leaving tenancy by the entirety as the correct answer.
4. In his will, Roger has his apartment house put in a trust to be managed by Alice on behalf of his son Jim. Which of the following is correct in this case?
(A) Roger is the trustor, and Alice is the trustee.
(B) Roger is the trustor, and Jim is the trustee.
(C) Alice is the trustor, and Jim is the beneficiary.
(D) Roger is the trustee, and Jim is the trustor.
Correct answer: (A). The person giving the property or creating the trust is the trustor. The person managing the trust is the trustee. The person receiving the benefits of the trust is the beneficiary. Roger is the trustor; Alice is the trustee; Jim is the beneficiary.
5. In which of the following forms of co-ownership are all owners required to sign a deed of sale?
(A) Tenancy in common
(B) Joint tenancy
(C) Tenancy by the entirety
(D) Tenancy by survivorship
Correct answer: (C). Tenants in common can always individually sell their interests in the property. Joint tenants, even though they receive their interest from the same deed, can break the joint tenancy by selling their individual interests; they’re allowed to do this without the permission of the other joint tenants. Tenancy by the entirety is for married couples only and requires both parties to sign the deed of sale. I made up Answer (D).
6. In what form of ownership does the owner get shares in a corporation rather than a deed?
(A) Condominium
(B) Planned unit development
(C) Townhouse
(D) Cooperative
Correct answer: (D). Condominiums, planned unit developments, and townhouses are all real estate ownership interests; no shares are involved since the owner gets a deed. A cooperative is ownership of shares in a corporation. Though not one of the choices, remember that a proprietary lease permits a cooperative shareholder to occupy her unit.
7. Liability is limited to the investment in what type of business ownership of real estate?
(A) General partnership
(B) Syndicate
(C) Joint venture
(D) Limited partnership
Correct answer: (D). In a general partnership, all partners are liable for their actions without limit. Remember that syndicates and joint ventures aren’t really forms of ownership but rather general descriptions of two or more people or companies cooperating to do one or more projects. The limited partnership is the only one of the four answers that limits the liability of the limited partners to their investments.
8. In what form of co-ownership does a deceased owner’s share go to her heirs?
(A) Tenancy in common
(B) Joint tenancy
(C) Tenancy by the entirety
(D) Tenancy in absolute
Correct answer: (A). In tenancy in common, you can leave your real estate interest to your heirs. In joint tenancy, the property may not be willed to anyone outside the joint tenancy. When one of the joint tenants dies, her share goes to the remaining joint tenants. Remember that this is called the right of survivorship and may vary in some states. In tenancy by the entirety, which is a form of ownership for married couples only, the share of the deceased spouse automatically goes to the surviving spouse. It may not be willed to anyone else. I made up tenancy in absolute.
9. You’re married and own property with your spouse. When you die, she will keep her half of the property, and you will be able to leave your half to your sister. You probably live in what kind of state?
(A) Community property state
(B) Joint tenancy state
(C) Tenancy by the entirety state
(D) Tenancy in common state
Correct answer: (A). Community property is the only form of ownership specifically for married couples that permits what is described in the question to occur. Joint tenancy isn’t specific to married couples. Tenancy by the entirety is a form of ownership for married people in which the deceased partner’s share in the property automatically goes to the surviving spouse. And although you may be able to create a scenario in which you own property as a tenant in common with your wife that allows you to leave half to your sister, this is one of those questions where the word “probably” should lead you to the better answer, which is community property state. It demonstrates the importance of carefully reading every word in a question.
10. A corporation owns property in what form?
(A) Tenancy in severalty
(B) Tenancy in common
(C) Joint tenancy
(D) Tenancy by the entirety
Correct answer: (A). Remember, a corporation is considered an individual person for legal purposes. The other answers involve multiple owners, and because a corporation is considered a single individual, tenancy in severalty is the only answer that works.