This chapter discusses legal considerations important in creating and defining various rights to real property. This Is Important in the study of real estate finance since it is these rights that are purchased, sold, and mortgaged. Thus, an understanding of the various rights associated with real estate is necessary to properly evaluate a real estate financial decision.
Legal considerations affect the risk of receiving the economic benefit associated with one’s property rights. For example, we will discuss the Importance of having a marketable title. Any defects In the title may result In a loss of benefits to the owner and Jeopardize the collateral value of the real estate for the mortgage lender. To some extent, this risk Is controlled and enameled by the use of title assurance methods, Including title Insurance and the use of general warranty deeds.
Knowing the various ways of proportional property rights may also result In mangling the value of a particular property, since It allows parties with different needs (e. G. , users, equity Investors, lenders) to have claims on the property rights that best meet those needs. Thus, the total value of all the rights associated with a reporter could exceed the total value of the property itself if there are no leases or other ways to separate rights.
This chapter has discussed the legal instruments and ramifications associated with financing real estate, such as default, foreclosure, and bankruptcy. The probability of one or more of these events occurring and the rights of the parties if it occurs ultimately affects the value of the various property rights. These legal considerations should be kept in mind as we discuss the risks associated with mortgage lending in later chapters. Clearly, the legal rights of borrowers and lenders affect the degree of sis assumed by each party and, thus, the value of entering into various transactions.
The availability of various legal alternatives can be viewed as a way of controlling and shifting risk between the various parties to a transaction. The probability of default or bankruptcy by a borrower and the legal alternatives available to each party affect the expected return to the lender from the loan. In later chapters we will discuss how the amount of the loan relative to the value of the property is used by the lender to control risk. Keep in mind the fact that loan covenants as discussed in this chapter also control the risk.
