Real Estate Loans Require Land

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This just keeps popping up everywhere, so I obviously need to explain it blatantly.

In order to be a real estate loan, there must be real property involved. In other words, land or an interest in land. It doesn't have to be what lawyers call "fee simple" and the rest of the world calls complete ownership, free of anyone else's interests, but it does have to be an interest in land.

When you buy a house, townhome, condominium, or even timeshare, what you are buying is an interest in the land it occupies. The building you want to live in comes along for the ride because it is what lawyers call appurtenant: attached in such a way as to make removal non-trivial. I know that moving even mobile homes isn't what anyone who understands calls "non-trivial", but it's a lot easier than moving something with a permanent foundation. Talk with a lawyer if you need a finer appreciation for what your state considers appurtenant; I'm just trying to convey a general idea.

The cleanest example of an interest in real estate is "fee simple": A piece of land in which nobody else owns any interests. It's been about a century since most urban plots had this feature, since J. Paul Getty figured out that if you separate out the mineral rights you can make more money, but there is still a lot of rural back-country where fee simple is common (although not ubiquitous. Lots of farmers, ranchers, etcetera have sold mineral rights).

Much more common today is a community development, where the neighborhood has a Homeowner's Association (hence HOA) for common area maintenance, and this HOA has rights to enforce common standards of appearance. This really empowers the neighborhood busybodies, but it does safeguard you from a neighbor who lets their property become an eyesore and drags your value down or rents his property to a fraternity with loud parties 24/7. This is still an interest in land.

Then there are Condominiums and Townhomes. These are common interest developments where the entire group shares title to the land, and all you have is the exclusive use of one particular piece of the area or volume, which is described in the initial plan. This typically includes a dwelling unit, one or more parking spaces, and perhaps a storage locker. Note that these are usually described in terms of the volume they were planned to occupy, and may not be 100% compliant with the plan document. I heard about a high-rise where pretty much every unit was at least partially above the volume originally described for that unit because there was a change in building codes requiring more height per story, but everyone understood what was intended and pretended it was all copacetic. This is still real estate, because each individual owner still has an interest in land.

The principal extends even to timeshares. Title companies don't like to do them and most lenders don't like them, but they've still got an interest, although time diluted and common interest. That's still a real estate loan.

Even leaseholds can be a real estate loan with some caveats. The lease has to run at least as long as the term of the loan or the lender will decline. No lender is going to approve a real estate loan where the real estate interest might go away before the loan is paid off, but even leaseholds are still real estate and you can get real estate loans on leaseholds. Of course, this renders said property essentially useless as an investment in many cases, but it is at least theoretically possible to get loans on them. In the East County, there are quite a few residences on leaseholds (mostly Indian land) in and around eastern El Cajon, Lakeside, and other communities.

Manufactured homes can be real estate loans, albeit with restrictions. The critical question is "What is the legal interest in the land?" If the land it sits on is an ownership interest or even a leasehold interest, it's usually at least theoretically possible to get a real estate loan on it. There are restrictions on loan to value ratio that mean a higher down payment requirement and therefore worth fewer dollars, but if there is an ownership interest in land, a real estate loan is at least theoretically possible.

What is not a real estate loan is any property where the land involved is rented space. If there is monthly space rent, it's not a real estate loan to buy the dwelling unit. It's a personal loan like buying an automobile, watercraft or airplane, and that is an entirely different department at the bank. People with real estate lender's licenses can't help you - it requires a different type of lending license and loan procedure. Most such dwellings are registered with the Department of Motor Vehicles or your state equivalent rather than the county recorder or assessor (the good news is there may not be property tax!). This isn't me or anyone else in the real estate industry trying to ghetto-ize you and your dwelling. It's not discrimination, prejudice, "raaaaaacism!", or anything else. It's what the politicians and lawyers have decided in setting up the legal structure we work in, and it applies to everyone in that situation, whatever else may be going on in your lives or theirs.

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About this Entry

This page contains a single entry by Dan Melson published on February 11, 2014 7:00 AM.

The Consequences of Not Shopping Multiple Lenders was the previous entry in this blog.

Eminent Domain Abuse: Putting a Stop to It is the next entry in this blog.

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