« Are You an Accidental Lender? | Main | Debt »
Real Estate Bundle of Rights
By John | June 4, 2011
Real estate ownership constitutes a “bundle of rights.” Most real estate investors strive to own property in “fee simple.” That means they own all of the rights associated with that particular property. As an investor in vacant land, I typically strive to own in fee simple. However, sometimes that is not possible.
The “right” most often not available when purchasing vacant land is mineral rights – the right to extract minerals from that property. What does that mean? What it means can vary from state to state. In Michigan, where I live, it typically refers to the right to drill for hydrocarbons – oil and gas. However, it can also refer to surface minerals, such as sand and gravel. If you are acquiring land that does not include mineral rights, make sure you know what that means in your state.
There are many other separate rights associated with land ownership. I have purchased land without grazing rights – they had been sold off to another rancher. I have purchased land that had no right of ingress or egress. (In other words, you couldn’t get to the land without a helicopter.) I have purchased land in which the prior owner retained timber rights for a specified time period. I have purchased land in which the prior owner retained timber rights for a specified time period and for specified portions of the property (as shown on a timber map). I have purchased land on which neighboring owners held easements for ingress and egress, or for monitoring oil and gas wells.
The right to use property is, of course, part of that bundle of rights. However, if you are new to land investments, you might be surprised by how many limitations are placed on usage rights. Zoning laws in many areas are very restrictive. In fact, to me, land in an area with no zoning laws is more valuable than land that is zoned.
Development rights are being purchased by government agencies, preventing the land from ever being developed.
Many state and federal laws impact the right to use your land, such as wetlands laws, endangered species laws, and requirements to obtain permits for everything from building to mining to installing a water well.
Speaking of water, western states, in particular, have different laws regarding water rights. Just because you own surface rights does not mean you have the right to use either surface water or the right to extract water from underground aquifers. I backed out of the purchase of a western ranch one time after consulting with a water attorney, who discovered a recorded water usage plan associated with that land.
I am an owner of land in Utah that has a very exciting water development opportunity associated with it. This could make the land worth several times what we paid for it.
The bundle of rights issue is not all negative. You might want to specialize in investing in particular rights, such as mineral rights, timber rights, development rights, water rights, etc. This represents an opportunity to develop very specialized knowledge of these property rights and how you might capitalize on them. It might also be much more cost effective to only purchase those rights you are interested in, rather than buying a fee simple interest in land.
Investing in vacant land is much more complicated than many realize. That is why it contains investment opportunities you may not have thought of.
Topics: Rural Land Investment | No Comments »