Life estate VS fee simple

[The Warrior Monk]

Why not say we are appraising a fee simple interest and explain that the current form of ownership is that of a life estate?

As Steven S. noted:

The remainderman is the one who holds the fee simple, and it is encumbered by (or divided by, if you prefer) the life estate.

There are two owners, each owning a different property: One owns the remainderman interest, and the other owns the life estate.

 

[PropertyEconomics]

I posted before Jim's post appeared. His post makes sense. Why not say we are appraising a fee simple interest and explain that the current form of ownership is that of a life estate?

An unencumbered fee does not exist as of the effective date of the report ... thus it cannot be appraised unless under a hypothetical condition that the life estate does not exist. Remember appraising something "as is" cannot reflect a value "as if".

 

[Mztk1]

An unencumbered fee estate does not exist in 99% of all houses we appraise as of the effective date. Heck an owner holding a mortgage in itself encumbers title. When completing a mortgage appraisal on the URAR with the scope of work contained in the URAR , we make assumptions every time that are built into the form. As assumptions built into the form that are made every day, these assumptions are not extraordinary, but common. When the subject is in a PUD with deed restrictions, how many of us check the "other" box for property rights? What if there is a 5' utility easement across the front or along the side yard, are we no longer allowed to check "Fee Simple" because technically it is encumbered? Or if the house is on the approach to the airport? Or there is already a mortgage in place? We can over-think this all day long and make each report we write a novel concerning the property rights alone if we'd like. But the fact is, the URAR asks us to state which rights are being appraised, in this case Fee Simple, and explicitly instructs us to make no opinions concerning title. I seriously do not see where there is a problem.

 

[Pittsburgh Pete]

Your assignment is to determine market value of a fee simple interest in the property. As a result, one would have to estimate (an that's all that can be done, estimate) the impact on the fee simple interest arising from the impact of the life estate.

That impact will be affected by the age of the life estate holder. Oftentimes this is done with reference to actuarial tables.

However, the bank would be going out on a big *** limb. One could surmise that if the life estate holder is 90 years old, that the impact is minor. However, if he lives to be 105, they would have a problem.

My brother is the CFO of a company that had purchased a property (apartment building) from an elderly man who requested that he be able to retain a life estate in his unit (i.e. this was done before my brother's tenure with the company). The elderly man is still kicking some 10+ years after the transaction.

 

[PropertyEconomics]

An unencumbered fee estate does not exist in 99% of all houses we appraise as of the effective date. Heck an owner holding a mortgage in itself encumbers title. When completing a mortgage appraisal on the URAR with the scope of work contained in the URAR , we make assumptions every time that are built into the form. As assumptions built into the form that are made every day, these assumptions are not extraordinary, but common. When the subject is in a PUD with deed restrictions, how many of us check the "other" box for property rights? What if there is a 5' utility easement across the front or along the side yard, are we no longer allowed to check "Fee Simple" because technically it is encumbered? Or if the house is on the approach to the airport? Or there is already a mortgage in place? We can over-think this all day long and make each report we write a novel concerning the property rights alone if we'd like. But the fact is, the URAR asks us to state which rights are being appraised, in this case Fee Simple, and explicitly instructs us to make no opinions concerning title. I seriously do not see where there is a problem.

You see no problem appraising a life estate as though it is fee simple interest?

 

[Pittsburgh Pete]

You see no problem appraising a life estate as though it is fee simple interest?

It is a fee simple interest. It's not a leased fee or a leasehold. Obviously the fee simple value is impacted by the life estate; an adjustment is warranted to all the sales based on the present value of the life estate. While unusual, not a particularly difficult problem.

Banks can lend on such situations. Appraiser in my office was a long time reviewer with PNC Bank and tells me that while they are rare, the bank can loan on them.

 

[Pittsburgh Pete]

You see no problem appraising a life estate as though it is fee simple interest?

Don't confuse the property interest with an encumbrance.

 

[PropertyEconomics]

Don't confuse the property interest with an encumbrance.

So you are telling me that a life estate is not an interest in real estate?
I dont believe I am the one confused here.

Look at it this way ... a Life Estate is much like a Leased Fee .. use and occupancy of the property has been granted to anohter .. the only difference is they arent paying lease payments and the term remains unknown.

 

[Hamlet]

An unencumbered fee estate does not exist in 99% of all houses we appraise as of the effective date. Heck an owner holding a mortgage in itself encumbers title. When completing a mortgage appraisal on the URAR with the scope of work contained in the URAR , we make assumptions every time that are built into the form. As assumptions built into the form that are made every day, these assumptions are not extraordinary, but common. When the subject is in a PUD with deed restrictions, how many of us check the "other" box for property rights? What if there is a 5' utility easement across the front or along the side yard, are we no longer allowed to check "Fee Simple" because technically it is encumbered? Or if the house is on the approach to the airport? Or there is already a mortgage in place? We can over-think this all day long and make each report we write a novel concerning the property rights alone if we'd like. But the fact is, the URAR asks us to state which rights are being appraised, in this case Fee Simple, and explicitly instructs us to make no opinions concerning title. I seriously do not see where there is a problem.

Jim, a mortgage can be paid off and has a set duration. A Life Estate must wait for a death known only to the Grim Reaper.

 

[Mztk1]

You see no problem appraising a life estate as though it is fee simple interest?

When doing a URAR report I am not appraising the house "as though" it were a fee simple interest. The report isn't asking me to identify the rights the borrower is in possession or will be obtaining with the sale.

My scope of work tells me to identify which rights I am appraising, either fee simple or leasehold, where the leasehold is a situation where I am appraising a house owned by the borrower that is on a leased lot. Further, my scope of work tells me not to render any opinion about title - so I don't.

This isn't a situation where I making a hypothetical, it is where I am stating what rights I am appraising, not what rights are owned. Those rights are intangible and exist no matter who the title is currently contructed.