Often, personal property can be mistaken as a fixture to real property, which can quickly escalate to disagreements, particularly when it comes to sales and leasing. Therefore, it's crucial to have a clear understanding of their differences.
Real property is land or anything that is attached to the land. Think of it as the lot and the house that sits on the lot. Anything sitting on a property but isn't attached to the property is not considered real property. A determining factor of real property is something that cannot be moved.
Personal property falls into one of two categories: chattels or intangibles.
Chattels are the type of personal property most dealt with in real estate and consist of tangible items. A chattel refers to any kind of physical property. For example, they can be the clothes on your back, furniture in a home, or the car parked in a driveway. In the sale of real estate, chattels are items that are allowed to be removed from the house when the seller leaves the property (unless negotiated otherwise).
Intangibles are the other kind of personal property. Intangible personal property is something that is owned but has no physical shape. Examples of intangible property are intellectual property rights, licenses, bank accounts, or insurance policies.
When taking your exam and working in real estate, it’s important to remember that personal property can become real property through annexation. Chattels become a part of real property when they are fixed through annexation. Annexation refers to the process that any chattel is fixed to a property, either by nail, screw, plumbing, etc.
For example, a stove installed into a kitchen becomes a fixture to the real property. Therefore, upon sale of the asset, the stove cannot be removed unless it was negotiated in the purchase agreement.
Real property can also be turned into personal property through severance. An example of severance would be if a new stove is installed during a kitchen renovation and the old one removed. The old stove that is now out of the kitchen has been severed from the real property and is now personal property.
Another example of severance would be if a farmer decided to harvest the timber growing in the forest at the back of his property. The timber is a part of the real property until the tree is cut, at which point it becomes personal property.
When working as a real estate agent, it is essential that you carefully communicate with your clients about what is personal property and what is a part of the real property asset. You want to avoid confusion as this can cause conflict that can ultimately ruin a deal and, worse, damage the relationship with your client.
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