Real Estate Annexation: A Guide For Beginner Investors

Key Takeaways:


Real estate annexation is becoming more of a reality in the wake of a growing population. As major metropolitan areas grow larger and seek to increase their jurisdiction, those in the path of expansion will likely experience some significant changes. Homeowners and investors, in particular, will find that real estate annexation can change the entire dynamic of a property and its underlying value. As a result, it’s more important than ever to not only know what real estate annexation is but how it affects real property.

What Is Annexation In Real Estate?

Annexation in real estate is a phrase used to describe the incorporation of one thing into another. As it relates to the real estate industry, annexation typically refers to two situations: local municipalities expanding their jurisdictions by taking over adjacent land or the act of homeowners physically attaching personal property to an existing home. The two types of real estate annexation couldn’t appear more different on the surface. Still, the important takeaway is that each involves the incorporation of outside elements into an existing entity.

Annexation real estate practices can get convoluted rather quickly, which begs the question: What are the types of real estate annexation, and what do they mean for those they impact?

Types Of Real Estate Annexation

On the one hand, annexation involving land refers to the forcible acquisition of unincorporated territories by adjacent incorporated municipalities. Simply put, annexation involving land is a strategy by which local governments may expand their jurisdiction to cover more area. Cities and counties, in particular, annex adjacent land to expand their borders and accommodate growing populations. By annexing nearby land and incorporating it into an existing municipality (the power of which to do so is given by the state), cities and counties may exercise sensible growth strategies and take advantage of new taxable revenue. However, it is worth noting that when land is annexed, the existing laws and tax codes.

Annexation real estate practices involving personal property, otherwise referred to as “annexation involving chattel,” refers to the process of physically attaching personal property to an existing home. A chandelier, for example, may be considered personal property if it’s still sitting in its box. However, the moment it’s attached to the home, it instantly becomes part of the property; that’s an important distinction to make when it comes time to sell a home. If for nothing else, the sale may exclude (or include) some personal items.

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Annexation real estate

What Is An Example Of Annexation?

Annexation real estate involving land is different from real estate annexation involving personal property.

Let’s say, for example, someone moved to an unincorporated neighborhood just outside of a small town just outside of San Diego because home values and taxes were less than their large metropolitan counterparts. At the time, the move allowed the new homeowner to live close to a city without having to pay the prohibitively expensive housing costs and taxes associated with California’s primary cities. However, after a few years in their new home, the owner receives a letter in the mail from his governing municipality suggesting San Diego is expanding its jurisdiction to meet the demands of a growing population. As a part of the expansion, the homeowner’s property now falls under San Diego’s jurisdiction. The realignment of city boundaries will most likely increase the home’s value, but the taxes will also increase relative to the city’s code.

Subsequently, real estate annexation involving personal property (or chattel) works a little differently. Let’s say the same owner (who now lives within San Diego’s jurisdiction) wanted to sell their home to take advantage of the increased property value. In the years since they moved in, however, they added several personal items to the home. In the living room, they installed a chandelier, and each bedroom got a ceiling fan. As a result, the sale of the home will include the personal items because they were annexed (incorporated into the house).

How Does Annexation Affect Landowners?

Annexation can affect landowners in more ways than one. First and foremost, annexation involving land will change the local municipality in which the home is located. As a result, the city or county in which the subject property was originally located will change; it will be incorporated into the growing entity. That’s not to say its physical location will change, only the name of the area it resides in. In addition to being added to the growing municipality, the home will be subject to a new tax code and governing regulations.

Simply put, the home will now fall under the jurisdiction of the new government and be subject to its already established tax code. It is worth noting, however, that annexation usually incorporates smaller cities and counties into larger ones. As a result, the homes being annexed typically grow in value but are subject to more taxes.

How Does Annexation Affect Real Estate Investors?

In addition to impacting landowners, annexation also affects individual real estate investors. Most notably, however, are the complications that may arise for investors looking to buy a property on recently annexed land. If for nothing else, conducting due diligence may unveil a few more obstacles. While not always the case, real estate annexation can lead to confusion when seeking out a number of official documents: open and expired permits, liens, property tax owed, and special assessments. It is entirely possible that the record keepers affiliated with the recently annexed land conduct things differently from the already incorporated municipality. If that’s the case, records could be lost, outstanding fines may go unnoticed, or several other complications could arise.

Real estate annexation can lead to unnecessary complications, but it could just as easily lead to unexpected benefits. In the event property is annexed, the home will likely increase in value. In transitioning from a smaller county or city to a larger one, the recognition of being associated with an incorporated city could increase the home’s value. Subsequently, different zoning codes could lead to more possibilities when it comes time to conduct remodels.

When all is said and done, real estate annexation can spell good or bad news for investors. However, those who mind due diligence can easily navigate the process and come out on the other end in a better position.

What If You Want Your Real Estate Annexed?

If the property would benefit from real estate annexation, there’s always the possibility of a homeowner petitioning for the process to begin. That’s not to say homeowners are guaranteed to annex property, but rather that they can catalyze their own change. It is possible to file a petition for annexation with the respective municipality. The process and bureaucratic hoops to jump through will vary from city to city, but speaking to the city’s attorney or a city planner will reveal what must be done.

Summary

With the rate primary cities are growing and the exodus of homebuyers leaving behind crowded metropolitans in the wake of the Coronavirus, real estate annexation is likely to become a reality for many homeowners soon. Today’s most populous cities are simply growing too fast and are constantly needing to expand. As a result, it’s essential for traditional homebuyers and real estate investors to know exactly what annexation means and how it will affect their own homes. Those who know how to translate what’s happening may be able to use it to their advantage.


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