How useful is it to formalize land titles?

by on August 20, 2016 at 4:56 am in Uncategorized | Permalink

There are both costs and benefits to bringing property into the formal sector.  Along those lines, “The Deregularization of Land Titles” is a new paper by Sebastian Galiani and Ernesto Schargrodsky:

In the last years, several countries implemented policy interventions to entitle urban squatters, encouraged by the results of studies showing large welfare gains from entitlement. We study a natural experiment in the allocation of land titles to very poor families in a suburban area of Buenos Aires, Argentina. Although previous studies on this experiment have found important effects of titling on investment, household structure, educational achievement, and child health, in this article we document that a large fraction of households that went through a situation at which formalization was challenged (death, divorce, sale/purchase), ended up being de-regularized. The legal costs of remaining formal seem too high relative to the value of these parcels and the income of their inhabitants.

This piece helps explain why Hernando De Soto’s ideas, however useful they may be in some regards, have not quite transformed either the world or for that matter the practice of development economics.

Here is a good sentence from the paper: “The cost of processing the inheritance of an asset valued at US$ 11,700 is about US$ 2,300.”  Legal systems are a normal good, and legalizing everything too quickly leads to burdens as well as benefits.  Try this bit too: “When property rights are transferred to very poor people, preserving legal tenure will likely entail onerous expenses in the form of attorney and public notary fees, and courts costs.  In addition, these charges are higher in relative terms in very unequal societies where the gap between the poor and the relatively well-off is wider.”

These topics remain under-explored.

1 dearieme August 20, 2016 at 5:19 am

“The cost of processing the inheritance of an asset valued at US$ 11,700 is about US$ 2,300.” There’s your problem; that legal cost is absurdly high.

I don’t know what it would cost in England, but you can apply for probate yourself, no lawyer required. Then there will be some trivial fee, I assume, at the Land Registry to record the change of ownership, and that would be that.

2 Norman Pfyster August 20, 2016 at 8:39 am

I’m not sure where that cost estimate came from, unless it includes taxes. When my grandmother died, the estate was distributed in accordance with the will for $0 (no fighting among the inheritors helped). No real property in the estate, though.

The legal costs of filing title documents on residential real property here in the US is not that high; around $350-500.

3 dearieme August 20, 2016 at 10:55 am

Those figures are for Buenos Aires, it says.

4 Andrew Clough August 21, 2016 at 3:21 pm

De Soto went into this a bit in his book but generally the number of man hours of waiting in line and filling out paperwork required to change a property registry in many places gets into the hundreds of hours. If you’re rich enough that the rules don’t apply to you, you can pay bribes, or you can hire people to do all this for you than you can benefit from legal protection for your property but not otherwise. Hence his point about capitalism only existing for the rich in many countries.

5 Troll me August 22, 2016 at 10:11 am

I thought it was more about how property rights would unlock value for many poor throughout the world. Especially in terms of collateral. Which is why he invested all that time to help reduce the money and time needed.

The last point, I guess it’s sort of the case, but I think it’s more something that follows from what he said, but not really something he said.

6 Steve Sailer August 20, 2016 at 5:27 am

An innovation pushed through during the Articles of Confederation period in the 1780s by Thomas Jefferson and some other people was to impose upon America west of the Appalachians a geometric grid based on latitude and longitude. This made land sales simpler and cheaper than on the East Coast, where the English “metes and bounds” system of describing property on titles was used.

Government surveyors measured off the rectangles you can still see flying across the country. But the latitude and longitude grid existed, at least in theory, even before the surveyors got there. So, there was little need in most of the United States to expensively retrofit a formal property titling system onto existing irregular habitations, the way Latin American countries influenced by De Soto are considering.

Jefferson, himself, was a land lawyer who had made a nice living off the old, more complex, more lawyer-intensive metes and bounds system.

Jefferson’s regular grid probably made America less charming, but also more prosperous. A recent study of an area in Ohio set up under the old metes and bounds system versus adjacent Jeffersonian districts shows the old system imposing a drag on development.

The Spanish New World is still plagued by colossal land grants made by the King of Spain to his conquistadors with only hand-wavingly vague descriptions. Every so often in New Mexico to this day, property disputes are expensively litigated over what exactly the King or the Mexican government had meant.

7 Thiago Ribeiro August 20, 2016 at 6:54 am

It is clear how much land the King meant and I won’t give any of it back.

8 ChrisA August 20, 2016 at 8:04 am

Steve – I don’t think the issue is so much the description of the land, but rather the proof or lack of it about who owns the land. So a better, lat-long, system certainly helps, but the real issue is some kind of definitive registry about who owns the land in question. The ideal approach is to have to register title to land in some kind of central database, rather than relying on proof of ownership from sale documents. But the US has no central land registry. So this is why in the US title insurance remains such a big deal and so costly. I had never heard of the title insurance approach before coming to the US as all the other countries I had bought property in had a centralized system so I was very shocked to be told I had to pay title insurance at closing on my first house there. Of course other countries are much worse, I had a relative who had to endure a long law suit in Italy from someone who claimed part of their house based on a will from the 1880’s. There was simply no way to prove that the seller who sold them the house actually owned all of the house, except by memories of a bunch of old people who “remembered” things and were willing to testify. For my projects now in developing countries we make the check when we buy land giant size and take a photo of the person who we bought it from holding the check in front of the land being sold. We can then show this to other relatives who turn up later and let them know who they need to chase for their share of any money.

9 Boonton August 20, 2016 at 11:10 am

Indeed consider buying and selling a car here in NJ. The state MVC gives you the title, if a lender wants to put a lean on it then they have to sign before the title can be changed to another person. No liens then just sign the title over to whoever wants to buy your car, they take it to MVC and they get a new title. Easy.

Real estate deeds are tracked by the county so that’s not a huge problem. All judgements, though, are automatic liens against any property you own but they don’t have to be recorded. So say back in 1985 John Smith stiffed a video rental place 100 miles away. They sued him and won a judgement for $50. Now you want to sell your house. It is seen that John Smith owned your house in 1985, they have to search if there were any judgements entered against him anywhere in the US in that time period (and make sure it is the same John Smith). They then have to prove the judgements were satisfied. If they weren’t then the person buying your house assumes the risk that he may have to pay them if the video store owner shows up demanding his money (and if the guy buying is using a mortgage then the bank will not let him buy the property in that condition). Since a search is only as good as the people that do it, you toss on title insurance to make sure nothing was missed (actually the buyer buys it for his mortgage company…it’s an additional charge if he wants one that actually covers himself and pays the video guy who might have been missed).

It seems a lot easier if those who win the judgement have to register their lien directly with the town. Then the transfer can happen without expensive searches and insurance. I suppose another side to this story would be people that use LLC, trade names and other legal vehicles to try to hide their assets from creditors, but then the same issue could erupt with a car and some high end cars equal low end houses in value.

10 chuck martel August 20, 2016 at 9:09 am

Yes, isn’t it just so sensible that the king of Spain can gift thousands of inhabited acres on the other side of the world that he’s never seen to his cronies and toadies? But then William Seward wrote a check to Tsar Alexander II of Russia for $7.2 million for what’s now Alaska, a place also inhabited, that neither of them had ever laid eyes upon or ever actually owned in any real sense. This took place shortly after the conclusion of a war ostensibly fought to eliminate slavery in the US. It was acceptable then, and still is apparently, to simply take the property of others if they don’t have the means to resist, however. See also Hawaii.

11 The Anti-Gnostic August 20, 2016 at 10:03 am

This lament about indigenous hunter-gatherer tribes comes up constantly but I don’t know what the present-day descendants of settlers and conquistadors are supposed to do about it. I agree the theft of the Kingdom of Hawaii was unjust and immoral, but I don’t see anybody agitating for Hawaiian independence, which I at least would be happy to grant if I could.

The tribes only recognized possession, and often engaged in genocidal wars over territory.

12 The Anti-Gnostic August 20, 2016 at 10:39 am

I can’t wait for Chile to conquer you all.

https://youtu.be/U3Kdic-Z2-4

13 chuck martel August 20, 2016 at 11:13 am

“This lament about indigenous hunter-gatherer tribes” implies that somehow, because of their lack of a nation/state, maybe, that tribal people are less deserving of consideration by the so-called civilized than those with complex and sophisticated governments. Seward bought Alaska from the Tsar, not the Athabascans or Aleuts that actually lived in Alaska. Bringing this up is a “lament”. Slavery, abolished in the US over 150 years ago, and its aftermath is, on the other hand, a topic of daily discussion and debate. The North American tribes, like tribes everywhere, had their own concept of land ownership which didn’t necessarily coincide with that of their conquerors. Certainly there were “genocidal wars” over the possession of land but the Blackfoot Indians and Seminoles didn’t use B-29s to firebomb their neighbors or the European continent. One could make the case that activities in southside Chicago constitute a “genocidal war”, too.

14 The Anti-Gnostic August 20, 2016 at 3:08 pm

Again, I don’t know what we can do about it now.

15 Thiago Ribeiro August 20, 2016 at 11:15 am

They will drown in human waves, the same way the Paraguayans did when they fought our forefathers. If things don’t go well, we, like the Russians against Napoleon, will retreat to the capital and wait until the snow stop their attack.

And Chile is a legitimate part of Brazil anyway.

16 msgkings August 20, 2016 at 2:00 pm

Nonsense, Thiago, Chile and Brazil are each states in the USA. All of S. America is. It’s right there in the name, United STATES of AMERICA. George Washington claimed them as states for the US when he discovered S. America.

17 Thiago Ribeiro August 20, 2016 at 2:46 pm

Brazil’s official name used to be United States of Brazil. The United States are a legitimate part of Brazil.

18 Troll me August 22, 2016 at 10:17 am

It look me that long to be sure. Man can you hold a straight face behind that text.

19 carlolspln August 20, 2016 at 4:49 pm

There are about twelve time zones between Moscow and Anchorage.

I don’t think so.

20 Sbard August 21, 2016 at 11:05 am

It’s a big back yard.

21 chuck martel August 20, 2016 at 11:20 am

Why does the US and its state governments recognize Spanish land grants as legitimate but ignore the preceding property rights of the native Americans?

22 robert August 20, 2016 at 2:54 pm

Because so-called native Americans didn’t own property, ergo, had no property rights. Native Americans were nomadic peoples that failed to leave behind any permanent structure worthy of the concept of “property rights.”

23 Dave August 21, 2016 at 1:24 pm

“permanent structure” is a rickety cornerstone for property rights outside of urban areas and individualist societies. perfect fit for colonialism, though.

24 Troll me August 22, 2016 at 10:26 am

There’s an increasing amount of work showing that our history on those subjects has been piss poor for a long time. Including evidence that there were actually fairly large cities in the south of the USA prior to colonization. One of the main running theories is that we weren’t dumb, it’s just that the smallpox had killed off so many of them by the time Europeans got that far inland that the economy collapsed, and with it the political order.

25 Cyrus August 20, 2016 at 10:07 pm

At this point, it’s not the Spanish land grant that matters, but continuous recent possession of the land. Regarding federal or unoccupied lands, courts do have a mixed record of recognizing native land claims.

26 dearieme August 20, 2016 at 5:28 am

Here are the fees for the Land Registry.
https://www.gov.uk/guidance/land-registry-registration-services-fees

Here’s the cost of probate: “the application fee of £215 – a cheque made payable to HM Courts and Tribunals Service (there’s no fee if the estate is under £5,000)”.

So there we are: for a tiny value of land, maybe £20 for the Land Registry and zero for probate, totalling less than $30.

27 Steve Sailer August 20, 2016 at 5:41 am

But what does it cost the first time?

Say everybody in the favela is more or less in agreement that the Cavahlo family’s backyard traditionally extends from the corner of their shanty to the tree stump and then to the rock that looks like Pele’s head and back to the other corner of their shanty. How much would you charge to turn that into legalese and make sure nobody disputes it?

28 dearieme August 20, 2016 at 7:20 am

In England? But that was done in the Neolithic, or perhaps the Bronze Age, and then redone under the Anglo-Saxons, certainly, and perhaps in the Iron Age too. Since pre-history, as far as is known every acre has belonged to someone. Or, maybe you mean the first time that land was registered nationally; that happened in the last few decades in England and Wales (several hundred years after Scotland did it).

I suppose somebody could look at what it cost to register the new landholdings created by the Commissioners under Parliamentary Enclosure in the 18th and 19th centuries, especially focusing on the plots given in compensation for loss of common rights, since those would often be modest in size – a few acres, perhaps – and brand new. Whether an 18th century example from a well-run country would be relevant, I doubt.

For favela-land; if a government were serious about this, it would have the taxpayer carry much of the costs for the first mapping and registration.

29 Brett Dunbar August 20, 2016 at 7:48 am

In the UK that would be adverse possession. Provided that they have been acting as the owner for twelve years they have definitive title, if the land is unregistered any prior title has been extinguished. The table includes a column giving the discounted rate for voluntary first registration, which is what applies in the case of adverse possession the maximum fee applicable if the land is worth over £1,000,000 is £680.

30 dearieme August 20, 2016 at 7:56 am

“In the UK that would be adverse possession”: well, in England and Wales anyway. You have to remember that there’s rather little that can accurately be called “UK law”.

31 Troll me August 22, 2016 at 10:32 am

Why even charge £20? It should increase the economic potential of the poor by giving them collateral. If you’re dirt poor but sitting on a property, it’s not hard to imagine that even a small barrier would lead many to delay for months, years, or even indefinitely.

I wouldn’t apply the same reasoning to an established land titling system. But to get things started off, the public purse might actually be just as well off or better in the long-run, while in the meantime making things easier for people who don’t usually get to do things in easy mode.

32 Ray Lopez August 20, 2016 at 6:30 am

Yes, registering land as “yours” (or a life estate rather, that is, yours until death) is expensive in the PH. Points towards reducing legal fees.

33 rayward August 20, 2016 at 7:21 am

What commenters are alluding to is a Torrens title system for land registration, similar to how motor vehicles are titled. But only a few states have even have a limited implementation of a Torrens title system (named for Sir Robert Richard Torrens, the third premier of South Australia). Cowen will be pleased to know that Singapore adopted a Torrens title system. But the prevailing method for ownership of real estate in the US continues to be the recording system of deeds of conveyance – the recorded deed itself isn’t “title” but merely evidence of title. That’s why a purchaser gets “title insurance”, the insurer agreeing to indemnify the purchaser against loss if “title” turns out to be different from what is reflected in the deed. As for the grid system for describing real estate, it is known as the Public Lands Survey System, which has been implemented by most states (beginning with the Treaty of Paris in 1783 following the end of the Revolutionary War). But the prevailing method for describing real estate continues to be the metes and bounds description, even where PLLS is fully implemented; hence, real estate is often described in a deed both ways. Old metes and bounds descriptions can be tricky, as sometimes they reference objects that are no longer there (such as a tree or fence). In most states the recording system is maintained locally by the county clerk; hence, systems tend to vary widely. Many if not most clerks are digitizing public records, and many digitized records can now be viewed on-line. Digitization doesn’t change the recording system for establishing ownership, but it may well lead to implementation of a Torrens system. The difficulty is the leap, as “ownership” may not be as some expect, including those who “occupy” the land. And that doesn’t even begin to consider such issues as mineral and water rights and ownership of rivers and streams. What’s a lawyer to do.

34 rayward August 20, 2016 at 7:33 am

I took the bar exam 40 years ago, but I can still remember the elements of “adverse possession” by the mnemonic ONCEHA: open, notorious, continuous, exclusive, hostile, actual. Is law fun or what.

35 Sbard August 21, 2016 at 11:10 am

When my mom worked in real estate law, she said that transactions involving the handful of jurisdictions in the US with a Torrens title system (Chicago being the big one at the time) were invariably slower and less convenient than the old-fashioned way.

36 Axa August 20, 2016 at 8:12 am

Legal costs are important but there’s a cultural component too. Macho attitude to land ownership = titles are for wimps, this land is mine and anyone with a different opinion will get shot. Also, only legal costs are considered. Perhaps opportunity costs (working Vs. making paperwork) and transportation costs (not every town has land registry offices) are even greater than legal fees.

37 Thiago Ribeiro August 20, 2016 at 9:51 am
38 The Anti-Gnostic August 20, 2016 at 10:36 am

Qualification for most Olympic contests requires generous subsidy for full-time training, usually from wealthy parents. So, ipso facto a lot of the participants are cocooned brats with a sense of entitlement.

I get the sense that after a few more of these pageants the Olympics will go the way of the World’s Fair. They are too expensive and too corrupt, and eventually the top talent will be bid away to other venues, carrying their prestige with them. Maybe one day what is old will be new again, and the Olympics will return permanently to Athens, strictly amateur, and absent two-thirds of the events. But there are a lot of people making really good livings off the current system, so it will follow the usual course of increased scale until collapse.

By the way, when was the last time the medals really were a significant percentage of gold, silver and bronze? It would be ironic if the decline in precious content correlated with the decline in career value to the medalist. There was a brief window where being an Olympic medalist in certain events paved the way for a pretty good life, e.g., Bruce/Caitlyn Jenner who never really worked for a living again. His successor, Dan O’Brien, owns a gym and does occasional commentary and volunteer coaching. Come to think of it though, probably 95% of Olympians have always disappeared back into whatever socio-economic strata they came from.

There are a lot of economic, political, fiscal and human biodiversity issues presented by the Olympics. Maybe you could give us an Olympics post Tyler.

39 msgkings August 20, 2016 at 2:04 pm

Ah, but most slanderers are brats.

40 The Anti-Gnostic August 20, 2016 at 3:09 pm

Most brats make excuses for their bad behavior.

Rio is a corrupt sewer, btw.

41 byomtov August 20, 2016 at 10:32 am

“The cost of processing the inheritance of an asset valued at US$ 11,700 is about US$ 2,300.”

And the benefits are worth??? Just asking.

42 TMC August 21, 2016 at 5:30 pm

Rough guess: $9400

43 Li Zhi August 20, 2016 at 11:05 am

This isn’t anything I know much about but it doesn’t seem to me to be obvious that an illiterate squatter who can’t read a map and who may be semi-nomadic would be a reliable witness to the legal ownership questions involved, especially if squatters are ubiquitous and where property rights are often ignored. In such a mess, how would the government even begin to disentangle all of the claims? Send letters? Which language? Oh wait, they’re mostly illiterate… So, it would have to be, it seems to me, a very expensive and intensive effort. I guess with GPS and a property tax (and registration) system, you might get a start, but only if compliance was pretty good which I doubt it would be…

44 derek August 20, 2016 at 1:25 pm

There is a part of town where I live that in the past was Crown land and used as a military camp. Some time around the First world war it ceased to be used for that purpose, and being a short distance away a bunch of people moved in and squatted. At first it was transients; the miners that showed up, either made rich or poor, then went elsewhere. In time the occupants were more stable; houses were built (this is eary 1900’s, probably wooden structures with no foundation) yards were maintained, gardens planted, children running around. I chatted with an old surveyor who was living there as a child. The government hired a surveyor to mark out the existing plots, and this young fellow was curious and helped out. The deeds were registered by the occupants paying a fee.

It isn’t complicated, but if the procedure is viewed by government as a way to extract rather than build, it will end up failing.

45 rayward August 20, 2016 at 11:11 am

Just to show readers the fun stuff real estate lawyers do, here are two pressing “ownership” issues in coastal areas: First, accreted land (the opposite of erosion), who owns it and what can the “owner” do with it? Second, old Spanish land grants that extended ownership into the marsh, who owns the marsh now and what can the “owner” do with it? As to the former, on one low country island the accreted land extends hundreds of yards out beyond the multi-million dollar homes that are “ocean front”; indeed, accretion adds to uplands daily. Developers (and the local taxing authority) are salivating, while owners of the “ocean front” homes can’t sleep at night. As to the latter, down in Florida in recent years expensive homes have been built adjacent to the marsh along with docks extending out into the marsh to the creeks running through the marsh and little “islands” in the marsh where the owners keep their expensive boats. “Investors” have been buying tax deeds for the marsh (including the little “islands” in the marsh) that were never transferred to the owners of the upland that abuts the marsh (who knew anyone “owned” the marsh) and offering to sell the marsh bottom to the upland owners for a tidy sum; otherwise, the upland owners are told to remove their boats from the marsh they don’t own. Have a nice day.

46 Yancey Ward August 20, 2016 at 11:37 am

Will no one speak up for the starving children of the lawyers and the government bureaucrats and judges in Argentina and elsewhere? I mean, sure, in the US and the UK, we let them starve in the streets via low transfer fees, but come on!

47 derek August 20, 2016 at 1:39 pm

This is an example of the ‘institutions’ that are described as necessary for development. As if the people empowered by the institutions are pure as the driven snow.

It doesn’t say, but maybe the institutions of state either get $2300 or $11,700 depending on whether the people run the process gauntlet. The more expensive the fees the more likely they will get the large sum.

This is Argentina. Don’t cry for me. Elect the wife of a popular president.

48 msgkings August 20, 2016 at 2:07 pm

“Elect the wife of a popular president.”

Are you crazy? I hope you are being sarcastic. We need to elect a vulgar reality show star. I’m thinking Kim Kardashian.

49 TMC August 21, 2016 at 5:33 pm

Isn’t that who we have now?

50 Edgar August 20, 2016 at 6:18 pm

Parallel notions explored in Conservation is Our Government Now https://www.dukeupress.edu/conservation-is-our-government-now Highly recommended.

51 Eduardo August 21, 2016 at 5:20 pm

Excellent paper! Thanks for sharing it.

52 YS August 26, 2016 at 12:22 pm

Or they can start using blockchain to record title which is much easier and cheaper. Trading/renting it would be easier too. Obviated need for lawyers and notaries. Of course, the smart phones may have to be subsidized….

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