Today’s topic will be Fee Simple vs Leasehold. Fee Simple is the most comprehensive form of ownership and is most common in the United States and Hawaii. Fee Simple means you own both the building and the land beneath it. The majority of Hawaii’s properties are fee simple. A leasehold means you own the building but someone else owns the land; the landowner pays the landowner a monthly lease rent. In this article, we will talk about fee simple vs leasehold, ownership and appraisal in Hawaii.
What Is Fee Simple vs Leasehold
Real estate ownership appears to be fairly simple. However, depending on where the property is located, ownership can mean a variety of things. While it is not universal, some states have two types of ownership: fee simple and leasehold. Here’s everything you need to know about them.
What Does the Term “Fee Simple” Mean?
Fee simple ownership is absolute ownership of real property in which the owner has complete control over; the land as well as any improvements (including buildings) that sit on it. You may have to pay a mortgage and property taxes, but with fee simple ownership; you can sell the entire property or parts of it whenever you want.
What Is the Definition of Leasehold?
A leasehold agreement is a contract between the fee simple owner and the lessee; or the person or group who will occupy the property in some way. “A leasehold is a contractual relationship that the lessee enters into with the property owner; so there is a fixed term on that contract,” says Brad Tisdahl, CEO of Tenant Risk Assessment; a New York City-based tenant credit consulting firm. The lessee has the right to use the land for the purposes specified in the lease. In that case, the lessee pays rent and, on occasion, operating expenses… for the use of the land.”
Fee Simple vs Leasehold Ownership
The most basic distinction between fee simple vs leasehold ownership is whether you own real estate in perpetuity. The preference for fee simple ownership vs a leasehold agreement is determined by the individual; the use of the property. In many cases, homebuyers in the United States prefer fee simple ownership because it gives them complete control over; the property and allows them to sell it for a profit.
When the property is used for business purposes, a leasehold is often preferred vs fee simple ownership. Most companies and individuals will not be in a position where they want to own real estate and run a business.
Fee simple ownership means there is no need to pay rent, but property taxes; must be paid to the local and state governments where applicable. A leasehold requires rent to be paid to the true property owner; the lessee may also be required to pay property taxes, depending on the terms of the lease.
The amount of leasehold rent you pay varies greatly depending on the type of property; the value of the real estate, and where the property is located. According to Live Baltimore, a non-profit that works to attract residents and create a healthy housing market; ground rent in the city typically ranges between $50 and $150 per year.
Leasehold condos in Hawaii, on the other hand, can cost hundreds or even thousands of dollars per month in lease rent, which does not include homeowners association fees for community maintenance and upkeep.
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With fee simple ownership, your association with the property lasts as long as you want to keep it; and after your death, you can pass it on to your next of kin. A leasehold has a predetermined term, which can be quite long. You would not receive the same capital gains tax break as if you sold a property with fee simple ownership. Furthermore, your buyer may have a more difficult time obtaining a mortgage.
Fee Simple vs Leasehold Appraisal
According to valuation theory, real estate interests or rights should be valued rather than the physical land and buildings themselves. Standards require the identification and reporting of interests or rights. When ordering and completing appraisal reports, the question of which property rights should be valued frequently arises. In appraisal, the primary property rights are fee simple estate vs leasehold fee estate. The “full bundle” of rights is included in the fee simple; whereas leases only convey partial property rights to tenants for use and occupancy. The valuation profession currently uses the following definitions (Dictionary of Real Estate Appraisal, 6th edition):
Fee Simple Estate: Absolute ownership free of any other interest or estate; subject only to the limitations imposed by governmental powers of taxation, eminent domain, police power, and escheat.
Leased Fee Estate: The ownership interest in a property held by the landlord or lessor under a lease; with the rights of use and occupancy conveyed or granted to a tenant or lessee. The ownership interest in a leased property
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If it is not explicitly stated, there may be some disagreement among appraisal as to whether a leasehold fee vs fee simple value should be presented. However, as an appraiser, it frequently raises the question, “shouldn’t we be determining how a typical buyer would view the lease and its impact on value?” Should you really present the leasehold fee interest if the lease or leases are only for a short period of time?
The Appraisal Institute held discussions and drafted a Property Rights Symposium Discussion Paper (12/21/17) in response to a desire for more consistency on these issues of fee simple vs leasehold. When a property is leased and the value of a lease interest is sought, the valuation process will reflect the lease and account for any loss or benefit due to the rent being above or below market, as well as any loss due to the time and cost of leasing vacant space.
Hawaii Fee Simple Vs Leasehold
What a bargain! A two-bedroom Waikiki condo is for sale for $150,000 when comparable condos typically sell for $450,000! When you see a listing with a price that appears to be too good to be true, it is almost certainly a leasehold property. In Hawaii, properties are classified as leasehold vs fee simple (“land tenure” statuses).
What Does Fee Simple vs Leasehold Mean in Hawaii?
A leasehold estate is one in which the owner, or lessor, leases real estate to a buyer, or lessee, for a set period of time. The lessee can live in the property for the duration of the lease and pay the rent specified in the lease. The lessee also pays and uses the property taxes. Leaseholds in Hawaii are typically for a long period of time – sometimes even longer than a typical 30-year mortgage, such as 50 years.
A fee simple ownership is one in which a buyer buys a real estate property outright and has the right to use it indefinitely. Unlike leasehold estates, there is no time limit on the use of the property with fee simple ownership. The owner of a Hawaii fee simply property would pay the mortgage, property taxes, association or maintenance fees, and any other costs associated with the property. A fee simple property owner can sell, lease, will, or trade the property. Fee simple real estate in Hawaii is typically more expensive, but it is typically easier to obtain financing compared to leasehold transactions.
Why Do Leasehold Estates Exist in Hawaii? How Many Leasehold Hawaii Properties Are There Now on Oahu?
Leasehold Hawaii real estate dates back to the early 1800s when all of Hawaii’s land belonged to one owner – King Kamehameha III. The Great Mahele of 1848 assigned ownership of all the King’s land to three main groups: the Konohiki, the King, and the Royal Government.
Instead of the traditional Hawaiian ahupua’a system, the Great Mahele made land possession possible. Owners of the land, on the other hand, would have to present claims to the Land Commission in order to secure title ownership of the property—a time-consuming and often difficult process. These trusts would then lease the lands, resulting in numerous leasehold properties in Hawaii in the past.
Should I Buy a Hawaii Leasehold vs Fee Simple Property?
A fee simple property is more desirable and cost-effective for most homebuyers, allowing the owner to generate equity. Leasehold estates, on the other hand, may make sense for the following types of buyers.
An investor may be interested in leasing a leasehold Hawaii property. Leasehold real estate frequently has low price points, and an investor may choose to rent out the property to generate monthly cash flow. Some leasehold properties, such as AirBnBs, are zoned for short-term rentals. In addition, if an investor owns multiple leasehold properties in the same building, operational costs are reduced, and the owner has a stronger voice in the building’s policies. Some investors have also rented out leasehold properties to college students.
Seniors looking to downsize may want to consider a leasehold estate. They have a fixed income, and leaseholds are less expensive than fee simple estates. Condos in Kahala or on the Gold Coast provide stunning views and easy access to medical care.
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Lifestyle buyers may want to consider a leasehold estate for the ease and luxury of living. Although first-time homebuyers in Hawaii may be drawn to leasehold due to their low cost, most real estate agents will advise them to purchase a fee simple property in order to build equity.
A leasehold condo or home in Hawaii, on the other hand, may make sense for buyers who already have appreciating assets and are simply looking to enjoy the Hawaii paradise lifestyle. While the number of leasehold properties in Hawaii is decreasing, you may be able to find an incredible deal that is ideal for you. Examine the land tenure status to determine whether the property is a leasehold or fee simple estate, and then decide which tenure status is best for your real estate needs.
Frequently Asked Questions
Which is better leasehold or fee simple?
In many cases, homebuyers in the United States prefer fee simple ownership because it gives them complete control over the property and allows them to sell it for a profit. When the property is used for business purposes, a leasehold is often preferred over fee simple ownership.
What is the difference between fee simple and leased fee?
In appraisals, the primary property rights are Fee Simple Estate vs Leased Fee Estate. The “full bundle” of rights is included in the fee simple, whereas leases only convey partial property rights to tenants for use and occupancy.
Is fee simple a good thing?
In fact, having a fee simple estate is advantageous when it comes to property ownership. It means you are the sole owner of the property and no one else has any claim to it. Many different sources describe it as the highest form of land ownership in common-law countries.
Can leased fee equal fee simple?
An appraiser may discover that the lease terms are in line with current market conditions during the development and analysis of the Income Approach to Value, and thus the value of the leased fee estate is equal to the fee simple estate, but the property rights appraised and market value label should be leased fee.
