Fee Simple vs. Leasehold

When browsing through real estate options in Hawaii, you may frequently come across the terms “leasehold” and “fee simple”. If you have never purchased real estate property in Hawaii, understanding these terms may seem a bit confusing at first. Yet, knowing what these terms mean and how they will affect your real estate transaction is an important part of determining which property is the right one for you.

What is Fee Simple?

Fee simple is the type of property ownership with which most people are familiar. With fee simple, you have complete ownership of the property you have purchased. As such, when you purchase a Fee Simple property, you own the entire property. This includes the land and all improvements that have been made upon it. You are free to fully enjoy the property so long as you adhere to applicable zoning laws, subdivision restrictions and other covenants. There is no time limit on the amount of time that you can own the property and you are free to pass the property on to your heirs.

What is Leasehold?

With a Leasehold property, you enter into a lease agreement with the Fee Simple landowner. While you are purchasing the structures and improvements, you are not purchasing the actual land on which it sits. When you sign a Leasehold, you get permission from the owner to occupy and use the land for a predetermined length of time. Therefore, your use of the land is limited to the amount of time specified on the lease. Once this period of time expires, the land returns to the owner.

When agreeing to a Leasehold, you may agree to use the land for several decades. This does not, however, tie you permanently to the land until the lease is up. Rather, you have the option to sell your rights to another buyer for the duration of your lease. In other words, if you purchase a lease of 50 years and decide to move after ten years, you can sell the remaining 40 years on your lease to someone else.

It is important to note that most lease rents are adjusted periodically. Typically, these adjustments take place every 10 to 15 years. Since the adjustments are based on the current value of the land, your lease rent will likely go up as the market value increases.

What are the Pros of Purchasing a Leasehold?

While purchasing a Leasehold does not give you ownership of the actual land on which the structures sit, Leasehold property is typically far less expensive than Fee Simple property. Furthermore, if the owner does decide to sell the property at a later date, you may be first in line to make the purchase. In this case, the owner will offer to make the Fee Available for purchase. The cost of this fee will be based on the value of the land and the time remaining on the lease. Once you have made the purchase, the property converts to Fee Simple. As an added convenience, many lenders will roll the Fee Available into the initial loan.

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