What Is Fee Simple Ownership?
Fee simple, also known as fee simple absolute or allodial ownership, is probably the most familiar form of property ownership to buyers of residential property, especially on the US Mainland and common law countries. A fee simple buyer acquires ownership of the entire property, including both the land and buildings. The fee simple owner does not pay ground rent, but does pay maintenance fees and real property taxes. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes - sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.
The fee simple estate is also called fee simple absolute (because it is the most complete form of ownership), "estate in fee simple" or "fee-simple title."
What Is Leasehold Ownership?
A leasehold interest is created when a fee simple landowner enters into an agreement or contract called a ground lease with a lessee. A lessee buys leasehold rights much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important respects. First, the buyer of residential leasehold property does not own the land and must pay ground rent. Second, his use of the land is limited to the remaining years covered by the lease. Thereafter, the land returns to the lessor, and is called reversion. Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor. Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease.
Conversion of leasehold property to fee simple ownership involves purchasing the landowner's remaining interest, called the leased fee interest. The lessors of many, if not most, leasehold properties are currently offering to sell their leased fee interests to their lessees or prospective buyers of a leasehold property. There is a State of Hawaii law and a City & County of Honolulu ( Oahu ) ordinance affecting the mandatory conversion of residential leasehold properties.
It is extremely important to understand fee simple vs leasehold because it: affects your decision to buy, affects your ability to obtain a loan, and it affects your ability to sell.
There are also some disadvantages of Leasehold ownership.
At the end of the lease you have to give back the land, unless you are offered the fee or you negotiate an extension.
If there is a surrender clause in the lease, the buildings or other improvements may revert to the owner.
Each year, as the lease term ticks down, the property becomes less valuable and thus harder to sell or obtain financing on.
If there are less than 10 years left on the lease term, financing will not be available, you will have to seek out cash buyers.
In order to qualify a Leasehold property for 1031 exchange, there must be a minimum of 30 years remaining on the lease.
In most cases, the Home Owners Association fees are not rolled into the lease rent. They are two separate payments.
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