What are Fee Simple and Leasehold Properties?

You might have noticed when using our search that some homes are priced way below asking price, but nothing seems to be wrong with them. Well have you checked the land tenure for the property? The type of land tenure of a property has a big impact on the pricing of home because it essentially determines how you own the land that a property sits on. 

When purchasing a home, you are technically buying two types of property– the physical house/dwelling, and the land. But you don’t necessarily have to own the land in order to own the building. The total purchase price of your home includes the price of the dwelling and the price of the land. This helps explain why Hawai’i homes are typically more expensive than on the mainland. The dwellings themselves are not usually valued higher, but you are potentially paying WAY more for less land. Land is at a premium out here.  

The Two Types Land Tenure 

Fee Simple 

Fee Simple is King! Most residential properties have Fee Simple land tenure, meaning the property owner owns the dwelling and the land. With Fee simple ownership, you have to pay maintenance fees and property taxes, but it is the most complete form of ownership. A fee simple owner can do whatever they want with the land (well...within legal limits anyway). Fee simple ownership also means you can trade the land, lease it out, or pass it on to others as you wish. 

Leasehold 

With Leasehold land tenure, you own the physical dwelling, you are leasing the land. When you purchase a leasehold property, you enter into a ground lease with the owner of the land.  This means you will have to pay rent on the land. 

What happens to the house when the land lease ends?  

Well you cannot just pick up and move most houses. When the lease is up, ownership of any dwellings or structures that were on the lease initially will revert to the land owner. Additionally, any maintenance or alterations to the land are subject to any restrictions in the lease 

Why buy a leasehold property? 

Well for one thing, leasehold properties are usually priced well below similar properties. If you do not plan to own the home for longer than the land-lease agreement, leasehold could be a good option. Plan to own the home long term, but don’t plan to pass it on to anyone? Leasehold might be for you too. Land-lease terms often span decades, far longer than you might intend to own the home. It is not unheard of, for instance, for a retiree to purchase a leasehold property, getting more bang for their buck, expecting to live in the home until they pass. If they do not plan to pass the property along to anyone, it’s okay that the property ownership reverts to the land owner.  

Can I buy a Leasehold property with my VA benefit? 

The short answer – YES.  

The long answer: 

The lease expiration must exceed the life of the loan by 14 years. So, for a conforming, 30-year VA loan, the lease term must be at least 44 years. Additionally, the lease fee, or rent paid for the land, must be fixed for the life of the loan.  

Depending on what you want to get out of homeownership, you might only want to search for fee simple or leasehold properties. With our search tool, you can customize the type of land tenure, so you only see the homes that you want to buy!