Fee Simple VS Leasehold Properties On O'ahu
Did you know that in Hawaii you can buy a house but not actually own the land it sits on? In this episode of Aloha O’ahu, I’m going to explain the difference between leasehold and fee simple properties here in Hawaii. I’ll show you some of the unique concepts of moving to the island so you know exactly what to expect.
Buying Property On O’ahu
If you're thinking about buying property on O’ahu, there are going to be some things that might be new to you. One of the unique aspects is learning about a concept that is more common in several states, including Florida, New York, and Hawaii.
I get calls from clients sometimes, and they're very excited about the deal they just saw on the internet, wanting more information. When I hear the word ‘deal,’ I already know they likely came across a leasehold property. A leasehold property means you own the structure attached to the land, but you don't own the land itself.
This means that you could find a plot of land with a house on it. You would own the house, but you do not own the land that it sits on. So when you're looking on the internet at property types, you want to see ‘LH’ or ‘FSLH’—which signifies leasehold.
Leasehold Versus Fee Simple
When you see an ‘LH’ or leasehold on a listing, it often results in a lower price point for the area. However, you have to know that with this type of property, you do not have an ownership or full control of that property. When you buy a leasehold, a lease can be for 10, 20, or 40 more years. At the end of that term, there are two options.
First, a new lease can be negotiated at the end of that term. You may have to pay additional money to renew that lease. If a new lease is not offered or you cannot come to any kind of agreement, that land reverts back to the person or the business that owns the leasehold. They usually keep whatever improvements were made to the land—and that could mean your house.
On the other hand, you can own property that’s fee simple. This means you own both the property as well as the land underneath it. When you buy and sell a fee simple property, any structures on the land are included in the purchase. Let me give you a basic example.
There is a building in a town called the Executive Center. You can buy a condo in the Executive Center for as little as $60,000—but you will only own it in leasehold in this particular building. You can also find condos you can buy in a fee simple for $350,000, where the leasehold owners in the building have the option to buy the fee. This means you can have buildings that are all leasehold, all fee simple, or some that are mixed. Just make sure you know which ones you are considering.
How It Started And Where It’s At
Leasehold ownership started here in Hawaii in the mid-1800s. Many parcels of land were sold to and managed by a trust that then leased out the land. Often, these leases were granted for extended periods of time—many for 99 years.
After that time, the lease could then be renewed or the property could be converted to fee simple. Over the years, many of the leasehold properties on O’ahu have been converted to fee simple. Today, approximately 2% of single-family homes and 10% of condominiums remain as leaseholds. The primary attraction to buying leasehold real estate is usually that it has a much lower price.
However, if you're going to apply for a loan, depending on the length of the lease that's remaining, you may not be able to find financing for that property. For example, if the lease has less than 30 years remaining, you will not be eligible for a traditional 30-year mortgage. But don't worry; we will work with your lender if you decide to purchase leasehold property.
If you're looking for your primary home, you may want to focus on fee simple properties. But if you're an investor, a leasehold might be an option for you.
Making O’ahu Your Home
I hope this gave you some idea of the differences between leasehold and fee simple properties in Hawaii and why it matters. There is some inherent uncertainty when you own a leasehold, and you can't have full control over your property. However, at this point, the vast majority of properties on O’ahu are fee simple properties. With fee simple, you have many more options and less uncertainty.
If you have any questions about the island of O’ahu or real estate in general, please don't hesitate to reach out and ask. Don't forget to subscribe to my channel for more information on living on the island of O’ahu, and stay tuned to the next episode of Aloha O’ahu to see what I feature next!