A condo in Hawaii for $50,000! What’s the catch? If you’ve searched for property in Hawaii, you may have noticed that when it comes to land tenure, some properties are fee simple and others are leasehold. In a nutshell, leasehold means you don’t own the land the structure is on. Fee simple means you own the land until you sell it, lease it to others, or transfer it after death.
Though not as common as it used to be, 15-20% of the total market in Hawaii is still leasehold property. Every year that percentage gets smaller as buildings are converted to fee simple. Leasehold is found in a few other states across the US on indigenous land; it also appears in New Zealand on Maori land. Additionally, leasehold is fairly prevalent for commercial buildings.
When you own property that is leasehold, you are leasing the land from the landowner and you rent it for a monthly lease rent fee for as many years is on the ground lease. The ground lease is the document that was recorded and agreed upon by the developer that sold to individual condo owners, who then agreed to it. Ownership rights include being able to deduct it, rent it, can do what you want with it, up until the end of the lease.
When the lease expires, you must move out of the building. The landowner gets the building free and clear and can do with it what they want. Sometimes they rent the property, sometimes they turn it into a fee simple property, and sometimes they resell to new owners as leasehold.
In some situations, the fee is available for purchase and the buyer will have opportunity to purchase the land. If a fee is offered, it may be recommended for you to purchase as you may not have another opportunity to do so; if you do, the price will likely increase.
There are some problems with leasehold as the lease length gets shorter. Once it gets to 30 years or less, you won’t be able to get a 30-year mortgage. You will also not be able to defer capital gains taxes. If it’s an investment property, you won’t be able to do a 1031-exchange if there’s less than 30 years left on the lease. In addition, the value of your property depends on the length of time left on the lease. The closer it gets to the lease expiration, the harder it will be to sell.
Leasehold can be the right opportunity depending on your circumstances. Understanding lease terms and purchase opportunities is best done with the help of real estate professional. Our Caron B Realty agents will help you understand the terms, what negotiation means for you, risks and benefits, and best course of action for your real estate goals. Call us to schedule a private consultation at (808) 593-9826 or email concierge@caronb.com
