What are Leasehold and Fee Simple properties in Hawaii?

Leaseholds are properties where an owner (lessor) leases real estate to buyers (lessees) for specific time periods. The lessee is permitted to occupy the property for the lease period and pays rent on the lease. The lessee is also responsible for paying the property taxes. Lease periods are typically very long, almost always extending beyond the term of a typical 30-year mortgage.

Fee Simple is the type of ownership where a buyer purchases a property outright and has the right to use the property indefinitely. The buyer pays the mortgage, property taxes and association/maintenance fees to stay in good standing.

In Hawaii, Leasehold and Fee Simple are the two common "Land Tenure" statuses. Hawaii leasehold properties are usually less expensive than comparable fee simple properties. Almost every buyer prefers fee simple, however not everyone can afford them.

Leasehold property prices generally decline as their lease terms approach expiration. If you see a condo on the market for $25,000, it may have just a few years left on its lease.

If a buyer anticipates needing a loan for the purchase, they would need to check with a lender to see if it will make a loan on the property. Mortgage companies usually require that the lease be at least five years longer than the loan. For example, to get a 30-year mortgage on a leasehold property, the lender would want to see at least 35 years remaining on the lease term.

It is very difficult to compare leasehold properties, unless they are two condos in the same building or two land parcels of similar size and lease terms. There are many lessors in Hawaii, and each property can have a different lease term, monthly payment and fee purchase price.

RPR does not take land tenure into account in our RVM or AVM estimates This means that leasehold properties will almost always be overvalued. This is an issue we are aware of, but we do not yet have a resolution.

Another difference is the property data source. Hawaii, unlike other areas of the United States, has two property recording systems: the Land Court system and the “regular" system. RPR receives public records data from both systems. 

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Comments

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    Anthony Lambiase

    I agree Leaseholds are properties where an owner (lessor) leases real estate to buyers (lessees) for specific time periods. The lessee is permitted to occupy the property for the lease period and pays rent on the lease. However, you are in error to assume the lessee is also responsible for paying the property taxes which is typically controlled by the lease contract clause. Yes and No - Lease periods are typically 12 months or longer such as 1 to 100 years. However, a leasehold is NOT always longer or almost always extending beyond the term of a typical 30-year mortgage.

    According to the The Appraisal of Real Estate, 14th Ed., (Chicago, Appraisal Institute, 2013), pg. 72 a leased fee estate is defined as "The ownership interest held by the lessor, which includes the right to the contract rent specified in the lease plus the reversionary right when the lease expires." Leased fee ownership occurs when the bundle of rights is divided by a lease. The terms of the lease control the time period of the Leasehold.



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