Leasehold (LH) v. Fee Simple(FS) v. Fee Available (FA)
In the state of Hawaii we have land that is conveyed in a two types of tenures. There is Fee Simple which is what property in the mainland is conveyed in. This means that when you buy the home you also own the land or interest in the land if you are buying a condominium or town home.
Leasehold property means that you only own the improvement on the land, not the land. For example, if there is a single family dwelling on the land then you only own the home and the land is owned by someone else. This often means you have to pay an additional fee every month called the Lease Rent. Basically, you are renting the land from the land owner.
This lease rent can range from a very low amount to a very high amount. For instance there are lease rents below a hundred dollars a month, to a property in Kahala that is over a thousand dollars a month.
Leasehold was created at a time in Hawaii when property was too expensive for individuals to purchase and instead of selling off the land the land owners decided to rent out the land and sell the homes on them. This allowed the land owners to increase their land value. However, this system was created 40+ years ago and many of the leases are now terming out.
This means that there is often less than 30 years remaining on the lease and some are even expiring. The problem for buyers and sellers when the lease amount is less than 30 years is that mortgages are difficult to obtain and will only be giving for a certain term with a cushion. For example, say there is 20 years on the lease remaining. The mortgage company will give you a mortgage for 15 years. Different mortgage companies vary in the cushion they need so this number may vary. However, what it comes down to is that you can't obtain a 30 year mortgage on a property that is sold in leasehold with less than 30+2-5 years remaining.
The other hurdle to overcome is when the lease rent is going to be bumped up. Throughout the life of the lease rent there are step ups in the lease hold portion. This means that your lease rent maybe $200 a month but in three years it will possibly change. No one can tell you how much it will increase and banks will look at when the next step up is scheduled for when considering your mortgage. Generally the lease rent is set for a period of ten years.
What this all means is that if you are considering a leasehold property you will possibly have a shorter term mortgage, which means your monthly mortgage amount will be more than if it were amortized over 30 years. Also, that when calculating if you can afford to purchase the property, the lease rent amount will be calculated in and this will often mean less buying power.
The great thing about leasehold properties is that their sales prices are often much lower than fee simple properties and there are still a few situations that are great opportunities for a buyer. Word of caution though; make sure you really understand what you are getting into and the circumstances of the lease portion of the property.
Land is not conveyed in Fee Available (FA) but if you should see this under tenure on an MLS sheet provided to you by your Realtor, what this means is that the fee is available for purchase. If at all possible, we highly recommend purchasing this at the same time you purchase the property; by doing so you will be buying in Fee Simple which is the best tenure to buy in. You would want to add the Fee Purchase Price to the List Price of the property to be sure you are not thinking of Over Paying for that property. Compare the added amount to other properties that have sold over the last several months. If your price is high, lower the offer on the Condo or Home. The price of the Fee Portion of the purchase is most often not negotiable.
Should you have any questions regarding tenures in Hawaii please feel free to contact Mike at 808-630-1828 or Gayle at 808-388-1485. We have successfully negotiated the simultaneous closings of homes and the fee portion for the property. We will be happy to work for you.
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