There are two types of property ownership in Hawaii. One, called Leasehold and the other Fee Simple. Both have something to offer and each is incredibly different. Buyers and investors alike are likely, at least initially to consider both types of purchases. All buyers considering real estate purchases in the State of Hawaii should be completely aware of the type of conveyance that is taking place.
Fee Simple Ownership is a property that is conveyed with no obligation to the previous owner. You buy the property outright with no strings attached after the sale has recorded under the terms and conditions specified in the contract. This is the most common type of home ownership and is the most prevelant type ownership for mainland US transactions.
Leasehold Ownership means you are leasing the land from a Fee Simple Owner for a specified period of time, under certain terms and conditions. Quite literally you are renting the property from the landowner. Leasehold purchases were very popular in the 70's in Hawaii when it was a much less expenses way to take ownership of property and the leases terms were for 25-55 years. You could have a leasehold single family home or a leasehold condominium/townhome.
Don't be left in the dark... When considering a purchase for Leasehold property and before you get too excited about the low low price ask:
- How long is the lease? If the lease is less than 25 years you will have some difficulty financing it
- Is there are step up increase, how often does it happen and how much is it? Many leases will have increases in the lease rent built into them. If it is a Fixed Lease, the rate does not change. Most Fixed Leases are for 25-30 years. Some leases can go from very low monthly fees to exhorbitant fees after the fixed period ends.
- Is there a renogotiation date and what are the terms of a renegotiation? If the lease has a renegotiation date in it, the land owner can do many things. They can put whatever price they want on it, or go with the current market price for land (which typically has increased substantially since the lease began) or in rare cases, keep it the same.
Another area for consideration is what happens when the lease expires. Usually a couple of outcomes are possible, a) Surrender of the property back to the property owner, including all improvements. b) Reversion of the land to the property owner.
In some instances, though there is no guarantee, you may be able to renegotiate the lease or get an extension. You may have to surrender the property in it's original condition, meaning all improvements etc. may have to be demolished and removed, or relinquish the property with it's improvements.
In any case, you should make sure you understand the leasehold agreement completely and the risks involved with this type of purchase. Many people who bought leasehold back in the 1970's found themselves with expirations, in renogitations (you do not get to call the shots) , or grossly increased lease rents and on a fixed income. Not a pretty picture.
Either way, make sure if you do consider leasehold, go into this with your eyes wide open, understand the drawbacks and risks, and by all means, make sure you have a good agent to represent you and help you comprehend the agreements and the lease.
Kelly Mitchell (RA) BBA, Top 5% PRUDENTIAL USA
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Kelly thanks for sharing this valuable info. I'm from Maryland where we have a ground lease as well. Yours is quite adifferent, but every bit as interesting.