Fee Simple Vs. Leasehold: An Important Distinction

Fee Simple Vs. Leasehold: An Important Distinction

When browsing for homes in your local area, have you ever come across a property with a price that seemed too good to be true? You think to yourself: Is there something wrong with it? Are there any structural issues? Is it HAUNTED?! Fortunately, there is a simple (non-paranormal) answer to all of your pressing questions; These are most likely Leasehold properties. While this explanation maybe isn’t as scary as ghosts or spirits, making the wrong decision when it comes to purchasing Leasehold vs. Fee Simple property could end up haunting you for the rest of your life…

Let’s start by breaking down what exactly these terms mean. Simply put, “Leasehold” and “Fee Simple” (also referred to as “Freehold”) are used to define how someone owns a particular piece of land. How you own your land impacts things like: how much your home is worth, what you can and cannot do with the land, and how long you can live there for.

Fee Simple is the strongest and most common form of home ownership one can have in this country. With this arrangement, you have full ownership of everything from the dirt on the ground to the the air above your land, and anything in between (such as a home, a storage shed, or a pool). Fee Simple properties give you the freedom to use your land however you please, with the added benefit of appreciating in value over time.

Leasehold properties, on the other hand, are a lesser known and fairly uncommon form of real estate ownership. In fact, you might not ever encounter a property of this sort depending on where you live. It is defined as being ownership for a set number of years, where one person owns the land (the “Lessor”), and another person owns the home on that land (the “Lessee”).

Typically, the Lessee buys the home and rents the land for a specified period of time, but when that time is up, both the property and land are returned to the Lessor. The value of a leased home depends on how much time is left on the lease. As the expiration date approaches, the price of your home actually decreases, making it harder to resell. Unfortunately, the home will eventually be worthless if the lease is not extended by the deadline.

For novice homebuyers or investors, I can understand why Leasehold properties may be an enticing purchase given the low prices, but understand that you are taking on potentially unneeded risk. Don’t get me wrong, Leasehold property can ultimately be a worthwhile purchase for savvy investors, but it’s not the right choice for everyone. If this is something you’re considering, I would recommend speaking with your Realtor to make sure this is the right decision for you, both now and in the future.