While most leasehold single-family homes in the state have been converted to fee simple ownership in recent decades, the leasehold option is still largely available in the Hawaii condo market. They can be a poor option for homeowners, but there are three reasons leasehold houses can be worth your consideration: cost, the appropriate fit for particular lifestyles, and an income possibility. Leasehold properties might sometimes be a good deal in those situations.
First, the figures: According to the Honolulu Board of Realtors, leasehold options make up around 12% of condos on the market, but fewer than 2% of single-family houses. Only 232 of the 1,842 condominiums listed in the Multiple Listing Service (MLS) statewide were offered as leasehold units at the time of publication. Almost all of the leasehold units were on Oahu, with only a few scattered around the Neighbor Islands. The majority of the one-bedroom condos were in town – Waikiki, Downtown, Makiki, and the University district – with a handful distributed across Pearl City and Windward Oahu. The price points varied greatly, as they did with all Hawai’i real estate, from affordable one-bedroom units starting at $40,000 plus monthly fees as low as $500 (maintenance fee and lease rent) to luxury beachfront condos starting at $1.5 million with monthly maintenance and lease fees totaling $5,000.
How Does a Leasehold Work?
Essentially, you pay the landowner a fixed amount of rent for the land your property is on. The land reverts to the lessor at the end of the period, and all ownership rights are annulled (your property reverts to the landowner). Renegotiation dates are included in most leases, and they allow the land lease amount to be renegotiated for a new term. The lease amount will rise, and it will often be multiples of the previous price.
If the fee is available, a buyer of a leased property may be entitled to purchase the land as part of the purchase of the improvements. In this case, “fee” refers to ownership of the land. Ongoing fee ownership is available from some landowners. When looking at a leasehold property, it never hurts to inquire if the fee is available for purchase.
If the fee is not available, you must learn everything you can about the lease conditions and the landowner’s intentions.
You should know how long the lease will last, when it will be renegotiated, and whether it has recently been renegotiated, as well as explore other choices for the property. It’s possible that a fee offering is in the works, or that the landowner may sell the fee to you. If the fee is not available, leasehold buyers should be aware of the following financial considerations:
It’s possible that you won’t be able to secure a 30-year loan – The majority of lenders will only finance for 90% of the lease’s remaining duration. If the lease period is 30 years, for example, the lender will provide a 27-year loan.
The IRS does not regard leases with fewer than 30 years remaining to be real estate. You won’t be able to sell the property or delay capital gains taxes.
Pay heed to any fee offers if you currently own a leasehold property. It’s usually a good idea to buy the charge as soon as it’s available. Don’t put it off. There are no promises that you will be given another chance, and the amount generally rises each time.
Risks of a Leasehold
Buying leasehold properties entails some risk. Before proceeding, double-check that you fully comprehend the lease terms. Even long-term leases frequently include renegotiation dates, which might cause problems with financing. If a renegotiation date is within 5 years of purchase, for example, the lender may utilize an expected renegotiated lease rate to qualify the buyer. When calculating whether a buyer qualifies for a loan, lease rents are added to the loan payment. Even if the buyer qualifies at the present lease rent amount, the higher predicted renegotiated rate may be too high for them to qualify for the financing.
It might also be difficult to resell a leasehold property. Leasehold properties, unlike fee simple properties, frequently lose value over time. Why? The lease duration is getting shorter. It may be difficult to resell the property as a result of this.
Leasehold is not suitable for everyone.
Fee Simple – owning the land outright – is substantially better for most individuals. A Leasehold property, on the other hand, may be appropriate in some circumstances.
Investors – Because the property has a modest initial cost, investors should expect a solid return during the lease duration. The rent for leasehold properties is the same as for fee simple properties.
Buyers that aren’t in it for the long term or to generate money are known as lifestyle buyers. These buyers typically have a large portfolio of properties and can obtain a Leasehold home in a desirable location for a fraction of the cost.
Seniors – Leasehold can be a good option to downsize and keep most of your assets liquid for retirees who don’t have heirs to pass the property to or who want to move their equity out of a fee simple property.
Students in College – Leaseholds can provide college students with a good place to reside throughout their studies while also generating rental revenue once they graduate. The absence of property appreciation over time will be the trade-off.
The landowner may choose to sell the fee to the homeowners on occasion. Although this appears to be excellent news for the homeowner, it is not always the case. The landowner frequently wants to sell the entire fee, not just a piece of it. This is the situation for properties in an association, when the landowner purchases the fee in collaboration with the association. In this scenario, the association normally obtains the majority of leasehold units in order to purchase the fee, and the other units are acquired by the association. The remaining units are usually financed by the association. You may choose to keep your unit as a leasehold unit if you do not have the means or ability to obtain a bank loan and finance the charge. In rare situations, the building or your apartment may not be able to be financed, thus you will have to pay the charge in cash. If you were one of the units that did not pay the charge, the association has taken over as the new landowner. The association will charge you lease rent according to the terms of your lease agreement, so nothing will change there; but, if you decide to acquire the fee later, the new association can charge you whatever they want.
Finally, there is the risk of the unknown when it comes to the price you will have to pay for the fee in the future. In many circumstances, the organization will charge you finance charges as well as some additional expenses if you want to purchase the fee later. In this instance, whether or not the market rises, the fee price will almost certainly rise each month. As a result, you may feel compelled to purchase the charge because the price will continue to climb each month you keep your leasehold unit.