What is fee simple in real estate?

Reading the fine print of your real estate documents can seem like a foreign language. There are so many different technical and legal terms involved that you can quickly feel lost and confused. One of the terms that you may have come across is “fee simple.” Understanding this term and others is key to ensuring a successful real estate transaction.

What is fee simple ownership?

Fee simple ownership is a type of property ownership in which the owner enjoys full ownership of a piece of land and any structures within it. This type of ownership is common with single-family homes. In these circumstances, the owner maintains the use of the land, the home, and any other outbuildings on the property like sheds or garages.

Fee simple ownership comes with a whole host of rights and privileges. Essentially, you can do what you wish with the property. If you want to renovate it, you can. If you want to build an addition, you can. If you want to sell it, you can.

This type of ownership is the most common in the United States and is also regarded as the highest form of ownership. That being said, fee simple ownership doesn’t necessarily mean that owners have free rein and cannot lose their property. Owners must continue to pay their mortgage, and any property taxes levied on the property. If there are unpaid debts associated with the property, you may end up with a lien.

What rights come with fee simple ownership?

As you now know, fee simple means that the owner has complete legal rights over a property without restrictions. But what does this entail? Here are some examples of the rights that are included with this type of real estate ownership:

Use: The owner has the right to use the property as he wishes so long as it is in a lawful manner.
Possess: The owner has the right to live on the property while also maintaining the right to exclude others from living on the property.
Transfer: The owner has the right to transfer the property through methods of selling, gifting, willing, etc.
Encumber: The owner has the right to use the property as a security in order to borrow funds.
Enjoy: The owner has the right to enjoy the property without any interference from others.

What are the different types of fee simple ownership?

A few different types of fee simple ownership can help you master the real estate game.

Fee simple absolute ownership

Usually, when people refer to “fee simple” ownership, they are talking about “fee simple absolute” ownership. However, it is important to understand the distinction between this type and others.

Fee simple absolute ownership is the most common form of real estate ownership in the United States since it is the most powerful. This type of ownership allows owners to own and use their property for the rest of their lives. But their rights don’t end there.

In fact, owners in a fee simple absolute arrangement can pass the property down to designated heirs like spouses, children, siblings, grandchildren, and other family members, as they desire. Owners in this type of arrangement can also impose certain conditions when passing down their estate that may limit what the heirs can do with the property.

Fee simple defeasible ownership

Under a fee simple defeasible ownership, owners must meet certain conditions to maintain possession of the property. These conditions were imposed by a former owner and agreed upon by the current one. If you violate these conditions in any way, you automatically lose the property.

While this type of ownership may seem more restrictive, it still provides you with the right to generally use the property as you wish and maintain it for the rest of your life -- all you have to do is meet a few conditions imposed by a previous owner.

For instance, say that you had a property passed down to you with the condition that you could not tear down the home. While your family member may have had fee simple absolute ownership over the property, in turn, you have fee simple defeasible ownership as a result of this condition.

Fee simple subject to condition subsequent

Finally, there is fee simple ownership that is subject to condition subsequent. This means that while you are subject to conditions set forth by a previous owner, violation of these conditions doesn’t automatically result in the loss of the property.

Instead, former owners can choose whether or not they enforce these conditions. While it might seem strange that someone would be willing to set a condition but not enforce it, sometimes people just don’t want to go through the hassle of taking over possession of the property.

For instance, say that you bought a home with the condition that it can only be used for residential purposes. Down the line, you want to open a retail store on your property for your small business. Doing so would give the former owner the power and the ability to retake the property from you -- but they could choose not to. Effectively, you’re at their mercy.

What are the other types of real estate ownership?

In addition to fee simple ownership, there are two other types of real estate ownership that you should know about.

Leasehold interest ownership

Leasehold interest ownership is a unique type of property ownership in which an individual owns the home on a piece of land that is then rented from the landowner. This arrangement is set up through a ground lease that typically has terms substantially longer than your typical one-year apartment lease. The terms of the land contract can be renegotiated at the end of its term.

Although this type of property ownership is relatively uncommon in the U.S., it is seen in certain scenarios. For instance, many condos or townhomes fall under this type of ownership wherein one person owns the actual unit itself but not the land it’s on. A leasehold interest may also contain restrictions and conditions for the leaseholder set forth by the actual property owner.

Leased fee ownership

In leased fee ownership, the landowner owns the land title and maintains rights to the land, but the use of the land and any improvement are leased out through a ground lease. These types of ground leases are usually longer-term and may last up to 40 to 50 years. At the end of the lease or in the event of default, the land, its improvement, and any use rights return to the landowner.

Other real estate legal terms you need to know

Now that you know what fee simple is and how it relates to property ownership, there are other real estate terms that you should know to get a better understanding of this arena:

Easement: Gives the right of land use to a party other than the owner for specific purposes
Encroachment: When buildings, fences, or gardens encroach across property lines onto a neighboring property
Lien: A claim against a property to obtain payment for taxes, services rendered, child support, and more
Title: Gives you ownership of the property and the right to use it as you see fit
Deed: Transfers ownership of the property from one party to another
Estate: All the property, money, and possessions owned by a single person or persons

Do you need a real estate lawyer?

While a real estate lawyer isn’t always necessary, it may make sense to consult with one in certain situations. For instance, certain states require attorneys to be involved in the legal process of selling a home. These states include Connecticut, Delaware, Georgia, Massachusetts, New York, South Carolina, and West Virginia.

Additionally, you may want to hire a real estate lawyer if you are having contractual issues with the purchase. If both sides aren’t seeing eye to eye or you’re dealing with any extraordinary circumstances, a real estate attorney could help mediate and guide you through the rest of the buying process.

Final thoughts on fee simple in real estate

Dealing with the legal world of real estate can be totally overwhelming since you likely don’t want to spend your limited spare time going to law school. Instead of dealing with all of these intricacies on your own, you may want to consult a professional. Professionals like real estate attorneys or even lenders can help guide you through the process of buying property. Always feel free to reach out to the lending experts at Vaster Capital for personalized expertise based on your unique financial situation.

Sources: