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Fee Simple vs. Leasehold: What's the Difference?

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There’s more than one way to own property, like a house or a plot of land. Those different types of property ownership come with other rights, responsibilities, and legal liabilities. 

To that end, it’s a good idea to know how you own a property, especially if you want to sell it or develop it in the future.

Today, let’s take a look at fee simple vs. leasehold ownership. We'll detail the differences between these ownership types and the benefits and downsides of both ownership styles.

What Is Fee Simple Ownership?

Fee simple ownership, AKA fee simple absolute ownership, means you completely own a property or plot of land. When you buy property under fee simple rules, you are given title or ownership of the property in question. 

Title ownership includes ownership of the land and any improvements to the land in perpetuity. Until you sell the property, you control everything there is to do with that land, plain and simple.

Under fee simple ownership rules, you have the right to:

  • Possess the land and live on it if you so choose
  • Use the land in whatever way you want (provided that your usage does not violate local or federal rules, of course)
  • Sell the land whenever you like
  • Give away or trade the land for other things
  • Lease the land to others (as in the case of property rental)
  • Pass the land to others upon your death

Most Americans purchase property with fee simple ownership. Many believe this is the only way to buy property legally — they consider other contacts for living on or using property to rent the space.

Benefits of Fee Simple Ownership

There are many benefits to fee simple ownership, namely the fact that one has the right to use or sell the property however they choose. 

They have ultimate flexibility in terms of modifying or developing the property and land around it, including: 

  • Air rights
  • Mineral rights (in case valuable minerals are found on the property in the future)
  • Inheritance rights
  • The right to modify any existing structures on the land

In other words, fee simple ownership is as close as one can get to total ownership of a plot of land with reasonable restrictions. 

Generally, one can do whatever they like to property they own under fee simple rules provided they do not negatively impact their neighbors or break local laws that everyone else must follow.

In addition to the above benefits, fee simple homeownership may be more accessible if you have to acquire financing from a bank or other institution. That’s because loan underwriters assess single-family homes with fee simple ownership as the best properties. 

After all, there aren’t as many contingencies to consider with the loan. On average, condos and other plan developments with leasehold rights are riskier and more challenging to acquire financing for.

Fee Simple vs. Fee Defeasible Ownership

Fee simple defeasible ownership is similar to standard fee simple ownership or fee simple absolute ownership.

Fee simple defeasible ownership means that the prior owner cells be given property to the current owner. 

However, the deed for that sale includes a condition that may restrict how the next owner uses the land. Some restrictions include: 

  • What developments may be made
  • How the land can be modified
  • Whether the land can be rented

If the conditions in a fee simple defeasible deed are not followed, ownership of the property may revert to the original owner. 

For example, say that a real estate seller wants to sell their property to a willing buyer. However, the property includes a family burial yard they wish to be untouched forever.

Both parties sign a fee simple defeasible contract stating that the new owner cannot touch the family burial yard under any circumstances. If the next owner decides to bulldoze over the family burial yard, ownership of the property could revert to the original owner.

Where Is Fee Simple Ownership Common?

In the US, yes. Leasehold ownership is not typical for real estate throughout the US aside from a few metro areas or specific states. If you buy a house in the US, the odds are that it is under fee simple ownership rules.

However, Baltimore, parts of Florida, and states like Hawaii do have more common leasehold ownership contracts. 

That’s due to various cultural or space-related factors. For example, there’s not a lot of space in Hawaii, so leasehold ownership is more common to prevent developments that would negatively impact land availability in the future.

What Is Leasehold Ownership?

Leasehold ownership involves creating a leasehold interest between a fee simple landowner, the lessor, and the contracting person or entity called the lessee. Similarly to lending other property, the lessor lends the owned property to the lessee for a certain amount of time and under specific ground rules.

With leasehold ownership, the lessee provides compensation to the lessor. In exchange, they get many rights to use and enjoy the land as they please, similarly to fee simple ownership. 

However, leasehold ownership means the lessee doesn't own the property. They, instead, have the right to use the property in question for a certain amount of time.

Furthermore, leasehold real estate may be transferred to a new owner. But the use of the land is limited to whatever years are remaining on the original leasehold lease. After the leasehold contract expires, possession of the land goes back to the lessor through a process called reversion. 

Benefits of Leasehold Ownership

While leasehold ownership has some limitations, there are also certain advantages.

For example, leasehold real estate owners pay less to get leasehold properties. They often need to pay much less than the 20% down payment standard typical homebuyers have to pay if they want fee simple ownership.

Furthermore, leasehold lessees can sell their leases to other parties at any time without getting the property lessor's permission. This is particularly common when dealing with commercial real estate. 

On top of that, leasehold ownership usually costs landlords a much smaller amount than what they would need to begin investing in traditional real estate.

Long-term leasehold leases can provide steady and affordable rental rates for lessees for a very long time, which is part of why these leases are more common in condensed metropolitan areas. 

In this light, leasehold ownership does provide certain financial benefits and flexibility that fee simple real estate ownership does not.

Where Is Leasehold Ownership Common?

Leasehold ownership is much more common outside of the US. For example, homebuyers will often encounter leaseholds for residential properties in the British Commonwealth and throughout the United Kingdom. 

This is partially due to cultural reasons and partially due to long-standing traditions or municipal laws.

Furthermore, leasehold ownership is more common for commercial properties, even throughout the US. Most business owners don’t want to purchase real estate in a shopping center, for example, and have to be responsible for it perpetually. 

Instead, they want to buy the property (or rent it), use it for several years, and focus more on running their business.

Main Difference Between Fee Simple vs. Leasehold Ownership

The primary difference between fee simple and leasehold ownership is property ownership time frames.

With fee simple ownership, you own the property in perpetuity. In other words, the property is yours unless you sell it, give it away, or die. No one can take the property from you unless you break the law or are required to sell the property to cover debts. 

Fee simple ownership is the most common type of property ownership in the US for personal property, like homes, ranches, and farms.

With leasehold ownership, you only have certain ownership-adjacent rights for a set time, usually some years. 

Furthermore, you must pay the lessor or the true owner of the property money over time, similarly to renting. This is more common for commercial properties in the US and beyond.

There are a few other differences as well. Notably, you pay rent under leasehold ownership terms, whereas you make mortgage payments under fee simple ownership terms. 

Furthermore, fee simple ownership means you have absolute control of the property and can do whatever you want. Leasehold contracts may have certain restrictions on how you can use the property in question, limiting your possibilities.

Bottom Line

As you can see, fee simple and leasehold ownership are good ways to own property. However, one could be better for your needs or future plans for a given plot of land. 

You should make sure that you purchase property with the proper ownership rules before signing on the dotted line of any contract.

Vaster’s loan officers can help. As knowledgeable financing experts, we can help you purchase a home or property for your business and secure the right financing for your needs and time limitations. 

Contact us today to explore the best mortgage options available to you. 

Sources:

Fee Simple vs. Leasehold: What You Need to Know | US News & World Report

Understanding Fee Simple vs Leasehold Ownership | Zillow

Fee Simple Ownership Vs. Leasehold: Key Differences | Fortune Builders

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