Understanding Fee Simple and Leasehold in Hawaii

A Hale Napili leasehold is listed for $50K, but is it a great deal?

For potential home buyers in Hawaii, the terms “fee-simple” and “leasehold” may be new, but are aspects of critical importance to understand. Most home buyers from the mainland are acquainted with a fee-simple estate, also known as freehold, as it may be the only type of land ownership in their state. A fee-simple buyer is given ownership of the land, improvements, and fixtures on the property for eternity.

As the most complete form of ownership, a fee simple owner has the right to sell, lease, pass on to heirs, trade, etc. the property without restriction or limitation. There are only a couple of circumstances under which another party can legally take that property from a fee-simple owner, such as a lien due to property taxes and by a mortgagee when the property was used to secure the mortgage and is in default.

On the other hand, a leasehold property owner does not own the land, but has the right to enjoy and use the land for a fixed amount of time. As determined on the individual lease, at the termination of the lease period the buildings and fixtures on the land may revert back to the lessor. In addition, should the leasehold property be transferred to a new owner, that individual is bound by the terms of the original lease, which may include restrictions on the use and modifications. Leasehold properties are typically priced much lower than comparable fee simple units, but have stricter financing requirements.

For example, a unit at Hale Napili (MLS# 337603) is currently listed for $50K. At first glance, a condo in a very private, beachfront complex on Napili Bay for sale at $50K seems like a phenomenal deal. However, keep in mind that it is a leasehold property, incurring a monthly lease fee of $480 with the possibility of purchasing the land fee-simple at approximately $375K-$400K. When taking these factors into account, this property is listed at a fair market value (certainly not the steal of the century). Ultimately, it is up to your specific circumstances as to which works best for you.

If you would like to learn more about the advantages of each and search for great investment opportunities, feel free to contact Alex or Mariah.