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Leasehold properties. Deal or Drain?

Often when buyers are searching for homes for sale in Hawaii they come across listings much cheaper than others. Often these are leasehold properties(LH).

Basically with and LH, you pay the landowner rent for the land your property is on for a fixed term, 10-20 years for example. When the term expires the land reverts to the lessor and all ownership rights are canceled (your property reverts to the landowner). Most leases have renegotiation dates where the land lease amount is renegotiated for another set term. The lease amount will increase and the increase is often multiples of the previous amount.

In some cases, a buyer of a leasehold property may have the opportunity to buy the land as part of the purchase of the improvements, if the fee is available. “Fee” in this instance means owning the land. Some landowners offer fee ownership on an ongoing basis. It never hurts to ask if the fee is available to purchase when looking at a leasehold property.

If the fee is not available, it’s imperative you find out everything you can regarding the lease terms and the landowner’s plans. Here is where the professional help of a Keller Williams agent is worth its weight in gold.

You may not be able to get a 30-year loan – Most lenders will only make a loan for 90% of the remaining term of the lease. For example, if the lease term has 30 years remaining, the lender will offer a 27 year loan.

Leases with less than 30 years remaining, the IRS does not consider the property as real estate. You won’t be able to exchange the property, or defer any capital gains taxes.

If you already own a leasehold property, pay attention to any fee offerings. It’s generally recommended to purchase the fee as soon as it is offered. Don’t wait. There are no guarantees you’ll get another chance, and the cost of the fee often increases over time.

Purchasing leasehold properties comes with risks and advantages. Make sure to understand the lease terms clearly before moving ahead. Even leases with long terms often have renegotiation dates which can interfere with financing. For example, if there is a renegotiation date within 5 years of purchase, a lender may use an estimated renegotiated lease rate to qualify the buyer. Lease rents are added to the loan payment when determining if the buyer qualifies for a loan. The higher estimated renegotiated rate may be too high for the buyer to qualify for the loan – even though they can qualify at the current lease rent amount.

Leasehold can also be difficult to re-sell for some. Unlike Fee Simple properties, leasehold properties often lose value over time. Why? The term of the lease gets shorter. This can make re-selling the property difficult.

On the flip side!! Many short term investors buying with cash can take advantage of the benefits of leasehold properties. Also many buyers on and fixed income or looking to make home purchase part of their retirement plan find Leasehold properties a great solution.

It’s always a great idea to talk to your local real estate professional to see if a leasehold is an option that works for you.

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