There are a number of different ways to control real estate. Most of us own our homes or buildings on a "fee simple" basis, which means that we own the land and anything on it for as long as we want to, including the right to control what happens with it after we die. The other extreme is a leasehold interest, where someone else owns the land, but gives us the right to use it for a period of time. After the lease expires, we lose the right to use the land, and both ownership and use revert back to the owner. Most people only know of one type of real estate ownership; fee simple, also known as freehold. There are a handful of states that have another form of ownership known as leasehold. The difference in these two types of land tenure is very different and affects the value of the real estate. It is important to know the difference, especially if you’re buying real estate in a leasehold state (i.e. Hawaii, New York, Florida). Fee simple ownership is probably the most familiar form of ownership to buyers of residential real estate. Depending on where you are from, you may not know of any other way to own real estate. Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership.
The main difference:
The fee simple owner has the right to possess, use the land and dispose of the land as he wishes–sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.
First, the buyer of leasehold real estate does not own the land; they only have a right to use the land for a pre-determined amount of time. Second, if leasehold real estate is transfered to a new owner, use of the land is limited to the remaining years covered by the original lease. At the end of the pre-determined period, the land reverts back to the Lessor, and is called reversion.
Benefits of Fee Simple Ownership
• Fee simple ownership of land is a very powerful thing. Other than the government's right to control, tax or confiscate your property, once you have fee ownership, a piece of property is yours to do what you wish with for as long as you want. You can improve it, knowing that you will own the improvements and their benefits, or you can borrow against it, since a lender knows that their money is protected by your property. In addition, because total control of property is valuable, you can also sell it to someone else.
Benefits of a Leasehold Interest
• One of the key benefits of a leasehold interest is that it is usually much less expensive than owning land. This is one of the reasons that farmers frequently lease land--they are able to better use their expensive equipment and their know-how, without having to tie a lot of their money up into land. In addition, leased land is flexible. Rather than owning property which may need to be sold in the future, it allows a business to use the land while it works for them, then walk away from it in the future. Leasing land may be the only way to get control of a particular piece of property because the landowner is unwilling to sell it. This has historically been the case in many areas of Hawaii, for instance. Finally, a leasehold interest in investment property receives favorable tax treatment, making it more profitable to own.
Drawbacks to A Leasehold Interest
• The largest drawback to a leasehold interest is that it eventually goes away. While most land goes up in value over time, a leasehold interest will eventually become worthless. In addition, most leasehold interests require payments to the landowner, while fee simple property can be bought outright or paid off. Leasehold interests are also much harder to sell because buyers typically prefer fee simple ownership. Finally, a leasehold interest is actually not real estate. When you own a leasehold interest, all that you own, ultimately, is a piece of paper that outlines your rights and responsibilities.
The main difference:
The fee simple owner has the right to possess, use the land and dispose of the land as he wishes–sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.
First, the buyer of leasehold real estate does not own the land; they only have a right to use the land for a pre-determined amount of time. Second, if leasehold real estate is transfered to a new owner, use of the land is limited to the remaining years covered by the original lease. At the end of the pre-determined period, the land reverts back to the Lessor, and is called reversion.
Benefits of Fee Simple Ownership
• Fee simple ownership of land is a very powerful thing. Other than the government's right to control, tax or confiscate your property, once you have fee ownership, a piece of property is yours to do what you wish with for as long as you want. You can improve it, knowing that you will own the improvements and their benefits, or you can borrow against it, since a lender knows that their money is protected by your property. In addition, because total control of property is valuable, you can also sell it to someone else.
Benefits of a Leasehold Interest
• One of the key benefits of a leasehold interest is that it is usually much less expensive than owning land. This is one of the reasons that farmers frequently lease land--they are able to better use their expensive equipment and their know-how, without having to tie a lot of their money up into land. In addition, leased land is flexible. Rather than owning property which may need to be sold in the future, it allows a business to use the land while it works for them, then walk away from it in the future. Leasing land may be the only way to get control of a particular piece of property because the landowner is unwilling to sell it. This has historically been the case in many areas of Hawaii, for instance. Finally, a leasehold interest in investment property receives favorable tax treatment, making it more profitable to own.
Drawbacks to A Leasehold Interest
• The largest drawback to a leasehold interest is that it eventually goes away. While most land goes up in value over time, a leasehold interest will eventually become worthless. In addition, most leasehold interests require payments to the landowner, while fee simple property can be bought outright or paid off. Leasehold interests are also much harder to sell because buyers typically prefer fee simple ownership. Finally, a leasehold interest is actually not real estate. When you own a leasehold interest, all that you own, ultimately, is a piece of paper that outlines your rights and responsibilities.