Fee Simple vs Leasehold: What Is the Difference?

Most home buyers are only familiar with fee simple real estate ownership because that is how most homes are purchased. Whether real estate is fee simple vs leasehold determines what they can do with it, regarding its possession, ownership, and whom it will revert to, upon their death and how it affects the value of the property.

The most common form of home ownership is fee simple and an owner has full possession of this property when they buy it. However, some states have leaseholds (i.e. Florida, Hawaii and New York) that have different terms. Knowing the difference between fee simple vs leasehold will make you aware of your rights, regarding real property.

What does Fee Simple Mean?

Also called freehold or fee simple absolute, fee simple ownership affords owners the most rights of any property owner, and gives complete possession. When you are the buyer of fee simple property, it will include the land and all improvements. It is yours, once you purchase it, to do with what you wish, within what is required by local ordinances, homeowners association (HOA) rules and covenants, conditions and restrictions (CC&R’s) that may be imposed on the property, of course.

Based on English Common Law, and the rights of a fee simple owner are only limited by government powers of compulsory purchase, police power, escheat, and taxation and may also be limited by conditions in the deed. When conditions of a deed require the property be used for a specific purpose it is called a fee simple conditional due to the circumstances placed on the deed.  A fee simple property is held in perpetuity and can be sold, traded, given away or leased to others. When an owner of fee simple property dies, the property reverts to their heirs unless the purpose of the property is stated to be disposed of differently in the owners will.

What does Leasehold Mean?

A little more complicated, when explaining fee simple vs leasehold finds that leaseholds have more types and purposes than fee simple and you only have possession of the property for a stated period. Leasehold is created when a fee simple owner (lessor) of real property enters into a lease with an entity or person (lessee). In this contractual relationship, the lessee compensates the lessor for the use and rights of the property, which is much the same as if the property is held in fee simple but there the similarities end.

The first difference is that the lessee does not own the land, but only has the right to use if for a predetermined amount of time. The second difference regards the ownership of the property. If the fee simple property is sold, the lessee will only have the use of the property for the remaining years of the lease. At the end of the lease period, the land reverts to the lessor. This is called revision and is another advantage of fee simple ownership.

Depending on how the lease is written and how the surrender clause in it is stated, buildings and any other improvements made, to the leased property, also may revert to the lessor. Many leases, especially ground leases, have a revision clause that gives the lessee the right to remove all improvements at the end of the lease. How the property is used, maintained and altered are subject to the terms of the lease and are set forth at its inception.

Do you know the other Leasehold terms?

Understanding the terms of a lease, if you are in a state that uses leaseholds, will help you wade your way through the technicalities if you find yourself in this situation.

• The length of a lease is called it is the lease term and is usually 55 years, plus, in some areas.
• Lease rent refers to the rent paid to the lessor
• The ‘fixed period’ refers to the period that the amount of the lease is ‘fixed’. This is different from a month-to-month lease that you can get out of by relinquishing your first and last month’s rent. In a fixed-term lease, the renter agrees to stay for a ‘fixed’ amount of time at a certain price.
• If you break a ‘fixed period’ lease you can be held liable for the amount owed on the remainder of the lease.
• The renegotiate comes after the fixed period and is when the lease can be renegotiated.
• The expiration date of a lease indicates when it ends.
• Reversion happens when the property returns to the possession of the fee simple owner, the lessor.
• Surrender is the fulfillment of reversion according to the terms
• A leased fee interest is the amount a lessor will accept to convey the property to the lessee, as fee simple ownership.

Which has more value for you?

Leaseholds, typically, have a lower value than a similar property with fee simple ownership. When comparing valuations of leasehold properties they should be matched against another leasehold real estate and not properties with fee simple ownership. This will give you a truer value of the property.

Do you see the difference in fee simple vs leasehold?

In some states, like Hawaii, Maryland, Florida and New York, you may not have a choice between a fee simple and leasehold property. This will depend on the type of property you want and where you want to live. If you do come across a situation where leasehold is your best option, you should now have a better idea of what you are getting into before signing the dotted line.

Full fee simple ownership is what most home buyers want and gives you the most control of your property. However, in the instance that you find yourself in a situation that requires leasehold, you may find that it suits you fine and allows you a home of your dreams.

2 Point Highlight

Whether real estate is fee simple vs leasehold determines what they can do with it, regarding its possession, ownership, and whom it will revert to, upon their death and how it affects the value of the property.

Leaseholds, typically, have a lower value than a like property with fee simple ownership.