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Wednesday, 22 May 2013 07:24

Understand Leasehold

Written by  Prudential Locations
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(Article is from Prudential Locations)

The common practice of owning a house on somebody else’s land — the basis of leasehold land tenure — extends back several decades when, after WWII, high property values and low inventory afforded few home-ownership opportunities. Selling a home “leasehold,” enabled developers to build and deliver homes at a lower cost as a way to address the affordable housing problem.

It was a good idea originally, born from the notion that they could make affordable housing available. Large landowners started in areas like Hawaii Kai, and people would say, You’re going all the way out there? But because Hawaii Kai was so far from town, and the land was offered leasehold, the cost of each home was an affordable $20,000 — ideal for the consumer who couldn’t afford fee simple prices.

Leaseholds In Today's Market

Today, while the price tag on leasehold property is still relatively more affordable than a comparable fee simple property, there is risk and controversy surrounding the practice.

The risk stems from concerns relating to how much time is left on the term of the lease and what will happen once the lease expires. Will the landowner want to change the use of the land entirely and choose not to renegotiate a new lease? And if they do offer the fee for purchase or to reset the rents in a new lease, what will the price be and will that still be affordable to the tenant?

Part of the problem, is that the typical lease was for a term of 55 years while the rent was frozen for the first 30. A lease in the 1950s may have started out at $20 per month but it was unknown what rents would command 30 years later.

After the first 30 years, the rents would be re-evaluated and adjusted based on fair market value of the fee interest in the land. It worked well for a while, but what went undetermined was the increasing value of the fee. And when the lease rent was renegotiated, it was commonly found that the fee owner wasn’t getting a fair return on the investment.

Issues with financing a leasehold purchase also became apparent when banks decided they weren’t interested in giving a 30-year loan on a property with less than 30 years remaining on the lease.

Of course the most disturbing prospect to leasehold tenants is the reversionary clause, which states once the lease expires, the tenant will have to leave the property.

Today, despite concerns about a lack of affordable housing, the practice of developers building new leasehold communities to address the problem would be risky, given the circumstances surrounding the concept now and the sour taste it has left in many. Yet the low price tag of leasehold property is still attractive to some buyers.

Already Own a Leasehold?

If you currently own a leasehold property, and have the opportunity to convert to fee simple, take it. Fee simple title is generally preferred. And if you’re attracted to buying a property in leasehold, get as much information as possible. Your specialist at Prudential Locations can help you to find out how long the lease term is, if the owner intends to sell, if there is currently a fee offering, and what your financing options are.

Buyers are urged to work closely with a Prudential Locations’ Realtor and to make sure they understand all the terms and conditions of the lease. The time remaining on the lease may have an impact on financing so buyers should work with a knowledgeable loan representative if financing is needed.

Read 2607 times Last modified on Wednesday, 22 May 2013 07:35
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