What's the "Deal" with Leasehold?
When you search online for property on Maui, you may notice that some properties appear to be quite similar to other properties except for one small detail: they are literally half the price! When I was a kid, my grandfather always taught me to do my due diligence when I discovered something too good to be true. There’s always a catch. The discounted price on these properties is usually because the home is designated as a “leasehold” property as opposed to a “fee simple” property. In most markets around the US, it’s rare to see leasehold properties available for sale. Let's explore the differences between these two types:
Fee Simple Explained
Fee simple is the most common type of property ownership and is widely recognized as the highest and very best form of ownership on Maui. When you own a fee simple property, you have complete ownership of both the land and any structures on it. The property Owner is entitled to full enjoyment of the property, only limited by zoning laws, deed restrictions, subdivision restrictions, and if applicable condominium CC&Rs. You have the right to use your property, occupy your property, sell your property or pass it on to your heirs. You also have the freedom to make changes to the property within legal limits. As the fee simple owner you are responsible for property taxes, property insurance, and property maintenance.
Leasehold ownership, on the other hand, involves owning the rights to use a property for a specific period of time through a lease agreement with the landowner. There is a lease offered by the Lessor to the Lessee and at the end of the lease, the property reverts back to the Lessor. The Lessee pays a monthly lease rent during the course of the lease. At the end of the lease term, the Lessor may or may not agree to extend the lease under a new lease agreement. If the lease is not extended, the Lessor will retain the property and the Lessee has no further rights to use of the property. During the lease term, the lease rent will typically increase. In Hawaii, leasehold properties are typically found on land owned by the state, Hawaiian Home Lands or through other private individuals.
How many Leasehold condos are on Maui?
There are only about 1,630 Leasehold condos that remain on Maui which is a very small fraction, only about 7.8%, of the total number of condos that exist on the island. There used to me many more leasehold condos but certain communities were able to act collectively to buy out the land and sell the Fee Simple interest to the unit owners. The vast majority of the remaining Leasehold condos are found in the West Maui areas of Lahaina, Kaanapali, Napili and Kahana which totals around 1,212 units.
Know before you buy
When considering fee simple versus leasehold properties in Hawaii, there are a few key points to keep in mind:
- Cost: In many cases, leasehold properties tend to be significantly more affordable upfront compared to fee simple properties because you are not purchasing the land. For example the 2022 median sales price for a 2 Bedroom Leasehold condo was $650,000 which is 25% cheaper compared the see simple median of $875,000. However, leasehold properties may require regular lease payments, which will likely increase over time.
- Lease Terms: Leasehold properties have lease agreements with specific terms, including lease duration and potential renewal or termination clauses. It's important to understand these terms and consider their implications before purchasing a leasehold property.
- Land Ownership: Fee simple properties provide full ownership of both the land and structures, providing greater control and flexibility. With leasehold properties, you have very limited rights as you are essentially leasing the land from the owner, subject to their rules and regulations.
- Financing and Resale: Obtaining financing for leasehold properties can sometimes be more challenging compared to fee simple properties. Additionally, leasehold properties may have restrictions on resale and the remaining lease term can affect your leasehold property's value and marketability.
Guidance is essential
It's crucial to consult with a real estate professional like the Sayles Team or a local attorney who is familiar with Hawaii's specific laws and regulations regarding fee simple and leasehold properties. While we usually do not recommend purchasing leasehold property, there are many that come up for sale on Maui! If you’re interested in learning more, our team can help provide tailor made guidance based on your circumstances and preferences.