Understanding the differences between leasehold and fee-simple property

The median price of a single-family home in Hawaii is now at $750,000 and $400,000 for condos.

But there is a way to get into the market, even into a beachfront property, for significantly less.

Like everything else, if it sounds too good to be true, be careful before you put yourself on the hook for hundreds of thousands of your money.

If you've been following the real estate market and are looking for a place to jump in, you know prices are soaring.

So imagine the surprise of a perspective buyer coming across a one-bedroom beachfront unit on Kaimana Beach, where Rocky the Hawaiian monk seal and her pup are hanging out, at a price of just $350,000.

As you might imagine, there is one big catch. It's leasehold.

"We get that question all the time," said Chad Takesue of Locations. "Oceanfront, $350,000, 'Wow, that's great, what a good steal. Can I go check it out?' Well, we say before we check it out, let me just explain to you one thing. We've got leasehold property here, and we've got fee-simple property, and you've got to know the difference."

That difference could translate into hundreds of thousands, if not $1 million or more, down the line.

The difference in a nutshell is with fee-simple property, you own the home as well as the the land it sits on. But with leasehold, you have zero interest in the land, which is often where the bulk of the value is.

"For example, let's say the lease term ends in seven years. Basically, the lessor of the property can take over the rights to the property," Takesue said. "So your leasehold ownership is really a temporary ownership for a duration of time of the physical structure."

Of course, there are cases where the lessor chooses to offer the fee. That's when reality sets in.

"Remember now, how do you calculate that fee? They're going to look at the market value of fee-simple property in the area, and many of these fee-simple units are going in the multimillion-dollar range," Takesue said. So you might be able to walk in and buy a beautiful oceanfront unit today for $350,000, but seven years from now, "you're talking seven figures."

While Locations doesn't generally recommend leasehold properties, it can make sense for some people -- say a retiree who wants to live the dream of owning a property on the beach and doesn't have any heirs.

Another possibility is a leasehold property where the lease doesn't expire for 50, 60, or even 70 years. Just be sure to understand the terms and what the step-ups in the lease are along the way.

"In Hawaii especially, land is so critical and that's where the real value of the property is," Takesue said. "You always want to err on the side of fee simple, but like I said, we have that product here in Hawaii, it's unique to Hawaii, and for some, it may work. It just depends on your situation."

Click here for more information from Locations.

Here are examples of leasehold units currently on the market and their expiration:

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