Forms of Homeownership
Let’s start with Fee Simple (aka as freehold/fee simple absolute), the most common form of ownership. Many home buyers are familiar with this type of ownership because that’s how most homes are purchased. It’s important to note that whether real estate is fee simple vs leasehold, it will determine what a homeowner can do with it, regarding possession, ownership, and more.
Under Fee Simple ownership, an owner has full possession of their property when bought. The buyer is given the title of the property, and has the right to sell it, transfer ownership of it, remortgage it, or put it in a will. In addition, no one can legally take real estate from an owner with a fee simple title.
Fee Simple: Condos & Townhouses
Fee simple can be contrasted with condo ownership. What does this mean? An owner will have complete access to the land, but they don’t own it. Owners of single-family residences have fee simple ownership, but condo and most townhouse owners do not since they only own the individual unit and not the land. However, they obtain the right to use the community property. Each unit has its own tax bill, deed, mortgage, and ownership rights, but shares in the maintenance of the common areas. A condo or townhome development will list the type of ownership available in the Covenants, Conditions and Restrictions (CC&Rs) document.
You may have never heard of the term “leasehold”. You’re not alone. In fact, its pretty uncommon and only really encountered in New Jersey, New York and Florida.
Basically, someone who buys a leasehold buys the right to live in the building, but does not own the land the building is standing on. Instead, the owner, called the freeholder, grants the buyer use of the building and the surrounding land for a set amount of time in an agreement called a ground lease. A ground lease allows the freeholder to establish how long the leaseholder can live on the property, and requires a down payment. Once paid, the leaseholder pays the freeholder rent, called ground rent, every month. When an agreement is met between both parties, they enter into what’s called a leasehold interest.
Leaseholds are common in commercial properties. Residential leaseholds are rare in the U.S. but exist in New York, New Jersey, and Florida. And, unlike apartment leases which are granted in one- and two-year spans, leaseholds can be established between 40-120 years. Once a leasehold expires, full ownership of the property remains to the freeholder.
Can you make improvements on a leasehold?
Under leasehold ownership, you can treat it like you would a home that you own. As long as the changes you want to make meet building codes of the city you live in, you’re free to make improvements. Tenants or leaseholders can choose to make improvements on things such as:
Painting the house
Installing a pool
Expanding the property by adding additional rooms (if city approves)
Is it a good idea to make these improvements? It depends. Since the leasehold agreement can last a long time, the tenant may want to renovate. They do so knowing that they won’t be investing in the property for themselves. Once the tenant reaches the end of the lease, the home switches ownership to the freeholder and they will then own the house with all the renovations that have been made.
Leasehold co-ops are also known as ground lease or landlease buildings (popular in New York City). In a leasehold co-op, the co-operative does not own the land that the building sits on, rather, they are leasing it from their landlord.
In this type of scenario, condo owners get an actual deed and therefore own their property, even though the building is under lease to a larger ownership entity, to which it pays rent.
Fee Simple vs. Leasehold: Which type of ownership has more value for you?
Leaseholds have a lower value than a similar property with fee simple ownership. When comparing valuations of leasehold properties, they should be matched against other leasehold real estate and not properties with fee simple ownership. This will give you a more accurate value of the property. Full fee simple ownership is what most home buyers want because it gives them the most control of their property. However, if 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.
Housing Cooperative (Co-op) Ownership
A housing cooperative or a co-op is a corporation whereby the owners don’t own their units outright; instead each resident is a shareholder. Buying a house or renting an apartment aren’t the only living arrangements available, and they can both be cost-prohibitive. A co-op provides an alternative to the traditional methods of owning a primary residence.
How does a Co-op work?
Some co-op owners are allowed to sell their co-op shares in the open market, depending on the market rate for co-ops in that location.
Co-ops can be less expensive than apartments since they operate on an at-cost basis, collecting money from residents to pay expenses.
However, before buying shares of a company, be sure to check out the company's financial situation and the fees involved.
Smaller co-ops are run by the residents, with everyone pitching in to take care of maintenance, landscaping, rules, etc.
Large units may be run by a board of directions that consist of residents.
Types of Co-ops:
Market Rate: Allow partners to buy and sell shares at whatever rate the market will bear.
Limited Equity: Set restrictions on the price at which shares may be bought/sold.
Leasing Co-ops: The co-op corporation leases the building rather than owning it and builds no equity.
Before buying a co-op, check out the company’s financial situation and meet the company’s shareholders. You’ll want to consider location, amenities and costs before buying as well. When you purchase shares in a co-op you take out a “share loan” instead of a mortgage, which operate like mortgages. In addition to the loan payments, which are made to the lender, co-op residents are responsible for paying a pro-rated share of the costs of running and maintaining the building. Other fees included each month could be cost of the property’s mortgage, utility bills, etc. In addition, buyers are entitled to tax deductions enjoyed by homeowners, including the deductions for interest and real estate taxes.
Moving on to condominiums! A condominium is one of a group of housing units where the homeowners own their individual unit space, and all the dwellings share ownership of common use area (hallways, parking lots, roads, etc). The main difference between condos and regular single homes is that there is no individual ownership of a plot of land. All the land in the condominium project is owned in common by all the homeowners. Condominiums frequently levy monthly “common charges” to each owner to help pay for the maintenance of the commonly owned areas.
Condominiums manage their properties through boards and/or associations with members being elected from all owners, and can also be assisted by a management company. Rules and regulations governing the condominiums are established by the rules of the development’s incorporation and may be modified by these boards.