AKAMAI MONEY By Greg Wiles |
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Q. I returned from college on the Mainland two years ago and have been forced to live with my parents because of the high cost of housing in Hawai'i. But I'd like to know how does buying leasehold property stack up against buy a fee-simple property? Is it a better alternative to renting?
— A. Choy, Honolulu
A. Interest in leasehold properties, once moribund, has increased as prices jumped for fee-simple real estate. Over the past couple of years the market has attracted more notice because prices are typically lower.
But be forewarned, leasehold remains a more complicated route in navigating a way out of your parent's home. You should only consider it if you understand how the leases work and retain a veteran real estate agent capable of separating good from bad leasehold properties, experts say.
"There's no question leasehold will cost you less," said Michael Pang, president and principal broker of Monarch Properties Inc., a Honolulu real estate brokerage. But "it has risks associated with it."
Leasehold homeowners rent the land under their abode, unlike fee-simple real estate where homeowners own the land. The leases typically run 55 or 60 years, with the first 30 years of rent at fixed rate.
Thereafter the rents may be adjusted and the lease often includes a clause saying the property reverts back to the landowner when the contract ends.
The system earned a black eye over the past two decades as lease rents came up for renegotiation and homeowners faced budget-busting increases in lease rents.
Since an uproar in the late 1980s and early 1990s, more landowners have washed their hands of the controversy by negotiating sales of their land to homeowners.
That's helped ease concern over leasehold properties, though there are landowners who've said they'll never sell. But with rising residential prices and rents, more prospective buyers are putting leasehold on their radar screens.
Pang, whose company helps condominium homeowner associations negotiate to buy land from property owners, said most of the leasehold condominium properties are on O'ahu. The greatest number is found in Waikiki, where all but one of the condominiums was developed on a leasehold basis.
In Makiki more than 50 percent of the condominiums were built leasehold, while 70 percent of those developed in 'Aiea were leasehold, Pang said.
In all, there are about 22,000 leasehold condominium units on O'ahu, he said. That's out of more than 135,000 total.
Finding the right leasehold property can be difficult because each development is different. Similar properties near each other may be light years apart when it comes to lease terms.
There are several big items to study before you start checking out leasehold properties. Those who don't understand the quirks of leasehold may find themselves paying more than they expected.
In a worst-case scenario, they could wind up with unanticipated lease-rent hikes and be forced to give their condominium back to the landowner at the end of the lease.
"If he doesn't investigate the property, his leasehold could end up being more expensive than fee simple," said Harvey Shapiro, research economist for the Honolulu Board of Realtors.
Thus, you need to dig out terms of the lease, paying specific attention to how long the payments stay at fixed rates and what happens afterward, Shapiro said.
You also need to study the formula for any rent revision, Shapiro said. There could be cases where rents are raised to the level where combined mortgage and lease-rent payments are more expensive than paying the mortgage on a higher-priced fee-simple property, he said.
Other considerations include the length of the lease and whether the leased land under the condominium has been offered for sale. You also need to look into how lenders will treat the property. In general, bankers don't issue mortgages for properties with short leases.
When you do get financing, the banker most likely will determine the loan length by cutting five years from the end of the lease, Pang said. A property with 30 years left on the lease most likely can qualify for a 25-year loan at most.
If everything checks out — you find a property that's inexpensively priced with a lengthy lease and reasonable future rent hikes — you might consider buying.
You also should factor in whether the landowner has already offered for sale the land underneath the unit and what happens with the lease during the period you expect to remain in the property.
"Because leasehold is so negatively thought of, you might be able to back into a leasehold that fits your needs," Shapiro said. "Then it would definitely be worthwhile to buy."
Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or gwiles@honoluluadvertiser.com