Owning a real estate property is a thing of joy. However, to make this excitement all encompassing, you’ll need full ownership of the structure in question. Here, you can do what you want without worrying about problems with your landlord.
In real estate, you get this freedom through fee simple ownership. If you intend to buy a home in the United States, chances are you’ll be entering into a fee simple ownership agreement. Why? It’s one of the most common types of real estate ownership.
While this concept might sound great for homeowners, you might want to consider the inner workings of fee simple ownership. We’ll run through this term and other related information in this article.
Fee Simple Estate Ownership Explained
What is a fee simple estate ownership?
Fee simple ownership means 100% control of the property. Here, you have outright ownership of the land beneath it and structures on it. With the appropriate land titles, there’s no restriction whatsoever.
In this form of ownership, you’re allowed to do what you want with the property. Whether you’d like to build a second house or a helipad on the top floor, you can do so with ease.
When it’s time to sell the property, you can slap any price you like on it. Fee simple owners can bequeath ownership rights to anyone of their choice. As long as it’s within the confines of your property, you can do anything!
Types of Fee Simple Ownership
While real estate syndications like Homes by Ardor bond you with other investors to make decent ROIs, fee simple owners can do what they want without seeking the approval of a foreign body.
That said, fee simple ownership comes in three forms:
- Fee simple absolute ownership
- Fee simple defeasible ownership
- Fee simple subject to condition subsequent
Fee Simple Absolute
Most people refer to this medium as the best kind of real estate ownership.
Also referred to as “freehold ownership,” property owners can do what they like to the structure. However, there are several restrictions, including zoning ordinances, local guidelines, and criminal laws.
For example, several zoning laws might hinder the property owner from operating a retail store in areas tagged as residential.
You can give away, sell, or revamp your property in a fee simple absolute agreement. If you’d like to entrust the property to your heir, you have the leeway of adding specific conditions for it in freehold ownership.
Some conditions might say subsequent owners shouldn’t tear the property down. On the flip side, others can reiterate the importance of family control at all times.
When the latter condition comes to the fore, heirs can’t sell it, regardless of their circumstances.
In a fee simple absolute contract, you can be the sole owner without transferring it to anyone as long as you’re alive. By making prompt mortgage payments and settling local property taxes, you shouldn’t find yourself in any legal debacles.
Fee Simple Defeasible
There’s a slight difference between defeasible and absolute fee simple estates. Unlike fee simple absolute ownership, defeasible estates wield less power.
While property owners have full ownership rights, they must be subject to the conditions put in place by the original owner. Violation of these provisions might result in property forfeiture.
According to specific conditions, the structure must be a residential property forever. If you convert this piece of real estate to an entertainment centre, the property reverts to the previous owner.
A fee simple defeasible ownership is common on unique structures, especially heritage listed properties. Thus, if you enter a defeasible ownership contract, bear in mind that you might risk:
- Government seizure
- Escheat state reversion
- Restrictions in usage by the previous or original owner
Note: The term “Escheat” refers to a scenario whereby a person with property dies without a legal heir to take over the reins.
When this happens, the government assumes ownership of the property.
Fee Simple Subject to Condition Subsequent
Although it looks like a mathematical formula, a fee simple subject to condition subsequent contract is a variation similar to a “defeasible” contract. Here, property owners must meet specific laws.
However, unlike fee simple defeasible, not meeting these provisions doesn’t result in current owners losing the property.
Original owners don’t take possession of the structure automatically and can instead decide to waive this right.
For example, let’s say the actual owner wants the property to be purely residential till the end of time. If you go against this condition by setting up a nightclub, they can evict you. However, they can decide not to do that in this fee simple variant.
Fee Simple Ownership: What Are Your Rights?
While some people are vested in the perks of this form of property ownership, it’s essential to understand your rights. Now, you can decide whether these structures are worth the hassle or not.
As an investor operating a fee simple ownership, you have rights to:
- Structure reconstruction
- Sell to anyone when you see fit
- Receive rent payments
Fee Simple Ownership Vs. Leasehold Ownership: How Do These Distinct Terms Compare?
Now that we’ve established what fee simple ownership means, it’s time to examine home sales featuring leasehold ownership.
To understand this term, let’s get some context from the word “lease.” When you enter a lease agreement for a car, office, or apartment, you have unrestricted access for a specific period.
Typically, this contract sees the lessee paying the lessor (property’s owner) to use their property for a particular timeline.
The same applies to leasehold ownership. Since the lessee doesn’t have fee simple ownership, they can’t sell or bequeath the property. Nonetheless, they’re allowed to modify the property to suit their unique requirements.
When the lease agreement expires, the lessee can renew or leave the property. By opting for the latter, the structure returns to the original owner, alongside any other improvements made during their stay. For example, if you build a store close to the main building, the landlord takes over once the lease ends.
Here are some leasehold terms worth remembering:
The lease term indicates the lease length. On private properties, these timelines can range from one to five years. However, commercial structures can field leases of ten to 20 years.
Long leases usually have renegotiation dates. For example, a 15-year lease might allow renegotiations every five years.
Reversion occurs when the property reverts to the owner upon lease expiry. The lessor has “Reversionary Interests” on these contracts, and they define when a property is theirs again.
Surrender happens when the lessee hands over property possession to the owner. If the lease hasn’t ended, both parties must reach a compromise.
The lessee pays this compensation for continued property usage. These payments can be monthly or annually, depending on the agreement.
Fee Simple Ownership: Are There Any Limits?
Although you have 100% control over this property, you are still subject to community, state, and federal laws at all times. Irrespective of the form of property ownership, the government can take land for public obligations.
That said, you also have to pay property taxes and debt as a fee simple owner. Lenders or the government can file liens on your property when you default on these payments. If you don’t heed these notices, your property may be foreclosed on.
Besides zoning laws and community regulations, a fee simple ownership is the closest you’ll ever get to owning real estate without encountering too many restrictions.
This form of ownership safeguards owners who want to do as they please on their property, with little to no external interference.
While multifamily real estate investments with services like Homes by Ardor might seem appealing, fee simple ownership ranks as the most common form of housing in the United States.
Fee simple ownership reaffirms one goal — 100% property control. Thus, if you’d like to modify, sell, or give away your property, you can do that without seeking the approval of any government authority.
Although fee simple ownership might sound positive in every aspect, it’s important to note that you must succumb to community and state provisions. These laws differ depending on the type of ownership.
Do you want to have a jacuzzi in your bedroom or create an extra swimming pool without having to explain yourself? Fee simple estate ownership is the way to go!