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Had not previously been familiar with the residential "leasehold" arrangement, until reading about it WRT some condo properties near Honolulu. Have now done about as much research as I think I can handle, so may I paraphrase what I believe I've learned, and anyone with a firmer grasp of the whole thing can chime in with their perspectives and opinions? And may I apologize in advance for what will surely be ultra-simplistic assumptions and notions.
(BTW this would be for the plan to actually occupy the condo full-time, not rent it out.)
Seems clear one is paying for the right to live in a place, but not the actual ownership of the "real" property, so one is never building equity. One is *essentially* paying rent, no?
The difference, however, from actually "renting", is that one could "sell" whatever time-portion of the leasehold agreement remains. The amount that one could "sell" for, all things equal, and forgetting transaction costs, would be somehow, mostly proportionally related to the remaining portion.
So, for example, if one paid $100K for a leasehold good for 10 years, and it was generally "accepted" that this was a fair deal, market-wise, then if one changed one's mind and wished to move/sell just a year later, one might be able to sell the deal for around $90K. (Again, ex-transaction costs, market changes, interest rate changes, external shocks, etc.)
Wait until just a year is left on the agreement, OTOH, and it's closer to $10K, or zero.
So why are things done this way?
(Lastly, one wouldn't be able to secure conventional financing for a leasehold, correct?)
The odds of a leasehold property value going to near zero - are near zero. Practically all leasehold condos will either get a lease extension and likely corresponding lease rent increase or eventually converted to fee simple with the owner of the lease getting the first opportunity to purchase - often with better terms the general public would be offered.
Exceptions of course exist - if the owner of the building wants to sell the building and the new owner wants to demolish it and put something else up it will go to zero.
There's a lot of history behind that. You can read articles like this to get more info. You will likely not be able to get financing for the full term of the lease, perhaps maybe 70% of it because the bank will want to cut it's risk.
I can think of two reasons to "buy" into a leasehold, but YMMV. (1) You want the Hawaiian lifestyle for a certain amount of time and are willing to pay a fixed price to do it. (2) The property can be used as a vacation rental. You "buy" the property and receive income to offset the expense and even get some profit off it.
If you are interested in the property you might check the with the seller and the HOA to see if the property is planning to convert to fee-simple. If it does, you might have to make an additional payment for your "part" of the common dwelling. I would do more research before proceeding.
I can think of two reasons to "buy" into a leasehold, but YMMV. (1) You want the Hawaiian lifestyle for a certain amount of time and are willing to pay a fixed price to do it. (2) The property can be used as a vacation rental.
I could see the possible appeal of #1. I suppose if you have money to burn, and just wanted to live in a super nice property for awhile. Like right now, there are some beachfront properties around Kahala that are going for 100k-200k for a 4 year lease. I could see the appeal of a temporary lifestyle since beachfronts are so hard to come by in the rental market and excessively expensive to purchase fee simple. Could be fun for a few years...
I’ve also seen some people get leaseholds in Waikiki specifically to rent them out, and they make a tiny bit of cash flow, but I still don’t see the appeal as an investment property.
Personally, I can’t imagine having to pay a landlord (who does zero property maintenance) an additional monthly fee on top of a mortgage payment to the bank. That just seems ridiculous out of principal. But I guess if you have money to burn it could make sense.
I could see the possible appeal of #1. I suppose if you have money to burn, and just wanted to live in a super nice property for awhile. Like right now, there are some beachfront properties around Kahala that are going for 100k-200k for a 4 year lease.
In addition to the purchase price for the 4 yrs remaining at that property, the monthly HOA Fee plus the monthly lease fee are about $3,800/ month. If you bought at $100k for 4 years you’d end up at about $5,900/month over the 4 years for mortgage, HOA and lease rent. Plus add your taxes and insurance. Still ends up pretty expensive.
In my mind, most people buying Leasehold are doing so because they can’t afford to buy fee-simple. It just has a lower cost of entry. But in the long run, it costs you more because of depreciation vs fee simple appreciation.
I can see a leasehold purchase if you’re older, won’t out live the existing lease term and aren’t worried about leaving anything in your will. Outside of that scenario, I’d probably prefer to rent if fee simple is unattainable. Or, move to a lower cost state and buy fee simple there.
In addition to the purchase price for the 4 yrs remaining at that property, the monthly HOA Fee plus the monthly lease fee are about $3,800/ month. If you bought at $100k for 4 years you’d end up at about $5,900/month over the 4 years for mortgage, HOA and lease rent. Plus add your taxes and insurance. Still ends up pretty expensive.
A more realistic version is Discovery Bay. The units are huge income money machines.
Owner occupancy is less than 40%.
Lease rent is $406 for a 1 bed 1 bath 1 parking. Maintenance is $865 but includes cable, internet, sewer, and water.
I snagged several units before word got out they are discussing going fee simple. Units were running well under $300K up until a couple of months ago - but with word out they may go fee simple they are running up the price. Take unit 1002 for example - Mar 2015 sold for $282K - now listed 8 years later for $399K
Excellent feedback, folks; thank you for taking the time. Distills it all down to what I *thought* I was trying to say, except much more clearly and succinctly!
A more realistic version is Discovery Bay. The units are huge income money machines.
Owner occupancy is less than 40%.
Lease rent is $406 for a 1 bed 1 bath 1 parking. Maintenance is $865 but includes cable, internet, sewer, and water.
I snagged several units before word got out they are discussing going fee simple. Units were running well under $300K up until a couple of months ago - but with word out they may go fee simple they are running up the price. Take unit 1002 for example - Mar 2015 sold for $282K - now listed 8 years later for $399K
Anyway, units run over 95% occupancy
I’ve known the HOA has been working on buying out the leasehold for several years. I always wondered how that would work once it was accomplished and how they were doing it. The cost to buy the fee for that many units has to be huge. So I wondered if they were taking loans to buy the fee and paying the loans from the HOA fee ? Or just how it’s being accomplished. And then once it’s accomplished, will they then sell the fee to the individual unit owners or hold the fee and increase HOA Fees to cover the costs to buy the fees ?
Since you’ve bought 2 units there, I’m hoping you can explain how it’s being accomplished. As I like the units and location. I just don’t like that the building does not have fire sprinklers in the units.
I’ve known the HOA has been working on buying out the leasehold for several years. I always wondered how that would work once it was accomplished and how they were doing it. The cost to buy the fee for that many units has to be huge. So I wondered if they were taking loans to buy the fee and paying the loans from the HOA fee ? Or just how it’s being accomplished. And then once it’s accomplished, will they then sell the fee to the individual unit owners or hold the fee and increase HOA Fees to cover the costs to buy the fees ?
Since you’ve bought 2 units there, I’m hoping you can explain how it’s being accomplished. As I like the units and location. I just don’t like that the building does not have fire sprinklers in the units.
I actually have more than 2 units.
The short story is the HOA owns a majority of the fee via a loan. The income from the fee exceeds the loan amount payments thus the profit is being used to purchase more fee and reduce the loan amount.
Last edited by whtviper1; 06-21-2023 at 01:14 PM..
Actually, at least on Oahu, there are very few Leasehold Condos remaining. Those that do remain clearly include the number of years remaining, or the scheduled "step ups" of the leasehold rent in their listings. For those that have only a few years left, such as the Kahala Beach which expires in 2027, you do need to understand that at that time it's "Everyone Out!" Of course, there have been numerous instances of Residents throwing a fit about how "unfair" it is to take their home at the end of the Leasehold period, but, it is clearly in the contract that you agree to when you purchased. Some of those Residents have dragged out the process for quite some time, at significant cost, but I am not personally aware of any that were ultimately "saved", although I honestly pay very little attention to those issues. You are paying a greatly reduced cost for the unit, relative to a fee simple or 99 year leasehold, so just plan on vacating at the appointed hour...and make sure your family members clearly understand the issue, in case you croak in the meantime.
The MUCH Bigger issue you need to become educated on with regard to purchasing a condo or HOA property, are the State condo laws in general; the specific "Governing Documents" for a particular project you are interested in; and especially, how to interpret the Annual Operating Budget, Reserve Funding Plan, and Reserve Study for the project. In particular, the Reserve Funding Plan will illuminate the actual financial health of the project. There is a great resource online, the Community Association Institute, which does have a local chapter here, discussing and education about all things Condo/HOA. Also, search for ThinkTech Hawaii Condo Online for a large library of videos hosted by local Business leaders, explaining every topic possible related to Condo/HOA Ownership in Hawaii.
More often than not, the Volunteer Boards that are responsible to maintain, protect, and preserve ALL of the common and limited common elements, fail to adequately fulfill their fiduciary duty. When this happens, it adversely affects the property values and results in "unexpected" Special Assessments or dramatic Maintenance fee increases. Or, the properties simply continue on a downward spiral until Owner occupancy is so low that everyone just stops caring. It is up to the Membership to get involved, attend meetings, and be sure your Board is following all the applicable laws and rules.
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