IMPORTANT DEFINITIONS FOR THE PROVISIONAL APPRAISERS

Simple vs. Leasehold | Complete Real Estate Answers Inc.

This morning while training provisional appraiser I came across the necessity of explaining the difference between Fee Simple ownership and Leasehold ownership. It was natural way to end up putting the definitions into the blog form. Fee simple ownership versus leasehold ownership may affect the value of real estate. There are some sates in USA which are leasehold states and some states do not exercise this form ownership much. Example will be Hawaii, New York, Florida – they are leasehold states.

IMPORTANT DEFINITIONS FOR THE PROVISIONAL APPRAISERS.

Most people only know of one type of real estate ownership; fee simple, also known as freehold.  There are a handful of states that have another form of ownership known as leasehold.

The difference in these two types of land tenure is very different and affects the value of the real estate.  It is important to know the difference, especially if you’re buying real estate in a leasehold state (i.e. Hawaii, New York, Florida).

What is the difference between leasehold and fee simple? 

FEE SIMPLE: Fee simple ownership is probably the most familiar form of ownership to buyers of residential real estate. Depending on where you are from, you may not know of any other way to own real estate. Fee simple is sometimes called fee simple absolute because it is the most complete form of ownership. A fee simple buyer is given title (ownership) of the property, which includes the land and any improvements to the land in perpetuity. Aside from a few exceptions, no one can legally take that real estate from an owner with fee simple title. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes–sell it, give it away, trade it for other things, lease it to others, or pass it to others upon death.

LEASEHOLD: A leasehold interest is created when a fee simple land-owner (Lessor) enters into an agreement or contract called a ground lease with a person or entity (Lessee). A Lessee gives compensation to the Lessor for the rights of use and enjoyment of the land much as one buys fee simple rights; however, the leasehold interest differs from the fee simple interest in several important respects. First, the buyer of leasehold real estate does not own the land; they only have a right to use the land for a pre-determined amount of time. Second, if leasehold real estate is transfered to a new owner, use of the land is limited to the remaining years covered by the original lease. At the end of the pre-determined period, the land reverts back to the Lessor, and is called reversion. Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor. Finally, the use, maintenance, and alteration of the leased premises are subject to any restrictions contained in the lease.

Important Leasehold terms to know: 

Lease Term – The length of the lease period (usually 55 years or more)
•Lease Rent – The amount of rent paid to the Lessor for use of the land
•Fixed Period – The period in which the lease rent amount is fixed
•Renegotiation Date – Date after the fixed period that the lease rent is renegotiated
•Expiration Date – The date that the lease ends
•Reversion – The act of giving back the property to the Lessor
•Surrender – Terms of the reversion
•Leased Fee Interest – An amount a Lessor will accept to convey fee simple ownership

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Case Study #1

i-95 I am appraising a single family residence in sleepy New England town.

The subject is located on a dead end street, which runs into a marshy area where it ends, but also runs parallel to a major interstate highway, I-95, thus resulting in a very high noise level along with pollution levels.

All other homes on the street conform to subject, in terms of maintenance, appearance, age, and style. There are two comparables on the street that recently closed, less than 6-months ago (one of which is located across the street from subject) at a range of $340,000-$380,000, along with some active listings priced at $390,000.

Subject property happens to be in foreclosure; so this is an exterior only (aka, “drive by”) appraisal, in which inspection is done from street.

While inspecting the property from the outside, I am surprised to find a huge addition made to the back of the property, which makes the subject dwelling twice as large as other properties, but similar in all other parameters, such as location, appearance, age, and even bathroom count.

Given a 1-mile criteria, comparable property values range from $210,000 to as high as $X-million, given that some properties would be located on a much more desirable water front community. The majority of homes, above 2,500SQFT sell for over $700,000, in this particular town, but they are not located adjacent to the highway, as the subject property is, and they offer a much grander view as well.

What is the best way to approach this property? Can sales observed from the street be a good market value indicator, despite the subject being twice as large as other comparables in the area?  Is this location, that is adjacent to a major Interstate Highway, on in which would drive the value in this case?

What would be your approach to appraising this property?

………

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Complete Real Estate Answers Inc.

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As an appraiser, real estate investor, Realtor; I am always on the go! My passion is real estate. My love for real estate started than I first stepped onto American soil, the land of opportunity! 15 years ago.A few months after my arrival, I lived and managed at a small B&B in New Canaan, while going to school, here, in Norwalk, for Hotel Restaurant Management. However, I shortly discovered that real estate was my calling.
When I started out, the first two years I did property assessment for Sabre Appraisal Division in New Canaan, CT. While with them, I diligently took courses and studied to become a licensed Certified CT Assessor, thereafter a licensed appraiser, then to top it off, a licensed Realtor! All part of my master plan to be entrenched in the real estate world.
As a residential appraiser for 12 years now, I have gotten the opportunity to go inside homes all over the county and state. I have appraised 100 of dozens of homes in Fairfield County. I truly think the more complicated the property, the better I appraise it, my Ph.D. analytical thinking helps me here a lot.
I reside in Stamford, CT with my husband of 10 years, who works the appraisal side of the business with me. I hold a Ph.D. degree from my home country in Physics. My two sons leave in California; one has his doctorate in political scientist and philosophy and is a professor at Claremont University, the other is an entrepreneur, President/CEO of his start-up company.
As a person that cannot sit still, in my free time I love to travel, to antique, do photography, cook and entertain my friends. I believe in giving in life, without expecting to get back. This is what brings me the utmost joy, yet being rewarded for a good job done, is as important and satisfying or equal to the joy of helping.

Nana Smith

“Ability is Nothing without Opportunity”.