Hawaii leasehold properties

[Plantman]

I would love to live in Hawaii but it seems the only properties I can afford are leasehold properties. I am not familiar with that term. Can someone please explain what that means. Is it like buying a condo and you have to pay a HOA fee? Is it something to run from or no big deal?

 

[Ready]

It means you are buying a property on leased land. So you will own the structure but not the land it is sitting on. There will be a separate fee you need to pay each month to the owner of the land for the right to maintain your property on it. You will need to see how many years are left in the lease and what protections may be included regarding fee increases.

The biggest problem with leased land is that once the lease is up the owner can refuse to renew the lease and they inherit your home for free. Or they could renew it under very unfavorable terms which make continuing to live there impractical. And if the lease has less than 30 years on it many banks will not issue 30 year mortgages on it. So if you ever need to sell it you will have to find a cash buyer.

Bottom line is, you don’t want one of these properties unless it’s a screaming deal.

 

[Koolau]

It means you are buying a property on leased land. So you will own the structure but not the land it is sitting on. There will be a separate fee you need to pay each month to the owner of the land for the right to maintain your property on it. You will need to see how many years are left in the lease and what protections may be included regarding fee increases.

The biggest problem with leased land is that once the lease is up the owner can refuse to renew the lease and they inherit your home for free. Or they could renew it under very unfavorable terms which make continuing to live there impractical. And if the lease has less than 30 years on it many banks will not issue 30 year mortgages on it. So if you ever need to sell it you will have to find a cash buyer.

Bottom line is, you don’t want one of these properties unless it’s a screaming deal.

What you have said is technically correct (at least to my knowledge). Having said that, I would not necessarily agree with your bottom line. There are ways to deal with the issue of lease-hold land (buy the fee, for instance) or purchase a property you'll not out live the lease. You can work with a realtor to find out your options - so I don't see leasehold as a deal breaker per se. It does complicate things and it is a strike against a property. Buying property in Hawaii takes some research and hopefully a trusted real estate person.

We got lucky and purchased fee simple (no lease - the fee had been purchased). Such properties are available but, as mentioned, they are more expensive. YMMV

 

[SecondAttempt]

Just to add to what Koolau said, leasehold is generally something to avoid, or at least research carefully. If you can find a property with, say, 25 years, left on the lease, it will be cheaper because the price essentially reflects zero value of the land at the end because of the possibility of nonrenewal.

In Hawaii, the largest land owner is Kamehameha Schools/Bishop Estate (KSBE). Bernice Bishop was the heir to the Kingdom of Hawaii and set up a trust with her lands to benefit the children of Hawaii in perpetuity and KSBE is that entity. They primarily make their money by managing the lands and spend it running a private school system. It is rare (but not unheard of) that they don't renew a lease or take an abusive stance when renewing. This is a unique characteristic of Hawaii leasehold properties that I think sets it apart from what you will hear about the rest of the US.

I own fee-simple land in Hawaii but I would not be afraid of a leasehold property. I would look closely at the details however. You will find that many of the condos and commercial properties (resorts etc.) along the coast are leasehold. Years ago I looked into buying a nice condo on leasehold land with 23 years left on the lease. The banks were not at all afraid to lend for 30 years on that deal.

One piece of advice I would give you though is to work with a knowledgeable and experienced buyer's agent. We have other weirdnesses with property in Hawaii. We have Kuleana lands for example where families have been living for generations without title and have rights. We also have lava zones (on the Big Island), and land boundaries are sometimes fuzzy and not strictly enforced. Most property legal descriptions locate a property based on the location where people used to pile pigs to tribute the local chief (ahupua'a). Yes we have GPS and all that but the coordinates are not in the legal description. It is also very common for properties to be cheap because they are traps. Maybe a prior owner graded the property wrong such that it cause flooding of the neighbor. Local agents will know this but there may be no legal actions filed because the neighbor being flooded wants the property sold so they can sue the new owner to make fixes.

Hawaii is a great place to live and not nearly as expensive as advertised if you live more like locals than tourists. But it has its pitfalls when it comes to property ownership!