Although property ownership might seem fairly cut and dry, there are actually several different types of ownership, with varying limitations and conditions. The most common type of property ownership in the US, for both residential and commercial real estate, is known as fee simple real estate.
What Is Fee Simple?
With fee simple real estate, the buyer takes full ownership of a piece of land and any buildings on that land. Most real estate transactions in the United States are considered fee simple. With fee simple ownership, you have the right to do whatever you want to the property, meaning you can tear down any existing buildings, create additions or build new buildings entirely. You can sell the land whenever you like, or you can bequeath the property to whomever you want.
“Whoever is buying or purchasing property — whether it’s land or an existing structure or resale, or whether it’s commercial or residential — you always want fee simple real estate,” said Henry Jaffe, a real estate broker for Sotheby’s International Real Estate. “Fee simple is always the best form of ownership.”
However, there are still scenarios in which you can lose your fee simple property, in the event that you have unpaid loans or liens, unpaid property taxes or other violations.
The 3 Types of Fee Simple
There are three different types of fee simple situations.
1. Fee Simple Absolute
The term fee simple absolute is often used interchangeably with fee simple. Property owners have full control of their land and can do as they wish, so long as they pay their mortgages and property taxes and don’t violate any local zoning laws.
Fee simple absolute owners can also include certain conditions to the property when bequeathing it to an heir. For instance, landowners can stipulate that certain buildings not be torn down, or that the property has to stay in the family. If you’re in the process of estate planning, these are factors you want to consider.
2. Fee Simple Defeasible
In a fee simple defeasible situation, landowners must meet certain conditions imposed on the property by the former owner. For instance, if one of the conditions of ownership is that the building remains a residential property, the new owner cannot violate that condition. If new owners do violate any conditions created by the former owner, the new owners will lose the property, and ownership will revert to the original owner.
3. Fee Simple Subject to Conditions Subsequent
Similarly to fee simple defeasible, fee simple subject to conditions subsequent also requires property owners to meet certain conditions set by the former owner. However, in the case of a violation, the owners might not always lose their property. In some cases, the former owner might choose to ignore violations and allow the new owner to keep the land.
An Example of Fee Simple in Commercial Real Estate
One example of a fee simple property in commercial real estate is a shopping center in which one entity owns the physical building, as well as the land on which that building is situated, said Adam Robbins, a Strategic Real Estate Advisor at Real Estate Bees. The owner of that property, assuming it’s fee simple absolute, has the right to sell, transfer, bequeath and build on the property as they see fit.
What’s the Difference Between Fee Simple vs Leasehold?
While most properties in the US are owned as fee simple real estate, some have leasehold ownership.
With a leasehold estate, Robbins explained, “The physical structures are owned by one party, and the underlying land is owned by another party.”
The party that is leasing the land from the landowner has the right to use the land for a set number of years. According to Robbins, “these types of leases have very long terms, usually more than 50 years,” when, “at the end of the lease, the improvements become property of the land owner.”
When entering into this type of arrangement, you pay a fee to rent the land, and you own any property or improvement that you end up building on the land only until your lease ends. Most commonly, leasehold arrangements are seen with co-ops, condos or townhouses.
“There’s an area just south of Rehoboth Beach, Delaware, with a whole section that’s essentially leased land,” Jaffe said.
The land, Jaffe added, constitutes residential homes priced much lower than they ordinarily would be — “$600,000 versus $2 million, which is what a house down the block sells for,” Jaffe said.
However, Jaffe often has to explain to clients that the reason for the low price is that “it’s not a fee simple ownership. It’s a leasehold ownership.” Each home on the leased land has a different duration of time left on the lease, “and so if there’s only 15 years remaining on that lease, the house is going to be a much lower price than a fee simple type of transaction.
What Is Life Estate?
In the case of a life estate, there is a grantor who owns the property and a grantee who is allowed to live on the property and must maintain the property.
According to Robbins, a life estate is “a right to use some property for the life of an individual or other legal entity. At either death or dissolution, the legal estate dissolves.”
When the grantor passes away, the grantee must vacate the property and forfeit their interest in the property. But if the grantee passes away first, then the property reverts to the grantor, which is called an estate in reversion.
Fee Simple Absolute Is the Preferred Form of Ownership
For property owners, fee simple absolute ownership is definitely the best situation to be in, as you’ll have full rights over your property, with no end date or unwanted conditions. In a fee simple absolute situation, you are free to sell, transfer or build on the property as you see fit.