As a real estate investor, there are two critical things to consider when looking at buying a property.
First, you need to verify that the person you purchase an investment property from has the full and legal right to sell the land and the buildings on it.
This is where fee simple ownership comes in.
Though knowing the vast list of real estate vocabulary may seem inconsequential, that knowledge can be the difference between a profitable deal and a deal that turns into a financial nightmare.
If you invest in real estate property that isn’t considered fee simple ownership, you can run into many problems — contractually, financially, and emotionally.
What is Fee Simple Ownership?
Fee simple is a term that is used in the world of real estate to describe an owner of a property who has full and irrevocable ownership of the land and any buildings that reside on the land.
Under fee simple ownership, the owner can do anything that he or she wishes — within the law — to the property and the buildings on it.
As a real estate investor looking to maximize a property’s profit, this is the type of ownership you should be looking for.
Keep in mind there are other types of ownership that will allow you access to a property but won’t provide you full ownership.
You may also see fee simple referred to as fee simple absolute and fee simple estate. There is a slight difference in fee simple absolute and fee simple, which we will discuss next.
Types of Fee Simple Ownership
There are two types of fee simple ownership, and it’s important that you understand the differences in them before you sign a contract.
Fee Simple Defeasible
Fee simple defeasible is a less-powerful form of property ownership.
Under fee simple defeasible, the property owner must meet certain conditions in order to maintain his or her ownership of the property.
Owners who violate the terms and conditions under a fee simple defeasible ownership agreement forfeit their ownership stakes.
For instance, if a fee simple defeasible agreement says that the property must be a residential property and the owner converts it to an Airbnb, it may result in a forfeiture of ownership in the property.
Fee Simple Absolute
Fee simple absolute is the most powerful form of fee simple estate.
Fee simple absolute is when the owner of the property has all the rights associated with a property, hence the term “absolute”.
For instance, if you have fee simple absolute ownership of a property, you can do anything with it, such as adding ADU housing to the property — as long as you don’t violate the law.
This form of ownership also ensures that you have the legal right to sell the property at your own discretion.
Fee Simple vs. Leasehold Ownership
Real estate investors may confuse fee simple with leasehold ownership, another important real estate term that classifies property ownership.
But there are noticeable differences.
Under a leasehold agreement, the leaseholder pays rent but is granted the full legal right to make improvements to the property at their own discretion. While leasehold agreement is more common in commercial facilities where making modifications is often a necessary part of doing business, it is still legal in residential agreements.
A tenant with leasehold ownership of a property does not maintain the right to sell the land or the building on it to anyone else, too.
Simply put, leasehold ownership isn’t complete ownership — fee simple ownership is.
Fee Simple Ownership: The Bottom Line
Fee simple estate is the highest form of property ownership in the world of real estate.
As a real estate investor, it’s crucial to your success that you have the right to do anything that you need to do with a property, whether that’s remodeling existing structures, tearing down buildings, or constructing new ones.
By having fee simple ownership, you can ensure that your property sees its maximum potential and profit.