Question about lease holds

4 Replies

Hello all, I'm new to Bigger Pockets and to real estate investing at all for that matter. However, I have been looking at a potential property but I am confused by one thing. I'm hoping someone here may give me help me better understand. This given property is for sale for $69,000 leasehold co-op with fee available for almost $299,000. $625 monthly interest on fee conversion loan ends with fee purchase. Where my confusions lie are where it says this is a leasehold co-op with fee available for almost $299,000. Can anyone please explain to me what this is trying to say? Thank you.

I don't deal much with residential co-ops.  However, I believe this is what it means:

That property likely has a number of units.  If you buy it fee for $299K, you own the entire building.  You can also buy into the co-op for $69K and have leasehold interest to use one of the units.  If you do this, you will need to pay $625/mo.   Think about it like you are either buying a car for $30k (fee), or your lease the same car for $5000 down and $200/mo.  Same idea.

Essentially, "fee" means you own the building and land.  "leasehold" means you have rights to utilize the space, but at the end of the terms, the space reverts back to whoever holds fee simple title.  

In general, stay away from buying leasehold interests.  

Thank you for the response Mr Chang. This adds a great deal of clarification for me.

@Daniel Chang , may I ask a question?  If a seller is advertising his leasehold interest for his specific unit (stock certificate) for $50,000 ... how do I determine the value of his asking price?  

I ask because if the lease hold unit has 20+ years left on the lease, and I can get in for a lower amount compared to fee, I would consider it.

Thank you in advance,

Mike

@Michael Gayer Jr

I'm not sure if you are asking about residential or commercial.  And I'm unsure if you are buying it for yourself as a owner-user or you're buying it with a tenant in place.

There's a whole bunch of legal mumbo jumbo that I'm not addressing, like what you can use the property for, who you can lease to.  So make sure it works for you.  

From a financial perspective:

If you're looking at an owner-user, then you would calculate the difference between a standard lease for a comparable property compared to the maintenance cost of the leasehold over the term of the leasehold, and discount it back to present value.  

For instance, say this is regarding an office space.  This leasehold interest will have ongoing maintenance of $300/mo.  But if you were to lease a similar office space, it would be $1000/mo.  The term is for 10 years, after which you own nothing.  Essentially, you would have a "gain" of  $700/mo over 10 years.  You then apply a discount factor, factoring things into it like illiquidity and apply it to the expected future cash flow savings and arrive at the present value.  That's what you should pay for it today. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.