Fee simple is a legal term describing a form of absolute property ownership with unlimited property rights that can be transferred or inherited as the property owner wishes. This is in contrast to leasehold or other types of interest in property, which may restrict the holder’s rights or responsibilities.
What Is Fee Simple Ownership?
Fee simple ownership is not a type of deed. A deed is a legal document showing ownership of the property. Fee simple shows the history of ownership and property transfer through a title. Fee simple shows the most absolute form of property ownership, and a deed is an instrument that shows whether the owner has rights to transfer the property to others.
If you already own or are looking to acquire property and are wondering if you have fee simple ownership, you can find out through a title search. Title companies do a title search to ensure there are no existing claims, liens, or mortgages against the property that would inhibit fee simple ownership.
Properties Without Fee Simple Ownership
Some properties typically aren’t owned fee simple, such as townhomes, condos, entire mobile home parks, and subdivisions where there are restrictions of use. For these types of properties to hold fee simple title, you would need to own the land with limited restrictions, no common areas, no governing associations, and no mandatory dues. For example, with individual condos, owners have unit deeds as opposed to warranty deeds with fee simple ownership.
If your property is in a subdivision, review the master deed which includes descriptions of the land and buildings, common areas, percentage of interest, a plot plan, what owner’s own, and any use restrictions. Also, review the property association’s guidelines. If you own the land beneath your property, which can sometimes be the case, you may hold fee simple title, although this isn’t typical.
Why Fee Simple Is Important to Real Estate Investors
When investing in real estate, it’s essential to know if you hold fee simple title when buying investment property. If you purchase certain types of properties, and you don’t own the land, you do not have unlimited and unrestricted rights or an absolute fee simple ownership. What you own is everything within the interior walls, unless otherwise specified in your deed or homeowners’ (HOA) bylaws.
If you are a real estate developer and plan to build condos or a subdivision, you will need to record a master deed. A master deed will allow you to divide your property into individual units to be sold and develop association bylaws. When you buy the land, you may have fee simple ownership, but when you divide and sell units, you decrease your ownership, turning it over to the association.
Individual unit owners each own a percentage of interest in the land, with the condo or homeowners association collecting fees and enforcing bylaws. Because the land is commonly owned, no unit owner has fee simple title. For other types of properties, it’s important to get a title search to make sure there are no title defects that preclude your ability to acquire investment property with fee simple ownership.
Fee Simple and Property Values
Anything less than fee simple interest is referred to as partial or fractional interest, such as with condo owners with membership in a condo association. Properties without the ownership of the land and all buildings on the land tend to be perceived as less valuable than properties that include all land and buildings.
While fee simple interest in properties is typically more valuable, some properties that do not have fee simple interest come with special benefits, such as condos with great amenities. These properties, in ideal locations and with lots of extras, can sometimes be more valuable than fee simple interest in nearby properties that don’t include such benefits.
How Fee Simple Affects a Mortgage
Fee simple ownership to a property gives the owner freedom and flexibility to borrow against their property, using it as security for a mortgage loan. Fee simple protects the lender because the borrower is guaranteeing that the lender can seize the property from the owner if the borrower defaults on the loan.
This is why title companies typically search―to make sure that property owners haven’t already committed the property on another loan or failed to pay taxes or contractors who have performed work on the property.
Fee Simple and Foreclosures
If you borrow against a property, having fee simple absolute ownership does not mean the bank can’t foreclose. When you get a mortgage to purchase or renovate a property, a lender will place a lien against the property. The lien protects the lender if you stop making payments on your loan. They can accelerate your loan and seize the property for nonpayment to recoup their loss.
Fee Simple and Property Taxes
Fee simple owners have to pay property taxes. If you don’t pay property taxes, your municipality can put a tax lien against your property and assess interest and fees until they are paid in full. If you go long enough without paying your taxes, the county can foreclose and take your property. You will not be able to sell or transfer your property with unpaid taxes.
Fee Simple and Zoning Ordinances
In addition to paying your mortgage and taxes with a fee simple property, you are still required to follow zoning laws and regulations. If you need to change the use of your property, such as converting a single-family residence into commercial or apartment rentals, you would need to get a permit from your town’s planning board.
Fee Simple Investment Property
If you’re buying investment property, you want to think about the current status of ownership. If you’re buying a distressed or foreclosed property, you want to make sure you can get clear title and establish fee simple ownership. You can find out if the property has a clear title through a title search.
A clear title has no liens, property boundary disputes, unpaid taxes, court judgments, or any other claims against it. When possible, you want to get a warranty deed, not a quitclaim deed. A warranty deed guarantees that the grantor has the legal rights to a property, whereas a quitclaim deed only transfers the grantor’s interest in the property, with no guarantee of clear title, making a warranty deed the better choice in most cases.
How Fee Simple Affects Selling an Investment Property
If you purchased the property with a warranty deed, obtained clear title, and have fee simple ownership, you shouldn’t have any issues with doing a like-kind exchange. However, if you have outstanding liens of any type, including mechanic’s liens, you will probably be required to resolve these before selling.
Mechanics’ liens are liens placed against a property by contractors who did work on the property but have not received payment. Types of properties that may have a mechanics’ lien are fix-and-flip properties, rehab projects, or investment properties where maintenance and repair companies have not been paid for materials or labor.
When you sell an investment property, you also want to think about what type of ownership you’re transferring to a new owner. A buyer typically pays for the title search and new deed, although sometimes sellers will offer to pay a percentage of closing costs―up to 6% or the purchase price―that may cover the cost of a title search and a new deed.
Transfer Fee Simple Investment Property
In addition to buying and selling investment property, there are times when you may transfer complete or partial ownership in a property. For example, you may purchase an investment property in your own name and then transfer ownership to a limited liability company (LLC), trust, or add a spouse or other owner. Typically, transferring interest in an investment property is done with a quitclaim deed and doesn’t alter your fee simple ownership.
When you buy, sell, or refinance a property, the lender typically requires a title search to make sure no claims against the property exists. If you’re paying cash for a property, you’ll want to consider hiring an attorney or a title company to do the search.
When you transfer your investment property to an LLC, trust, or add a spouse, a title search is not typically conducted since it was done at the time of purchase. If you’re joining a partnership and taking a portion of ownership with a quitclaim deed, it might be a wise choice to have a title search done so that you don’t inherit existing liens or claims against the property.
Fee Simple Alternatives
Up to now, we’ve discussed fee simple, also known as fee simple absolute, where a property owner has absolute property ownership with unlimited property rights that can be transferred or inherited as the property owner wishes. There are other forms of property ownership you want to know about also, such as fee simple defeasible, leasehold, freehold, life estate, and tribal lands.
Fee Simple Defeasible vs Fee Simple Absolute
Fee simple defeasible is a conditional form of fee simple ownership. If the grantee fails to meet those conditions, the property can be returned to the grantor or their agent. Investors who offer owner financing may use fee simple defeasible to protect their interests in the property, so they can foreclose if a buyer defaults or damages the property.
For investors who are buying or selling property with owner financing, it’s important to understand how these work or, if they’re going to be included in the agreement, to talk with an attorney to determine what the best course of action will be and which type of fee simple ownership makes the most sense.
Fee Simple vs Leasehold
Some states have another form of ownership called a “leasehold interest.” With a leasehold interest, the lessee doesn’t own the land but is given rights by the fee simple owner to use the land for a predetermined time. The owner leases the land to another party who then builds on the land, such as is the case in some industrial parks.
If the property is transferred to a new owner, land use is restricted to the remaining years in the original leasehold agreement. The land then returns to the original owner or lessor. Any additions or improvements of the land, including buildings, cleared lots, driveways, or septic installs potentially can become the property of the lessor. How the property is maintained or used during the term of the leasehold agreement should be stated clearly.
Fee Simple vs. Life Estate
A life estate is a type of fee simple ownership when the property is owned for the period of one’s life and ends upon their death. The owner of a life estate is called a “life tenant.” When the life tenant dies, the property is either returned to the original owner or a designee. This designee has what is called a “future interest” in the property.
A life estate is a good option when the life tenant wants to transfer property to heirs automatically upon their death. If the life tenant has an investment property with a life estate, the life tenant can rent the property to someone else. They’re not required to live there. If the life tenant wants to sell the property, they would need to obtain a release from the life estate.
When to Talk With an Attorney About Fee Simple
In most property transfers, except for properties like condos, townhomes, and subdivisions, fee simple is the most common type of property ownership. It’s still important to understand which type of ownership you hold since there are some cases where it affects transferring property, in which case an attorney can be helpful.
If you’re unsure of what type of property ownership you have, look at the most recent deed. If it isn’t clear or you have questions about your ownership rights, check out Rocket Lawyer. Its team of legal professionals can review your deed and help you understand your ownership interest in your property.
Fee Simple Frequently Asked Questions (FAQs)
Below, we’re going to answer some of the most frequently asked questions on what is fee simple. If you have additional questions or would like to comment on the subject, visit the Fit Small Business forum.
What does fee simple mean on a deed?
Fee simple, also known as freehold, is absolute, unrestricted property ownership. While you may not see “fee simple” on the deed, when the title is clear and transferred to a new owner, the new owner becomes the absolute owner, without any limitations or restrictions on how the property is used.
Is my property fee simple?
Fee simple is the most common form of property ownership in the United States. Your primary residence and properties you own that include the land and all buildings with unrestricted rights and clear title are fee simple. To ensure fee simple ownership, look at your deed and title or conduct a title search.
What rights does an owner in fee simple possess?
With fee simple absolute, ownership rights are unrestricted and can be transferred or inherited as the owner wishes. A fee simple owner also has the right to borrow against the property such as in the case of taking out a mortgage or a line of credit.
Fee Simple Glossary
Some common terms and aspects of fee simple ownership include:
- Fee simple: A form of absolute entitlement, or title, to land and real property, with the freedom to transfer, or dispose of at will.
- Title: A property owner’s exclusive rights to own real property. Clear title is when there are no encumbrances, liens, or claims against a property, giving the owner fee simple title.
- Deed, such as warranty or quitclaim: An official signed, recorded and delivered document showing one’s legal rights of ownership to property.
- Liens: The property may still be subject to property taxes, and the owner can place voluntary liens against the property, such as a mortgage.
We hope this article helps you answer the question, ”What is fee simple?” Fee simple is an absolute, unrestricted ownership of real property. Real estate investors need to know which type of ownership they have when transferring, buying, selling, or financing property. If you need to finance your next investment property, a lender will require a title search to make sure there are no liens or other claims against the property.