Buying real estate is always a risk, so it’s important to take many precautions when doing so. One thing to keep in mind is the importance of a clear title. Fortunately, this doesn’t come up in most U.S. home sales because most American homeowners own their properties in fee simple absolute.
What Is Fee Simple Ownership?
In English law, fee simple ownership is a form of freehold ownership, in which land can be owned in common-law countries. Fee simple ownership is the highest possible ownership that one can have in real estate.
To further define the origins of the term, the word “fee” is derived from the word “fief,” meaning a feudal landholding. Feudal land tenures existed in England and involved a tenant and an overlord who were both engaged in a symbiotic relationship. This relationship meant that both sides had duties and services to provide to the property or the other person.
What Is Fee Simple Absolute Ownership?
The best form of real property ownership is fee simple absolute, sometimes called a freehold, which means that the owner or owners can do whatever they like with the property, subject only to encumbrances like liens, or local guidelines, such as zoning, taxation or criminal laws. Some examples of zoning limits are operating a retail store from a house strictly zoned as residential, and failure to pay local property taxes.
Fee simple absolute properties can be sold, developed or bequeathed as the owner sees fit. The good news is that the majority of homes being bought and sold fall into this category.
Fee Simple Vs. Fee Simple Absolute Properties
Sometimes the terms “fee simple” and “fee simple absolute” are used interchangeably but be aware that legally – albeit rarely – there is a difference.
Fee simple absolute owners of real estate can convey properties to heirs, but place conditions that ensure the original owner’s wishes are respected. Let’s look at an example. An owner bequeaths an estate to his or her child on the condition that the child marries by the age of 30. The parent was a fee simple absolute owner, but the child is only a fee simple owner until the marriage takes place. If the child seeks to sell the property before their 30th birthday, they cannot convey the property in fee simple absolute to the potential buyer. Be warned that title searches from a title insurance company won’t necessarily protect the buyer from future claims by the estate or other heirs.
What Is An Encumbrance?
An encumbrance is a claim against a property that’s made by someone who isn’t the property's owner. Properties are encumbered by mortgage liens until the mortgage is paid in full. Liens can also be imposed for failure to pay for improvements to the property (a mechanic’s lien) or taxes (a tax lien). Encumbrances don’t affect an owner’s rights to anything other than the proceeds of a sale. They simply tie the debt on the property to the sale of the property. Encumbrances appear in title searches, so it’s imperative to make sure the title is clean.
Fee Simple Vs Leasehold
When it comes to comparing fee simple and leasehold ownership, there are several key distinctions for homeowners to keep in mind.
Leasehold ownership occurs when a landowner enters into an agreement called a ground lease with a lessee. Leaseholds give lessees the right to occupy land, subject to the terms of the lease. The lease becomes an asset of the lessee or tenant, especially in long-term lease situations, but will never create an ownership in the property. Owners or landlords may limit uses of the property in a lease. For example, landlords can restrict pet ownership by tenants. Condos, townhouses or co-ops – all common in large cities like New York City – are different from single-family houses, which are almost always owned in fee simple. The land beneath these structures is generally not owned by the condo or townhouse owner.
Fee Simple Ownership Vs. Other Ownership Types
Let’s define some other types of property ownership and see how they compare to fee simple estates.
Fee simple defeasible ownership is when the ownership is dependent on specific conditions, and the contract is written with conveyance to show intent to transfer the property. If these specific conditions are not met, the property may be returned to the grantor.
Fee simple ownership subject to condition subsequent is similar to fee simple ownership, but it has a condition attached and is followed by a right of entry.
Property owned in fee simple defeasible or fee simple subject to condition subsequent may have been bequeathed to heirs generations ago. This is called a fee tail.
These types of ownership could give rise to claims of property ownership today. However, it’s important to note that these are relatively unusual cases of property ownership, and they can get very complicated and messy. Speak to a real estate attorney immediately if any of these ownership types affect a property you’re interested in buying.
Summary: Proceed With Caution
If you’re a potential real estate investor looking to buy property, it’s important to remember the topics we covered today and beware of variations in state law. You should always make sure that the title is clear and reflects that the party selling the property owns it in fee simple absolute. It’s also important to understand that experienced property attorneys are crucial to advising in complicated real estate questions. If you still have questions about property ownership or buying property, speak with one of our Home Loan Experts today!