Property Types: fee-simple, condominium concepts, villas & more
So you’ve decided to make a home purchase. Now it’s time to do your research. There are quite a few property types to choose from. The property type you choose will impact what type of financing you can qualify for, how much you will need to spend, and ultimately the type of lifestyle you will have in your new home.
WHAT IS A SINGLE FAMILY HOME
A single-family is generally a free-standing dwelling that has these traits:
- No common walls: it is a stand-alone, detached property, the home doesn’t share common walls or a roof with any other dwelling.
- Land: it is built on its own parcel of land and the area around the building is for the private use of the owner.
- Entrance and exit: has its own private and direct access to a street or
- Utilities: Only one set of utilities can service a single-family
- One owner: A single-family home is built as the residence for one family, person, or household, whose owner has an undivided interest in the property.
- Single kitchen: A single-family home has one kitchen (adding a kitchen to an in-law suite or pool house will alter a home’s zoning classification).
Financing a Single-Family Home
Single-family homes are financeable through the widest variety of government-backed and conventional loan products. Renovation financing options like Fannie Mae’s “HomeStyles”, FHA’s “203K” and Freddy Mac’s “CHOICERenovation are available.” Jumbo, private, grants and bonds are other options. Talk to your agent about the age of the home and the condition of the property to select which is best for you.
WHAT IS A TOWNHOUSE
A townhouse is a single-family home that shares one or more walls with other independently-owned units. They are often rows of uniform homes, two stories or taller. Residents own their interior and exterior walls, lawn, and roof. Insurance for both the home and the property is needed. There is often a homeowners association that collects dues to communally pay for shared areas like a community pool and shared maintenance like trash collection, lawn care, and roof repair. Occasionally you will find townhomes that are governed by a condominium association, effectively making them condos and not townhomes. Ask upfront how a townhome is governed to avoid wasting your time because there are major differences when it comes to financing. Your agent can always steer you in the right direction!
Financing a Townhouse
Townhomes can be financed any way a single-family home may be financed as long as they are not governed as a condominium. Government-backed loans like FHA, FHA 203K, and VA loans are available as well as a wide variety of conventional conforming and non-conforming products, both private and retail. The lender will have to take homeowners association dues along with any upcoming or levied assessments into consideration to determine the buyer’s debt-to-income ratio.
WHAT IS A CONDOMINIUM
A condominium or “Condo” is an ownership concept, often in an apartment building. The owner has a deed for the apartment and pays real estate taxes for the unit. Condo owners pay fees to maintain the grounds and the building (or buildings, for a larger complex). The owner pays fees to contribute to the building maintenance, the land, and the collective utilities. The owners elect a board to make decisions for the owners and they set the rules and regulations along with the budgets and repair schedules. Collectively you share in the costs of ownership. The board may require larger down payments for condo purchases in some buildings to hedge against default.
Financing a Condominium
may require a higher down payment than a single-family home because as many condo boards require larger equity positions to protect the communal assets. The reasoning is that if a buyer has a substantial amount of equity in the unit, they are less likely to default on the mortgage and/or stop paying their association dues which would cause financial burdens on the rest of the unit holders or jeopardize the building.
WHAT IS A CO-OP
A co-op is a non-profit company that owns and operates a residential complex. Buyers lease one of the building’s units by buying shares of stock in the building’s corporation along with a proprietary deed that claims their rights to exclusively inhabit. The land is often leased on a 99-year land lease and renewed every century. Buyers have to go through an approval process, don’t own their apartment, and don’t have ultimate control over renting, subletting, or selling. If renting, you may have to present your potential tenants to the board for approval. Lease and tax bills aren’t sent to the co-op shareholders but instead to the corporation. A monthly co-op fee includes mortgage payments, taxes, maintenance, and utilities. This cost is usually higher than condo fees. And they often require a larger down payment than other options—but usually cost less overall. There are financial advantages of co-op living—including substantial breaks on real estate taxes, transfer taxes, and a state recordation tax that occurs in real estate transactions. In some cases, co-op owners can deduct maintenance fees from their taxes.
Financing A Co-Op
Financing a co-op is tough as few lenders will finance co-ops, and very few co-ops will accept financing as an option. This is due to the high risk a lender takes on. Should a co-op owner default on their loan, the lender would be foreclosing on a stock certificate not on real property. For similar reasons the boards of most co-ops are not willing to take on the risk of default and communal disturbances that could accompany a foreclosure. Most purchases are Cash.
WHAT IS A DUPLEX (TRIPLEX/QUADPLEX)
A duplex refers to residential units attached to another, with a yard to maintain. You could purchase a two-family house and rent out the second unit, subsidizing your own housing costs with a real estate investment. If you decide to move out, you can simply rent it out (ask your lender about limitations on loan products if this is the goal). Your rented duplex would then be a 100% rental property, and your expenditures would be tax-deductible. Keep in mind, though that your on-site living arrangements won’t offer you as much privacy as a single-family home. And you’ll have to learn how to play landlord—you’re responsible for not only your backed-up toilet but your tenant’s as well.
Financing a Duplex
Financing a duplex is open to FHA loans, Conventional loans, Jumbo loans, and Renovation financing options like Fanny Mae’s “HomeStyles”, FHA’s “203K” and Freddy Mac’s “CHOICERenovation.” Depending on the location, you may be able to qualify for publicly-funded home improvement costs. Rules change for buildings with more than four units.
TYPES OF OWNERSHIP
- Fee simple ownership is the most complete form of ownership. A fee simple buyer is given title (ownership) of the property, which includes the land and any improvements to the land in perpetuity. Aside from a few exceptions, no one can legally take real estate from an owner with fee simple title. The fee simple owner has the right to possess, use the land and dispose of the land as he wishes — sell it, give it away, trade it for other things, lease it to others or pass it to others upon
- Leasehold ownership or “interest” is created when a fee simple land-owner (Lessor) enters into an agreement or contract called a ground lease with a person or entity (Lessee). A Lessee gives compensation to the Lessor for the rights of use and enjoyment of the land.
- The buyer of leasehold real estate does not own the land; they only have a right to use the land for a pre-determined amount of time.
- If the leasehold real estate is transferred to a new owner, use of the land is limited to the remaining years covered by the original lease. At the end of the pre-determined period, the land reverts back to the Lessor (called reversion.) Depending on the provisions of any surrender clause in the lease, the buildings and other improvements on the land may also revert to the lessor.