Why First-Time Homebuyers Should Avoid Leasehold Properties
When you are looking at properties in Downtown West End, False Creek, University Land, SE Marine Vancouver and North Vancouver Roche Point. one thing that will definitely stand out is leasehold properties. They are usually cheaper in price per square foot when compared to similar property types in the neighbourhood. For first-time homebuyers, this seems like a no-brainer—you save money and get to own a home. That may be true but it’s essential to understand the pros and cons before making any decision. This article will highlight why leasehold properties might not be the best choice for you.
First of all, What is a Leasehold Property?
A leasehold property means you own the property but not the land it stands on. Instead, you lease the land from the landowner for a specified period, typically ranging from 20 to 99 years. As the lease expires, ownership of the property reverts to the Leasehold Land Owner unless the lease is extended or purchased outright.
Potential Pitfalls of Leasehold Properties
1. Limited Ownership Duration
Leasehold properties come with a ticking clock. As the lease term shortens, the property’s value decreases. Mortgages become harder to obtain for properties with less than 50 years remaining on the lease, significantly limiting your future resale options and financial security.
2. Expensive Lease Extensions
Extending a lease can be costly and complicated. The shorter the remaining lease, the more expensive it becomes to extend. For first-time buyers, this hidden cost can be a significant financial burden. Some banks allow you to include the cost of extension in the mortgage. For example, the purchase price is $500,000 and the cost of extension is $100,000 for 20 years. You might be able to obtain a mortgage of $600,000. Reach out to me for more financing options.
3. Pre -paid Vs Non Pre-paid Leasehold
Units on pre-paid leasehold land tend to be more expensive because the seller has already paid the remaining lease amount, which the new buyer will assume. In contrast, non pre-paid leases, which are often found on First Nations land or in certain areas of Vancouver like Granville Island, come with more uncertainty. Homeowners with non pre-paid leases must make monthly lease payments in addition to strata fees and property taxes. Depending on the lease agreement, the landowner can increase these lease payments at different intervals and by varying amounts. Make sure you consult with your lawyer.
4. Complex Legal Issues
The legal framework surrounding leasehold properties is more complex than freehold properties. Understanding the lease terms and negotiating extensions require legal expertise, adding to the overall cost and stress of the home-buying process.
Real-Life Scenarios in Vancouver, BC
Consider a young couple who purchased a leasehold condo in False Creek with 15 years left on the lease. After living there for a decade, they found it challenging to sell the property because potential buyers struggled to secure mortgages. They faced a $130,000 bill to extend the lease for another 20 years, a considerable financial hit that could have been avoided with a freehold property.
Alternatives to Leasehold Properties
For first-time buyers, freehold properties are generally better options. Freehold ownership means you own the property and the land outright, offering greater security and fewer ongoing costs. If you’re considering condos, look for buildings with a well managed strata company and a responsible building manager. A proactive strata council where residents collectively take steps to repair and invest in capital upgrades.
Ensure you’re working with an agent who is knowledgeable about leasehold properties (like me!), as well as the lease and buying process, so you fully understand all the details of your purchase.
Final Thoughts
While leasehold properties can seem more affordable upfront, they often come with long-term financial and legal complexities that can outweigh the initial savings. As a first-time homebuyer, avoid leases with less than 50 years remaining, as obtaining financing from banks becomes significantly more difficult. Additionally, the value of a leasehold property rarely increases over time. As the lease term shortens, uncertainty grows. Consider investing in a smaller or older freehold property instead, as it can offer peace of mind and financial stability in the future.
Understanding the potential pitfalls of leasehold properties ensures you make an informed decision that aligns with your long-term financial goals. Remember, your home is not just a place to live but also a significant investment. Make sure it’s one that grows with you.
Feel free to reach out for any questions or further guidance on navigating the real estate market as a first-time homebuyer. Your journey to finding the perfect home starts with the right knowledge and support. Happy house hunting!
Subscribe to Vancouver Market Update for More Real Estate Tips!
Stay tuned for more tips and insights into the real estate market by subscribing to our newsletter. Whether you’re buying your first home or looking to invest, we’re here to guide you every step of the way.