99 Years or Bust: Should You Buy a Leasehold Property in Vancouver?
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by Richard Morrison
- June 30, 2022
- News, Tips
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Life is full of tradeoffs. If you want a bigger home and ownership in a great neighbourhood, it will cost more. But if you buy leasehold prepaid nonstrata property or a leasehold strata lot, you can save big and get the house or condo of your dreams!
The leasehold landlord of the land leased builds on and improves the land for 50-99 years before selling or renting out portions of the buildings to developers. This means that leasehold prepaid properties are often more spacious units with views included, all at an affordable price in Vancouver!
The main differences between leasehold and freehold property exist in the way they are owned. If you own a freehold property, you will pay the landowner for it. A leasehold property has no freeholder; the owner owns the property but not the land itself. Leasehold properties are common among flats, and apartments, as well as larger apartment buildings. Generally, leasehold properties cost less than freeholds, which can be beneficial for you if you have limited cash to invest.
You should also be aware that leases often require a fixed ground rent. This ground rent is an annual charge that the leaseholder pays to the landlord.
Table of Contents showKey Takeaway
When deciding whether or not to purchase a leasehold property in Vancouver, it is important to take personal factors into account. As leasehold property is usually less expensive than freehold land, it is a more accessible option for some purchasers. However, it is important to bear in mind the risks associated with leasehold property, such as the potential eviction if the landowner sells or redevelops the land. Ultimately, leasehold property is typically seen as a less desirable investment than freehold property in the long term. Therefore, it is important to carefully examine the terms of the lease and seek professional advice before making a decision.
Leasehold Ownership
Leasehold land is often owned by the city. But it can also be owned by other people, like the federal government, or First Nations bands, or Universities. There are many types of leasehold units: condos to townhouses to detached houses and apartment complexes, duplexes to mobile homes. But all share one thing in common: they are usually attractively priced and in better neighborhoods than freehold units with simple title (unlike freehold units where you own the land without a leasehold interest backing it). They come with ground rent which is the term used to describe the lease arrangement. Also you own the common property and your share of the unit but you only lease the land underneath. Leasehold Ownership is like a glamorized rental.
Take a look at some great example places on strawhomes.ca including these 1 bedroom condos in the West End.
Now compare the above unit with a freehold condo below in the same area
You can save hundreds of thousands and more off the typical asking price if you buy a leasehold instead of a freehold strata plan.
With a leasehold, you’re buying nothing but the right to occupy or “right of exclusive possession” until your contract is up. This can be as long or short of a period as desired and it’s usually fairly expensive because developers will often cover this cost in their initial sale price for the unit. You’ll have to pay land rent on top of any strata fees, property taxes, mortgage payments that might already exist too! The refinance process and conveyancing is also more expensive, especially if the lease agreement is coming up for renewal with you as the “tenant.” Be sure to speak with your mortgage broker or mortgage lenders before proceeding.
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Are prepaid Leaseholds a good investment?
When you buy a leasehold from a lessor, your lifestyle is often better as a lessee but it’s not always a good investment in the globe. There are many opportunities like the UBC endowment land where one can live in what they could otherwise only dream about with its views of native forests and beautiful ocean views.
Also, you don’t get to share in the rising land value. In fact, it could cost more than just money on your end! It’s important that buyers understand there are risks involved with this type of property purchase and do their due diligence before signing anything.
Most leasehold only appreciate at about 50% of a regular free titled property.
This can sometimes end up costing you. In fact, the rise in land value could lead to an increase of your annual lease payments, called a “ground lease,” and even result in dramatic increases by certain dates.
For example, in 2006 some False Creek condo building owners saw their annual condo lease payments skyrocket by up to 700% when the City adjusted for the land value at that time. Subject to arbitration, these landlords were later able to lower them by several hundred dollars per month back to fair market value. This occurred because of recent land sales that had dramatically skewed property values in exponentially due to the Olympic Village built for the Vancouver 2010 Olympics in British Columbia – new developments of leasehold strata property that were built nearby were sold off at record prices! The above was not achieved with the help of a good lawyer – which is also costly.
Risks Associated
If your strata lot lease is coming to an end soon, you won’t know if it will get renewed. Its important to review the rent review clause with the land title office to check the lease term of the model strata lot. Unfortunately there is no recourse from the real estate board if you did not review terms prior to your purchase. And you can’t be sure of the cost because land prices could go up and could make things more expensive.
As a leasehold tenant, you will not be able to know if it will be renewed and what the cost will be. If it is not renewed, the landowner would have the right to buy out the buildings and do whatever they want with them, even if that means tearing down existing buildings, selling, rezoning, or selling for redevelopment to a potential developer buyer. This makes some leasehold properties less than ideal investments because they don’t increase in value.
Leasehold properties are hard to sell. When the lease is over, the property value can be even lower and come with higher fee for maintenance.
Financing
Banks are not sure about many leaseholds, so they will ask for a lot of money as a down payment – 25 to 30 per cent down payment most times. They will also scrutinize a condo unit with a fine tooth comb using the strata property act. A lender will only loan you the amount that is left on the lease. For example, if you have a 20-year lease, then they might loan you for only 15 years. Reverse mortgages are hard to get for people with leases because banks don’t know how long the person will live. This is also the case whether you are buying condominium in Vancouver, strata lots or townhome leasehold strata plan.
If your lease was to end and you were not able to renew it with re-financing, what would happen?
This is a risk. If the leasehold property owner sells or redevelops the land they rented out for 99 years, then all leaseholders are ousted from their homes until the new leaseholder takes over. Most homeowners have had enough time on their lease that this has never been an issue, but if you’re considering buying one of these properties there’s no guarantee that will always be true.
Conclusion
Alas, If you want to have lifestyle or to live near your work and in a beautiful area, then it may be the right choice for you. Look for apartments with long leases – 25 years or longer – and preferably ones that last more time than you plan to live there. Prepaid lease of 99-year are the most secure, but they also cost almost as much as freehold properties.
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Find a real estate agent or broker who has experience in selling leasehold properties. Where can you find a home with leasehold? Start by doing an advanced search on Strawhomes.com for homes in your neighbourhood that have the word “leasehold.”
Sources:
https://www.pazderlaw.com/buying-a-leasehold-property-in-bc/
Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.
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