Fee simple: What is it in real estate and how does it work?

If you’ve taken out a mortgage and bought a house in the United States, it’s likely you’ve taken fee simple ownership of the real property. The fee simple model is the most common type of homeownership in the country.

But if you’re like most people, you probably don’t know what this type of ownership is and what rights it grants you. Fortunately, despite its unusual name, this form of ownership is relatively easy to understand.

Let’s take a closer look at what fee simple means in real estate and the different types of fee simple ownership.

Fee simple definition

The real estate term fee simple describes a landowner’s complete and total ownership of a piece of land and all properties on it. The fee simple owner may do anything they wish on the land as long as it falls within established easements and zoning laws.

How fee simple ownership works

Fee simple ownership means that as long as you follow zoning and easement restrictions, you can add a bedroom to your home, build a second-story addition, create a new garage or tear down your entire home and build a new one from scratch.

You also have the right to sell the land and its buildings whenever you want. Or you can pass down the property to whomever you’d like.

However, this doesn’t mean owners can’t lose their properties and land. Government bodies can use eminent domain to file liens against fee simple estates if the owners fail to pay property taxes or commit other violations. These stakeholders can then take back the property through the foreclosure process.

Types of fee simple ownership

Now that you understand what fee simple ownership is, let’s discuss the different types of this kind of ownership.

Fee simple absolute

Fee simple and fee simple absolute are often used interchangeably, but there is a slight difference. That’s because there are two main types of freehold estate: fee simple absolute and fee simple defeasible.

Fee simple absolute is more powerful than fee simple defeasible because it’s outright ownership with no restrictions, except those imposed by zoning and easement laws. It’s actually the most common form of ownership in the U.S. Fee simple absolute is what people usually mean when describing fee simple ownership.

Under absolute ownership, owners can own their properties and land forever – as long as they make their mortgage payments and pay their property taxes – and make any changes they’d like.

Owners in a fee simple absolute arrangement can also include certain conditions on their property or life estate when passing it to an heir.

Fee simple absolute example

Let’s say you have fee simple absolute ownership of your home, with no zoning law or easement restrictions. So, you tear down your home and rebuild a restaurant where it stood. This drastic change to the property does not risk your ownership because you have an absolute right to it.

Some zoning laws, however, may prevent you from changing a residential property into a commercial one, even if you have fee simple absolute ownership.

Fee simple defeasible

Fee simple defeasible, sometimes called fee simple determinable, is a slightly less powerful form of ownership. In this arrangement, owners can keep their properties and land forever. But to retain possession, they must meet certain conditions put in place by a former property owner.

Owners who violate these conditions automatically lose their property and land.

Fee simple defeasible example

Say you buy land and a home from an owner who stipulates that you can own the property as long the house remains a residential property. If you turn it into a hotel, violating your agreement, ownership of the land and properties reverts to the previous owner.

Fee simple subject to condition subsequent

Fee simple subject to condition subsequent is similar to fee simple defeasible. Owners must meet certain conditions to retain ownership of their properties or land. But if they violate these conditions, they might not lose their land. That’s because the original owners don’t automatically retake possession.

The former owners can choose to ignore the violations and let the new owners retain ownership.

Fee simple subject to condition subsequent example

Again, say you buy land and a home with the condition that you leave the house as a residence. If you turn that home into a hotel, the former owner could retake possession of the property. But the former owner doesn’t have to do this.

Fee simple vs. leasehold ownership: What’s the difference?

In the U.S., most residential real estate is owned on a fee simple basis. A smaller percentage of home sales result in leasehold ownership.

Under the leasehold model, one party owns a property while the tenant can use the land for a set number of years. Leases involved in these arrangements are usually long-term, typically lasting 55 years or more. Some owners may grant a life lease in which the tenancy remains until the lessee passes away. In that case, the property reverts to the grantor.

If you enter into a leasehold arrangement, you'll have to pay a fee to use the land, unlike fee simple ownership which requires no rent payments. You'll own any home on the land, but when the lease ends, both the land and home will revert to the previous owner – unless you negotiate a new lease before the old one expires.

While rare in the U.S., leasehold estate arrangements are most often seen with condos, townhouses and co-ops.

The bottom line

If you’re buying a home, you’ll most likely end up with the fee simple model of ownership. This is by far the most common real estate ownership arrangement in the country. If you want to learn more about this type of land ownership, and make sure your home is being sold under such an arrangement, you can work with a real estate attorney when buying a home.

Looking to get started on your home buying journey and take fee simple ownership? Start your mortgage application today to see what you can qualify for.