We have gotten many inquiries over the years about land leases so this week, we want to touch on them! The goal when buying a home is to own both the house AND the land that the house was built on. Many who maybe cannot afford a Single Family Home, or maybe don’t want to upkeep the exterior of the home, opt to purchase a condo or townhouse. However, there is another option.. Buying a house, condo, or townhome that is situated on leased land.
So What Is A Land Lease Exactly?
Essentially, a land lease allows a “tenant” to use a piece of land that is owned by a landlord in exchange for rent. This route may allow you to buy a home that you otherwise wouldn’t be able to afford. Identifying leased land can be a little tricky. If the price of the home is significantly lower than others around it, check with your realtor. You may also find the term “leasehold interest” somewhere in the details of the property. There are some significant drawbacks that you should be aware of prior to buying a home on leased land.
- Loss of Equity. For most people, owning a home is a major source of wealth by building equity. With leased land property, you risk losing all of your equity at the lease expiration, depending on the terms of the lease surrender clause.
- Significantly Higher HOA Fees. When looking into homes on leased land, you may notice a rather steep homeowner association fee. These fees are used to upkeep the land around you and any amenities the community provides.
- Time Remaining on the Lease. It is imperative to know how much time remains on the lease of the home you are potentially buying. Especially if you hope to stay in the home longer than the lease term, finding out what will happen when the lease term end may influence your decision on purchasing. Additionally, it may be difficult if not impossible to get a loan on the property. For example, if a land lease has 20 years left, you may be able to get a 15 year mortgage, but a 30 year mortgage would not be possible. Ideally, a land lease exceeding your potential life span, even if you don’t plan on living there forever, would protect your investment and make resale much easier.
- Land Lease Fee. In addition to your HOA, you also have the “rent” you pay for leasing the land. It’s important to find out how often this adjusts and by how much. You want to make sure you are truly saving money and won’t be forced to move due to escalating costs.
- Lower Purchase Price. The home will be significantly less than a traditional home because the land is not being purchased. Buyers can live in a high-priced location that they otherwise could not afford.
- Low or No Property Taxes. Since you don’t own the land, you will likely have no, or low property taxes which can help even out paying the lease fee and the higher HOA fees.
The Bottom Line.
Buying a home on leased land can be tempting, especially when you see that low sales price, although there are many complex details that buying on leased land entails that traditional home buying does not. Traditional home ownership creates financial security for most people.. Buying on leased land may be a solution for those who want to live in a community or area that may otherwise be out of reach, rather than building equity.