Should You Buy a Home on Leased Land?
From high-end condos in Hawaii to inexpensive trailer parks almost anywhere in the United States, homes on leased land are a way to own a home for a lot less money than a house on land owned by the homeowner.
A condo on leased land in Hawaii, for example, can cost $200,000, while a comparable home can cost $1 million and includes ownership of the land beneath it. A mobile home in a trailer park can cost $40,000 on leased land, while a nearby home with the land can cost $400,000.
But that's the catch of buying a home on leased land - you don't own the land, which can lead to a host of complications and other expenses.
Here are some things to consider before buying a home on leased land, which you may also see listed as a leasehold or a ground lease:
Homeowners' association fees
HOA fees are common with condos, but with leased land, they can be three or four times what they'd normally be in a normal HOA where you own the land. If the fees are around $1,000 or more per month, you're likely in a leased-land property.
HOA fees are usually used to pay for the use and upkeep of common amenities such as pools and lawns. They're set at a monthly fee, but can rise each year to pay for community property repairs and can lead to a large, unexpected bill.
Even though you're not buying the land in a leasehold, you may still be asked to pay an annual lease fee for a certain length of time - 20 to 30 years, for example - that will likely rise with the rate of inflation. Unlike a set monthly mortgage payment on a traditional, 30-year fixed mortgage, land-lease property fees can change every year. Increases can be tied to inflation or a market valuation report, among other things.
A land lease townhouse project in Boulder, Colo., has had lease fees rise from $2,800 a year in 1998 when the condos were valued at $120,000, to a $9,500 annual lease in 2010 when a foreclosed home sold for as little as $33,000, says Bob Gordon, a real estate agent at Re/Max Alliance in Boulder.
"What's the catch? As home values increase, it is really the underlying value in the land that is going up," Gordon says. "As home values go up, the owner of the land can find an appraiser to increase the value of the lease, and the owners of the townhomes get a higher bill."
In this case, increasing home values hurt the homeowners through higher land-lease fees. Gordon says he urges clients to use extreme caution when considering a land lease.
Taxes on the land
Even though you don't own the land in a land-lease property, you may still have to pay taxes on it. That's what happened to Stanley Goodrich, who bought a condo several years ago in Palm Springs, Calif. on Indian leased land.
When Goodrich received his first tax bill, there were taxes he owed for the building and the land, which he thought was an error. He called the Riverside County tax office and was told "Indians do not pay taxes, and someone has to," he recalls.
The lease may expire before you do
The annual lease fee is set for a specific amount of time, and it doesn't start when you buy the home. For example, if you buy a condo on a property that has a 20-year lease, but the lease term is already in its 10th year, then you have 10 years left on the current lease.
That can affect you in a few ways. It can be difficult or impossible to get a mortgage loan for longer than the lease term, such as a 30-year mortgage on a 20-year lease.
A leased-land property may be difficult to sell as a lease nears its end because the new owners won't know the terms of the new lease if it's renewed.
If the lease runs out while you still own the house, a surrender clause will stipulate the terms. The lease may be renewed at a higher rate. If it's not renewed, you'll have to give up the land and may have to surrender any improvements to the land, such as your condo. If you do get to keep the home, you may have to move it. Moving your home may be impractical, even with a trailer home.
Not building equity
Homeownership is often a way to build wealth. With leased-land property, as mentioned above, you could lose all of your equity when the lease expires, depending on the surrender clause terms.
Resale will be more difficult than with a traditional home because the lease shortens each year. Your home value will likely drop as the lease term approaches. And if you want to leave the home to your heirs, a leasehold won't be as valuable as a traditional home.
A lease-land home may not feel like it's yours
Just as regular condo owners may feel that HOA rules get in the way of enjoying their home by being restrictive on decorations and how high their bushes can be, lease-land homeowners may also feel restricted by the body that owns the lease rights.
For example, leasing land for a home on a lake may include the whole parcel or just the shoreline, says Jerry Grodesky, a managing broker at Farm and Lake Houses Real Estate in Buckley, Ill. Rules may restrict your ability to build waterfront structures that inhibit your neighbor's view, for example.
"I caution and educate buyers when there is a leased situation," Grodesky says. "Whatever the resident does may be monitored, approved, disapproved, fined or regulated in some way by the body that owns the lease rights."