Should You Buy Property On Leased Land?


The most traditional form of home ownership is owning a house and the land on which it is built. Those who wish to avoid the costs of outdoor maintenance and upkeep can purchase a condo or townhouse. There is another homeownership option: buying just the home and leasing the land it occupies.

Buying a home in a leased land community allows you to own a home that you might not otherwise be able to afford. However, there are drawbacks and this type of purchase lacks some of the benefits of traditional home ownership.

The basics

With a trained eye, you can usually spot a leased land property, even when not explicitly stated. Keywords to search for include “manufactured home” and “rental interest.” Exterior features may include shared amenities such as an “association pool” or “association tennis courts.” The price of the leased property tends to fall below the market value of a similar property.

For example, if the current rate for a traditional three-bedroom, two-bath, 1,600-square-foot home is around $ 500,000, a comparable home on leased land can cost $ 150,000. A rented property can also have exclusive features for its price.

High Homeowners Association (HOA) fees also indicate that a listing may be for a leased land property. A normal HOA rate can be around $ 250 per month, while an HOA rate on a leased land property can be $ 900 per month. If you look at a satellite map of the neighborhood where the house is located, the houses can be very close together and have a very similar style. Finally, in a typical neighborhood, some homes have their own pools, while in a leased-land community none of them will.

Real estate listings do not always include leased land properties. Sometimes key information is left out of a real estate listing due to an agent’s carelessness or because the agent or seller is trying to hide something. Research the hidden facts and never buy a leased land property without fully understanding the unusual features of this type of home ownership.

Types of leased land properties

There are several types of residential rental properties and the most common type varies by region. In Hawaii and Delaware, there are condos for rent. In areas with Native American reservations, such as Palm Springs, you may be able to purchase property on leased reservation land. In Los Angeles, where even suburban housing is high, there are leased land properties in suburban areas, like Canyon Country. Florida and Arizona also have several leased retirement communities.

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Leased land properties exist in other areas, but because land leasing is an unconventional way to buy property, this option is not available in all states. Trailer parks, perhaps the most common form of leased land community, can be found almost anywhere.

When you buy a home or condo on leased land, you will take out a mortgage on the property as usual. Your monthly mortgage payment will be lower because the home’s purchase price is lower, but you will also have to pay a significant monthly rental fee. Because land rental properties are often located in entire communities of similar properties, a leased land property may also include HOA fees to cover maintenance of gardens, community pools, community buildings, etc.

General considerations

If you think that buying property on a leased land may be right for you, you should consider the following.

How much time is left in the lease?

If the length of the remaining lease is less than you expect to stay in the home, you should ask what happens to your interest in the property at the end of the lease term. The term of the lease will also affect your ability to finance the home. It can be difficult or impossible to obtain a mortgage if the remaining lease term on the land is 20 years and you want a 30-year mortgage.

Ideally, a lease that exceeds your potential remaining useful life will protect your financial interests and your peace of mind. While you may not live in this house for the rest of your life, it is nice to have that option. And if you sell the home, a long lease term left will positively affect its sale price.

What are the terms of the waiver clause?

Check the terms of the waiver clause if the lease expires while you still own the home. If the lease expires and is not renewed, you will have to give up the use of the land on which your home is built. Some waiver clauses state that you must also surrender any improvements to the land (that is, your condo, townhouse, or home). Avoid unpleasant surprises by getting the information before you buy.

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How much monthly, how often do you adjust and by how much?

If there are HOA fees, ask the same questions about them. You want to make sure that you really save money by buying a leased land property and that one day you won’t be forced to move due to escalating costs.

Am I better renting?

Consider whether owning a home on leased land is preferable to renting. The two are similar in many respects, including the payment of monthly installments determined by another party. Owning a traditional home can give you a greater degree of freedom; If that’s important to you, it may be worth waiting to save for your down payment or increase your income enough to qualify for a good mortgage on a traditional home.

Advantage

A big advantage of this is that you can buy your home for much less than a traditional home because you don’t have to buy the land. At the same time, leased land properties can offer a better environment than apartment living for children and pets, and you can invest the money that the lease saves.

Buyers can live in a high-priced place that they might not otherwise be able to afford. For example, in Huntington Beach, California, there are several mobile home communities near the Pacific Ocean. To buy even an entry-level home in Huntington Beach, you might need around $ 400,000. Buying an entry-level home from an RV park, by comparison, could cost as little as $ 40,000.

Leased land communities often include amenities not always found in traditional neighborhoods, such as clubhouses, swimming pools, tennis courts, playgrounds, and golf courses. Due to the community partnership aspect, any HOA fee may include regular lawn mowing.

Also, because you don’t own the land, you likely have low or no property taxes, which can alleviate some of the pain of paying the leased land and HOA fees. In some areas, local laws restrict the amount by which rental land rates can increase annually.

Disadvantages

The biggest downside to owning a home on leased land is related to the equity in the building. For many people, homeownership is a major source of wealth. With a leased land property, you risk losing all of your principal at the expiration of the lease, under the terms of the waiver clause. Reselling the home is likely to be more difficult than reselling a traditional home, especially since with each passing year, the remaining term of the lease gets shorter.

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For this reason, if you want to leave something to your heirs, a house on leased land will not be as valuable to them as a traditional house.

Leased land properties are often part of an HOA, which means additional monthly fees that are somewhat unpredictable. While Homeowners Association fees are typically a fixed amount each month, they can increase annually. The HOA may also charge a special appraisal for major community property repairs or improvements, resulting in a large and unexpected bill.

HOA fees can be particularly problematic for those who don’t make use of common amenities like swimming pools, or who prefer to do their own landscaping to save money.

While traditional home ownership can be a good hedge against inflation, leased land ownership is not. When you buy a home with a fixed-rate mortgage, your payment remains the same each year as inflation increases..

Eventually, the monthly payment to own your home could be less than the rent in your neighborhood. And while home values ​​fluctuate, long-term price increases often equal or exceed the rate of inflation. In a leased land community, your monthly lease payments and HOA rates will likely increase at least as much as the inflation rate. Meanwhile, your home will lose value as the end of the lease term nears.

If you have a manufactured home on leased land and the lease expires (and the delivery clause does not require you to relinquish ownership), you can theoretically take it to another leased land community or to a parcel of land you own. bought.

However, this is not very realistic unless you are shopping for an RV. Otherwise, you will have to disassemble the house and transport it to new ground. This can be very impractical and is probably prohibitively expensive.

The bottom line

Buying a home on leased land can be tempting when you see the competitive list price, but buying involves considerations that traditional home buying does not. Traditional home ownership facilitates financial security for most people, but buying a home on leased land can be a viable alternative for those whose top priority is buying a particular community at a lower price than a home or condo. traditional, rather than accumulating capital.

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Mark Holland

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