Although you may be familiar with renting a car, did you realize that you can also rent land for your house? A land lease combines the renting of the land with the purchasing of the house. Although this type of arrangement may be a less expensive way to become a homeowner, it also has disadvantages that should be carefully considered. Here are the fundamentals.
What is a lease on land?
A landowner, or lessor in legal parlance, rents out the property to a tenant, or lessee, under the terms of a land lease, also known as a ground lease. A land lease can be used to buy a house and more land, or only to buy land that you want to develop in the future.
A land lease is typical for commercial buildings, but many owners of residential real estate also pay to lease the land that houses are on. For instance, many co-ops in New York City were constructed using land leases.
Workings of Land Leases
Even when it isn’t stated directly, a leased-land property may typically be identified with a trained eye. Look for the terms “manufactured house” and “leasehold interest,” among others. Shared amenities like a “association pool” or “association tennis courts” may be found as exterior elements. The cost of leased property typically falls below the market price for a comparable property.
A comparable home on leased property may cost $150,000 if the prevailing rate for a standard 1,600 square foot, three bedroom, two bathroom home is roughly $500,000, for instance. For its price, a leased property home could also offer upmarket features.
High homeowners association (HOA) dues are another sign that a listing might be for leased land. An HOA charge on a property with leased land may be $900 per month, whereas a typical HOA fee might be under $250. The houses may be close together and have a lot in common if you look at a satellite map of the area where the house is situated. Finally, while some homes in a conventional neighborhood have their own pools, none do in a community built on leased land.
Leasing-land property isn’t often mentioned in real estate listings. Key details might occasionally be omitted from a real estate listing due to an agent’s carelessness or the seller’s deliberate concealment. Look into the obscure details, and never buy a leased-land property before you fully comprehend the peculiar characteristics of this style of homeownership.
Land Lease Agreement Types
Subordinated and unsubordinated land leases are the two basic varieties, albeit unsubordinated leases are much more prevalent because they provide the landowner additional rights.
In an unsubordinated lease, even if the tenant defaults on a loan for improvements, the landowner still has first dibs on the property. Due of this, it could be more challenging for someone to get mortgage financing to construct or develop a home on that site.
However, with a subordinated lease, the landlord assumes a lesser position for claims on the property in the event that the tenant fails on the mortgage, which may jeopardize the value of the house. In this case, the landowner can also raise the rental fee to offset the risk.
Choosing a Land Lease: Pros and Cons
Here are some of the benefits and drawbacks of a land lease agreement.
Due to the fact that you are not paying for the land, purchasing a home on a leased property may be less expensive than purchasing a single-family home outright. Additionally, you might try to negotiate a lower lease payment if you intend to live in a building on the site and perhaps even make improvements to it.
Additionally, depending on how much the property owner wishes to charge you for that expense, you might be able to avoid paying the whole amount of your annual property tax bill. It’s possible that your contract will require you to pay for it.
The entire cost of living in a land-lease community may include access to amenities like a recreation center or pool.
However, there are significant drawbacks to land-lease agreements. If the lender has fewer rights to recoup their investment than the landowner, they might be reluctant to offer you a mortgage on an unsubordinated lease.
You might not be aware, for instance, of any potential property encroachments or environmental concerns with the site.
Another danger is that the property owners might evict you if your lease expires. You can attempt to plan for what will happen next if you are aware of when a lease period ends—either for your agreement with the landowner or the landowner’s personal lease. But organizing and carrying out a move costs a lot of money and time. If you’re not ready for it, this could become a significant issue.