The most traditional form of homeownership is to own a house and the land on which it is built. Those who wish to avoid the costs of outdoor maintenance and upkeep might instead purchase a condominium or townhouse. There is another homeownership option: buying only the home and leasing the land it occupies.
Purchasing a home in a leased-land community enables you to own a home you otherwise may not be able to afford. There are drawbacks, however, and this type of purchase lacks some of the benefits of traditional homeownership.
- With a leased-land home, you may own the house, but you lease the land where the home is built.
- Buying a home on leased land can save you money in some circumstances.
- Common risks with leased-land homes include escalating lease and/or HOA payments and difficulty selling the home.
- Pay close attention to the surrender clause, which details what happens if the lease expires while you still own the house.
How Land Leases Work
With a trained eye, you usually can spot a leased-land property, even when it is not explicitly stated. Keywords to look for include “manufactured home” and “leasehold interest.” Exterior features may include shared amenities, such as an “association pool” or “association tennis courts.” The price of leased property tends to fall below market value for an otherwise similar property.
For example, if the going rate for a traditional three-bedroom, two-bathroom, 1,600-square-foot home is around $500,000, then a comparable home on leased land may cost $150,000. A leased property home may also have upscale features for its price.
Steep homeowners association (HOA) fees also indicate that a listing may be for a leased-land property. A normal HOA fee might be around $250 per month, while an HOA fee on a leased-land property might be $900 per month. If you look at a satellite map of the neighborhood where the home is located, the homes may be close together and very similar in 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 don’t always list leased-land property. Sometimes, key information is left out of a real estate listing because of an agent’s sloppiness or because the agent or seller is trying to hide something. Investigate the hidden facts, and never purchase a leased-land property without thoroughly understanding the unusual features of this type of homeownership.
Types of Leased Land Properties
There are several types of residential leased-land properties, and the most common type varies by region. In Hawaii and Delaware, there are leasehold condos. In areas with Native American reservations, such as Palm Springs, Calif., you may be able to purchase property on leased reservation land. In Los Angeles, where even homes in the suburbs are high-priced, there are leased-land properties in areas such as Canyon Country. Florida and Arizona have a number of leased-land retirement communities as well.
Leased-land properties exist in other areas, but because leasing land is an unconventional way to purchase property, this option is not available in every state. Trailer parks, perhaps the most common form of leased-land community, can be found almost anywhere.
When you buy a house or condo on leased land, you’ll take out a mortgage on the property as usual. The monthly mortgage payment will be less because the home’s purchase price is lower, but you’ll also have to pay a significant monthly land lease fee. Because land lease properties often are located in entire communities of similar properties, a leased-land property also may come with HOA fees to cover the upkeep of landscaping, community pools, community buildings, etc.
Special Considerations for Leased Land
If you think that buying a property on leased land may be right for you, you should consider the following:
How much time is remaining on the lease?
If the length of the remaining lease is less time than you hope to remain in the home, you should inquire about what happens to your interest in the property at the end of the lease term. The lease term also will affect your ability to finance the home. It may be difficult or impossible to get 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 lifespan will protect your financial interests and your peace of mind. While you may not live in this home for the rest of your life, it’s nice to have that option. And if you sell the home, a long remaining lease term will positively affect your sale price.
What are the terms of the surrender clause?
Check the terms of the surrender clause if the lease will run out while you still own the house. If the lease expires and is not renewed, you will have to give up use of the land upon which your home is built. Some surrender clauses stipulate that you also must surrender any improvements to the land (i.e., your condo, townhouse, or house). Avoid ugly surprises by getting the information before you buy.
What are the monthly costs, and will they rise?
If there are HOA fees, ask the same questions about those. You want to make sure that you really will be saving money by buying a leased-land property, and that you won’t be forced to move one day by escalating costs.
Am I better off renting?
Consider whether owning a home on leased land is preferable to renting. The two are similar in many ways, including the payment of monthly fees that are determined by another party. Owning a traditional home may give you a greater degree of freedom; if that is important to you, it may be worth the wait to save up for a down payment or increase your income enough to qualify for a good mortgage on a traditional home.
One big advantage to leased land is that you can purchase 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 may offer better surroundings than apartment living for children and pets, and you can invest the money that leasing saves you.
Leased-land communities often include amenities not always found in traditional neighborhoods, such as clubhouses, pools, tennis courts, playgrounds, and golf courses. Because of the community association aspect, any HOA fees may include having your lawn mowed on a regular basis.
Also, because you don’t own the land, you’ll likely have low or no property taxes, which can take some of the sting out of paying leased land and HOA fees. In some areas, local laws restrict the amount by which leased land fees can increase annually.
The most significant downside to owning a home on leased land relates to building equity. For many people, homeownership is a major source of wealth. With a leased-land property, you risk losing all of your equity at lease expiration, depending on the terms of the surrender clause. The resale of the home is likely to be more difficult than the resale of a traditional home, especially because with each passing year, the remaining term on the lease shortens.
For this reason, if you want to leave something to your heirs, a home on leased land will not be nearly as valuable to them as a traditional home.
Leased-land properties often are part of an HOA, which means extra monthly fees that are somewhat unpredictable. While HOA fees typically are a set amount each month, they can rise annually. The HOA also can levy a special assessment for major community property repairs or upgrades, creating a large, unexpected bill.
While traditional homeownership can be a good hedge against inflation, owning a leased-land property is not. When you buy a home with a fixed-rate mortgage, your payment remains the same each year as inflation goes up.
Frequently Asked Questions
Are land leases a good investment?
They can be. If designed properly, they can be a win-win scenario for both parties. Land leases do not require down payments on often-expensive land, so tenants can free up cash and focus on improving the development instead.
What is the difference between leasehold and land lease?
The length of the lease is very different. Leasehold titles generally last for much longer—anywhere from 25 to 99 years—whereas leases are for six months, a year, or even month by month.
How does a land lease work?
A land lease involves a combination of buying a home and renting the land it sits on. This kind of agreement can be a less expensive route to homeownership because leasing land doesn’t require a large down payment.
What happens when a land lease expires?
Theoretically, a land lease could come to the end of its term without renewal, and the building would revert to the leaseholder. It means that co-op or condo owners would face eviction or could become tenants in their homes. However, this is a rare situation.
The Bottom Line
Buying a home on leased land can be tempting when you see the competitive list price, but the purchase involves considerations that traditional home buying does not. Traditional homeownership facilitates financial security for most people, but buying a home on leased land may be a viable alternative for those whose major priority is buying into a particular community at a lower price than a traditional home or condominium rather than building equity.