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Buying a house as well as the land it’s built on is the traditional road to homeownership. Another option is to buy a condominium or townhouse if you want to save yourself the high maintenance costs and upkeep efforts. And then, there is yet another option for homeownership: a land lease. In such a real estate transaction, you buy only the home while leasing the piece of land it occupies. You don’t buy the land.
A land lease, aka a ground lease, lets you “own” a property that you otherwise may not be able to afford. You get it on a lease for a set period of time from its owner – whether an individual or a company. Of course, there are some major differences between this type of purchase and traditional ownership of land. In this blog, we’ll explore that and so much more.
What is a land lease?
A land lease is a type of property lease agreement that lets you, the tenant, use a piece of land owned by someone else, the landlord, in exchange for rent. Land leases can be for both residential as well as commercial properties.
Sometimes, a lease of a vacant plot of land even allows the tenant to construct a temporary or a permanent structure – but at their own cost. The tenant may make their own improvements or grow crops on the leased land while the landowner collects the monthly rent. The concept of land leases is quite common in the case of mobile homes, billboards, or farmlands.
Land lease vs buying a home
A land leasing arrangement is similar to renting a home, but long-term.
A typical home purchase gives you complete ownership of an existing home and its surrounding property. You can undertake home improvement projects as you deem fit. The ultimate goal is an enhancement of the overall home value, building good home equity, and getting a good return on investment at the time of selling the house.
However, if you own a house on a leased piece of land, you might face restrictions in terms of making any value-adding improvements. The most important factor to consider is that although a land lease may help you save money upfront, you’ll not get any ROI as you’re not building equity the way you do in a traditional home-buying transaction.
A real estate expert can help you decide if the best option is leasing land or buying a house depending on your lifestyle and budget.
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How does a land lease agreement work?
If you’re considering a land lease, you’ll have the duties of a homeowner and a renter. Let’s see how. Just like in the case of a standard home-buying procedure, you’ll have to secure a home mortgage for the physical property. But, you’ll also have to account for the land lease expense that you’ll pay every year. If the property is part of a homeowners association, you’ll also be responsible for paying all the dues.
A land lease may generally last between 50 and 99 years – depending on the lease agreement. Every land lease agreement may vary depending on the type of land it is and the purpose of leasing. Accordingly, the permissions and obligations of a lessee will be chalked out.
Types of land leases
The two types of land leases are subordinated leases and unsubordinated leases.
In a subordinated lease, the property owner or the landowner is at risk if the tenant defaults on the mortgage or a home improvement loan. It can put the home equity at risk – sometimes even leading to a foreclosure. To compensate for this risk, the landowner may even increase the rental rate. According to the American Bar Association, this lease type is best avoided by landowners.
Unsubordinated lease is more common and preferred by landlords as it provides more rights to the owner of the land. They retain ownership and the top priority of claims on the land even in the case of a loan default by the tenant.
Land lease pros and cons
- Less expensive than buying a house: Buying a real estate will have a higher upfront cost while buying a property on leased land could be more affordable.
- Lower property taxes: Your property tax bill will be lower since you’re only being taxed on the property and not the land.
- Lease amount or fees may increase over time: There may be potential fluctuations in the costs or fees of a land lease. For instance, there have been a few private equity firms in recent times who had acquired trailer parks and increased the monthly fees almost immediately. That’s why experienced real estate agents advise tenants to negotiate a multi-year lease.
- Less flexible than renting a house: A renter can choose not to renew the lease and move out if the landlord fails to maintain the property or creates problems. However, getting out of a land-lease agreement can be more challenging and expensive.
- Difficulty in getting a mortgage: If you’re applying for a 30-year mortgage for leased land, your loan lender may require proof that you’ll be able to stay for at least that long.
Is a land lease a good idea?
If you’re a lessee buying a home on leased land, it’s always advisable to consider the following factors while weighing its benefits:
- Your land lease term or when the lease expires.
- The monthly homeowner fees and the total lease expense.
- The fine print of the agreement. For example, do note if there’s a mention of an increase in the fees or what happens if the land is sold to another individual or company.
Leased-land living arrangements exist across the United States – especially in states where real estate prices are really high or are in prime locations. From California to New York City, you can find several high-rise buildings or grounded properties on a land lease.
A land lease deal allows you to purchase just the dwelling and pay rent on the land every month to the landowner. So, you end up spending much less money upfront as compared to a house purchase price.