It is commonly thought that, when purchasing a home, homebuyers receive ownership over both the home and the land upon which it is built on. Though this is the traditional practice, there is an alternative in the form of land-lease communities.
As its name implies, residents of these communities are allowed the option of buying a residence while leasing the land that it resides on but not owning it outright. For example, Saddlebrook Farms in Illinois, Greenwood Village in New York, and On Top of the World in Florida are all land-lease communities where residents pay a monthly association fee but are only taxed on their homes and not the land.
How Do Mortgages & HOA Fees Work?
When purchasing a house or detached condo on leased land, you’ll still take out a mortgage on the property. The monthly mortgage payment will, however, be comparatively less than a property where the land itself is owned. The home’s purchase price will also be lower, though you’ll still be required to pay a monthly land-lease fee. For communities that only offer leased land, a homeowners association fee may also be required.
Pros & Cons
The concept behind leased land homes enables homebuyers the ability to pay less for a home and not worry about the land around it. However, there’s a reason why land-lease communities are not as common as those where you buy both the home and the land. By leasing the land of your home, residents lose certain benefits that are found in traditional homeownership. Both sides of the argument make valid points that are worth considering.
Advantages:
- When purchasing the home, homebuyers will often pay significantly less than they would have had they also bought the land with it.
- By paying less on their homes, homebuyers have the opportunity to buy into a community they may have otherwise been unable to afford.
- Because they don’t own the land, homeowners pay little to no property taxes. With that said, each community is different and some may impose HOA fees for the communities upkeep.
- Landowners will often lease land for very long periods of time, such as 100 years, meaning you won’t have to worry about the lease expiring if it’s a new home.
Disadvantages:
- Leased land homeownership runs a risk of instability. Leases need to be renewed on a monthly or yearly basis. Should the landowners ever decide to not renew the lease for the land, those residents would be required to leave the house.
- The rate for land-leases can be expected to rise over time. While the monthly rate may be low at first, the payment can rise exponentially. In the long run, you may be paying much more than anticipated.
- It’s difficult to build and maintain equity with a home on leased land. Upon the lease’s expiration, you could lose all of your equity on the home depending on the terms of the surrender clause.
Do Your Research
As with buying any home, land-lease homes and communities require a lot of research. With so many variables, there are questions to consider to make sure land-leasing is the best option for you.
- Figure out how much time is given on the lease. If you decide to live in the home beyond the end of the lease, make sure that option is even possible.
- Ask how much the monthly land-lease payment is, as well as how that number can be expected to change over time.
- Pay attention to the surrender clause. Upon the expiration of a lease, some surrender clauses will require that you also give up any improvement made on the land. To avoid any surprises at the end of a lease, read the fine print before you sign.
