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Jeffrey L. Beal, president of Real Estate Solutions, has 40 years' experience in multiple phases of the real estate industry.
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You might have experience with leasing a car, but did you know you can also lease land for your home? 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, but it also comes with drawbacks that warrant careful consideration. Here are the basics to know.
A land lease, also known as a ground lease, is an arrangement in which a landowner (the lessor, in legal terminology) rents out the land to a tenant (or the lessee). A land lease can be used to purchase a home plus land, or simply to purchase land that you plan to develop later on.
A land lease is common for commercial places of business, but many residential real estate property owners also pay to lease the land their homes sit on — many co-op buildings in New York City, for example, are built on land leases.
There are two main types of land leases: subordinated and unsubordinated.
Some mortgage lenders, however, might require subordination. In this case, the lessor could demand additional compensation or some other guarantee from the tenant.
If you’re on the tenant side and considering a land lease, be prepared to act as both a homeowner and a renter. You’ll need to secure a mortgage for the physical property (or pay all-cash if you can afford it), and account for what you’ll pay each year in lease and other fees. For instance, some land-lease properties are part of homeowners associations, which means you’re also responsible for paying HOA dues.
Land leases are common mostly for manufactured housing and mobile homes. More than 4 million Americans live in nearly 50,000 land-lease communities — also called mobile home or trailer parks — across the U.S., according to data from ManufacturedHomes.com. However, you can find leasehold properties elsewhere, too. From retirement communities in California to high-rise buildings in Manhattan, leased-land living arrangements exist across the country.
If you’re looking for a leased-land property, a real estate agent is one of the best resources. Your agent should have a good idea of which properties in your area are attached to land leases.
A lower purchase price might be enticing, but the potential for unexpected increases in the cost of the land can quickly erase any financial gain. If you’re thinking about buying a home on leased land, consider:
“There are pros and cons to leased-land living,” says Zach Wahls, an Iowa state senator and vice president of community investment and development at GreenState Credit Union. “However, I think it’s the rare exception when the pros outweigh the cons. Most people will be better off in a more traditional living arrangement whether they rent a home or own it.”
