You Can Lease the Land but Own the Home

Lease Land Own Home in CaliforniaI will often work with buyers via e-mail for several months as they begin their initial research but are not quite ready to visit homes for sale. These buyers have a desire to learn about the market and research areas long before making a purchase. Some agents would give up on these types of buyers, but I enjoy working with folks who like to educate themselves about real estate before purchasing what is quite possibly the largest investment they will ever make. Plus, these buyers will ask questions that make for educational blog posts, like the one below which I was recently asked.

Question:

I noticed that some of the properties said that the land is leased. How does that effect the owner of the property?

Answer:

You’re right in thinking it does affect the owner of the property. Land and houses are both forms of real property so they can have separate owners. There are some places where you can NEVER own the land.. just the house, so you lease the land from, say, the government.

You’re smart to pick up on the differences. A property with leased land can appear to be more affordable–below market value–until you notice that crucial difference. Sometimes it’s more difficult to obtain financing on a property with leased land because there’s less for the bank or lender to take possession of in the event of default.

More Detailed Answer:

When you buy real estate, you are buying a “bundle of rights” to use the property which includes the right to own, possess, use, enjoy, borrow against, and dispose of the property. Anything that may be owned and gained lawfully is known as property. Property can be real or personal.

Real property is land and anything permanently attached to the land, like a house. Personal property is movable like furniture, money, trade fixtures–and don’t usually come with the sale of real property unless specified. When you rent a property, the rights to the property that you lease are considered Personal Property.

Now you understand the difference between Real and Personal Property.. let’s talk about estates.

An estate is the ownership interest of claim a person has in real property. There are two types of estates that may be owned: freehold and less-than-freehold. A freehold estate is an estate of indefinite duration, which means it is yours forever and you have the right to sell it or pass it on to your heirs. The freehold estate is a real property estate of an owner whose hold on the estate is free of anyone else’s restrictions.

A less-than-freehold estate, or leasehold estate, is an estate owned by a tenant who rents real property. They have temporary and limited rights of use in a real property estate. As I mentioned earlier, the rights set forth in a lease are personal property.

Real property includes the land, house, airspace above the land, surface rights, mineral rights, and water rights. These elements can be sold or leased individually to one another, like in the situation where the Land is Leased. The property owner can only legally sell the house and not the land beneath it which is owned by someone else.

Despite the fact that the home owner doesn’t also own the land, there are some pros to buying a home on leased land.

Benefits to Lease Land:

  • Home prices are typically less expensive than comparable properties on fee land.
  • Property taxes are less because you are only paying taxes on the purchase price of the house.
  • Because of the reasons above, buyers might be able to afford to live in a more desirable neighborhood.
  • A community of leased-land properties can include amenities typically found in condominiums or townhomes like tennis courts, pools, clubhouses, playgrounds, etc.

Disadvantages to Lease Land:

  • The lease is going to end so be mindful of how much time is left on a land-lease before purchasing.
  • Often times the homeowner has no rights to the land and need to obtain permission before building additional structures or changing the land in any way.
  • There might be HOA fees in a land lease community which add to the monthly expenses of owning the property.

Lease land can be for residential or commercial use. In urban areas, an investor might work with a developer to create a land lease contract, allowing the developer to build a structure and rent or sell it, with the understanding that the land is leased and does not come with the building.

A contract for a land lease typically runs for at least 50 years with a maximum of 99 years. The land owner is usually willing to renew the lease, although probably at a higher rate because the property value will have increased.

Before purchasing a property attached to a land lease, contact us at 1-800-287-1808 to speak to one of our expert real estate brokers about whether this situation is best for you. With the amount of REO and Bank Owned Properties For Sale in California, you might be able to own the home and the land for just as little as owning a home with a land-lease.

Sources:http://www.investopedia.com/articles/mortgages-real-estate/08/leased-land.asp#axzz1pfosZ8W8

http://www.wisegeek.com/what-is-a-land-lease.htm

http://www.paulkaplanrealtor.com/FeeLandLeaseLand.php

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