9 Inherent Risks of Buying a Home on Leased Land

9 Inherent Risks of Buying a Home on Leased Land

Home ownership is not only about owning both the home as well as the land it was built on. Some home buyers opt for a less traditional form of home ownership which only requires them to buy a home and simply lease the land that itbuying a home on leased land occupies.

Though buying a home on leased land is not nearly as beneficial as traditional home ownership, there are still a few advantages to buying a home on leased land. The benefits include affordability, convenience, and lifestyle choices are the top reasons why home buyers are lured to this form of home ownership.

For those who consider this option, it pays to know that there are significant risks involved in purchasing a house on leased land that you should take into consideration. An important factor to consider is obtaining a mortgage when a home has a land lease. It is important to ask mortgage questions to ensure you are able to obtain a mortgage.

Many home buyers will consider a home on leased land if they are buying a starter home.

Buying a Home on Leased Land

Home buying refers to purchasing a home that is not located on one’s own property. In most cases, the homeowner leases the land from a third party and lives in another location while owning the home that is situated on the leased land.

homes on leased landThere are many reasons why someone may decide to purchase a home on leased land. Some people find it more affordable than owning a home outright, while others believe that the convenience and lifestyle choices associated with this type of ownership are worth the risk. There are costs of ownership that all homebuyers need to be aware of before they purchase a home. When considering buying a home, it can be easy to overlook many of the costs of homeownership expenses.

There are also a number of reasons why homeowners may want to surrender their lease agreement. If the lease expires and the surrender clause only requires you to give up the land, then you may be able to transfer the home to a new location. However, this can be unrealistic especially if your home was built upon foundations or concrete slabs.

There are many condo communities that are located on leased land. There can also be mobile home communities that are on a land lease. It can be challenging to obtain financing a mobile home on leased land.

Loss of Equity if the Land Lease Expires

The loss of equity is one of the most notable risks of owning a home on leased land. Unlike traditional homes, the property on leased land has a lease expiration date which means that you could lose an outstanding amount of your investment as the lease expires. If your aim is to build equity and leave a valuable inheritance to your children, then building a traditional home would be a more viable option than purchasing a home on leased land.

Lower Resale Value

Acquiring a home on leased land is easier on the budget as it is less expensive since you’re only purchasing the home itself without having to purchase the actual land. It could also mean that you can opt for a more expensive home depending on your budget.

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However, it is inevitable for the value of the home to depreciate as the remaining term on the lease shortens. In the event that you decide to resell the home before the lease expires, then expect that you will only receive a partial amount from your investment since it will most likely sell at a lower resale value.

Lease Duration

leased landThe duration of the lease is also a key consideration when buying a home that is on leased land. It is important to know what the average lease term is in your area so that you can make an informed decision about whether or not the length of the lease is right for you. Some leases are for as short as one year while others can last for up to 10 years or more.

Take into account how long you intend to live in the home, how much money you want to spend, and what kind of lifestyle you want before making a decision about purchasing a home on leased land.

Difficulty in Selling a Home on Leased Land

Aside from the lower resale value, homes on leased land can also be more difficult to sell compared to a traditional home. Unlike traditional homes, purchasing a home on leased land involves a lot of considerations, and the reason why finding a potential buyer for this type of home is often challenging for homeowners who want to sell their homes.

Unpredictable Rise of HOA Fees

Most leased-land properties are subjected to an HOA rental policy which typically creates binding legal obligations to pay a specific amount each month for repairs, upkeep, and improvements in the community. This type of fee can be unpredictable and may rise significantly, especially in times of inflation. The possibility of increased HOA fees is definitely something that you should look into as it may most likely affect your budget and finances in the coming future. There are pros and cons of living in a community with an HOA.

Unexpected Increase in Land Lease Fees

Aside from the unpredictable rise in HOA fees, there is also a possibility that the lease on the land may increase. Some lease contracts come with a provision that allows such a fee increase which can be more troublesome for residents. Even if the contract does not come with such a provision, you still have to consider the possibility of an increased lease amount once the lease comes to the end of its term.

Property Taxation

Though this varies from state to state, most homeowners on leased land are subject to property taxes. This means that if you sell your home, the proceeds will likely be taxed as well. Unless you have enough money saved up to cover the tax bill and other associated costs, you could face financial hardship when trying to sell your home.

Unrealistic Surrender Clause

If the land lease expires and the surrender clause only requires you to give up the land, then you may be able to transferrisks of buying a home on leased land the home to a new land. However, this can be unrealistic especially if your home was built upon a foundation or concrete slab.

A home that was built on foundations cannot be transferred from one location to another which means that you would most likely leave the home on the land that you’re surrendering. Even if you’re planning to buy a manufactured home, moving the home to a new location can cost thousands of dollars which is impractical considering that the home will eventually lose its value over time.

The affordability, convenience, and lifestyle choices are the top reasons why many homeowners are swayed into purchasing a home on leased land, but this is a risky endeavor that involves significant considerations. Whether you are living a minimalist lifestyle or a luxury lifestyle, there is a home for you.

Buying a home is one of the biggest investments that you’ll ever make and getting the best out of your hard-earned money is not a guarantee if you don’t own the land that your home occupies. In addition, when a buyer decides to purchase a home on leased land, the property does not offer the same financial security that you can get from traditional home ownership which is alone a major factor in your decision process.

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Final Thoughts

A home buyer may ask themselves if it is bad to buy a house on leased land. The real estate market can be volatile and unpredictable, making it difficult for buyers and sellers in the marketplace. What looked like a great deal one day can quickly turn into a nightmare if conditions change in an adverse way.

Though buying a home on land that is leased carries risks, it is an option that some people prefer because of its many benefits.

About the Author

The article “9 Inherent Risks of Buying a Home on Leased Land” was written by Sharon Paxson, a top Newport Beach Real Estate Agent. With experience beginning in 2005, representing buyers, sellers, and landlords, we welcome the opportunity to share our expertise with you and guide you through your real estate transaction.

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Sharon Paxson is a full-time REALTOR® with EQTY | Forbes Global Properties and has been specializing in residential real estate throughout the Newport Beach area since 2005 assisting Buyer’s, Seller’s, Landlords, and Tenants with their real estate needs.

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