The dream of homeownership often conjures images of a quaint house nestled on a piece of land that you can call your own. However, in some cases, individuals choose to purchase homes on leased land, a unique arrangement that comes with its own set of considerations and advantages. In this blog, we’ll explore the concept of purchasing a home on leased land, examining the pros and cons and offering insights to help potential buyers make informed decisions.
Understanding Leased Land
When you buy a home on leased land, you’re essentially purchasing the structure and improvements on the property while leasing the land it sits on. The land is owned by a third party, often a private landowner or a community development – in some cases a tribal community, and the homeowner pays a lease fee for the use of the land.
Pros of Purchasing on Leased Land:
Lower Initial Costs
Homes on leased land tend to have a lower upfront cost compared to traditional real estate. This can be particularly attractive for first-time homebuyers or those on a tighter budget.
Reduced Maintenance Responsibilities
The landowner typically assumes responsibility for common maintenance tasks, such as landscaping and infrastructure repairs. This can be a significant advantage for homeowners who prefer a more hands-off approach to property maintenance.
Access to Desirable Locations
Leased land properties are often found in prime locations, such as beachfronts or exclusive communities, where purchasing the land outright might be financially prohibitive.
Cons of Purchasing on Leased Land:
Ongoing Lease Payments
Homeowners on leased land must pay regular lease fees, which can increase over time. This ongoing cost may negate some of the initial financial advantages of a lower purchase price.
Since you don’t own the land, your control over the property may be restricted. Land use restrictions, changes in lease terms, or the possibility of the landowner selling the property can impact your long-term plans.
Selling a home on leased land may present challenges. Prospective buyers may be hesitant due to concerns about the terms of the lease, making it potentially harder to sell the property.
Considerations for Buyers:
Thoroughly Review the Lease Agreement:
Before committing to a purchase, carefully review the lease agreement. Pay attention to lease terms, fee structures, and any restrictions that may affect your use of the property.
Investigate Lease Renewal Terms:
Understand the conditions for lease renewal and whether there are provisions for purchasing the land in the future. This can provide greater stability and peace of mind.
Explore Financing Options:
Not all lenders may be willing to finance homes on leased land. Work with a mortgage broker experienced in this niche to explore financing options and secure the best terms.
Obtain a copy of the leasehold document and examine it for the following requirements:
- The lease and any sublease must be recorded in the appropriate public land records.
- The lease and any sublease must be in full force and effect.
- A lease or sublease of the fee must be executed by both the fee owner and the sub-lessor.
- The lease and any sublease must permit the following:
- Mortgaging of the estate
- Assignment of the leasehold estate without the lessor’s consent
- Release of an assigning lessee or sub-lessee
Fannie Mae Lease Requirements
- The term of the leasehold estate must run at least five years beyond the maturity date of the mortgage, unless fee simple title will vest at an earlier date in the borrower. Axia will make “odd-term” mortgage loans equal to the number of months remaining minus 60 (five years) to meet this requirement.
- The lease must provide that the leasehold can be assigned, transferred, mortgaged, and sublet an unlimited number of times either without restriction or on payment of a reasonable fee and delivery of reasonable documentation to the lessor. The lessor may not require a credit review or impose other qualifying criteria on any assignee, transferee, mortgagee, or sublessee.
- The lease must provide for the borrower to retain voting rights in any homeowners’ association.
- The lease must provide that in addition to the obligation to pay lease rents, the borrower will pay taxes, insurance, and homeowners’ association dues (if applicable), related to the land in addition to those he or she is paying on the improvements.
- The lease must be valid, in good standing, and in full force and effect in all respects.
- The lease must not include any default provisions that could give rise to forfeiture or termination of the lease, except for nonpayment of the lease rents.
- The lease must include provisions to protect the mortgagee’s interests in the event of a property condemnation.
- The lease must be serviced by either the lender that delivers the mortgage to Fannie Mae or the servicer it designates to service the mortgage.
- The lease must provide lenders with the right to receive a minimum of 30 days’ notice of any default by the borrower, and the option to either cure the default or take over the borrower’s rights under the lease.
In certain cases, properties are located within a Native American Reservation, Native American Land or Tribal Land where title is vested in a leasehold or a land trust are eligible under very specific guidelines.
Agua Caliente (ACBCI) / Burea of Indian Affairs (BIA)
- Prior to submitting an offer, ask the seller if they have any secondary financing that may not have been reviewed by the BIA. Unapproved encumbrances will be subject to additional fees and cause review delays at the BIA when you are trying to transfer the lease.
- Vesting on the lease assignment must match the Deed of Trust, so all parties on the signing the deed of trust must be on title – non-borrowing spouses and vesting in a trust when there is a loan involved will be a problem.
- Minimum down payments may need be met as a condition of assignment of the lease. If you can, obtain a copy of the Lease Demand to know what fees both parties will have up front, and to determine any down payment requirement they may have.
- Many associations are subject to a Master Lease (Fey’s Canyon, Desert Princess, Mission Hills, Cathedral Canyon Country Club are most common). The Master Lease holder will have a separate review process which is completed prior to the file being sent to the BIA for approval.