The highs and lows of parenting and real estate.

Land Lease, Good Buy or a Sucker’s Deal?

Yesterday, when I was pulling some property info off the ARMLS site I came across a statement in the ‘Realtor Remarks’ section that I didn’t understand at all. It said “Land lease amount in arbitration.” Now, of course I understand the definitions of the individual words (when I called and asked the listing agent what she meant by this she said, “Uh… they’re currently arbitrating the amount of the land lease.” Thanks, ma’am, I wanted to say, now that you’ve switched the order of the words around for me it makes perfect sense), but the concept of a ‘land lease’ was one that I hadn’t yet encountered. After my attempt at extracting an understanding from my fellow Realtor was thwarted, I called my manager at the Century 21 office.

He explained that someone (in this case, a trust) bought the land before any of the houses were built on it and still currently has ownership of the land. So when you buy the house, you really only buy the house. The land underneath and around the house has to be leased to you for a monthly fee. In another home I found, the land lease amount was 0.1% of the sale price per month ($469 per month). In the case of the original house I found, however, the land lease amount was ‘in arbitration,’ meaning you would be buying blind, with no amount set until some unspecified time in the future. This sounded like a real bummer of a deal to me. It sounded kind of like an HOA fee, but potentially lots higher than even the highest HOA fees I’d seen, and with none of the benefits. It’s not like the owner of the land comes around and mows your lawn for you or anything. So I asked my manager, “How would this benefit my client at all?” He didn’t beat around the bush with his answer that there just isn’t really any benefit. “I would stay away from deals like that,” he cautioned me. And that makes sense to me. In real estate, generally it’s not the structure on a piece of property that appreciates, it’s the land. The structure will continue to deteriorate and require repairs, while the land it stands on is what they defined in my real estate classes as indestructible. No matter what you put on it, how you plant it or even dig it up, a piece of land cannot be moved, and it cannot be destroyed. So the land is by far the better deal in the house vs. land debate.

Ultimately, I guess the answer to my initial question would be that it depends which side you’re on. For now, until I hear a reasonable argument for it, the only way I’m getting involved in a land lease is if I’m the one buying the land.

3 Responses to Land Lease, Good Buy or a Sucker’s Deal?

  1. Is there the potential for the land owner to want to take back possession of the land? How does that work?

  2. Yes, actually, that would be a problem as well. Most of those kind of rights would be spelled out in the actual lease for the land (and I assume that ‘renter’s rights’ would apply), but I did speak with someone who had owned a house that sat on a land leased property in Colorado, and it was ultimately revoked by the owner so that it could be mined. The pitfalls in this kind of an arraignment seem to be limitless.

  3. This kind of arrangement is fairly common, I believe, in transactions made when the buyer is not a citizen of the country or entity in which the land resides. For example, cabins built on reservation land, or retirement home built in Baja and “owned” by US retirees.

    It sure wouldn’t help me sleep soundly at night.

    jt

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