If you’ve been exploring Orange County real estate listings, you may run across properties listed for sale that seem far more affordable than other listings. Why are some of these listings so cheap compared to their far more expensive O.C. counterparts?
One reason may be due to the fact that the house alone is for sale, not the home and the land it sits upon. This type of arrangement is referred to in the real estate business as a land lease deal and the price you see does not include costs associated with the land, which you must rent.
One of the most common versions of the leased land deal? Trailer parks. But single-wide and double-wide trailers are not the only types of homes that may be on a leased land option. Many of these could be manufactured homes.
Should You Buy A Home On Leased Land?
In a typical suburban home sale, you purchase the house and the land it sits upon. If you buy a house in Newport Beach, Huntington Beach or Dana Point that does not come with the land, it may be offered at a much lower sale price, but should you take such an offer?
Some sources say no; one publication notes that you may save about 25% on a leased land home while you are paying on the mortgage, but other factors might make the savings less appealing.
A leased land deal may require you to join a homeowners’ association, which requires dues. This is because leased land properties are often located in communities together. The trailer park metaphor is appropriate here, but not all leased land options involve trailers.
And then there’s the land lease itself to contend with. How much will you pay per year on the lease, and how long is that lease compared to the term of your mortgage? Will the lease expire before your loan does? If your land lease is for 50 or 99 years, you shouldn’t have to worry, right?
But what if you want to leave your home to someone else if you pass away? The lease expiration in such cases makes that more problematic.
Even if you’re buying a home with a land lease that has plenty of time on the clock, so to speak, it pays to ask about this in advance. Don’t be taken by surprise by the duration of the lease, and be sure to scour the purchase agreement for information about maintenance fees, and when the rent is subject to increase. These are all critical issues for a new buyer to review.
The Surrender Clause
If your lease expires while you still own the property but you choose not to renew the lease, do you know what your rights and obligations are? Land lease deals may come with a surrender clause requiring you to give up the use of the land if you choose not to renew the lease.
You may also, depending on the legally binding language in your agreement, be required to give up any improvements to the land which can include your house.
You will need to discuss this clause with the seller and you should completely understand your obligations under the clause. Don’t sign a purchase agreement without knowing both your rights and responsibilities in these cases.
Who Should Consider Buying An Orange County Home On Leased Land
Generally speaking, the following buyers should consider a land lease option when house hunting:
- You want a larger home but can’t afford to purchase it in the Orange County housing market
- You don’t mind trading some payment predictability for the lower price
- You can absorb cost-of-living or inflationary adjustments for land rent, HOA fees, and related costs
- You don’t want to live in the home for the full term of the loan
- You are comfortable with belonging to a Home Owner Association
- You don’t plan to own the home once the land lease expires
Some buyers may come to Orange County from a state where land lease sales are not as common; it’s an option some haven’t explored because it simply wasn’t viable elsewhere. That’s one reason to consider it in O.C. if you’ve never explored the option. It pays to make a fully informed decision about home buying.
If you have flexibility in your budget for issues like a more expensive land lease should the old one expire or increasing fees due to inflation, a land lease loan may not be a bad option to consider. Some borrowers consider land lease homes in Orange County because they may be more affordable than more aspirational homes in the area.
Some may find a land lease arrangement more appealing if the Homeowners Association agreements include more third-party maintenance for common areas and less reliance on the residence doing common yard chores, landscaping, etc. Such arrangements are up to the individual HOA and are not standardized, but they are worth asking about when you’re talking to a seller.
Remember, state law and other variables may have a say in how a California HOA works; if you have never belonged to one in Orange County before, you’ll want to check the bylaws and covenants to ensure you fully understand your obligations and your rights under the agreement. Other states may have more liberal or more restrictive HOA guidelines.
You’ll want to check the expiration date of the lease on the property since it may be harder to sell a home that is closer to the next lease renewal period.
It’s true that many borrowers don’t enter their home loan journey already thinking about selling the home they want to buy, but it’s smart to look to the future of your mortgage and set some financial plans and goals that can help inform today’s decisions. You’ll want to know how tough it might be to sell a home that is close to land lease renewal.
One benefit of a leased land home purchase that’s attractive to many in O.C.? You may be able to purchase a larger California home with a land lease deal than if you bought a typical suburban house in the same area.
However, a fixed-interest rate mortgage will stay the same through inflation, recession, or other economic woes. A land lease arrangement may have you paying costs that increase with the cost of living or for inflation such as HOA fees and land rental fees.
Who Should Not Buy A Home On Leased Land
There are certain kinds of home buyers who should definitely not buy a home on leased land. They include:
- Buyers who want to build equity in a home they can borrow against later
- Those who want to leave a home to a family member of friend when they die
- Those who don’t want to join a homeowner’s association (not applicable in all cases, but you should definitely ask for certain leased-land homes in Orange County)
- Those who don’t want resale restrictions on their homes (some contracts specify such limits to control property values)
- Buyers who need predictability in their lease payments and HOA maintenance costs over the lifetime of the loan
- Buyers looking at land lease properties with a short amount of time remaining on the existing lease. If there’s no way to know how much the new lease will cost you later or you know the price hike is more than you are comfortable with, it may not be a good idea to commit
- Buyers who expect the same type of rising property values in a home purchased with a land lease agreement may be disappointed by the reality; a typical suburban home may be a better bet if you have high hopes to cash in later when there’s a rising real estate market or one that is expected to boom
