This is my column for this week from the Arizona Republic (permanent link).
Musical chairs: You can buy a home on leased land for a bargain price, but you must be prepared to sell before the music stops
We’re preparing to list a condominium that sits on leased land. Land leases aren’t common in the Phoenix area, but they do exist.
The most common way to own real property in the Valley is in fee simple: You own the land and all the structures on it, plus any mineral, water and air rights that haven’t been alienated by legislation or previous sale.
A very distant second way of owning property is the condominium plat: You own the airspace described by your interior walls, and you and all of your neighbors own the land and structures in common. Most often you will also own the air conditioner, and possibly also the roof. These are expensive to replace, so crafty developers and their HOAs socialize the risk to you.
We have a few co-ops in the Phoenix area, but very few. In a cooperative, you and all of your neighbors own the land and the structures in common, and you have a right to occupy your living space.
In a land lease, the structures can be owned in any one of these three ways — by individuals, by a condominium HOA or by a cooperative corporation. The important difference is that the land is owned by a landlord, and the landlord will be taking that land back someday.
What happens to the structures? They revert to the landlord’s ownership, and the former owners of those structures are left owning nothing.
In essence, it’s a game of musical chairs. The structures on the leasehold pass from owner to owner, but, when the music stops, no one then on that land has a place to sit. This tends to depress property values on leased land.
But land leases are written for very long terms, and a lot can happen in that time. If the landlord gets a huge offer for the land, the people who own the structures could get bought out early at a huge premium.
In the mean time, in exchange for taking the downstream risk of a depressed resale price, buyers can purchase a home for a bargain price.
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Ken in Chicago says:
There are some high end homes built in our area on 99 year leased land. Sure that seems like a long ways down the road, but those homes are all going to end up going back to the land owner.
Just a thought, Will the owners as the lease is getting set to expire maintain the property? Why would they invest money into a property that will be reverting to the land owners.
July 5, 2008 — 8:29 pm
Jessica Beganski says:
We have a few areas in Connecticut with land leases and they permit buyers to have a vacation home by the shoreline for under $200,000 – with the land, similar homes would be upwards of $350,000.
However, it doesn’t seem that much different that owning a mobile home – except you can’t move the house.
July 7, 2008 — 7:28 am