Some homes and condominiums in Palm Springs and in other cities of the Coachella Valley are on lease land, which are either Indian leases or private developer leases.
The primary difference between buying land (freehold estate or commonly referred to as fee land or fee simple) versus leasing the land (leasehold estate or commonly called lease land) is that leased land can, in some cases, reduce the costs of a home ownership up to 30%.
Once a structure is built, the land beneath it can be of no other use to the landowner (as well as the homeowner). Therefore, by owning a structure on leased land, the homeowner enjoys the use of the land without the capital outlay associated with the land. The result can often be that the prospective homeowner can afford “more home” for less money.
With respect to trust-deeds for land with structures, the entire property isn’t fully owned until the trust-deed is paid off and the beneficiary (lender) authorizes the trustee holding the deed to legally pass ownership to the trustor (borrower). Put differently, property buyers that finance their purchase, don’t really own their property for up to 30 years.
IS FINANCING AVAILABLE ON LEASE LAND?
If purchasing on lease land, it is important to consider the term of the lease if you are financing and resale in the future. A 15-year mortgage needs a minimum lease term of 20 years and a 30-year mortgage needs a minimum lease term of 35-years.
Whether fee land or lease land, we recommend that you use a local lender who knows the local market and works with local appraisers to ensure the success of underwriting your home loan. Also, most national banks and lenders will not finance the sale of a home on lease land.
NDC Homes can refer you to several mortgage professionals who are experienced in financing lease land in the desert.
WON’T THE VALUE OF REAL ESTATE CLIMB FASTER WITH OWNED LAND?
While many aspects and events determine resale values, all available figures indicate that resales of homes on leased land have climbed in the exact proportion as other homes in the area. The condition in which a property is maintained is far more influential on its resale value than whether it’s on leased land.
WHAT ABOUT HEIRS, CAN A LEASHOLD ESTATE PASS ON TO THEM?
Yes, a home on leased land is as easily transferred to heirs as homes on fee land. However, if there are concerns about heirs 65 years from now, there are practical questions for the owner to consider:
- Will the heirs want a 65-year-old home when the average life of most residences is estimated at less than fifty years?
- Considering that most residents change ownership about every five years (which could be more that 10 turns of ownership during the life of the lease) is the home likely to stay in the family for 65 years?
- The dollar difference invested between lease land and fee land across a broad-based investment account for 10 years, could potentially yield attractive earnings:
|Lease Land||Fee Simple|
|Savings to Invest||$240,000||$0|
|Monthly Lease Payment||$400||$0|
|Annual Lease Payment||$4,800||$0|
|Holding Period Years||10||10|
|Total Term Lease Payments||$48,000||$0|
|Investment Return at 7%*||$0||$427,780|
*Based on assumptions calculated at http://www.bankrate.com/calculators/retirement/roi-calculator.aspx All buyers should review their investments options with their own investment professionals.
- Investing an initial amount of $240,000, that could potentially be worth $427,780 after 10 years, appears to be a more attractive investment.
WHAT HAPPENS AT THE END OF THE LEASE?
If there is no legal restriction prohibiting the lessor from selling its land, the lessee (or heirs) may have the option to purchase the land. However, most probably, the current lessee would be offered a new lease based on conditions existing at that time; and there would be no financial advantage of the lessor taking back the land.
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