Why a Land Lease Wouldn't Work in My Retirement Plan
Today, I’m sharing my thoughts and what I've learned about land leases. Buying a home on property owned by someone else can appear to be an affordable alternative to traditional homeownership—but I’m learning that the arrangement could come with some serious financial risks if I were to choose this option in my later retirement years.
I’ve previously discussed the downsides of 55+ communities, many of which fall into the land-lease category. In fact, having a land lease is one of my top five criticisms of that type of senior living. But land leases are a broader option, not limited to 55+ communities.
The Initial Appeal
Let me show you an example. Here’s a listing very similar to one that caught my eye when I was researching my relocation to Delaware:
View the example listing on Zillow
You can see the appeal—it’s a single-family home, and it looks updated and is located in a fairly nice neighborhood. The price for what I’d be getting sounded too good to be true until I read the fine print and learned that it would involve paying a monthly land-lease fee of over $800.
Along with the $300 monthly HOA fee, this home would be unaffordable for me. On top of all of that, the question becomes: What happens if something changes with the land, since I’d only own the structure? What immediately follows is one answer to this question that I came across while watching TV the other day. Then I’ll discuss how this can play out in real life here in Delaware.
A Strange Little House on the Prairie Connection
In the series finale of Little House on the Prairie, the TV movie Little House: The Last Farewell—WARNING: SPOILER ALERT—a wealthy tycoon buys the land on which Walnut Grove is located and forces the residents, including Laura and Almanzo, to either begin paying rent and working his land for him, or be evicted.
Laura was so angry, she busted out all the windows she had recently installed in her house and inspired the entire town to blow up their buildings with dynamite before moving away, rather than leave the town intact for the new owner’s use.
At first, this seems like a heroic, albeit tragic, story. It’s pure fiction, by the way.
But here’s an interesting twist I learned while researching this post: the land where Little House on the Prairie was filmed was itself leased. The production had agreed to return the property to its original condition when filming ended, which meant the Walnut Grove sets had to be removed. Michael Landon decided to incorporate the destruction of the buildings into the story.
That makes the episode an even more fitting analogy than I originally realized.
In reality, a similar problem can and does happen with land leases. The difference is that, if that had been a land-lease story, each owner might have been responsible for either moving their structure or, if relocation wasn’t possible, disposing of it and clearing it from the land.
So, it wouldn’t have been such a heroic story, but more leaning on the tragic side.
What If the Land Use Changes?
I know someone living here in Delaware currently facing the real possibility of not only losing the place where their home is located, but still having to pay the mortgage on the structure.
It seems incredibly unfair and heartless, yet this is a legal possibility when a manufactured-home community is converted to a different use.
One important distinction I learned in my research is that the land simply changing ownership does not automatically mean residents have to leave. The more serious situation is when the owner intends to change the use of the land and terminate or not renew the lot leases.
If that happens here in Delaware, the law says the affected tenants must receive at least one year’s written notice so they have time to arrange to relocate their structures or, if relocation isn’t possible, dispose of them.
That gives people time, but time alone doesn’t necessarily solve the financial problem.
Delaware’s Protections
Fortunately, there are two other protections in place.
There’s a trust fund that can help people with relocation or, if they must give up a home that can’t be relocated, provide some compensation.
The problem with the financial assistance is that it’s such a low amount. The trust fund can provide up to $1,000 toward temporary lodging for people whose homes are being relocated, or, in the case of a home that can’t be relocated, up to $16,000 of the appraised value, depending on the size of the structure.
We’re usually talking about single- and multi-wides when discussing manufactured homes, but the term also includes other non-traditional structures on leased land, such as the one in today's Zillow example. The listing describes it as a single-family residence on a permanent foundation, and there are two-story homes surrounding it on the same leased land.
I don’t think any of the homes in that neighborhood would be easy to relocate.
Even with these protections in place, the situation could destroy some people financially. It's even worse for people who are still on the hook to continue paying a mortgage for a house which no longer exists.
The other legal protection in place is called the Right to First Offer, or ROFO. It’s an opportunity for the community’s homeowners association to make an initial offer on the property before the seller opens the sale to outside buyers. This way, the HOA has an opportunity to preserve the community and govern itself.
That’s the situation of the person I know who lives in one of these communities. They’ve been served the written letter of notice and now have the opportunity to form an HOA, because there currently isn’t one, and potentially make an offer.
The problem with ROFO is that it’s very expensive to buy land. There would have to be an agreement among the tenants, and not everyone is onboard with going that route.
So, What’s the Advantage?
All of this makes me wonder, what’s the advantage of buying on leased land?
Well, I see that some of these structures are rented out by the owners. Maybe they ensure the structure is movable and have plans to move it or take the loss if need be. I’m not sure.
Also, not all land leases have the same level of risk. Some may have very long lease terms that wouldn’t expire for decades.
There are some advantages. The purchase price can be lower because you’re buying only the structure and not the expensive underlying land. Depending on the community, fees may also cover things like lawn care, trash pickup, and upkeep of common areas.
That maintenance-free aspect could become attractive to me later in life.
But there are other risks I’d need to consider in addition to the possibility of a change in land use.
- Rising lease costs: Landowners can increase ground rent over time, potentially erasing some of the initial savings.
- Expiration and loss: Leases have expiration dates. If a lease isn’t renewed, relocating the structure could be difficult or extremely expensive.
- Harder financing: Financing can be more difficult when the land underneath the home isn’t included in the purchase.
- Depreciation and resale: The value and resale prospects of the home may be affected as the remaining lease term gets shorter.
- Less equity: Because I wouldn’t own the underlying land, I wouldn’t have that portion of the property building equity along with the home.
Where I Stand Right Now
So where does all of this leave me?
I get the initial appeal of land leases. The lower purchase price, less maintenance, and possibly some amenities could become attractive to me later in life.
But the whole reason I’m exploring future housing options is to make sure I have secure, affordable housing as I age. I’d be giving up something pretty significant in exchange for those advantages: ownership and control of the land beneath my home.
After learning more about land leases, I don't think I'd be comfortable purchasing a structure through one. I would consider renting from an owner, however.
For more conversation on this and other early retiree topics, be sure to browse the playlists on my YouTube channel and visit my podcast on Spotify.
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