“LEASED LAND OR FEE SIMPLE?”
I get asked this questions all of the time. Here’s my answer….
The decision of Leased Land or Fee Simple is ONLY a financial decision. This is not a lifestyle decision nor, as anything, a permanent decision. Buy a condo today, then upgrade to a home later. The process is the same… a balance between one’s personal and financial goals at the time.
So, to be armed with information let’s proceed…
Fee Simple Land: Land that is owned outright by the owner.
The owner has full control and use of the property/land. ”Fee Simple” is a British term not to be confused with a ‘land lease fee or lease payment’.
- 100% of Cost of a home or condo
- 100% of Cost of land
- Property Taxes on both
Leased Land: Land that is being rented or leased for a certain period of time.
The owner of a “leased land” property owns the real property on the land (ie house or condo) yet does NOT own the actual land. In this scenario, the owner has limited use and must follow terms of the land lease agreement.
- 100% of Cost of a home or condo
- Land lease payments spread out over time
- Property Taxes on the home or condo ONLY
UNDERSTANDING A LEASE AGREEMENT:
- Typically, a land lease agreement has several terms to be aware of, such as:
- 1. A land lease payment amount.
Typically, this “fee” (not to be confused with ‘Fee Simple Land’) is payable monthly or yearly depending upon the lessor
- 2. Limited Right to Encumber
Most leases include restrictions preventing an owner from over encumbering such as a minimum downpayment
(or equity) requirements or restrictions on reverse mortgages
- 3. An Expiration date
This only matters in terms of obtaining financing. Lenders who loan on leased land require a lease term to equal a
- minimum of 5 years in addition to the loan term. (ie 30 year loan + 5 years = 35 year minimum on lease term)
UNDERSTANDING THE NUMBERS:
We all understand a Fee Land purchase. You pay for it, it’s yours.
This means you pay 100% for the cost of the home/condo PLUS 100% of the cost of the land PLUS 100% of the property tax on both.
For lease land, properties cost less than their Fee Land equivalent. Although there is no rule or formula, properties on Leased Land have lower purchase prices than if you were to buy it on Fee Simple Land. Historically, we’ve seen about a 20-30% savings on Leased Land properties in this regard. Makes sense as you’re not buying the land. This means you don’t pay for the land, nor pay for the property tax on the land.
Now that you know what’s involved in a land lease, you are armed with the information to make a decision on buying on Leased Land or on Fee Land.
After reading this, I hope you have NOT decided one way or the other. In fact, your home shopping process most likely will throw you a curve ball when you see “THE” perfect property for you, or, at least, “THE” best property for you at the time.
If buying real estate was “all about the numbers” we would all be buying warehouses. We buy property for personal lifestyle choices more than for any other reason. And as you search for property, only you can determine what “feels right” for your lifestyle.
What do you want? Play golf, tennis or pickleball. Live closer to hiking or bike trails. Looking to decompress on long weekends to unwind. Float in the pool. Have an entertainment space for parties or enough rooms for family gatherings.
Your lifestyle enjoyment and the memories you make won’t change simply based on which land type you choose. Find a property that meets your needs and goal, and start enjoying Palm Springs! Happy Home Shopping!