Lease Land vs. Fee Simple

I talk to a lot of potential buyers and there are many questions I need to ask them to help them find the perfect property to buy.  Some examples are, "How many bedrooms do you need?", "Do you want a condo or a house?", "What part of town do you want to live in?", etc.  One question, though, is unique to the Palm Springs area..."Do you want to lease the land or own it (fee simple)?"  From many people I get a very strong response..."absolutely no lease land."  This is fine, everybody is entitled to their opinions and desires, but in many cases I think the people are not 100% informed about what lease land is and what it means to them as the purchasers of real property.  My friends at Orange Coast Title Company work tirelessly in the Coachella Valley to help educate buyers about lease land vs. fee simple land.  They came up with a brochure about the topic which I am copying as this week's blog...I hope you enjoy it!

The primary difference between buying land and leasing it is obvious.  Leased land reduces the cost of a home by 20 to 30%.  Once a structure is built, the land beneath it can be of no other use to the homeowner.  So by owning on leased land the homeowner gets the use of the land without the capital outlay and can afford a far more luxurious home for less money.  Furthermore, since no one actually owns a home free and clear until the loan is paid off most so called "land owners" don't really "own" their property for the first 15-30 years.

For example, this simple logic has been sufficient to satisfy thousands of home and business owners in the Palm Springs area whose homes and businesses are located on land leased from the Agua Caliente Indian tribe.  But for those who like to explore all ramifications here are some more facts to ponder, posed in the form of most frequently asked questions about Indian leased land:

WON'T THE VALUE OF MY REAL ESTATE CLIMB FASTER IF I OWN THE LAND?

While resale values are determined by many things, all available figures indicate that resales of homes on leased land have climbed in exact proportion to other homes in the area.  The condition in which you keep your home has far more influence on its resale value than the fact it is (or is not) on lease land.

WHAT ABOUT MY CHILDREN AND GRANDCHILDREN AND WILL I BE ABLE TO PASS A LEASEHOLD ESTATE ON TO THEM?

Of course.  You can give or sell your home on lease land just as easily as on fee land.  However, if you are concerned about your heirs 65 years from now, there are four realistic questions you should ask yourself:
1) Will they really want a 65+ year-old home when the average life of most California residences is estimated at less than 50 years?
2) Considering that most residences change ownership about every five years is this home really likely to stay in your family for 65 years?
3) If you have a savings of $206 per month ($2,472 per year) by leasing land vs. purchasing over the life of a 65 year lease your savings would total $160,680...even without earning interest.  If you kept this monthly savings in an account paying 10% annual interest your savings would exceed $1,250,000 over 65 years.  Wouldn't that be a better way to take care of your great -grandchildren?
4) What happens at the end of the lease?  Since there is no legal restriction prohibiting the tribe from selling its land you or your heirs nay have the option to purchase if you wish to do so.  However, most probably, you would be offered a new lease based on conditions existing at that time.  There would be no financial advantage to taking the land back and, as the tribe long ago observed, "One can not eat dirt."

WHY DO SOME PEOPLE COMPARE A HOME ON LEASED LAND TO A VARIABLE ANNUITY LIFE INSURANCE POLICY?

Probably because it's easier to understand!  Just as a variable annuity gives you the possibility of gaining from both fixed interest rates and asset appreciation a home purchased on leased land gives you a monthly savings along with the possibility of home appreciation.

It can be an investment hedge whether home prices are rising or falling.  During an "up" period, your home will increase in price.  In a "down" period, the dollars you did not spend on land, but invested in a fixed interest savings, will continue to increase.

Today, building on lease land is no longer an advantage reserved for business and investment buyers.  Now, in Palm Springs and the surrounding communities, it is something any home buying family can enjoy, thanks to the honesty, intelligence and perseverance of those original desert dwellers who were sincere when they said, "Welcome, brother, my home is your home"

What's my take?  You can get some great deals on lease land properties...definitely more than the property you'd get on fee land.  However, there is uncertainty in the lease.  Most lease rates fluctuate with the Consumer Price Index, so you don't know exactly how much the lease payment will be at a point in the future.  And the lease does expire, so someday you will have to deal with renegotiating a new term with the tribe.  I tell people that as long as the lease has a long life (at least 40 more years remaining on the lease) and the terms are good it is smart to consider buying a property on lease land.  But know yourself...if you're uncomfortable with uncertainty a land lease may not be right for you under any circumstances. 

If you have any questions or concerns with the issues discussed here please contact me...I'd love to hear from you!

Alan Wilke
Condos@PalmSpringsCondoLiving.Com
760-464-6693