Generally, a person purchasing a home buys the house and the land upon which it is situated. But there is a form of home buying where only the house is purchased and the land is leased. This form of financial arrangement is called a land lease. There are various reasons why one might wish to enter into a land lease agreement rather than a home purchase.

A common situation is one where an investor wants to retain ownership of a parcel of land but not develop it. The owner would enter into the land lease contract with a developer to build a home and then sell it. But the land would not come with the house. Usually a land lease will be for between 50 and 99 years. If the lease is near the end, the owner will generally renew it, although with a rental increase. There are advantages and disadvantages to this form of home ownership.

The most significant advantage of a land lease is that the purchase price is almost always much less than that for a home bought in the traditional manner. Not buying the land saves money. This enables you to purchase a higher quality home in a more expensive residential area than you might otherwise be able to do. Also, because you don’t own the land itself, you will have no or low property taxes to pay.

Typically land lease homes are part of residential communities that provide common services and facilities. Amenities might include private playgrounds, swimming pools, tennis courts, party or conference rooms and so forth. There would be homeowner association (HOA) fees. But they would most likely cover lawn mowing, snow removal and similar services.

There are downsides to holding property under a land lease contract. It is often problematic finding financing for land lease homes. This makes them harder to sell. HOA fees for these properties are invariably higher than those for comparable houses owned outright or for condos. The residents generally share in the cost of the lease of the land. That portion of the lease might appear in the monthly HOA bill. In addition, the HOA might make large assessments to cover major community improvements. If you don’t use certain costly amenities such as a golf course, you might find maintenance or major upgrades to be overly burdensome. You also might wish to do your own landscaping.

The most significant disadvantages are economic issues. Home ownership is a good hedge against inflation. When you are paying off a fixed-rate mortgage, your monthly payment remains the same when inflation rises. For a leased-land property, the lease payments and monthly HOA fees will increase at the rate of inflation or greater. At the same time, your home will decrease in value as the lease term approaches its end. Also, you will not be building any equity in your leased land residence. At the expiration of the lease, you could lose all of your equity according to the surrender clause of the lease.

Other considerations to examine before signing a land lease agreement include the amount of time remaining on the lease. If it is less than the time you plan to live in the house, you need to know your status at the expiration of the lease. This information is also critical in financing the home. If the remaining lease term is less years than what you want a mortgage for, it will be very difficult to obtain the financing. You also need to be fully aware of the terms of the surrender clause. The amounts of the monthly lease payment and HOA fees, how often they are adjusted, and by how much, are very important.

Buying a home through a land lease contract can be an attractive option in light of the lower purchase price. It is essential that you study the matter and obtain advice from professionals who are knowledgeable about land lease agreements.