Land leases in Orange County CA? should I steer clear?

11 Replies

AsThanks in advancerch to find my perfect first deal I've come across some townhomes in orange county. The mortgage and the hoa can be covered by a renter, and it would cash flow. It's the first time I've ever seen or heard of land leases and this one is 2000 per year. I was wondering if I should steer clear or what questions should I ask that can help determine if it's a good deal? Thanks in advance for all your help.

Dennis, more information might help, a land lease has no improvement to speak of, amenities perhaps but no residence or commercial income producing property, then you mention an HOA and tenant. What's the circumstance, id this an out-lot of a development? What type of tenant, use of land is there? :)

I personally will never buy anything on leased land. The value of the building drops precipitously as the end of the land lease nears, then the land lease has to get renegotiated and you have to pay more for the lease once that's negotiated. I hate not having complete control over my property, which is why I won't even buy anything with HOA.

I remember when we were looking for multifamily rentals here in OC a few years back and came across a fourplex in Anaheim that looked like a good deal (as far as GRM, etc.), then I found out it was on leased land, so we passed on it. As I recall, it sat on the market quite a while.

I agree with @Kimberly T. I encourage my clients to stay away from leased land for the same reasons.

much will depend on the remaining term of the land lease, assuming at that time the building reverts to the land owner. There is a value, just tougher to figure out.

Some friends of mine were looking at a place in Orange, Ca, that is a condo complex on leased land. A freshly negotiated land lease (not sure exactly of the lease details) would have them paying around $1300/ month (HOA included), and 4/2 condo's sell for around $100k at the moment (whereas fee land would be closer to a $500,000+ condo). Obviously the lease would have to be gone over with a fine toothed comb to know exactly where you stand. But property taxes on a similar place would probably run $5000+ per year. To rent a similar place would be around $2500.

Under the right circumstances it could be worth a look at, of course that would really depend on the lease. I haven't done any homework on it to know if this case is an anomaly.

Andrew

@Dennis Guzman As has been mentioned, we would need to know the specifics to give information. There are areas in Newport Beach where multi million dollar houses and even manufactured homes are on land leases. What is the amount of the lease each month? What is the term? What are the CC&R's? Where in O.C. is the property?

Depending on any restrictions, etc. some of those properties can be used to produce solid cash flow as vacation rentals, etc.

This is a case where the devil is in the details.

Are the townhomes in the south coast metro area? I know that condos/townhomes in that area have a land lease that expires sometime around 2017.

Personally I'd be a little nervous.

My apologies everyone,

The property in questions is a 2/2 townhome in a complex of 20 in Costa Mesa, asking price is 150K HOA is $440 plus $2,000 per year in land lease. I am waiting for a call back from our rep so I can inquire further. Rents in the area run between 1750-2300 depending on amenities.

First questions on my list are how long is the term and if there are any restrictions with renting out the units.

Anything else I should inquire about?

I'd find out if the HOA has enough reserves to avoid special assessments.

Dennis, in some cases, owners of property on leased land has the option to buy out the land now or in the near future. I would ask if there has been talks of such an arrangement on the table.

WOW! Sorry, I missed the obvious. I think that was BC, before coffee!

Read the by-laws of the HOA

Check out their court filings, contingent liabilities

Check leasing restrictions

Check the ownership. % of owner occupied vs. rental

Is it an FHA Approved development, A PUD? (helps with financing)

I'd look to see the minutes of meetings, it's a non-profit, they should be public.

Minutes may indicate the number of votes, that tells you how active others are in the HOA, some never show up and the board just has a free hand, it gets political, I don't care for that, activity is much better as it keeps board members accountable.

Only other real issue is maintenance contracts, are they independent or does the developer remain on the board and have maintenance contracts you can't get rid of? The older the organization the better you can see what to expect.

Back to the Cards game, not looking good at the moment, they need my attention! :)

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.