Buying a Condo on Leased Land

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Buying a Condo on Leased Land

Hannah Noble
New to Real Estate · Orange County, CA · Member since 2020 · 19 posts · 8 votes

I found a 2bd 2ba condo in southern California (orange county area) in a very desirable area, minutes from the beach and a downtown area. It is definitely a fixer upper (mostly cosmetic), but has a lot of potential for add value. However, the down side is that it is on leased land (lease ends in 2057). It sounds like this lease keeps being renewed and most likely will in 2057. The downside is the lease will continue to go up as it is renewed.I am not very familiar with making investments on leased land, but doesn't sound like an ideal situation for a REI purchase. I know that it really affects the appreciation and re-sale value on it since you don't actually own the land.

What intrigues me about it....

This condo is goingg for half the price of similar condos in that neighborhood that have been somewhat updated and down the street from small homes and condos that almost triple in price.

Background on the condo complex that is on the leased land...

There was a 1bd 1ba in this condominium that was recently upgraded and sold in September for about $10,000 more than the one I am looking at. Another one that is somewhat upgraded and same layout (2bd 2ba) that is currently on the market for 140k more than the asking price on the one I'm looking at, but has been on the market for a while (most likely because it is priced too high with the land lease and isn't fully upgraded). A few years back an upgraded 2bd 2ba with the same layout sold for about 85k more than the price mine is currently listed at.

Because of the land lease it doesn't sound like something I would hold onto for too long because I am not going to appreciate like other properties in this area due to the land lease. However, may be one that could be a live in flip kind of idea. However, just unsure of how the land lease will effect buyers in 2-5 years, even if it is upgraded, in a good location, and listed well below average condos in that area.

Would love any thoughts or experiences anyone has had with land leases, especially in areas with high appreciation, desirable living conditions, and any thoughts about a purchase like that with everything that is going on in the world right now with our economy.

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  • Joe HomsBusiness Member
    Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
    5y

    @Hannah Noble looks like you have done your homework and answered most of your questions.  I personally would not buy on leased land for all the points that you bring up.  It's like buying a home on a cliff that is slipping, because the price is low and it has a gorgeous view.  Eventually its going to slid down the hill and you will have nothing.  It's also very difficult to get a loan on this type of property.

    Good Investing...

    [email protected]949-625-4533
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  • Ross Hair
    Real Estate Broker · Boulder, CO · Member since 2008 · 29 posts · 11 votes
    5y

    @Hannah Noble You need to be very careful and do deep due diligence on a leasehold condo deal subject to a ground lease. Don't be afraid of the deal, just do your due diligence.  Here are the headline red flags to look out for:

    1 - Leasehold Interest. When you purchase the condo you will own the improvements (the condo) but you will not own the land beneath the condo. That's not unusual (a condo association or HOA would normally own the land anyway). The unusual part in a leasehold condo is that an investor owns the land and will charge you ground rent. So red flag one is determine the ground rent and pay attention to ground rent escalation clauses. The ground rent could be very high (20K plus a year and rising) plus leasehold owners often try to sell just before a rent escalation period.

    2 - Ground Lease. The ground rent, rent escalation and length of the ground lease are the critical parts of this deal. At the end of the ground lease ownership of the improvements usually return to the ground owner. You need to check if you can automatically renew the lease. If you can not renew the ground lease, or you can't renew it at a reasonable rate, the value of the condo will significantly decrease, down to zero , as the ground lease nears its end of term. In short, your condo will decrease in value each year. Red flag 2 is check the right of lease renewal and red flag 3 is pay careful attention to rent escalation.

    3 - Financing a Leasehold Condo. Fannie Mae underwrites leasehold mortgages so getting competitive finance isn't difficult but does require a mortgage broker who understands the product. The red flags are that lenders may not offer leasehold mortgages in your area, lenders require the ground lease to run at least 5 years past the mortgage term (you have 37 years left .. that's getting tight) and the condo dev still needs to be warrantable. Most older leasehold condo developments are no longer warrantable. If not warrantable you will not get a loan. Even if you have the cash to buy, it will be difficult to resell.

    Some ideas - value the condo based on the comparable cost of renting the same unit. If the numbers pencil then think of it as a nice rental for you personally in a great area (few minutes from the beach). It could also be a really nice short term rental as you can buy for far less than a comparable fee simple condo and the cash flow could be excellent. Just accept that you need to make enough money now to walk away from your purchase price later.

    The biggest idea - figure out how you can be the land owner in one of your future deals.

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