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The advantages can be substantial...but there are drawbacks, too.
Posted April 27, 2010
If you opt to buy into a retirement community featuring manufactured homes, you may find yourself in the unique position of owning your home, but not the land on which it sits. That’s because many manufactured home communities are “land lease ” communities: you pay monthly rent for your spot in the neighborhood, even though you own your home.
There are real advantages to such an approach, the most important being that you can save a significant amount of money. But there are also disadvantages, such as a loss of equity. And there are real differences between the two types of ownership that go beyond the pocketbook.
Why a Land Lease Might Be For You
Many seniors moving to a retirement community are on a fixed income, and are limited in their housing options by the amount realized from the sale of their former home. Under those circumstances, it can make sense to move to a land lease community, where you pay only for your home and not the land on which it sits.
Owning land entails not only a high purchase cost, but also high property taxes and low liquidity. Many seniors prefer to reduce their housing costs by leasing land for a manufactured home, and investing the money saved. In many cases, the savings—and the profits—can be substantial.
Many seniors also recognize that residency in a retirement community can be a short-term thing. As residents age, many are forced to move elsewhere due to illness, declining coping skills, or death of a spouse. The turnover rate of homes within a retirement community can be high; and for some seniors, it makes little sense to invest most of their savings in a short-term home.
Why a Land Lease Might Not Be For You
Many other seniors prefer the stability of land ownership. Most leases are signed for a single year; after they expire, they continue on a month-to-month basis, but can be renewed. Bear in mind, though, that the owner can decline to renew the lease—at which point, you must move. Many older manufactured home communities also are sited on land that continues to increase in value, and you could some day find your entire community sold out from under you to make way for a more profitable venture. That won’t happen if you own the land rather than lease it.
What’s more, land ownership can be a good investment. Even though liquidity is low, real estate is traditionally an excellent hedge against inflation. The monthly payment on a fixed-rate mortgage can, with time, be less than the monthly cost of renting; and over the long haul the rise in home values usually outpaces inflation. But in a land lease community, monthly rent will increase at least to keep pace with inflation, and will probably surpass it (that’s how the developer makes his profit, after all).
HOA vs. Professional Management
In nearly all common-interest developments (CIDs) in which residents own their own lots, the community’s management is handled by a homeowner’s association (HOA). All common areas such as streets, parks, pools, etc., are owned in common; and an elected board sets community policy and determines dues and assessments.
In a land-lease community, the developer continues to own all common areas, and the community is run by a professional manager. Increases in rent or fees are beyond the influence of residents, as is community policy regarding everything from parking to pets. Either situation can deliver good results; but be aware that in a land-lease community, because you’re a tenant you have little real say in running your community.