Posted by JohnBoy on June 07, 1999 at 24:11:05:
It sounds like you would be buying yourself one expensive rental for 5 years if the land owner will only give you a 5 year lease. In 5 years you will be in the same position the building owner is now. Owning a building with no land to go with it and the land owner can raise the land lease to whatever he wanted to.
Assuming the seller of the building would finance the $66k at 100% with 0% interest. You will have to pay this off within the 5 years since you will only have a 5 year lease on the land. That’s $1100 per month plus $1200 for the land lease plus another $433 per month for the taxes. That’s $2733 per month for 5 years at which time you could end up with nothing to sell. Is this house worth throwing out $163,980 over 5 years just to live there?
Why not sit down with the seller of the house and explain to him that you talked with a couple of banks about buying this house. The problem is no bank will amortize the mortgage for more years than the lease on the land would be for. Since the land owner will only lease for 5 years then the bank would only go for a 5 year loan which will make this deal undoable for you.
Instead of the seller bulldozing the house down and losing everything why not lease you the building for 5 years at $400 per month with an option to buy at $40,000 at the end of 5 years. If the land owner gives you a problem with renewing the land lease then the seller could always bulldoze the house at that time. At least this way the property would be affordable for you and he would at least collect $400 a month for 5 years which would give him some extra income every month. If you can get another lease in 5 years and exercise your option in 5 years the seller ends up getting $64,000 for the building. At this point he has nothing to lose and only extra income to gain.
If he goes for this then write up a contract subject to you being able to secure a lease with the land owner. Then sit with the land owner and tell him the same thing about the banks not willing to give you a mortgage with only having a 5 year lease on the land. Tell him they will require the lease to be for the same number of years as your mortgage. Try to get him to go for a 30 year lease. Tell him he could build in reasonable lease payment increases every 5 years if that would satisfy his needs. Explain that you talked to the seller of the building and would like to buy his house but with such a short ground lease this deal wouldn’t be doable. Tell him the seller is planning on tearing the house down soon because he doesn’t think he will be able to sell it with short terms on a ground lease. If the seller tears down the house he won’t get his $1200 a month unless someone else comes along willing to lease the land and build a home on it which no one in their right mind would do if they couldn’t get a minimum of 30 years on the lease. If he won’t go for the 30 year lease then try for 25, 20, or at the very least 15 years. This way you might be able to sell at a profit with 15 years. 25 - 30 years would be pretty easy to sell for ocean front property.
If all else fails then you need to ask yourself if living there for 5 years is worth the cost. At $400 on the building and $1633 on the ground lease and taxes is worth it to you for only having 5 years to live there then that’s up to you to decide. That will still cost you over $121,980 in 5 years.
You said you could get $2,000 per week in the summer if you rented it out. You would need to rent it for 13 weeks each summer to cover your total cost of rents for 5 years if you get the seller to agree on the $400 per month with an option to buy. That’s 3 full months every summer you need it rented out at $2,000 per week.
And if you do end up doing a deal on this, whatever you do, make sure you get a “first right of refusal” on the land in the event the owner should ever decide to sell. He shouldn’t have a problem with giving you that. That just means you will have first right to buy the land for the same price someone else is willing to pay for it. If you can live with the price and wanted to buy it at that time then you get first choice on it. Otherwise you just pass on your right and the other buyer gets it…