Leased lots are more common around the lake than you think. Lake Homes Realty’s CEO, Glenn Phillips, shares why you should consider purchasing these properties.
Common on Many Lakes: Larger lakes were built by power companies, and in order to maintain control of the surrounding land, they prefer to lease lots instead of selling them.
Buy House, Transfer Lease: When buying a home on these lots, the lease will get transferred to the new owners of the property.
Reconsider Time of Homeownership: There’s no need to fear the time length of a lease. If you want to stay longer than your allotted time, you can always renew it. If you’d like to leave sooner than expected, the lease will be transferred to your buyers.
Can Still Finance a Home: Local lenders who are familiar with this structure will have no issue helping you finance.
Buying on a leased lot is a great option for buyers. Remember, you aren’t restricted to the timeframe of the lease because of renewal and transfer options!
Did you know that many lake homes are built on leased lots? In this video, we demystify what misconceptions you may have in regards to leased lake lots.
Shoreline Ownership. Oftentimes, lakes are owned by public or private utility companies, the Corp. of Engineers, the Tennessee Valley Authority, etc. Because of this, lots on these lakes are leased.
Lease Duration. Leased lots typically have long terms. It’s not uncommon to see durations range anywhere from 25 to 99 years. Because most homeowners don’t own their lake homes for more than 20 years, these long-term lease durations are factors that lake home buyers must consider when purchasing or building a home on a leased lot.
Mortgage Impact. Getting a mortgage on a leased lot is not unusual and happens quite often with lake homes. But one of the concerns that potential lake homeowners could encounter is how the mortgage term could impact the lease term duration. For instance, a lender may not approve a 30-year mortgage for a lake home that is on a 25-year lease.
It’s no secret that lake property typically costs more. If you are shopping for your first lake home, chances are you’re extremely aware of this! What many first-time buyers don’t know is that there are several hidden costs of buying a lake home that may lie just beneath the surface.
While you are busy falling in love with that gorgeous lake home of your dreams, keep the following factors in mind. Your budget will thank you!
Leased Lots
Even with a traditional mortgage, buying a lake home may involve leasing the land itself.
This is most common on waterfront property. The power company, the local municipality, or even the federal government may own the lake itself – and that often includes the shoreline.
When you purchase a home on a “leased lot,” you enter into a long-term lease with the owner.
These are not complicated, but it can be a significant expense. Leases typically run between $200 and $500 a month, depending on the area. Depending on the area, your lease could last anywhere from 20 to 100 years!
When on the waterfront, ask always find out who owns the shoreline. This can be a huge factor in your budget.
Property Taxes
Lake property is subject to higher property taxes as well, and if your lake home is going to be a second home, that can make tax season incredibly complicated.
These hidden costs of buying a lake home often don’t pop up until you’ve already been in the home for months.
Many lake homeowners have their primary residence in different counties or even states. Research the local laws and tax rates for your lake home. Don’t be afraid to consult with an accountant!
If you rent out your lake home, you may also be subject to income tax.
Insurance
Homeowner’s insurance is usually higher for lake homes due to their increased exposure to the elements. Having good coverage is a wise choice to begin with. Unfortunately, that choice might already be made for you.
Local laws and insurance companies often mandate a higher level of insurance coverage for lake homes, including flood insurance.
Remember that you need to get coverage for any additional structures on the property, such as your dock, guest house, or sea wall. Your homeowner’s insurance policy may not cover them automatically.
Flood insurance should always be seriously considered for lake property. After the floodwaters recede, this protection can mean the difference between a serious hassle and a financial disaster.
HVAC and Septic Systems
According to Wally Cawthon, a Lake Homes Realty agent on Jackson Lake, Georgia, “The two biggest unexpected and preventable expenses for first-time lake home buyers are repairs to HVAC systems and septic systems. If buyers take proper inspection measures, they can avoid these in almost every case.”
Many lake homes, especially in rural areas, use a septic system.
These need to inspected regularly to ensure that they don’t pollute the local water table, or the lake itself.
Never purchase a lake home with a septic system before having it professionally inspected.
This typically costs $200 to $500, and is money well spent. Replacing a seriously damaged septic system can easily cost up to $7,000.
HVAC systems should also be thoroughly inspected before buying.
A home that looks picture-perfect when the weather is mild can still house an HVAC system long past its prime.
Buy without having it inspected, and you may be in for a rude surprise (and an even more rude repair bill) when you take ownership.
Outdated HVAC systems can also churn through electricity, especially in the chilly winter months.
Depending on the specifications, a high-quality, permanent dock can cost more than $50,000. Factors such as size, water depth, climate, and other factors all contribute to this cost.
If part of your dream home involves building a dock, get a professional estimate on dock construction, then factor that cost into your budget for the new home.
On the other hand, you may have your eye on property that already has a dock.
If so, ask the selling agent if they know how old it is. Most wooden docks last 20 to 25 years. Purchasing one that is due to be replaced can be a serious hit to your wallet!
Know how your homeowner’s insurance policy covers your dock. Many policies cover the structure from incidental damage, but not damage due to flooding, freezing, or thawing.
Utilities
Many lakes are situated in pristine, secluded, rural areas. This means that power, water, cable, and other utilities often come at a premium.
Lake homes need a dedicated “land line” for the telephone. Between the rural locations and limited cellular service providers, you never want to rely entirely on a cell phone.
This may seem like a trivial concern. Lake homeowners can attest, though, that these hidden costs of buying a lake home add up quickly.
You will find this doubly true if your lake house is a second home. This is why many lake homeowners “winterize” their homes in the winter months, cutting off the power, gas, and water when it isn’t in use.
These associations often serve the same role as small-town municipalities around the lake itself. They maintain the lake, set local regulations, and preserve the natural beauty of the area.
Homeowner’s association dues usually make up a small, but mandatory, annual cost.
It’s a good idea to acquaint yourself with the association before purchasing the home. This can give you an inside look at the local culture, including your future neighbors!
Do the Research
These are the most common costs to take into consideration. When researching a lake home, factor these into your budget early on.
Having property on a lake is amazing, but when it comes to the lake shoreline, someone else – depending on the situation – may own it. For instance, some properties entitle you to use the water, but not to construct a dock or other structure by the shoreline.
Before purchasing a home on the lake, make sure you ask about shoreline ownership.
Power Companies
Power companies often build lakes for hydroelectric power generation and similar uses; this means that the company owns the lake. However, they may allow the land around the lake to be sold or leased. Many times these leases are for long periods of time – such as 100 years (more on that later).
Usually, these lakes are open for recreational use. But, the power companies that own them typically instruct homeowners and visitors to follow certain restrictions and user guidelines.
Private Property Owner
Say there is a large acreage property with a lake on it. If the lake is situated completely within the land’s perimeter, then the owner of the land also owns the lake. The lake is considered to be private property, and the owner can do with it as they wish.
Another private property example is when a home is on land that extends to the lake shoreline, but the lake itself is not part of the land purchased.
In this instance, only the property is private. A real estate agent will be able to tell you where the property line ends and where dock construction is permitted.
In other instances, property owners own the home, the land, and part of the shoreline. If your property includes shoreline ownership, its value could increase.
Part of the U.S. Army Corps of Engineers’ role is “planning, designing, building, and operating locks and dams.”
The Corps owns and operates more than 200 locks and dams throughout the United States, and in many instances owns the lake, shoreline, and property in the immediate area.
Although on some lakes property can be sold for private ownership and use, there are other lakes on which no private construction or ownership is allowed.
However, even if no private construction or ownership is permitted, the Corps usually provides public access boat ramps so that people can still enjoy the lake by boat. They are are also usually public campgrounds and nature areas located nearby.
Leased Lots
As previously mentioned, some entities, like power companies, own a lake and the surrounding land but offer leased lots. These leased lots can be confusing to those who do not have experience dealing with them.
If you buy a home on a power company-owned lake, the home you purchased will be yours. The land, however, may be leased from the power company. But you don’t have to worry about the length of your lease term. Many lakes will lease land in 100-year terms.
Buying a home on a leased lot is almost a hybrid between an inheritance and a leasing agreement.
Buyers don’t have to re-negotiate lease terms with every property purchase. Instead lease agreements, responsibilities, and property additions – like boathouses and docks – are “passed down” to the next buyer.
An important thing to remember about leased lots though is that the original landowner (the utility company) maintains ownership of the land and lake shoreline when leasing terms expire.
Violating shoreline ownership rules and restrictions can result in fees and fines owed.
Before purchasing a home on the lake, ask your real estate agent about the shoreline. Any lake expert agent will be able to tell you who owns the shoreline and what restrictions may be in place.
Every lake home buyer has the same question when it comes to shoreline ownership. Do you own this land, or lease it? The choice does not always belong to you.
Who Legally Owns the Land?
The owner of the lakebed and the shoreline property may have stipulations on the way they can legally offer building lots. Most owners of major, developed lakes in the United States are public utilities. Utilities such as power companies or government agencies like the U.S. Army Corps of Engineers.
In fact, some estimates show that these kinds of shoreline ownership accounts for about 90 percent of the approximately 41 million acres of lakes and reservoirs in the United States.
When a public utility builds a lake because it needs water for industrial use, such as hydroelectric power, cooling of industrial power plants, etc., the public utility, within Federal Energy Regulatory Commission (FERC) agreements, retains possession of much of the land around the lake, including shoreline areas.
The FERC may allow the public utility to only leaseshoreline lots to homeowners. In other cases, the public utility is able to actually sell the lots to homeowners.
Whether they lease or sell the lot is based on the individual public utility’s agreement with the FERC regarding a particular lake. Additionally, highly detailed state or local lake protection ordinances contain restrictions covering many concerns. These concerns include how many homes can be built along shorelines, how close to the water they can be, and how wide visibility buffers must be between them.
Things to Consider with Leased Land and Shoreline Ownership
Potential lake home residents are cautioned to read the fine print on land lease documents. For instance, a lease may stipulate that if “improvements” are not made within a certain number of years, the lease could be terminated.
This means that a person who intends to eventually build a retirement home on leased land, let’s say in 40 years, may not be allowed to do so. This is because the lease could stipulate that “improvements” or building of the home must occur within 5 years.
Land leases can run for a maximum of 99 years, while some lake leases are much shorter. Sometimes running 35 or less. A mortgage lender will typically not issue a mortgage to buy or build your lake home for longer than the length of the lease on the lot. For instance, seeking a 30-year mortgage to build on a lot that is leased for 25 years is futile.
Consideration for inheritance must include the length of the property lease and whether it is renewable. With many leases, after the lease term expires and there is no renewal option, all land and “improvements” (inclusive of houses and other structures) revert back to the organization who has issued the lease to the person.
So don’t build a lake home on leased land with no ability to renew. Also don’t expect your heirs to automatically have ownership of the lake home.
At some lakes, ownership of the ground might be an option when deciding to build a new home or purchase an existing home. There is usually more opportunity for this on a privately-owned lake, although many publicly-owned lakes offer ownership as well.
Some public utility officials say the trend at public utility-owned lakes is moving more toward selling the lots, rather than leasing them. But, only if it is allowed in the FERC agreement.
Floodplains and Your Shoreline
Keep in mind that whether leasing or buying land to build on, power companies by law must retain ownership of the floodplain. In practical terms, a floodplain is a certain number of feet of land extending from the shore of a lake.
This boundary is determined by federal and state agencies. It is vital for storm runoff, vegetation diversity, water quality, wildlife habitat, and aesthetic qualities.
Turn to an Expert
There can be many complications when it comes to purchasing or leasing property on a lake. This is why it is always best to enlist the help of a real estate agent. Specifically one who focuses on lake real estate.
A true lake specialist will be very familiar with all of the details of their lake. They will be glad to walk you through all available options and what each will mean to you as a buyer.
