The least expensive way to get into your first home might be through a Community Land Trust. A community land trust (CLT) is a non-profit organization that offers sustainable, affordable housing. It does so by purchasing land and developing it into multiple homesites.
The CLT retains title to the land, but sells the house to the new home buyer, and leases the land under the home. Leases typically run 99 years and are renewable, so they are effectively perpetual.
The home buyer purchases the home at a price that is substantially below the market price for like homes in the area. In exchange, there are usually restrictions that define how much the property can be sold for at any point in the future. This ensures that the community will provide affordable housing forever.
Community Land Trust Mortgages Have Been Hard to Finance
Lending on homes in a CLT has been difficult until recently. Because the land is leased, and not owned, there are only a handful of lenders who have been willing to make loans on them.
Most mortgages made in the U.S., no matter who originates the loan, are sold to either Fannie Mae, Freddie Mac or Wall Street investment hedge funds. This frees up capital for lenders to go make more loans. But these agencies didn’t buy loans made on leased land.
Since there was no ready market for these loans, banks that made the loans had to retain them “in portfolio,” so that capital was now tied up. This made it less attractive than conventional mortgages, so few lenders offered to finance CLT properties. Less competition meant less favorable interest rates, terms and fees for borrowers.
This changed in November 2018 when Freddie Mac announced that it would begin buying mortgages made on Community Land Trust properties. While it will take time, more lenders should jump into the market now, driving down rates and fees and allowing CLT home buyers more financing options.
Where Do I Find a Community Land Trust Home?
Now that this is starting to sound good, where do you find one? It’s not so easy. The easiest way to find one in your state is to search the internet for community land trusts in your state. You’ll find that your options are limited, and that the number of available homes at any one time might be measured in the dozens, or even single digits. However, they do exist in urban, suburban and rural areas.
To find individual homes within each community, you’ll need to visit that particular community’s web site. Because the resale of CLT homes is restricted, they are almost never sold by real estate agents or through Multiple Listing Services (MLS). Rather, when you want to sell your property, you tell the CLT, which then offers it to the next person in line on the waiting list at the purchase price defined by the terms of your lease.
The Benefits Are Obvious. What Are the Downsides?
Surprisingly, the fact that you are leasing the land under your home rather than owning it does not matter much. In most cases you are still allowed to use your land in any legally permissible way, provided it doesn’t conflict with the by-laws of your community.
However, that doesn’t mean you do anything with it at all. Like any condominium, there will probably be restrictions, for example, on what you can do to change the looks of the outside of your home and whether or not you can expand your home.
There are almost always restrictions on renting out your home; most CLT communities simply forbid it.
There are almost always restrictions on renting out your home; most CLT communities simply forbid it. It’s not, therefore, generally a good way to begin building a real estate empire.
The allowable resale value of your home is set by a formula in your lease agreement, so if the real estate market in the surrounding area suddenly explodes in value, you won’t see that benefit. On the other hand, if the market crashes, your resale price will probably still be below the predominant value in the area, so you probably won’t lose value when the surrounding market corrects, either.
Most CLT lease agreements will allow you to will your property to immediate family upon your death, but you may not sell the property to just anyone; the buyer must qualify to purchase the home the same way any other buyer would.
How Do I Qualify for a Community Land Trust Home?
You’ll need to earn less than the median income for the area, but high enough to qualify for the mortgage. It’s a narrow window in many cases, but Freddie Mac’s involvement will expand underwriting requirements considerably.
For the first-time home buyer, a home built by a community land trust may be the way to put down roots.