Ground rent cuts cost of becoming homeowner

REAL ESTATE MAILBAG

December 19, 1993

Q: What is a ground rent? And should I redeem my ground rent?

A: Many homeowners in Maryland do not own the land under their house. Instead, they pay a yearly ground rent to the true owner of the land -- or the fee simple owner.

With ground rent, there are two owners: the fee simple owner, who owns the land; and the leaseholder, who owns the house and other improvements to the land but must pay rent to use the land.

A Maryland ground rent lease typically runs for 99 years and is renewable forever. It is about $45 to $250 per year, and is paid in semiannual installments. The yearly rent -- which is set by law -- is usually equal to 6 percent of the value of the land.

Thus, if the land is valued at $3,000, the ground rent would be set at $180 per year. The homeowner, at any time, can buy the land for par, or face, value and rid himself of the ground rent.

If the ground rent payment is more than six months in default, the owner of the ground may file suit to take title to the house. The owner of the house has a right to bring the ground rent current, plus pay the ground owner's expenses, and keep title to the house until the time a forfeiture decree is signed by a judge.

The origins of ground rents go back to Maryland's Colonial days. Ground rents were originally created for two main reasons: to enable the buyer to purchase a house inexpensively by not having to pay for the land; and to enable an owner of a piece of land to sell something (that is, the right to own, occupy and control the improvements on the land) but still collect a yearly rent and maintain the legal ownership of the land.

Should a homeowner buy the ground?

There are two factors. First, the owner may want to own the land for emotional reasons or, on the other hand, may not care who technically owns the land.

Second, it might make financial sense to buy the land. If the homeowner is paying 6 percent to rent the land, and interest rates are low, it could be worth buying the land -- if, of course, the homeowner has the money. The homeowner, when first buying the property, may not buy the land because it would add to the amount that he would need to borrow or put down on the house.

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