Louis Wilen, a Montgomery County resident who is a part-owner of a few ground rents, emailed me the other day to share his observations about when (and how) it's worth it for homeowners to buy out the ground rent on their property. I thought you'd be interested, so I'm turning today's blog post over to him in just a moment.
First, Ground Rent 101:
It's a longstanding quirk in our system, one that seems to separate the ownership of homes from the ground underneath them. If your home has a ground rent, you must pay a fee -- usually a relatively small one, twice a year -- to the owner of that investment. Or you can buy it outright, known as "redeeming" it.
Homeowners dealing with ground rent do actually own their land as long as they continue to pay. They officially have a "leasehold" interest in their home and ground, while the ground rent investor has a "reversionary interest." The ground rent works as a never-ending lien.
A Baltimore Sun series about abuses by big ground-rent owners prompted state legislators to pass a series of laws intended to reform the system. One of those changes was recently overturned by Maryland's highest court as unconstitutional because it zapped any ground rent that wasn't registered by owners before the end of September 2010. (A variety of mom-and-pop ground rent owners, the types who weren't seizing houses left and right over small unpaid bills, had complained that they had no idea until it was too late that the state had required registration.)
OK -- that should do. Take it away, Louis:
With most ground rents yielding 6 percent (and some yielding 12 percent) based on the rent rate divided by their redemption value, most homeowners would save money by redeeming their ground rents, assuming that they have the cash to do so. Paying off a ground rent is essentially equivalent to putting money into a risk-free investment yielding 6 percent. Since there are no risk-free investments yielding 6 percent at this time, the financial benefit of redeeming a ground rent is clear.
Redemption of a ground rent requires payment of recording fees and transfer tax. The amount of the fees and taxes vary depending on the jurisdiction in which the property is located, but as an example, the government fees and taxes to redeem a $100 per year ground rent would be about $100. Also, if the parties need legal assistance to perform a title search, draw up the deed and perform settlement services, there could be additional costs of about $200 to $500.
Continue reading "Thinking of redeeming your ground rent?" »