Achieving the American Dream. That’s what many of us strive for. And that often means seeking a home to own. Perhaps you have experienced the excitement of unlocking the door of your newly-purchased home. Sadly, sometimes that dream can turn into the nightmare of home foreclosure, shutting the door on that important opportunity.
This is what happened to many homeowners after the last housing bubble burst in 2008. But, surprisingly, one form of homeownership was much less likely to lead to foreclosure than others and that was owning a home as part of a Community Land Trust or CLT.
In a CLT, the homeowner finances and owns the title to the building portion of the home. But, the land portion — which averages about 30% of the total home value – is rented from a non-profit organization, which has title to the land underlying the house structure. The homeowner only pays a nominal amount in land rent to the trust – about $30 per month — but pays the property taxes on the home.
Studies have shown that CLT homes have a much better chance of avoiding foreclosure than conventionally-financed homes. This is likely because the land value portion of properties is much more volatile than the building portion of properties. If you look at yearly information, you would see that the labor and material costs that go into building values vary only slightly. But land values – which are based strictly on demand – vary dramatically, leading people to hugely overpay during a housing bubble. Because homeowners in a CLT only finance the stable building portion, they avoid overpaying for homes during the bubble years.
Despite this good news about CLTs, the bad news is that relatively few homes are in CLTs. The CLT that is located in St. Paul, MN has existed for decades but only 75 homes are part of it. This is why an organization I volunteer with called Common Ground USA has begun working on a project we call a Public Land Trust or PLT that we think can create these benefits at a much larger scale.
Under a PLT, a homeowner would also only finance the building portion of a home but wouldn’t have to finance the land portion. Why? Because they would be paying full land rent for it, which is about 6% of the land’s selling price, to the trust instead of paying property taxes (i.e. the trust would pay the property taxes on the home). This could come about in several ways. For example, the City and County are often selling properties that they own because of tax forfeiture or other situations. Under a PLT, when selling these properties, the City or County, through the trust, could retain title to the land and only sell the building to a buyer, who would pay land rent to the trust in lieu of property taxes.
In addition, the City and County often provides funding to developers and home owners. In exchange for this funding, a deed restriction could be placed on the property requiring in perpetuity that land rent be paid to the trust in lieu of property taxes.
Homes of average value or above usually pay more in land rent than they would in property taxes. However, because they don’t have to finance the land portion of the home, they still have lower monthly payments than they would with conventional financing. So, both the community and the homeowner come out ahead. It’s a win, win!
It’s time to stop paying land owners, banks and Wall Street for the land under our homes. They didn’t create the land and the community creates its value. We should be paying the community for that value instead. With Public Land Trusts, we can pay our communities for the value they create and at the same time help more people avoid the nightmare of home foreclosure. Let’s help these individuals remain in the American Dream.
