Patrick,

It's a bit more complicated than what I've included here. I'll be glad to email you a more detailed explanation if you'd like.

Basically... ground rent was originally created to make home buying more affordable. Let's say that a house in Baltimore has a a $120/yr ground rent. The capitalized value of that ground rent at 6% is $2000 (120/.06=2000). When the house was originally built, you could purchase it for $7000 in fee simple (no ground rent) or for $5000 (the in-fee value minus the capitalized value of the ground rent) with a ground rent. When most of the older ground rents were created it really did make a difference in home affordability.

Fast-forward to the present. Ground rents were generally created for 99 years with the right to renew every 99 years. However, the ground rent amount cannot change. So, a $120/yr payment now is primarily a nuisance. The owner of the ground rent has NO rights - except one important one: the right to collect that $120/year. Since the ground rent existed before your mortgage, his right supersedes that of your mortgage company. That's why lenders will require that ground rent be escrowed - so they are certain that it is paid. If you do not pay it, the owner of the ground rent can file an "ejectment proceeding" and get title to the house.

I would have no concerns about purchasing a home with a ground rent. One caveat: if you are getting a mortgage, a LOT of out-of-state lenders have never heard of ground rents. Some may not give you a mortgage; most will require that the ground rent be redeemed at settlement (easily done). Local lenders have no problem with them at all.

IF you are totally opposed to the idea of the ground rent, the person who owns it MUST allow the homeowner to "redeem" it for the capitalized value (in this case, $2000). Then the "house and ground" are "merged" and the ground rent no longer exists - the home is in fee simple. Frequently the owner of the ground rent cannot be found. The state has an escrow procedure that will allow you to redeem it in that case.

Hope that helps.

Ted Stewart, CRS, e-PRO
Yerman Witman Gaines & Garceau Realty

Mon May 5 2008, 09:14

Ground rent is the rent you pay to an owner of the ground on which your house sits. In such types of properties you do not own the ground and need to pay rent to someone -- usually annually. The purchase price of a property which has ground rent will usually be less than if the same property were "fee simple" -- where you own ground as well as the structure. A home sale/purchase involving ground rent has a few extra disclosure forms and if the ground rent owner cannot be found, the settlement company has to handle the transaction slightly differently. Some counties will have a special process setup for buyers to pay off the ground rent and own the property fee and simple even if the ground rent owner cannot be found.

Sat May 3 2008, 19:16