Choosing A Building Lot For Your Home - Preserving Value
You’ve decided that you want to buy a lot and have a builder construct your new home. Your primary concern should be to make sure that the value of the total property (i.e., lot and house) will increase and be preserved over time. You may be a buyer now, but sooner or later you will want to sell the property. As a seller, your goal should be to realize a profit on your investment, and this can only be accomplished if you base your decisions on objective data and not emotions. With that goal in mind, what can you do to preserve the value of your property and avoid making a huge mistake?
If you’ve read my prior articles, then you understand the importance of location and the need to evaluate pairs of parcels. In a “buy a lot then build a new home” scenario, the pair consists of the vacant building lot you want to buy and all of the other properties in the immediate area. The value of your potential home site is going to be impacted (for better or worse) by the values and uses of the properties nearby. So if you find what you think is a terrific residential building lot that’s adjacent to a commercial parcel, an industrial building or a quarry, get this: the lot is not terrific. Those neighboring properties will “taint” or depress the value of your property.
Another key to preserving value in this situation is to remember that your project consists of two separate components: the land (the building lot) and the improvements (e.g., the home, sidewalk, driveway, utilities, landscaping) that would be installed on it. In deciding how much to spend for each component, you should be guided by the values of the neighboring properties. For example, you shouldn’t pay $200,000 for a building lot in an area where other comparable lots have sold for $150,000. You shouldn’t spend $400,000 for your total package in a neighborhood where existing homes on their lots are selling for $300,000.
The value of the lot will not increase in direct proportion to the improvements you add to it if the surrounding property values are either equal to or less than the value of the lot without the added improvements. Where “L” is the lot and “I” represents the improvements, the total value of the property is not going to be L + I. In other words, putting a $300,000 house on a lot you’ve bought for $150,000 won’t magically raise the value of the property to $450,000 if adjoining properties (homes on their lots) are selling for only $300,000. A good rule of thumb to follow is that the total cost for your project should not be substantially more than the sale values of the neighboring residential properties.
Suppose the total budget for your project is $400,000. How should you decide what to spend separately for the land and for the improvements? Picture a dog with a tail. In terms of priorities, the land is the dog and the house is the tail. That doesn’t mean you should pay more for the lot than for construction. It does mean, however, that you shouldn’t choose an undesirable or location-challenged lot because it has a cheap price and then dump big bucks into the house. In the long run, you’ll lose value. You won’t recover the money you spent on bells and whistles for the house when you try to sell the property in the future. Home buyers might love the house, but if they hate the location or feel that the lot is undesirable, they won’t buy your property or will discount the price they pay for it.
You may have to allocate 30-40% of your $400,000 budget to land cost which means paying up to $150,000 for a quality building lot. This would leave you with around $240,000 for the house (if the cost for site preparation, utilities, permits and other work is $10,000). Could you get a house built for $240,000 and if so, would it have the features you wanted? The answer would depend on the size of the structure, the building specifications and the costs the builder is charging in the construction contract. But regardless of what you spend for your project, just make sure that you keep the total cost consistent with the neighborhood values. If you find that this is impossible to do, then your options would include changing your house specifications, looking for lots in lower-priced areas, or rethinking your initial decision to buy a lot and have your home built.
At last, there is a resource for people interested in buying or selling land. Check out Nancy Chadwick’s real estate investing and land development guides, articles and books at
http://www.LandBuyingandSelling.com/
Tags: building lot, buying land, real estate development
