When you purchase a new home, you also purchase the lot that it is built on. Some lots may cost more than other, due to many factors.
How much more (or less) you’ll pay for a lot you like depends on the lot’s characteristics and how the builder adds the perceived value of those characteristics to the home’s price, says Priscilla Schumacher, director of sales and marketing at Edward R. James Homes, a homebuilder in Glenview, Ill.
“Let’s say one home is set further up than another,” Schumacher says. “Is the view going to be stopped or will you see a wider range? Are you looking at a pond? A park? A golf course? You plus this and minus that and that’s what we add to the base price of that home.”
Positive attributes might include a flat lot, corner lot, view lot, larger lot or cul-de-sac lot. Negative attributes might include the proximity of a cemetery, industrial park, heavily trafficked road or other undesirable land uses.
Lot premiums can range from zero or a few thousand dollars to hundreds of thousands or even millions. A luxury home with an unobstructed ocean view might be priced at $2 million more than the same home across the street.
Choosing a lot can involve making tradeoffs, says Irene Hammond, a Realtor at eXp Realty in Scottsdale, Ariz.
“If a home has a road behind it, for example, that becomes a deterrent because you’ll have traffic. If there won’t be much traffic and you have a little extra land and (more) privacy, it could be a wash. Or it could be a busy street that is less desirable,” Hammond says.
Nuances matter. Is the road a single lane or three lanes in each direction? Is it an access road that goes into and out of the community or an internal road traveled only by residents? Is there a traffic signal? Is the lot on a corner? These and many other factors could affect the lot premium.
The direction a home faces can also be an important attribute. Some buyers prefer a north-facing home; others want a home that faces south, east or west. Each direction might have a different premium assigned to it by the builder.
Regardless of each lot’s specific attributes, the very best lots naturally command the fattest premiums, says Pete Reeb, principal at John Burns Real Estate Consulting in San Diego, Calif.
“You also have to factor in that the higher the price of the house, the more the buyers are going to want the best lot,” Reeb adds. “You almost can’t price the prime lots high enough because that’s what everybody wants.”
Physical characteristics aren’t the only factor. Builders also adjust premiums to speed or slow sales of homes in a community or match the pace of sales to construction schedules or simply to maximize profits.
“One of the ways that builders can control their pace of sales is by varying how much they charge for a home and for the most prime-premium lots versus the more standard lots,” Reeb explains.
Smart buyers look at lots in real life, not just online or on a map.
“The buyer wants to go out and actually see the lot and see with their own eyes if it’s more desirable or not and if they see the extra value or not,” Reeb says.
Schumacher says buyers never ask what lot premium the builder has added to a home’s base price.
“They can see the attributes and it is quite obvious to us all and to them why they are paying a little bit more,” she says.
But Reeb says it’s “very reasonable” for buyers to ask that question.
Some lots hold their value, allowing buyers to recoup the premium when they sell their home. But housing markets are cyclical and both the prevalence and amount of lot premiums can — and do — fluctuate over time.
“The best view lots always got a premium,” Reeb says, “but, whereas a builder might sell a million-dollar house with a $200,000 premium in an up market, in a down market, maybe that premium dropped to $150,000. Generally speaking, more desirable lots tend to hold their value better than less desirable lots.”
The bottom line is that buyers need to do their homework and choose their lot with care.
Marcie Geffner is an award-winning freelance reporter, writer and editor in Ventura, California. In the last decade, she has penned more than 1,000 published stories about residential and commercial real estate, banking, credit cards, computer security, health insurance and small business, among other subjects. Editors describe her as “detail-driven,” “conscientious,” “smart” and “incredibly versatile.” Her award-winning reporting has been lauded as “rock solid,” “spot-on relevant,” “informative,” “engaging,” “interesting” and “nuanced.” Her stories have been cited in seven published nonfiction books and two U.S. Congressional hearings.
Prior to her freelance career, Geffner was senior editor of California Real Estate magazine. Later, she became managing editor of Inman.com, an independent real estate news website. She also has prior employment experience in technical writing, corporate communications and employee communications. She received a bachelor’s degree in English with high honors from UCLA and master’s degree in business administration (MBA) from Pepperdine University in Malibu, California. She enjoys reading, home improvement projects and watching seagulls at the beach.
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Nancy
What if I paid a premium for a lot, described as an oversized preservation lot…and then the developer goes through and mows down the woods to build a street behind the house instead? The house has not been built yet, and now the view I wanted has been destroyed. Do I have any chance to back out, or get the money I paid for the lot significantly reduced due to the absolute destruction of the view I had banked on? Thanks!
Jamie Garcia
Hi Nancy,
You should review your contract with a legal professional to see if you are entitled to any compensation or if you can back out of your contract at this stage.