There is an ongoing debate about the lot premium. Essentially, is there a value of paying a “premium” for a home site when buying a new home? Certainly, the home builder is seeking to increase their profit margin. But for a home buyer, there is a question of future value at resale.
A home builder will typically sell certain home sites within a community at a higher price, effectively increasing the price of a new home. Some home sites are deemed to be more “valuable” because of the lot’s characteristics and/or location. A lot premium may be charged if a home site is larger, flatter, and/or more symmetrical than others in the community. Lots tucked away from the main road or close to common areas are typically premium priced as well.
Don’t hate the home builder for charging a lot premium on your new home. Home builders are trying to sustain a business by recouping the cost and financial risk of land development. Placing a premium on home sites has become a science, and research consultants typically provide data on developing home sites and pricing.
However, there is also an economic factor. When the housing market was still reeling from the Great Recession, charging a lot premium was not common. However, home builders added lot premiums when sales recovered.
John Burns, CEO of John Burns Consulting, wrote about the rising premiums on home sites as the new home market recovered in 2013 (Lot Premiums Are Back!; realestateconsulting.com; May 23,2013), stating “Our consulting team has noted a significant trend in the market: lot premiums are rising substantially!” Burns broke down lot premiums based on region. And, of course, lot premiums increased according to how the region’s housing market recovered. For example, lot premiums in Florida were about 10 percent at that time; While Southern California was trending to include the premium in the list price to help stabilize prices. Also, the DC region’s housing market was still recovering and home builders were only charging 1 to 2 percent for a lot premium.
Burns also noted that buyer demographics can also dictate lot premiums. At that time, it was reported that home builders in Southern California were charging a 5 percent premium based on feng shui and home site orientation. And a 20 percent premium was charged for home sites with “good feng shui” that were located on a cul-de-sac.
The availability of buildable home sites may also dictate lot premium charges in the near future. A recent National Association of Home Builders survey indicated a shortage of home building lots (Lot Shortages Worse Than Ever According to NAHB Survey; nahb.org; May 26, 2016). NAHB Chief Economist Robert Dietz stated, “We have monitored lot availability for the last two decades, and it is clear that the scarcity of building lots is growing… Whether due to land use policy, geographic constraints or other regulatory constraints, the lack of lots for residential construction will have negative impacts on housing affordability in many markets.”
To understand the relative numbers, NAHB stated “…this record shortage comes at a time when new homes are being started at a rate of under 1.2 million a year. In 2005, when total housing starts were over 2 million, the share of builders reporting a shortage of lots was 53 percent…”
If you pay a lot premium on a new home, however, it is not always clear that you would be able to pass on the premium when you re-sell. But a recent study conducted by Paul K. Asabere and Forrest E. Huffman (The Relative Impacts of Trails and Greenbelts on Home Price; Journal of Real Estate Finance and Economics; May 2009; vol 38, p408) provides some data on what you might expect: home sites close to trails, greenbelts, and greenways can demand a price premium of up to 5 percent. A similar effect can also be found in homes with a “view” or in a cul-de-sac; as well as homes that are adjacent to a golf course, playground, tennis court, neighborhood pool.
Copyright © Dan Krell
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