Lot premium value on new home

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.

Original published at https://dankrell.com/blog/2016/12/29/lot-premium-value-on-new-home/

By Dan Krell
Copyright © 2016

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Reclaiming the charm and appeal of old homes

Old Home“They don’t build’em like they used to…”

is often heard by those who praise the virtues of an old home.  Many home buyers might talk about the character and charm that exudes from an old home, while others might point to the quality of materials and workmanship that cannot be matched by new homes built today.

In some respects, it’s good they don’t build homes the way they used to because some materials used in the past that were thought to be beneficial have been found to be toxic and/or hazardous.  Building materials have changed through the years and continue to evolve for safety, strength, durability, and environmental impact.  Many home components are engineered and prefabricated to make installation straight forward, as well as make the home increasingly efficient and environmentally friendly.  Floor joists and trusses are engineered to allow for larger and open home designs; while roof and siding components engineered to help reduce heating and cooling costs.  Foundation and basement construction techniques and components are designed to be effective in preventing water penetration.

Workmanship has also changed over the years as well.  Because engineered materials are typically prefabricated, onsite custom design and installation is not necessary; construction crews are basically required to know how to use and install the pre-manufactured components.

Hazardous materials aside, there is something about old homes that grabs our attention.  Because the building materials and components were not mass produced or prefabricated, perhaps it’s the workmanship of the construction that demonstrates that the on-site craftsmen were not just masters of their trade – but artisans.

Although new homes incorporate modern fixtures and appliances designed for comfort, functionality, and efficiency; many are drawn to the antique quality of the old home.  Old home parts are highly sought after items for modern homes too.  Many are lured by the appeal and personality of vintage home parts, but I also sense there is also something about the durability of the parts that lets them continue in service.  Vintage doorknobs, especially the crystal type, are collectible and sought after antique home parts.

Those who appreciate old homes talk about the hearty materials that were used in construction.  Compared to the new engineered components manufactured to an exact specification, the craftsmen who built the old home onsite appeared to use ample materials that made the construction feel sturdy and robust.  This “over-engineering” is typically frowned upon today; using too much raw materials is expensive and considered wasteful.

old homeAnother comparison between old vs. new homes is the lumber that is used in a home’s construction.  Some are keen on old homes because they were built from first generation lumber, compared to engineered composites typically used in modern homes.  Compared to the wood composites often comprised of glued wood pieces and fibers, first generation lumber is believed to be stronger and more durable.  Also known as old growth lumber, first generation lumber refers to lumber that was milled from virgin forests where trees were hundreds of years old.  Because of deforestation, old growth lumber is no longer harvested for construction materials.

To incorporate the virtues of vintage and old building materials in modern homes, many reclaim those resources from tear downs.  From classic fixtures and hardware to first generation wood, the reclaiming industry has become popular not only to be environmentally friendly – but to reclaim the charm and character of a bygone age.

by Dan Krell ©

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. This article was originally published the week of February 3, 2014 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.

Build your dream home and avoid a nightmare

by Dan Krell
© 2012

custom homeThe fact that home sale inventory has dropped off compared to recent years is not news. The reduced number of homes for sale has made it more difficult for increasingly discerning home buyers to find the “perfect” home. And for some, a perfect home even goes beyond a new “spec” home or new home development; so they consider a custom home as a way to uncompromisingly have all the features they really want in their new home.

There are many pros and cons to building a custom home. As you might imagine, one clear advantage of building a custom home over buying a resale is that you can choose your home style and floor plan to fit your taste and lifestyle. Customizing a resale to fit your needs has its limitations; besides the physical limitations of the home itself, you may encounter issues with zoning and/or a HOA. Buying a spec home or a home in a new home development also has limitations; you are typically limited to the home styles and floor plans offered by the builder (and some will not comply with customization requests).

Planning to build a custom home takes time and money. Choosing the right contractor and architect is highly important. Designing the home you want requires time for permitting and construction. Weather is often an impediment; poor weather conditions can prolong the process and possibly increase your construction costs.

Next, you’ll need to find a place to build your dream home. Finding the perfect lot can sometimes be difficult, depending on the type and size of home you’re planning. Among the many things to consider: you need to make sure that the lot is zoned appropriately, as well as being large enough for the home you choose to build. Additionally, you should consider utility availability to the lot: is public water and sewer available; is natural gas available. Other issues that could affect your lot: clearing trees, easements, and/or protection areas.

Custom HomeIf an unimproved lot is not found to meet your needs, another option is to buy a “tear down.” A tear down is an old home that is torn down to build a new home on the existing lot. Of course, there are issues that need to be addressed when going this route as well. Besides encountering building issues similar to those of an unimproved lot, you may encounter additional zoning and permitting constraints with a tear down.

Unless you’re willing to pay for your project with cash, you’ll have to secure financing. Depending on your project, there are various loans are available so consult your lender about terms and qualifying criteria. Some loans may combine the acquisition of the land and the construction; and other loans could provide the loan for the construction, and then convert to a permanent mortgage.

Although it’s great feeling to build the home of your dreams, you should also consider its resale. Tastes vary, so your idea of a dream home may not be everyone else’s. A large amount of non-traditional customization could not only turn off future home buyers, but could very well hurt your sale price.

Building a custom home requires due diligence. The Maryland Home Builder Registration Unit (of the MD Office of the Attorny General)provides consumer information about purchasing new homes and the Home Builder Guaranty Fund (www.oag.state.md.us/Homebuilder/index.htm).

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