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.

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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This article is not intended to provide nor should it be relied upon for legal and financial advice.  Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Missing pieces to a housing recovery

by Dan Krell
© 2012

Home salesAs the housing market expectantly slows for the winter months, we can start reflecting on this year’s housing statistics.  Home sale figures appear to point to a year ending slightly better than last.  But it may be that local home sale stats may not best those posted during the 2009-2010 period.  It appears that there are missing pieces to the housing market, which if not put into place, could result in a new real estate norm.  Let’s take a look at the puzzle…

First, the National Association of Realtors® (Realtor.org) reported that national pending home sales have been elevated most of the year; and although national existing home sales have increased during October, the numbers fluctuated throughout the year.  Of course, trying to determine the local state of housing through the national market snapshot may be like trying to see a local road map by looking at the solar system; but there is truth to what NAR Chief Economist Lawrence Yun described as “…rising consumer confidence about home buying…”

Second, New home sales have increased compared to last year.  Although the existing home sales statistics reported by the NAR may have co-mingled some new home figures in the data (due to the methodology), the U.S. Census Bureau (census.gov/construction/nrs/) reports new home sales.  Not surprisingly, October new home sales increased about 17% compared to October 2011, and 2012 year to date new home sales increased about 20% compared to 2011.

A forthcoming piece to the puzzle, which may likely be reported in the latter weeks of December, is that November was another positive month for real estate.  And more importantly – November may have been a brilliant month locally.  A preliminary analysis of Montgomery County MLS (Metropolitan Regional Information Systems, Inc.) home sale figures (all inclusive) point to a marked sales volume increase in November compared to November 2011, as well as an increase in the average monthly home sale price (dankrell.com/realestate).

AnotNew Home Salesher piece to the local real estate puzzle is home buyer behavior.  Home buyers in the market are increasingly demanding about what they are getting for their money.  Given the lack of home listings in the resale market (down about 27% from 2011 year to date through October for Montgomery County single family homes: gcaar.com), combined with variances in home sale prices and the cost for renovations and updates on many homes; home buyers perceive value in purchasing new homes compared to buying a resale in today’s market.  This is an unacknowledged reason for the surge of new home sales this year, and why new home builders have rebounded before the resale market.

The missing pieces to improving the resale market are inventory and home prices.  As mentioned, a lack of home inventory continues.  If resale inventory were to match those of previous years, it stands to reason that resale inventory would also increase.  Inventories are lackluster most likely because many home owners have put their selling plans on hold until they are convinced that home prices have stabilized.

It’s welcome news that the 2012 housing market is slightly better than the 2011.  And although the landscape of the local market has improved, home sale figures are not much better than those posted during 2009-2010.  If resale inventory does not increase, the resale market of 2013 will probably be much like that of 2012.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 3, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Need to know when buying a new home that is built in Maryland

by Dan Krell © 2012

New HomesIn today’s housing market, chances are that you may looking to buy a new home rather than a resale;

be prepared and know what you can reasonably expect from the home builder, as well as understanding how to resolve problems with the builder.  Whether or not you have a licensed real estate agent representing you in the transaction; the Maryland Office of the Attorney General Consumer Protection Division provides consumers guidance, pertinent information and other resources to dealing with a home builder and buying a new home built in Maryland.

Unfortunately, many home buyers believe they do not need representation when buying a new home.  Because the new home builder reps are often friendly, helpful and may appear to be on your side in the transaction; it is understandable how a home buyer may misconstrue the home builder’s sales persons’ loyalties.  However, home buyers must recognize that the builder’s sales people represent the home builder.

Before engaging a home builder and their sales people, you should check out whether or not the home builder is registered with the Home Builder Registration Unit.  Additionally, unless the home builder hires a licensed real estate agent to represent them, the home builder’s sales reps must also be registered with the Home Builder Registration Unit.

Before entering into a contract with a home builder,

you might consider reading the consumer information booklet that home builders are required to provide consumers before entering into a new home sales contract.  The booklet is provided by the Home Builder Registration Unit of the Maryland OAG Consumer Protection Division and discusses: choosing a builder, the contract, how your deposit is protected, custom home contracts, construction of your home, and resolving problems.

The Maryland OAG Consumer Protection Division oversees a Home Builder Guaranty Fund “that allows consumers to seek compensation for losses resulting from an act or omission by a registered builder who constructs a new home for a consumer.”  You may seek compensation from the guaranty fund if your home builder is registered with the Home Builder Registration Unit and you entered into a contract for a new home built in Maryland after January 1, 2009.

New HomesPayments from the Home Builder Guaranty Fund are to cover actual loss that result from “an act or omission by a registered builder as determined by the Consumer Protection Division or a court of competent jurisdiction…”  The Guaranty Fund is not meant to cover such items as: attorney fees, punitive damages, interest, court costs, personal injury, or subsequent damages.  The “actual loss” that is covered refers to “the costs of restoration, repair, replacement or completion that results from the incomplete construction of a new home, a breach of an express or implied warranty, or a failure of the builder to meet certain construction standards or guidelines.”

Guaranty Fund claims must be made “within 2 years after the consumer discovered or should have discovered the loss or damage or within 2 years after the new home warranty expires, whichever comes first. If the consumer files a claim against the home warranty plan, he or she must file the claim against the Guaranty Fund within 4 months after that claims process is exhausted.”

For further information on the Home Builder Registration Unit, consumer information booklet, and the Home Builder Guaranty Fund – visit the Maryland OAG Consumer Protection Division website on home builders (www.oag.state.md.us/Homebuilder/index.htm).

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 17, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

It’s time to buy a new home

new homes for sale

The time may be right for you to buy a new home this spring. Low interest rates and reduced prices, combined with builder incentives may make a new home a viable option that many home buyers have forgotten about.

Home builders that survived the culling of the market decline have sought out ways to make homes more affordable. Going with the new trend, some home builders are offering more efficient floor plans, as well as more cost efficient building processes.

Modular homes seem to be more prevalent these days as custom home builders seek to reduce costs to the buyers as well as increasing floor plan flexibility and construction quality. The reason why many home builders are turning to modular designs may be that the modules are built in a controlled environment, which increases quality while reducing weather related delays and damage. In a typical plant, manufactured and modular housing fabrication quality specialists constantly monitor fabrication to ensure the final product meets or exceeds all codes, which is unlike on-site construction where inspections can be random and inconsistent.

One attraction to buying a new home is that everything is new! Along with the new, one expects warranties. Make sure you discuss the warranties that are provided with your purchase with your builder and Realtor®. It is typical for new appliances, fixtures and flooring to have limited manufactures warranties, so make sure you receive all paperwork related to those items.

Additionally, most builders offer a warranty as well; the warranty is most likely guaranteed by a third party. According to a homebuyer’s booklet offered by the Maryland Attorney General’s Office Consumer Protection Division, a home builder warranty in Maryland must include at a minimum: “any defects in materials or workmanship for one year; any defects in the electrical, plumbing, heating, cooling and ventilating systems for two years (not to exceed the period of the manufacturer’s warranty); and defects to any load-bearing structural elements for five years.” The booklet recommends that you contact the third party guaranteeing the warranty, to check if the builder is in good standing.

Although a home may be new, it does not guarantee that it is perfect when delivered to you. It is common to conduct a “final walkthrough” with a builder representative to check the systems and to identify any defects that may need repair or correction. Builders will ask for a “punch list” of items that need correction.

Former president of the American Society of Home Inspectors, Frank Lesh, was on record as saying that “Even new homes have defects that only a professional can detect…” He stated that a home inspector can help ensure that a new home’s major systems (roof, foundation, electrical, plumbing) “are functioning properly and safely before moving in”… “Because many items can’t be inspected after a house has been built, homeowners should consider having a series of phased inspections conducted at key milestone markers. ASHI encourages homebuyers to consider an inspection at the following times: prior to foundation pour; prior to insulation and drywall; prior to the final walkthrough.” (ashi.org)

If you’re considering buying a new home, consider visiting new home resources offered by the National Association of Home Builders (nahb.org) and the American Society of Home Inspectors (ashi.org), as well as the homebuyer’s booklet offered by the Maryland Attorney General’s Office Consumer Protection Division (http://www.marylandattorneygeneral.gov)

By Dan Krell
Copyright © 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.