How much should I budget for land costs?
A general rule of thumb is that the land costs should amount to about %20 of the total cost. For example, if your total house budget is $200k, you land costs shouldn’t be more than $40k. And if you total house budget is $500k then the lot costs should be less than $100k. There are exceptions, like I said this is just a general rule of thumb. Other things to consider are local tax rates, possible HOA fees, water and sewer types, utilities.
The other consideration you must look at is the neighboring house values. Land costs typically are reflective of the values that surround them. You might be tempted to move on that piece of land that is valued way below your budget; thinking “then I could spend more inside my house.” Remember the classic real estate saying? The top three drivers in home value are location, location and location. Building a house that costs $400k in a community where the average home price is $150k does not make you home worth $400k, it makes it worth a lot less. Your lender makes these comparisons also. If you ever want to sell your home you will have a lot of difficulty because you may owe more than the home is worth. It’s important to look at the comps for the house you plan to build.
The actual lot features are another consideration to look at. This is especially important when looking at lots in established communities. Sometimes the leftover lots in a community are used as the “garbage” lot; a place where extra fill dirt is dumped or other site trash. It also might be because the lot has been tested and has unsupportive soil or other issues that would increase the build cost for that lot. Doing your homework on these lots is very important. Always make sure there is a due diligence time written into any offer. This will give you time to test for the soil conditions or research any other restrictions you need to be aware of prior to going forward with the purchase. Knowing these restrictions will help you negotiate from a position of knowledge if a lower purchase price is needed.
Building a new home can be one of the most daunting yet exciting tasks anyone could decide to make. Creating a home that fits your exact lifestyle both now and for years to come is every families dream. But where do you start? How do you begin to weigh the many decisions you have to make? Where will your house be? How much will it cost? How long will it take? Who do I trust to build it? What if there are warranty issues? And on and on…… We’ve developed a guide to help you begin your journey, based on our years of experience.
Step #1 - What can you afford?
It is so much fun to begin looking at floorplans on-line or in magazines, or to begin perusing through material samples and kitchen idea books. However the single most important decision you need to make first is budget. Your budget will drive the rest of your decisions. Every choice you make will depend on what your budget is.
There are few things more defeating than finding the perfect floorplan only to realize that it will cost twice what your budget will allow. It’s like test driving that really awesome car on the lot, feeling the awesome handling and even how awesome your favorite song sounds booming through the speakers. This is the perfect car. You have to buy it. When you return to the lot, the salesman informs you that this car costs a lot more than you could possibly afford. You wouldn’t do that, right? You would figure out what you could afford and then try to find the right car that also fits within your budget. The same is true for your new home.
There are several tools to help you determine just how much you can afford. Many lender websites offer online tools where you can input your existing income and bills, and then they will calculate what you might be able to afford. While these are typically quick and easy, they aren’t always accurate. The best practice, as in deciding to purchase an existing house, is to actually talk to your lender and get a pre-approval. That way you have a concrete budget established, and can move forward with making the decisions you need to make.