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.
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.