When you purchase a new home, you also purchase the lot that it is built on. Some lots may cost more than other, due to many factors.
How much more (or less) you’ll pay for a lot you like depends on the lot’s characteristics and how the builder adds the perceived value of those characteristics to the home’s price, says Priscilla Schumacher, director of sales and marketing at Edward R. James Homes, a homebuilder in Glenview, Ill.
“Let’s say one home is set further up than another,” Schumacher says. “Is the view going to be stopped or will you see a wider range? Are you looking at a pond? A park? A golf course? You plus this and minus that and that’s what we add to the base price of that home.”
Positive attributes might include a flat lot, corner lot, view lot, larger lot or cul-de-sac lot. Negative attributes might include the proximity of a cemetery, industrial park, heavily trafficked road or other undesirable land uses.
Lot premiums can range from zero or a few thousand dollars to hundreds of thousands or even millions. A luxury home with an unobstructed ocean view might be priced at $2 million more than the same home across the street.
Lot Premiums: It’s All Pluses and Minuses
Choosing a lot can involve making tradeoffs, says Irene Hammond, a Realtor at eXp Realty in Scottsdale, Ariz.
“If a home has a road behind it, for example, that becomes a deterrent because you’ll have traffic. If there won’t be much traffic and you have a little extra land and (more) privacy, it could be a wash. Or it could be a busy street that is less desirable,” Hammond says.
Some lots hold their value, allowing buyers to recoup the premium when they sell their home. But housing markets are cyclical and both the prevalence and amount of lot premiums can — and do — fluctuate over time.Nuances matter. Is the road a single lane or three lanes in each direction? Is it an access road that goes into and out of the community or an internal road traveled only by residents? Is there a traffic signal? Is the lot on a corner? These and many other factors could affect the lot premium.
The direction a home faces can also be an important attribute. Some buyers prefer a north-facing home; others want a home that faces south, east or west. Each direction might have a different premium assigned to it by the builder.
Less Obvious Factors That Affect Lot Premiums
Regardless of each lot’s specific attributes, the very best lots naturally command the fattest premiums, says Pete Reeb, principal at John Burns Real Estate Consulting in San Diego, Calif.
“You also have to factor in that the higher the price of the house, the more the buyers are going to want the best lot,” Reeb adds. “You almost can’t price the prime lots high enough because that’s what everybody wants.”
Physical characteristics aren’t the only factor. Builders also adjust premiums to speed or slow sales of homes in a community or match the pace of sales to construction schedules or simply to maximize profits.
“One of the ways that builders can control their pace of sales is by varying how much they charge for a home and for the most prime-premium lots versus the more standard lots,” Reeb explains.
Lot Premium Tips for New-Home Buyers
Smart buyers look at lots in real life, not just online or on a map.
“The buyer wants to go out and actually see the lot and see with their own eyes if it’s more desirable or not and if they see the extra value or not,” Reeb says.
Schumacher says buyers never ask what lot premium the builder has added to a home’s base price.
“They can see the attributes and it is quite obvious to us all and to them why they are paying a little bit more,” she says.
But Reeb says it’s “very reasonable” for buyers to ask that question.
Some lots hold their value, allowing buyers to recoup the premium when they sell their home. But housing markets are cyclical and both the prevalence and amount of lot premiums can — and do — fluctuate over time.
“The best view lots always got a premium,” Reeb says, “but, whereas a builder might sell a million-dollar house with a $200,000 premium in an up market, in a down market, maybe that premium dropped to $150,000. Generally speaking, more desirable lots tend to hold their value better than less desirable lots.”
The bottom line is that buyers need to do their homework and choose their lot with care.