Should You Buy A Lot To Build Your Home?

You have been looking at houses forever, faithfully doing the weekend tours of new and existing homes. But you can’t seem to find what you want: the right house in the right location. Getting frustrated and discouraged, you are thinking that maybe you should buy vacant land and have somebody build the house you’ve always wanted. Is that a no-lose proposition? Probably not.

Although several issues are important to consider, your first question may be what is it really going to cost you if you buy a lot and have a home built. Understand up front that your expenses will probably be substantially more than if you bought an existing home or one in a builder’s new construction community. Here’s why.

You couldn’t take advantage of a builder’s economies of scale.

You are paying a retail price for the lot. When builders buy land for development, they pay wholesale because they subdivide one parcel into several lots and spreading the purchase price and their other costs across all of the lots. Because they’re building many houses and not just one house, their construction costs per square foot are less. If you purchase one ream of multi-purpose paper, you might be paying $6.50 per ream. But if you bought a case of that paper, it would cost you around $4.50/ream. The same principle applies to buying one lot and building one house.

Your real estate investing involves financing three separate phases.

The building lot, house construction, and completed property are essentially separate parts of the project and you will need financing for them. Not all banks and mortgage companies offer lot loans and construction financing. Lenders usually require more down money for lot loans, so you might have to come up with cash for 20-25% of the purchase price of the lot. You’d need a loan for the site work and house construction. Once the construction was completed, the other two loans would be replaced by a permanent loan or mortgage on the entire property. You’d be paying points and other fees for the loans and closing costs when you settle on the lot.

You’d need a builder, real estate attorney and possibly an architect.

Plans for a true custom home designed by an architect can cost thousands of dollars. (You could save money by using plans that your builder already has.) You will need a builder. If you don’t build houses for a living, this is not the time to start! And don’t use Uncle Charlie unless he’s an experienced home builder. Most production (i.e., high volume) building organizations won’t be interested in building just one home, so you’ll need a smaller builder. Your relationship with the builder will be laid out in the construction contract. This should contain all of the details and specifications for the job and provisions for cost overruns, punchlist items, and time frames for completion. Enter your attorney. When you are interviewing builders, get a copy of their proposed contract so your attorney will have time to review it before you have to sign it. Also, you should not buy a lot until your builder inspects it to estimate construction costs and determine if the lot is suitable.

Consider this real scenario. A builder is selling 3,750 sq. ft. homes on lots for $515,950 in a new home community. That’s a combined purchase price for the house and lot of $138/sq. ft. Each home has a three-car garage, full unfinished basement, fireplace, skylights, cathedral ceilings, rear staircase, public utilities, central air and other bells and whistles. A similarly sized building lot in a comparable area in the same township is for sale for $225,000 (which doesn’t include about $10,000 for utility hook-up and permit fees, lot grading and other preparation costs). Putting aside financing, settlement, architectural and legal costs, the only way you’d come close to the price of the builder’s package is if you could get a home built for around $75/sq. ft. ($225,000 + $10,000 + 3,750 sq. ft. x $75 per sq. ft. = $516,250). However, you wouldn’t be able to duplicate what the builder is offering. You’d probably wind up with a stripped-down, barebones house.

So what’s the solution? Stay tuned for my next article (“Ways To Get a Building Lot for Your Home”).

By: Nancy Chadwick