Lucy’s Football – Calculating the Real Value of Your Lot
- January 1, 2010
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Do you remember Peanuts, when Lucy would hold the football for Charlie Brown and yell at him to come try a kick? Charlie Brown would say no to Lucy because he was well accustomed to her antics. Against his better judgment and with much cajoling from Lucy, Charlie Brown would finally agree. He put his head down, took laser aim at the football, and began the run towards the ball in hopes of kicking it further than ever before. You know the rest of the story. (If you don’t: Lucy would swipe the ball away at Charlie Brown’s last pre-kick step and he would go flying through the air in flips until he landed flat on his back. “Ughhh”)
When I first started in this business, I brought the pure naïve excitement that Charlie Brown had every time he’d try his kick. I would call my business partner, who had been in the business already for 6-7 years, and suggest we go look at a lot that I had just discovered on my MLS meddlings. “Matt, we need to go see this lot –it’s a full acre in Westlake Hills with partial city views at a great price. I can’t understand why it’s been on the market for 200 days.” Matt would assure me something was off or wrong, but I’d convince him to go anyway. When we got to the lot, we’d have to break out the belays and carabiners to lower me down the side of the cliff. On the way down, I was trying to imagine how our foundation crew might like this project, or even worse, how much concrete and how many retaining walls would be necessary to build something here on the side of El Capitan.
While I still have the enthusiasm that I had in my first year, and I still believe in excellent lot finds, I’ve also learned a good bit about how to value a lot. For those of you in the early part of your process, (the ones looking for a lot) I’d recommend taking a systematic approach to ensure that you find something you love but also something that makes financial sense. An important part of that approach should be to determine what “lot-driven costs” might exist in the construction of your planned home. Lot-driven costs, or site costs, include items that you must account for in the eventual construction of you residence. These costs are typically ones that you don’t necessarily receive credit for when you go to later sell your home. In other words, if a potential buyer is walking into two homes of equal quality and equal value, will he/she appreciate the fact that one home has a foundation that cost $100,000 more than the house next door, or will he/she be more interested in the finish out and amenities? Here are some of the more important factors to consider:
- Slope of lot: As I already referred to in the introduction above, slope can certainly impact construction costs. While a flat lot is not only easier for the crews to navigate and work, the raw material requirements (concrete, steel, and fill) are usually lower. If you think about a lot with a 15% natural grade, you can quickly see how more foundation will be needed, assuming you’d like a flat slab. You and your architect may even decide to cut into the earth to lower the finish floor height, but the machine work and labor involved with such a cut is also expensive. If you are hoping for a pool out the back and close to the outdoor living space, as most of our clients prefer, then you also have to consider the extra costs associated with a taller pool and deck foundation. Lastly, the driveway may tend to be more expensive if it’s steep, because of the extra footings required for support. So pretend that you are evaluating two lots each half an acre, and one is flat and for sale at $10 and one is steep and for sale for $8. Assuming you would put a $40 house on both, but the slope of the $8 lot causes you to actually spend $45 to build your home. At the end, your $8 lot actually cost $13 because of the extra site costs. You don’t get credit for your slab when buyers come to look at your home so you probably would have been better off with the $10 lot – all other things being equal.
- Improvements: although this is a fairly obvious item, many people forget to fully add the costs associated with water, electric, and sewer. If your lot needs septic, don’t forget to add in the costs for extra engineering fees and permits/inspections. If your neighborhood already has water and sewer, but the developer has chosen to offset the lot costs by attaching a mud bond to the property taxes for the next 20 years, you will get dinged every year until those bonds are paid off. The net present value of those bonds can add up quickly. If you have electric at the street, but your site will be located 400 feet from the street, don’t forget to add in the costs for the underground electric work. If you have any unsightly utility poles, you want to bury them. Assuming you can get approval to do so, this will also add to the cost. Lastly, you may need a well. You should talk to well experts in your area to see what the total cost (well, pump, storage tank) will cost, and what water quality should be expected.
- Lot shape: developers have mastered the art of maximizing their return by shaping lots to get the most bang for buck. If the street in question has panoramic views out the back, you should expect long narrow lots, with little street frontage. If your neighborhood has cul-de-sacs, the developer may have drawn the plat to cram more lots in the cul-de-sac and the result may some pie shaped lots. For the long narrow lot, with little street frontage, this probably means a longer driveway, and possibly even more landscaping requirements (based on the CC&R’s), more irrigation needs, and more maintenance. If it’s a pie-shaped lot, you too may have a longer driveway, but also often times find a difficult situation with the foundation footprint fitting in the setbacks, requiring your architect to add twice or even triple the amount of corners to your plans. All of these items can increase costs.
- Soil: while most lots in Central Texas are moderately safe, we have encountered some surprising conditions. My business partner, for example, found during the planning stages of his personal home in downtown Austin, that he would be building on top of a small spring. The wet, clay-like conditions increased the scope of his site work, foundation’s beams, and retaining walls. Had he not purchased his lot at a discount to other lots in the neighborhood, he may have wound up in a mispriced situation. We’ve also encountered other lots where during the soil testing phase, we discovered that 8 feet of fill had been placed in the middle of the lot many years back. Since you can’t lock the slab down on fill, we had a choice to either have the fill hauled off, or to dig deeper beams and footings for the foundation. This isn’t something to be paranoid about, but if you have even the slightest doubt during your negotiations, you can ask the seller to provide you with a soil test during your option period.
None of the above items are show stoppers, and we routinely handle at least one to two of these conditions for three fourths of our projects. These types of additional site costs can actually make perfect sense in the right scenario. You must be willing, however, to calculate these items in comparison with other lots in the same or even a similar neighborhood to ensure you are buying value and not overpaying on your lot purchase. The above examples shouldn’t cause you to run from the lot, they should just help influence how much you are willing to pay for it. You don’t want to be the one running full speed while Lucy holds the football.