Getting Started

Lot Selection – Factors that Affect Cost

When it comes time to find a lot there many factors for which you need to be aware that can greatly affect not only the purchase price but the cost of improvements. Before beginning your search, I strongly suggest you determine a budget for what you can and want to spend. Be sure to also consider how what you spend on your lot will affect what you can spend on the construction of your house. Also, consider engaging to help you with your search.

As we discussed in a previous article the experience and professionalism that a realtor can bring to the process can be invaluable. A realtor can help provide you with a list of available lots and they will accompany you to preview those lots. A realtor can research and provide you with lots of information about the lots like whether they are served by public utilities, what school district the property is in, and the local property tax rate. If and when you decide to make an offer, your realtor will prepare the contract documents and manage the process all the way through closing.

The factor that most affects price is the oldest adage in real estate – location, location, location. Property in downtown Manhattan is going to be more expensive than farmland in Tennessee. Generally the price of raw land and finished lots will diminish the farther out you move from a metropolitan area. The price of raw land is directly related to location, demand, and scarcity, but for finished lots diminished prices are also reflective of the cost of the improvements made by the developer which are necessary to bring them to market.

Demand and scarcity are free market forces that can cause prices to rise and fall. When less property is available for sale the price of that property will be higher. The more people who want to buy the same property the more it will cost. The converse is true in both instances. Demand for property is hard to predict which is why many people think of developers as modern day river boat gamblers, but scarcity can be more easily determined through research and analysis.

When you start looking at specific lots after you consider the purchase price you will need to understand the other factors that will affect the cost of the improvements that you plan to make. The first factors to consider are the egress of the lot and the existence of easements. Egress is how you get to and from the lot. If you have to install a lengthy driveway or a bridge to cross a creek, clear trees to cut in a road, or remove large rocks to access your building pad obviously that is going to create more cost.

Easements are a Deeded legal right which allow another party to access and use the land for a specific purpose. The most common easements are for public utilities meaning the local municipality or utility provider has been given the right to place their utilities on the property and maintain them when necessary. Another type of easement might be for egress to an adjacent land owner who may be land locked and unable to access their property any other way. Easements are forever unless you can convince the party to whom the easement was granted to vacate it. The existence of easements can affect egress which can affect the cost of improvements. The lack of needed easements which may have to be purchased from other adjacent land owners can also affect the cost of your improvements.

The next factor that can affect the cost of improvements is the availability of public utilities. It is very costly to have to install a well and or septic system if the lot does not have access to public utilities. The installation of a well, storage tank, and pump starts at around $8,000.00 and can be as much as $30,000.00 assuming the property perks and a sufficient ground water supply even exists. The installation of a septic system starts around $15,000.00 and can also exceed $30,000.00 under certain circumstances. Conversely the fees to connect to public utilities are usually less than $10,000.00, at least in the New River Valley of Virginia. If you buy a lot for $50,000.00 but have to install a well and septic system your real cost could be much, much higher.

Another factor to consider is the topography of the lot. Lots which have extreme grades can present unique and expensive challenges when it comes time to build. If you plan on having a basement you do not want to buy a flat lot because there will be a lot of additional excavation cost. If your lot has very steep slopes you can expect additional cost for the foundation and the importation of fill material and top soil.

Speaking of fill material and top soil, the cut/fill requirements of a lot in relation to the house plan can create additional costs. The perfect scenario is that whatever soil you have to dig out to install your foundation can be used for backfill and top soil for the yard. This is defined as a balanced site. If you have to cut out more material than you plan to put back you have to haul off the excess. If you lack the required amount of material to backfill around the foundation and provide acceptable egress than you have to import material. In both instances we would say the site is unbalanced which creates additional cost to mitigate. A site engineer can determine whether a lot will have any cut/fill requirements as well as approximate the quantity (expressed in cubic yards) of what has to be imported or removed.

Another factor to consider before purchasing a lot is whether there is a Homeowner’s Association (HOA) and if so, whether annual dues are charged and in what amount. Almost all new subdivisions have a HOA and charge some amount of money annually to cover the cost of things like mowing common areas, paying for the electricity for light poles, and carrying a general liability insurance policy. Homeowner Associations for subdivisions which have community pools or other types of recreational facilities may have very expensive annual dues. In addition all Homeowner Associations have a set of Deeded Covenants and Restrictions which define certain rules property owners must abide. Be sure to understand the Covenants and Restrictions of the HOA and the amount of fees charged before purchasing a lot.

Another factor to consider before purchasing a lot is the possibility of the existence of rock and other unforeseen circumstances. Rock removal can be very, very expensive. It is nearly impossible to predict the existence of rock unless you do some geographic drilling; however use your common sense to make an educated guess. If you are building on top of a mountain, chances are you are going to encounter rock. Be sure to plan and budget for a rock contingency if you think there is a possibility rock might be present. Other unforeseen circumstances might be the presence of underground streams, buried trash and debris, abandoned septic tanks, maybe even human remains. You just never know and while you can’t be prepared for every possibility it helps to understand up front that the discovery of unforeseen circumstances will increase your cost in most instances.

Finally, unless you are building the home where you plan to live the rest of your life, you have to consider resale when selecting and purchasing a lot. Lots with strong resale value will naturally cost more to purchase, but they come with some peace of mind that your investment will be protected.