Replies

1. 
   EricPaulson | Apr 12, 2007 12:55pm | #1

   Do a comp on some homes in the area similiar to what you might build.

   Back out the building costs.

   [email protected]

    

    

    

    

2. 
   SamT | Apr 12, 2007 05:51pm | #2

   You're thinking of a development and you don't know how to estimate?

   Whoo boy!

   What is your background?

   Is the development infrastructure in place yet?

   If not, figure $30K to $1M to find out if you can build and if it would be profitable.

   The very first thing you do is click on the folder icon next to the "Business" heading to the left. Read the threads that look appropriate. When you get to the bottom of that list, click on the "Next 50" link and continue.
   SamT

   There are three kinds of people: Predaters, Prey, and Paladins. For the life of me, I can't see why Prey feels safer from predators by disarming and emasculating Paladins.

   
   

   ---

   Edited 4/12/2007 10:54 am by SamT

1. 
   jcrew2 | Apr 13, 2007 03:35pm | #3

   Maybe I should clarify a few things. The area I'm speaking of is being developed. Several lots have been cleared and they vary in size from 3 to 10 acres. There are no homes there yet and the restrictions call for a minimum of 1200sf. I can estimate my building costs in general although I have yet to find out all of the details for utilities in this area but I know that septic tanks will be used for waste. It's a rural community in between two cities. The value of homes in the area is a wide range. Comps provide some idea of home values but there are other factors to consider (compare to homes in the closest city, compare to homes in other rural areas even though they may be in another county, etc.) I expect that some people will be building vacation homes of sorts, while others may build their primary residence. In any case I have time to decide on that. I can estimate costs for building the house, once I decide on what to build, I was just wondering if there is a general rule of thumb that says, "try to keep your land costs within ??? percentage of your total building costs". I am currently finishing a home that I built for a friend on his land, and I have 2 more homes to build this year on lots that I bought elsewhere. The development I am speaking of is just starting to sell lots and I am looking to the future. I do have knowledge about the field, but I post questions here so that I can continue to learn, and I read questions posted by others as well. With that said, maybe you'll have an answer to my question (you know, the rule of thumb thing), if not, hopefully someone else will. Thanks anyway.

1. 
   SamT | Apr 13, 2007 04:51pm | #4

   OK. You're not the developer. You are thinking of buying some lots and building spec homes.

   There is no RoT. Like Eric said, you have to work backwards.

   Determine the sale price of the home + lot and your cost + profit to build. The difference is what you can afford to pay for the land. If you pay less, your profit goes up.

   Yes, it will cost you some time and money to find out those numbers. Consider this as your ante just to see the cards. If you don't like the cards/numbers, fold and wait for another deal.

   What I might do in your shoes is offer a good realtor $200 and lunch for 4 hours of their time. meet them at the development and spend three hours picking their brain and taking notes before buying them a two martinin lunch. During lunch is when all the information the two of you saw will coalesce  and provide further insights.

   If it still sounds good, then I would take a few weeks to draw some quickie plans, several for each proposed lot, and repeat the lunch/consulting with a different realtor, this time discussing only the plans I made for each lot.

    

    SamT

   There are three kinds of people: Predaters, Prey, and Paladins. The really strange thing is that Prey feels safer from Predators by disarming and emasculating Paladins.

3. 
   DanH | Apr 13, 2007 06:05pm | #5

   On a city lot, where land is relatively scarce and development has "matured" to a degree, you can make some rough generalizations -- the value of the building will be at least the value of the lot and generally 2-3x. If the building is worth less then it will likely be torn down to build a new one to put the land to better use. If the building is worth more it will be overpriced for the neighborhood and a money loser.

   But in a rural development even these vague rules of thumb go out the window. The open land is considered to be a part of the overall property value, especially if the occupant wants to raise a horse, grow wine grapes, have a large garden, or build 30 tacky (VBG) sheds. The worth of the actual residence may be (from the owner's viewpoint) secondary to the land itself.

   In fact, in such rural developments it's not unusual to see homes which vary in size/value by a factor of four or more, with the variability increasing with lot size and decreasing with land cost/acre. This is both a cause and effect of most such homes being contracted vs spec.

   So convenient a thing it is to be a reasonable Creature, since it enables one to find or make a Reason for everything one has a mind to do. --Benjamin Franklin
4. 
   CapnMac | Apr 13, 2007 07:50pm | #6

   Well, in days of old, for city lots, the rule-of-thumb was that the land cost 10% of the house upon it.  But, that's in-town.  And, it's long-ago old-fashioned, too (I've seen lots built to 1.5% & 2.5% ratios).

   Since you are looking in a more rural situation, the numbers are not so hard and fast.  Some of that comes from how rural are these country lots?  In my county, there are distinct areas that are rural, and will stay that way, and those that are rural until a deveolper creates a subdivision, which the nearer city will then want to annex for the tax base.

   Which sort of country lot, then, makes a big difference.  If it's going to be annexed, then larger houses, generally, "want" building on those lots.  If it's "get away from the city" lots, those will be smaller houses on the same size lots.

   Some of this will come down to what you want out of this.  If there is a market for folks who want modest houses on big lots, then, that's where you ought to aim.  If the market wants big, "show" houses, out on lots bigger than in the city; then, that's the way to go.  What happens, of course, is that both conditions often exist.

   Occupational hazard of my occupation not being around (sorry Bubba)
1. 
   peteshlagor | Apr 13, 2007 08:52pm | #7

   I recently examined the tax records for all of the houses in my snobdivision.

   It appears the land value is about 20% of the total taxable value.  Of course, that's just my 'hood.

    

2. 
   Snort | Apr 13, 2007 09:02pm | #8

   The rule of thumb, as I've been told by realtors around here, is house shouldn't be more than 4 times the lot price. Even though there's nothing in the subdivision yet, you should be able to get comparables from home sales nearby.Find a local appraiser? Outside of the gates the trucks were unloadin',

   The weather was hot, a-nearly 90 degrees.

   The man standin' next to me, his head was exploding,

   Well, I was prayin' the pieces wouldn't fall on me.

5. 
   woodguy99 | Apr 13, 2007 10:08pm | #9

   I'm building a $750K house on a piece of land worth 1 or 1.5 million. 

    

    

1. 
   VaTom | Apr 14, 2007 05:22am | #10

   What're you doing for financing?  My experience is that you've got a bad ratio.  25% (or less) for land is good.

   My house is a similar situation to yours.  I didn't finance it and found it very difficult to borrow against.  Finally worked it out with a credit union.  Not that I've used their offer...

   In our area, those financing ratios rule (greater than 30% gets you into difficult territory).  Except for those moving to the area who don't need financing.  Typically, much longer time on the market for those houses.

   PAHS Designer/Builder- Bury it!

   Edited 4/13/2007 10:25 pm ET by VaTom

1. 
   woodguy99 | Apr 14, 2007 06:14am | #11

   I'm building it for a client, not for myself.  The house and land was inherited, we tore the old house down and we're building a new one.  It will probably appraise for 2.2 to 2.4 when we're done.

   We did another tear-down right up the road last year.  I don't know what they paid but the asking price was something like 2.4 million, we tore it down and they spent 2.5 million building the new place.  It would probably sell for 3.5 million now.  Yeah, not a great investment, but it's for them and not an investment. 

    

6. 
   Kgmz | Apr 18, 2007 06:47pm | #12

   I don't know how it is in Alabama. But up here in the Pacific NW my old rule of thumb was the cost of the land should never be more than 25% of the total package.

   I can remember when a simple 1600 sq ft home and a 8000 sq ft lot would sell for about $70,000 and the lot cost was $10,000. Then land prices started going up and I started the 25% rule.

   And the last few years land has gone nuts so my rule now is around 33%, but I try and stay at a lot less if possible. There are some builders around here on subdivision 5000-6000 sq ft lots that are paying $125,000 for the lot and selling the total package for around $300,000. These are the new starter homes in our area and no way will I get into that part of the market, as I think it is nuts. There is another development around here where the 1/4 acre lots sold for $150,000 and the houses sell for $450,000 and up, so about 33%.

   We build higher end specs on parcels like you are looking at 1 acre and up. The house we are building now is on 2 acres, is 2395 sq ft, 4 bedroom, 3 bath, with attached large 600 sq ft 2 car garage and detached 576 sq ft 2 car garage. I figured the land value at $100,000, septic and well costs at $25,000 max. The total package will be selling at $479,000. We also have some 5 acre parcels where the houses will be selling in the $700,000 to 1 million range. (Luckily we bought these parcels years ago and only paid $10,000 a acre)

    

   What kind of homes are in the area you are looking at?

   Are you going to buy a few of the lots or all of them?

   The problem I see is you buy a few lots and someone buys one and builds a real cheap 1200 sq ft rambler or at worst case moves in a mobile home. That move just devalued what you could build there and cuts your profit. If you buy all of them, you control what the neighborhood wil be like and could build for example million dollar homes if the market will bear it.

7. 
   Dudley | Apr 18, 2007 06:57pm | #13

   best guide would be your county's tax assessor's web site -- the site will give you two things that will give you the broad parameters for what you are looking for -- Real Property Assessment and Improvement Assessment -- this is just a start.  Then put in some addresses of houses you think you would like to mimic as far a developing -- you'll get a sense of the ratios -- real property assessment divided by the total assessment is the percentage you were looking for. all the best

8. 
   Ed Michnick | Apr 25, 2007 07:02am | #14

   This may help.