Real Estate Advice
Building in the City
Dear Pat,
For some time now we’ve been eyeing a wonderful property that has a
small house on the back of a nicely wooded lot (40x140), just a few
blocks from the river. The owner will sell to us for $150,000, which
is probably an OK price if we intended to live in the little house.
But we really just want the lot so we can build a custom energy
efficient home. What is normal lot value these days, and are we crazy
to start a project with so much into the land?
---Builders at Heart
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Dear
Builders,
I understand what you want to know, but you’re asking the wrong
questions. First, it’s best to forget any notions of “normal” lot
value, especially in the city. Appraisers, assessors, and insurance
underwriters may apportion a percentage of overall market value of an
existing property as land value for their own purposes, but that
doesn’t determine the real market value of a lot for sale. Obviously,
the ever-moving market determines the market value.
The rule of
thumb for new suburban construction is 25-30% of the overall cost to
be spent on land. Thus, in a development of homes averaging $400,000,
lot values typically will average $100,000-125,000. Of course, that
3-1 ratio is hard to obtain in the city where undeveloped land is
extremely rare, and where the most desirable building sites are
already taken. In the city a 2-1 ratio (or less when a tear-down is
involved) is more likely, and you should be careful to ensure that the
overall cost of your project doesn’t push too far past the average
property values in your neighborhood, or on your block.
As to
crazy, I wouldn’t hazard a guess without knowing much more about your
specific location and construction plans. But let’s assume you can
buy the lot, with building, for $150,000, and can complete the
construction of your dream house for an additional $250,000. (Not
easy, I know, but you said you were Builders at Heart). That’s
$400,000. |
Now here
are the questions you should be asking: if we
put $400,000 (or put your own number here)
into a house, will this neighborhood support
it? Could we sell it today for that price, or
perhaps in 5 years, with a modest 3%
appreciation rate? Are we planning a home
that will have wide buyer appeal in terms of
features and aesthetics, or does our plan
limit the eventual market? And, most
important: if the answers don’t add up, do we
care?
A
Realtor can answer all but one of those
questions for you, Builders. But it’s the
last question that may make you appear crazy
if you answer it “wrong”. For what it’s
worth, my husband and I answered that question
“wrong” ten years ago, and we’ve never
regretted it. Good luck!
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Pat
Rosaves is a full-time real estate
professional living in the Seward -
Longfellow area. She has more than 29
years experience in helping people with
their real estate needs. Questions may be
sent to her at River Realty, 2543 38th
Avenue South, Mpls, MN 55406. Or call her
at 612-724-1314 or email her at Pat@RiverRealty.net |
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