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Q & A with
Dennis Walsh
I have a client who is doing a feasibility
study on 5 acre lot. I need your expertise in this situation because
drilling a well and running electricity is going to be costly for the buyer.
How much should the land cost when compared to the final cost of the home?
M.B.B. from Camas, WA
I hope all is well with you.
Regarding this building site ... it can be frustrating when the cost of the
essential service becomes prohibitive. I've been in these situations many
times over the years, whether it be the cost of wells, poor soil conditions,
gas or electric service, sewers, or in many cases, very difficult and
expensive septic systems.
The bottom line in any case is that at some point we reach a total cost of
"improved" building site that is no longer acceptable to our buyers. If this
cost is too great, then an alternative building site becomes a better choice
offering a combination of location, features and overall value that is more
in line with specific needs and budget of the buyers.
In every case we look to reach a place where we can begin "normal'
construction activity with relatively "normal' costs. And while "normal" is
a relative term, this generally means that we have all permits, approvals,
utilities and other services ready to install a foundation and begin to
build ... without incurring significant costs that are considered beyond
what is normal for this area and style of construction.
I've experienced many situations where the cost of site preparation is
excessive. My customers in some of these situations chose to move on to
another building site. In other cases, once the discovery of these costs was
made, the seller of the site would agree to reduce the price to reflect
consideration for these costs. Let's face it, given that other aspects are
roughly equal, if "Site A" costs more money to become acceptable as a
building site than a similar "Site B", then Site A is not worth as much
money in it's raw state. As a builder, it was only once we reached a point
where the excavation was complete and foundation in place that we felt any
level of being "out of the woods" as far as large cost over-runs.
One approach I've used, especially in the case of questionable water well
costs, is to enter into an agreement where the seller of the site agrees to
install a working well(s) prior to closing of the purchase by the buyers. If
water is not provided at a level of performance and quality of a
pre-established basis, the deal is not consummated. I personally would never
purchase a building lot and just roll the dice on the availability of
quality water ... or other utilities for that matter.
Soil conditions often lead to excessive expense in excavation and foundation
construction. Electric, gas and other utility services can also become cost
prohibitive ... and that's simply a decision your buyers will have to make.
The best you can do is to help them determine if the total land costs are:
A) a good value relative to other available building sites ... and B) if
these costs, along with the balance of the home construction costs, are a
reasonable value and within their financial reach. Since the cost of the
building site as a ratio to total improved costs ranges from less than 25%
to more than 75% in some areas, the only thing you can do is to research
what's normal in your market.
The good news is that you're exploring these costs up front and helping your
customers make informed decisions before they’ve made a commitment to this
site.
I hope this helps and wish you continued success!
Have a question for Dennis? Write to
question@sellnewhomes.com...
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