Buying a new construction home has its perks.
But there’s one factor that can throw you for a loop: lot premiums.
If you’ve ever browsed lots in a new community and noticed that Lot A was $50,000 more expensive than Lot B, even though they’re right next to each other, it’s due to the lot premium.
The type of lot you choose to construct a home on matters and can greatly swing the price of the project.
So, what in the world influences lot premiums, and is the extra cost worth it?
Well, I’m so glad you asked because we’re digging into everything you could ever need to know about these additional fees.
By the end of this article, if you’re in the market for a house, you’ll feel much more comfortable choosing your new home.
1. What is a Lot Premium?
A lot premium is an additional cost that land developers and homebuilders add on to the lots of new developments that are more desirable.
Fair enough, right?
A lot sitting on a cliff, looking over the ocean, would obviously cost more than a lot in a regular residential area with no view.
But how lot premiums are priced isn’t always so obvious.
For example, certain streets could be considered more desirable than others, resulting in a higher cost.
Keep in mind that lot premiums are only for new construction homes.
Homes that have been previously owned will not have a premium, but the desirability of the lot will be reflected in the overall price.
As you can imagine, lot premiums have a huge range–they could be anywhere from $1,000 to over $100,000.
The additional fee can easily shoot the price of a new home out of your budget, so be mindful!
2. Are Lot Premiums Worth it?
Whether or not a lot premium is worth it depends on the buyer.
Some people dream of having a south-facing backyard that looks out over the ocean.
In that case, sure, a lot premium is worth it.
But for the people who would prefer to put more money into building their dream home, the lot might not be as important and could throw off their budget.
There’s also no guarantee that a lot with a premium will hold its value over time.
Of course, an oceanfront property will always be desirable, but at the end of the day, the market dictates the value.
So, an expensive lot premium doesn’t always mean a good investment.
Additionally, whatever home building company is selling the lot controls what the premiums are.
There are no specific guidelines that sellers have to follow when pricing premiums.
For example, two virtually identical lots (with the same desirability) in two separate communities could have premiums that differ by thousands of dollars.
Talk with your real estate agent about the premiums on lots you’re interested in and ask how the price compares with other communities.
It just might save you a few bucks.
3. What Determines the Price of a Lot?
What determines the lot premium can be incredibly obvious or a bit more nuanced.
Homebuilders who are selling lots get to make the rules, which means, as a buyer, you need to watch out for yourself and really consider if the tagged premiums are right for you.
Let’s get a better idea of how premiums are determined
Lot Size
The bigger the lot, the bigger the premium.
It’s reasonable to expect to pay a higher amount if your lot size is 1.5x larger than the others in the community.
This is an important thing to consider when planning out your home.
A large house might not be able to fit on a standard lot, so you’ll have to pay for the extra land and the premium that comes along with it.
Vistas
Lots with gorgeous views will have a steeper premium than those that don’t.
Communities only have so many of these kinds of lots, and it gives developers the chance to slap on a high premium.
Keep in mind that lots with a view and a high premium could be relatively standard in terms of size and location.
Corner Location
Lots located on corners tend to have a premium.
Corner lots are considered to be more desirable because they are often larger than standard lots, and whoever builds a home on them will only have a neighbor on one side.
But watch out because corner lots could also mean being more exposed to a busy intersection.
Cul-de-sac Location
Cul-de-sac lots are more private, and that means a premium will be stamped on them.
Homeowners won’t have to worry about through traffic, making it safer for children to play outside and reducing the overall amount of road noise.
Supply and Demand
The developers of a new residential community are in full control of lot premiums.
They can dictate the rate of sales by raising or lowering premiums.
If a new community is being built near a booming city like Austin, the homebuilders know that they can charge higher premiums on lots that aren’t extraordinarily unique.
Additionally, if there are 20 lots with views of the ocean, and only 5 are left, the premiums on those last five will likely be higher than the previous fifteen.
Natural Surroundings
A lot that backs up to a wooded area, a lake, a pond, or other natural areas will have a high premium.
Sometimes lots that don’t even back up to a natural area but are simply closer to it than other sites will still have a premium.
For example, if a new community is being built right next to a lake, there’s a good chance that you won’t find any lots without a premium.
4. What Lots Don’t Have Premiums?
Not every lot in a new development has a premium.
An average lot without any special desirability will likely not come with additional fees.
So, if the lot is the standard size, doesn’t back up to nature, isn’t on a corner or cul-de-sac, or doesn’t have a view, in theory, it shouldn’t have a premium.
I say in theory because, unfortunately, homebuilders sometimes try to get the most out of buyers.
In some cases, the only lots that don’t have a premium are the worst locations, which means you would have to pay extra for just an average site.
That doesn’t seem entirely fair, does it?
Well, homebuilders are in full control over the prices.
Even though local governments are the ones regulating the development of new communities, premiums are determined by whoever is selling the lots.
During the crazy housing market conditions of the COVID-19 pandemic, some homebuilders were accused of unfairly increasing housing prices through premiums.
Average lots that wouldn’t normally have an extra fee suddenly had premiums of thousands of dollars.
5. Can You Negotiate Lot Premiums?
Lot premiums can absolutely be negotiated.
Homebuilders want to make as much money as possible from their development project, which means they are going to look out for their interests first.
That’s not to say that every builder or land developer is trying to take advantage of you, but money makes people do wild things, doesn’t it?
Well, the good news is that you have every right to have the seller explain how they valued the lot premium.
It would be a good idea to use a real estate agent to help you negotiate prices.
Your agent will have a better understanding of the premium prices in other neighborhoods and if the prices have recently gone up.
If the market is hot and people are buying homes left and right, you may have trouble talking down the price, but you don’t get what you don’t ask for!
6. Are New Builds Overpriced?
New construction homes tend to be priced higher than old homes (or homes that have already had an owner).
Part of the higher price is due to the allure of a new community and lot premiums.
Houses usually aren’t the only thing being built around a new development.
Oftentimes, there are new shops, restaurants, and schools popping up all around the area, driving up the prices.
Older homes, on the other hand, don’t have lot premiums. Instead, the housing market of the area will determine the price.
But does that mean new construction homes are overpriced?
Nope!
Everyone has their own preferences, and if you want to be a part of a new neighborhood, then a higher price would be worth it!
7. Cons of Buying New Construction Homes?
Before you commit to paying a high lot premium and building a house, let’s look at the cons of new construction homes.
Higher prices
On average, new homes are around 17% more expensive than resale homes.
This is due to lot premiums, upgrades, locations, and the homebuilding companies.
People who are looking to get the most bang for their buck will want to look in communities that are already built up.
Less Negotiable
New construction homes often have fixed prices, and the company selling the houses will be less likely to negotiate.
Less flexible pricing will be the most severe when demand is high.
Smaller Lot Sizes
Today’s land developers are cramming as many lots as possible into new communities to maximize profits.
That means lot sizes are getting smaller even though prices are getting higher.
Limited Customization
Many homebuilders don’t allow for total customizations.
Houses have to be built in a specific model, and only certain features can be personally designed.
Delays
New construction homes mean you’ll have to wait for the home to be built before moving in.
Although builders will give you an estimated move-in date, delays can happen, which could lead to you being stuck in a rental home longer than you anticipated, costing you more money.
8. What is the Average Lot Size in the US?
Now that we know lot sizes in preplanned communities are getting smaller, despite the high lot premiums prices, let’s take a look at the average lot size in the United States.
In 2020, the average lot size was 13,896 square feet.
The bad news is that properties are getting smaller and smaller.
In 1978, the average lot size was 18,760 square feet.
That’s around a 25% decrease!
Even though it seems logical to assume larger lot sizes would cost more, that’s not the case.
California has the second smallest average lot size, but it has the highest price per square foot–$85.60.
Compare that price with Mississippi, where the average price per square foot is just $5.71.
Location rules everything in real estate, and the cost and size of lots reflect that.
9. Which States Offer the Largest Lot Sizes for Home Buyers?
Do you think you can guess the state with the largest lot sizes?
It’s not Texas…
Despite the small size of the state, Vermont, on average, has the nation’s largest lots!
The median lot size comes in at a whopping 74,408 square feet–shocking, right?
In fact, three other states in New England made the top 10 list as well–New Hampshire, Maine, and Connecticut.
The reason these states have such large lots is primarily due to the zoning policies that require lots to be a certain size to limit population density.
Despite these zoning policies, land in New England is relatively inexpensive compared to states like California, Nevada, and Colorado.
10. Is Buying a Lot the Same as a Mortgage?
When you buy a lot in a new development, you usually have to immediately build a house with the designated homebuilding companies.
In that case, the value of the lot gets put into the overall price of the house, so everything would be included in the mortgage.
However, if you were solely buying a lot, and you didn’t have to build a house on it, you would get a land loan instead of a home loan.
Lenders see land loans as being riskier than home loans because there is less collateral, which means interest rates on the borrowed money could be higher.
To minimize the risk, you may be required to put down a bigger down payment (percentage-wise) on a land loan than you would a home loan.
11. Does Land Appreciate as Much as Houses?
Houses don’t appreciate; they decay.
The land is what appreciates and drives the value of a home up over time.
Of course, the house has to be upgraded and renovated in order for this to be true.
Buying raw land in a remote location can be a different story.
If the area of the property isn’t likely to become more popular, the land won’t appreciate nearly as quickly as property in a residential area.
Final Thoughts
Lot premiums are a very important thing to consider when building a home in a new community.
Home builders will add a hefty premium to properties with any features considered more desirable.
But remember, these additional fees can be negotiated, and if you are one of the first buyers, your odds of talking down the price will be much higher!
So, to those of you who are in the market for a new construction house, I wish you the best of luck on your journey–exciting times ahead!
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.