With Colorado real estate being in high demand, local housing markets are experiencing a shortage in inventory for resale.
This lack of availability in existing homes is motivating some buyers to buy vacant land and build, rather than wait for their ideal home to come on the market or to settle for a home they don’t love.
Buyers have a few options when it comes to buying land and building a new home:
- They can choose a production builder (also known as a tract builder) or
- They can build a custom home
Production builders are a popular option for buyers looking to simplify the building process. Production builders already have the systems in place to build multiple new homes, usually in a development, with connections to city services and infrastructures, like electricity and streets. They own the lots and package them with pre-designed houses to provide a complete property to the buyer.
This simplifies the building process for the buyers and is often the far more cost-effective route to building a new home.
Production builders and developers usually purchase entire tracts of land and divide the land into lots of various sizes. So the buyer typically doesn’t know how much the production builder paid for each lot. And because of the pre-planned nature of production builders, buyers have few choices with regard to lot size. They simply choose one of the available lots provided by the production builder.
The builder may only allow certain home plans to be built on certain lots to retain a pleasing neighborhood aesthetic and uniform land-to-building ratio in the community. The land-to-building ratio is simply how much house sits on how much land. Builders don’t want to build a large house on a small lot or a small house on a large lot. So if you’re considering a production builder, you should be careful to confirm that the specific home design you want is available with the specific lot you’re interested in.
Additionally, production builders typically offer upgrade packages to the homes. Upgrades could include higher-quality materials, like granite countertops instead of Formica, or additional features like fireplaces or spa tubs. These upgrades are pre-selected by the builder to ensure that the total cost of the build will fall within an appraisal-safe range.
All of this pre-planning means the buyers don’t have to spend any time thinking about the cost of the land and how it relates to the total cost of the build. The production builders have already taken care of that.
Some buyers will prefer to build a custom home rather than buy a production builder’s package. The most common reasons for choosing the custom home route are:
- You don’t find exactly what you’re looking for in production homes
- You want something unique
- You want a larger lot for added privacy
- You want to design your dream home
Choosing to build a custom home raises the question of how to evaluate the cost of the lot compared to the total project cost.
Unlike purchasing a lot-and-home package from a production builder, building a custom home generally requires finding your own lot. The lot is an entirely separate expense from the building budget.
When looking at lots, it’s important to understand any community building restrictions. Communities may have architectural building requirements that strongly influence the look and feel of the completed home. The building requirements and restrictions will also directly impact your total project costs.
The Traditional Percentage of Costs to Allocate to Land
The cost of the lot has traditionally been 25% of the total project cost.
For example, if you have a total project budget of $200,000, you should expect to pay $50,000 of that amount for the vacant land since 25% of $200,000 is $50,000.
This ratio has changed in recent years due to factors like increasing lot prices, escalating construction costs, and the increased demand for smaller homes.
As long as the final project appraises, lenders are flexible with the lot-cost-to-total-cost ratio. Homeowners Associations (HOAs), however, may be less flexible.
How HOAs Affect the Lot-Cost-to-Total-Cost Ratio
HOAs have the authority to dictate what can and cannot be built in the community
The goal of the HOA regarding design restrictions is to create a visually-appealing community of cohesive, stylized homes and landscapes.
Some homeowners find HOA design guidelines overly restrictive. Other homeowners appreciate the pleasant environment provided by the curated look and feel of the neighborhood. Many of these restrictions exist to keep the community free from some of the eye-sores that plague other communities, like distracting paint colors or out-of-place architecture.
To that end, HOAs have specific design guidelines addressing multiple aspects of the build that may include:
- Square Footage
- Exterior Cladding
- Roof Style and Roofing Material
- And More
These restrictions can actually be helpful in the building process because they eliminate many choices. With so many decisions to be made in building a custom home, buyers spend excessive amounts of time shopping different options for styles and materials. HOA requirements to use certain styles and materials saves a lot of time and indecision for many buyers.
Of course each of these design guidelines directly affects the total cost of your home building project. So it’s important to budget around the HOA’s design requirements. And because they will directly impact your total cost, they should be considered even before you purchase a lot. You want to make sure you will have enough money remaining in your budget, after purchasing your lot, to build a home in accordance with the HOA’s design guidelines.
Just as production builders are concerned about the land-to-building ratio, so are HOAs. No one wants a large house built on a too-small lot or vice versa. So HOAs will typically dictate the size of the structure that can be built on a given lot.
Let’s look at an example:
A couple buys a lot for $75,000 in an HOA community with a strict set of design guidelines. Their total budget is $300,000. They don’t need a lot of square footage, but they do want a good quality home with some nice upgrades.
In Colorado Springs a basic tract, or even semi-custom, home could be built for as little as $110 per square foot (for anyone wondering, luxury custom homes tend to start at about $150 per square foot).
At $110 per square foot, our buyers could build a 2,000 square foot home and still be within their budget (110 per square foot x 2,000 sq feet = 220,000 + 75,000 for the lot = 295,000).
However, when the architect begins designing the home, they notice that the HOA design guidelines dictate that the ranch-style home the buyers want to build must have a minimum of 1,500 square feet on the main level.
This requirement means the project cost is already at $240,000 (1,500 square feet times $110 = $165,000 + 75,000 for the lot) before adding in the cost of the lower level or foundation. A 1,500 square foot main level will require a 1,500 square foot foundation and crawlspace or basement, which could add another $165,000 putting the total project cost at $405,000. So project ends up being $105,000 over the $300,000 budget, even before upgrades can be added.
This is why the HOA square footage requirements should be considered prior to purchasing a lot.
In most HOA areas, you’ll immediately notice that the architectural style is consistent throughout the development. This is due to the HOA style guidelines.
The guidelines may restrict builders from including design elements like balconies, columns, or bay windows, which would keep the building costs lower. Alternatively, the guidelines may require certain architectural design elements, which would increase the total project cost.
Exterior cladding is likely included in the design guidelines to present a uniform exterior appearance.
Stone costs significantly more than stucco, which costs more than masonite. Many HOA’s require both stucco and a significant amount of decorative stone. Make sure your budget takes the exterior cladding requirement into consideration.
Roof Style and Roofing Material
A simple gable roof (the classic roofing style in which the roof peaks in the center and slopes down on two sides of a rectangular house) is inexpensive to install and maintain. But because it lacks visual interest, many HOA guidelines call for more expensive styles. The more modern hip-and-valley style, which creates multiple angles and multiple peaks is naturally more expensive because it is more complex.
Roofing materials are also a consideration. For example, fire-prone areas may require tightly-interlocking clay tile over a fire resistant cap sheet. Both the cap sheet and the tile are far more expensive than a traditional shingle roof. The cost of the roof could potentially double if higher-end materials are required by the HOA.
Landscaping is often an underestimated (or even forgotten) budget item for new builds. But landscaping can be costly, especially when the HOA is involved in landscape design.
HOAs routinely issue guidelines for things like:
- The size and material of costly hardscape. The HOA may dictate how wide your driveway must be, and they may require a fence or wall around your lot of a certain height and thickness. They can even require gates of a certain style.
- The amount of sod. If the neighborhood is looking for a green lawn aesthetic, they can require that a specific percentage of your lot be covered in sod.
- Number of trees. HOAs want enough trees to make the community feel green, but not so many as to make it look overgrown. So they can dictate the number of trees per lot.
- Sprinkler system requirements. To ensure that the landscaping is maintained throughout the neighborhood, the HOA may have requirements for sprinkler systems to keep the lawn well-watered.
Naturally, all of these items add to your total building budget, so they may cut into the amount specifically budgeted for the lot.
Other Factors that Impact Cost
In addition to the ways the HOA requirements affect the total project cost, other factors like soil quality, utilities, and construction quality will also make an impact on the total cost.
Vacant land might not be quite ready to be built on. The lot might need to be leveled before building can begin. Additional excavation and backfill may be required due to expansive soils, which can drive the project cost up.
The soil can also affect water and septic systems. Additional excavation or backfill could be required to accommodate the septic system design. And the depth of the aquifer can significantly affect well costs based on how easy or how difficult it is to access the aquifer
Also, there will be fees to connect the utilities for the home with the public utility systems. Public Utilities Tap fees should be researched for your specific building location and included in your project budget.
Lastly, construction quality can substantially impact the cost of the project. Homes are typically built on a per-square-foot cost-basis. The better the construction quality, the higher the cost per square foot.
For example, a $110 per square foot build might include lower-end construction materials like:
- Vinyl windows
- Hollow-core doors
- Formica countertops
A $150 per square foot build, on the other hand, would include higher-end construction materials like:
- Aluminum-clad wood windows
- Solid wood doors
- Granite countertops
And again, these costs are per square foot. So on a 2,000 square foot home, the construction quality could potentially make an $80,000 difference ($40 difference per square foot x 2,000 square feet).
The lot price does not stand alone. It is deeply connected to the total project cost by way of its relationship to the cost of the structure that can be built on that lot.
The building requirements and restrictions go with the lot. And they directly impact the total cost of the project. Before you buy a lot it’s important to understand the many factors that contribute to the final price of the completed home.
You should consult with your builder prior to purchasing a lot. They can usually shed some light on most of the issues mentioned in this article