"Vet out" is horse slang. When you consider buying a horse, it's wise to have a vet take a close look at that horse to ensure the critter doesn't have a hidden or unnoted issue that would decrease or scuttle its value. It's a good idea to do the same thing for a lot. Who wants to buy a lot and build a house and then find out you have to sell it at a loss? And even if you think "I will die in this house", life can take unexpected twists and turns, so it behooves you (so to speak…) to ensure that you can get out of the house with your finances intact or, at the very least, know exactly what you are getting yourself into.
We've not found too much guidance in assessing whether or not a lot is a good deal. Real estate agents will tell you that it's worth what you or someone is willing to pay for it. Not terribly helpful. However, a real estate agent can get you comps: Comparable sales in the general area. However, comps are only helpful if there have been a fair number of lots that have sold in the area. If the area is too broad, then a number of other factors start to kick in (neighborhood, nearby amenities, nearby non-amenities, size, schools, slope). And folks selling lots outside the desirable core are usually pushing to get city core prices. Can’t blame them.
We've been using several techniques to assess the value of lots we've looked at: (1) comparison shopping, (2) comps, (3) county assessed value of the lot, (4) an analysis of county assessed value of neighboring houses, (5) an analysis of what our final house would cost, and (6) infatuation level. Whew! No wonder this process is tuckering us out!
Comparison shopping is simply knowing what other lots for sale are going for and what their pros and cons are as compared to the lot du jour. If a ho-hum lot in a suspect part of town is twice as expensive as a comparable lot in the nice part of town, then that ho-hum lot is most likely way overpriced (perhaps there's treasure under them thar hills!). Comparison shopping is even better when the lots are in the same part of town. However, some lots are real difficult to assess. For example, a lot with a view of the river located in a bad part of town has a river pulling the price higher while the neighborhood pulls the price in the opposite direction. Sellers, not surprisingly, root for the river (and emotional pull a river may have on a potential buyer). At the very least comparison shopping will let you know whether or not the price of your potential lot is in the ballpark.
Comps will tell you what lots actually sold for and also allow you to see what the owners asked for when they sold those lots. In a seller’s market, bidding wars may drive the price higher than asking. In a buyer’s market, selling prices may be lower than asking prices. If a seller is smart, she will highball the price in hopes of maximizing returns.
In Texas, the value of the property as assessed by the county appraisal office is public information. In Austin, this information is online. By law, the tax assessor is required to appraise the property to within five percent of what it would sell for on the open market. How that is assessed, I don't know, but I've found the county assessed values for residential properties to be pretty good. Keep in mind that these numbers are backward looking. If the market has warmed up, the tax assessor's numbers may underestimate the value, and if the market has cooled down, the tax assessor may overestimate the value of the property. Using their database, I can see what the value of the lot is as well as the value of the improvements. I don't know what their logic is in assessing values, but it appears that they determine what properties are selling for, subtract off $75 to $100 a square foot for improvements (the house), and assign the remaining to the land. Not an unreasonable assessment, in my humble opinion.
Using these county-assessed values as well as the comps, you can determine how your dream home fits financially into the neighborhood. You generally don’t want to have the most expensive house in the hood. This puts you on the cutting edge of prices, and you are likely to get cut by that edge if you have to sell. So if the lot is $100,000 and it costs you $250,000 to build a 2,000 square foot house, you can see if comparably sized houses in the hood are in the $350,000 range you would need to break even at the end of construction. If you need a substantial construction loan, you need to look at this because your bank certainly will.
Something to keep in mind is that the bigger the house, the more likely the lot will vet out. The cost per square foot of land for a 100K lot for a 2,000 square-foot house is $50. For a 4,000 square foot house, it’s $25. If houses are generally selling for $150 a square foot, your McMansion comes in at $150 (good) while your MiniMansion comes in at $175 (not so good). Sadly, there’s a financial incentive to build big on expensive lots, hence all the inner-city scraping going on.
And then there’s infatuation. For us, this is what pushes us to offer more for the dirt (Look at the view of the river!). In the end, it’s better to kill the mood with spreadsheets of reality than to wake up years later with regret. Spock v. Kirk.
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