does the lot vet out?

"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.

how much does it cost to build?

Note: We have an updated (and much more informative [with numbers!]) post on this topic here.

One of the challenges of building a custom home is figuring out how much it costs to build. Some books state that you can forget about accurately estimating what it will cost to build a custom home--a disturbing prospect for a bud on a budget. Furthermore, it's important to know if whatever numbers you are comparing and contrasting are apples and apples and not oranges and apples. For example, we asked an architect friend how much it costs to build modern, and he replied "Plan on $200 a square foot." Another architect told us $125. For a 2,000 square foot house, that's a $150,000 difference (not to mention a scary amount of scratch to begin with). What gives?

The first thing to note is the difference between "soft" and "hard" costs. In short, soft costs occur before construction begins and hard costs occur after construction begins. Soft costs include the architectural planning, property acquisition, the permitting and approval process with the city, and any carrying costs (such as interest payments) before construction begins. Oftentimes, quoted cost per square foot only includes the hard costs, the costs once the concrete starts sloshing and nails start flying. Therefore, a quick question you should ask after receiving a back-of-the-envelope estimate is "Is that just hard costs?"

Another thing to ask is whether or not the price per square foot includes the garage and any patios as part of the square feet. In other words, is the price per square foot for conditioned space only? If not, you might walk away with a considerable underestimate of the total price to build. This is important not only for budgeting purposes but also for assessing the economics of building on a particular lot.

Costs vary, of course, across the country. For the Austin area it seems that building a cookie cutter suburban-style, a semi-custom, starts at about $100 a square foot. For custom, costs start at $125 for builder-grade finish out (in other words, not fancy). The fancier you want it, the more it costs. Modern tends to cost more because the materials and construction are less familiar to builders and the materials themselves can cost more. Building green also adds to the cost.

kouichi kimura

Love love love these houses designed by the Japanese firm, Kouichi Kimura. Very sculptural, calming, and zenny. The sides shown here are the privacy sides, something that seems to be a calling card for these architects on these urban and inwardly focused homes.

kouichi kimura

dirty deeds (done dirt cheap)

One enemy of modern architecture is the dreaded deed restriction. A deed restriction is a little goodie attached to the deed of the property, with or without a house, that dictates what you can or can’t do with the property. On one hand, this can be a good thing. It ensures an apartment building or gas station or business doesn’t get built or moves in right next to you. However, it can be a real mood killer if you want to build modern. For example, consider a lot we drooled over in the hills of northwest Austin. After reading through an inch-and-a-half thick stack of paperwork titled “Restrictions”, we discovered several items that were ultimately unworkable for us.

In the past, the neighborhood association had to approve your building plans. Given the standard architecture in the hood, it would have been highly unlikely that they would have approved a blocky, flat-roofed modern with lots of windows and steel. In short, our house would have been designed by committee. Yuck. We all know what comes out of committees… Fortunately, that provision had been removed several years ago. However, there were restrictions on the outside materials, the color of those materials (which explained the bland sameness of color up and down the street), and the configuration of the yard and whatever sat on the yard (posing potential problems for rainwater harvesting). Anything you did outside that upset a single neighbor could turn into the Spanish Inquisition.

More troubling were the building restrictions posed by the city on the lot. The lot was going to be a challenge to build on. Grade started at the curb at four feet above street level and wandered up from there to the back of the lot. Given the grade issues, it would make sense to place the driveway and garage on the western side of the lot where the slope was more gradual and there was more room to place a drive. However, the city had placed several restrictions on the lot that makes it impossible to build on without variances. First, the city required that any cut in the limestone could not be any greater than 4 feet deep. Second, the city required that the grade of the driveway be no smaller than 1 foot rise (or fall) per 10 feet of length. Third, the city required that the garage be 20 feet from the street. And fourth, the city required that the drive and garage be on the eastern side of this particular lot. Given those restrictions, it is impossible to build on the lot without a number of variances from the city. A friend in the neighborhood confirmed that the lot had gone unsold for many years because no one had figured out how to build on it. At first glance, after a hike about the property, I didn’t understand why. After reading the deed restrictions, it became real clear.

Yes, it’s possible to get variances from the city, but that adds time and cost, not to mention no guarantee of success. That, combined with color and yard restrictions (and the lack of western exposure to enjoy sunsets), caused us to bid ado to this little piece of hillside heaven. Furthermore, a previous owner, way back when during the days preceding prohibition, put a deed restriction on the property disallowing the brewing of beer. Not that I'm a brewer, but what if I wanted to?