WHAT TO DO WITH THAT VACANT LOT YOU BOUGHT TO BUILD YOUR CUSTOM DREAM HOME?

 What to do with that lot?

There are many people in the Phoenix metro area that have purchased custom home lots with the intention of building the home of their dreams.  Many of these lots were purchased during the real estate boom when buyers paid dearly.  Some lot owners have since sold their properties, while others are sitting with the land unsure about what to do while watching land values drop year over year. 

 As far as land values go, as an Arizona custom home builder, we believe the worst is over.  Duh, how much worse can it get?  In one custom home subdivision, Vasaro, Chandler, AZ, the devastation has passed.   Based on  Arizona multiple listing service data, the worst hit on land values in this subdivision occurred between 2007 and 2009, where a 70% price drop occurred over those two years alone.  This is a gated custom home subdivision where average home prices were once over $1.3 million and now run about $600,000.  The average square footage is around 4500 square feet with three-car side entry garages.  Each home is built by a custom home builder, so no two homes look alike.   In 2006, the average price for a 0.5 acre parcel was $383,500 while today’s value (based on only ONE sale in the subdivision by the end of  the first quarter for 2011)  is $65,000,let’s hope a few more sales occur this year and bring the average price back up to the $100,000 range where it has lingered the past two years.  That’s an 84% drop from the high.  Really????  How much worse can it get?  Why would someone wait so long in this nightmare and dump a lot at the bottom of the market for $65,000?  Could it be fear?   Or it could be a terrible financial condition that made it necessary to dump it.  Maybe it was an owner that was just  sick of the HOA fees and the property taxes that they had to pay while owning the lot?  If they were upside down on the lot, meaning they owed a bank more than it is worth at today’s prices, it may be difficult to walk away.  In Arizona you will likely be held accountable to the bank if you walk away from such a property.  Arizona is an anti-deficiency state for a primary residence, but clearly not where investment property is concerned.

For someone that owns a lot in this subdivision and has held onto it, this drop in value has been sickening.  But now what?  Hold onto it until prices come back?  Try to sell it at the absolute lowest prices yet?  Go  ahead and build a house on it?  Let’s discuss those three issues.

1.  Hold onto it until prices come back.  In the Phoenix area, we have seen this up and down real estate cycle happen before in the 80’s during the Savings and Loan (S&L) crisis.  It took years and years after the S&L crisis for property values to increase.  This time around it may take 10 years or more for property values to increase, and they likely will NOT increase to the values at the height of the bubble.
2. Try to sell it?  If you own a vacant custom home lot and want to sell it, you are definitely stuck at today’s prices.  The next question to ask is, “Is land selling well right now?”  Actually, not well, unless you just give it away.  It is much easier to sell a house at a reasonable price than to sell dirt right now.  There are no longer investors counting on appreciation then flipping a lot to a spec builder.  There are no longer speculation builders out there buying lots to build a custom home and sell it.  As an Arizona custom home builder, this was never our business model.  We typically build homes for a particular customer. 
3. Go ahead and build a house on it?  If you had planned on building a custom home for yourself and your family, you might actually consider building on the lot.  

• If you already own a vacant lot that you had planned on building your dream house then you don’t need to be reminded that you are paying annual property taxes on this land.  If you currently own the home in which you reside you are paying property taxes on your residence as well, then it may be time to ask yourself ‘why’?   Is it time to sell the lot, despite the low prices?  Is it time to build a custom home and sell your existing home or rent out your existing home?   One of our customers has successfully rented out their previous home.  As many people have found out over the past few years, buying vacant land is a very risky and speculative investment. Unlike investment income properties where rental incomes pay the annual property taxes, raw or vacant land does not bring in any income to pay for the property taxes.  With vacant land, you still pay those annual taxes.
• If you already own a vacant lot that you had planned on building your dream home then you also don’t need to be reminded that you may be paying monthly homeowner’s association dues.  Perhaps you are also paying those for the home you are living in, whether you are renting or owning.  These are drain on your finances.
• If you need to sell something, in this market it is easier to sell a home at a reasonable price than to sell a vacant lot.  If vacant lots are selling at all, it is all about location and still selling dirt cheap, as evidenced by the ONE selling in this example subdivision.
• If you own the property outright, free and clear, what if you built a smaller house on the lot than found in the rest of the subdivision, say 4000 square feet rather than the average of 4500 square feet?  What if you kept the construction costs to around $90.00 sq. ft., without skimping on style and quality, which is not impossible in this market?  Construction costs have come down as well, lead times are nearly nothing as subcontractors are anxious to get on a job.  Run the numbers, if the current sales price is $129 a square foot, in this subdivision, what would the value of your new house be…. over $500,000?  Will it return the money lost in the lot, probably not, but what will?

In summary, there is no right or wrong answer.  The solution depends upon each person that may have bought a lot for their custom home and has owned it throughout this real estate nightmare.   Each solution is different based on the owner’s current situation.  There are as many different viewpoints here as there are people.  Some might ask, why add to the inventory of homes?  Well, if  inventory is an issue, lets talk about the high density builders that are still building away in the Phoenix market.  What seems stupid and insane to one person, makes sense to another person, you just have to do what makes sense for you!  If you want to discuss your particular situation, we believe our extensive experience as an Arizona custom home builder   we can help, please contact us directly at woodridgecustom@cox.net .

Related articles

• Housing market: 13% of all U.S. homes are vacant(talesfromthelou.wordpress.com)
• Selecting a Lot in Subdivision(homebuildingsmart.com)

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1. What’s Happening In the Phoenix Area Real Estate Market?
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Tagged as: Dream Home, Home construction