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The Price of Land

Can you afford to buy a vacant lot to build your dream home? Here is a quick calculation for you to consider. Look at the value of a similar sized new home in the immediate area of the lot you want to buy. Let's say it is $800,000. The value of the lot should be about 1/3 of this value, or about $266,000. Lot prices in California are currently being sold at a premium because of the scarcity factor, so a $266,000 lot will probably fetch $300,000.

Figure 1 How the value of the final home relates to the lot value. The cost of the land should be about 1/3 of the value of the completed home. Note that this final value is NOT the cost of the lot, site preparation and building costs. It should include some equity, meaning that the costs incurred should be less than the sale value of the home. In actual fact, an owner-builder may be satisfied with a lower amount of equity than a builder who is building to sell the home on completion. This is the major reason that builders are typically willing to pay less for a lot than an owner-builder.

If you see a lot in southern California for $90,000 it is either going to be in the desert, miles from any utilities, or it is going to be unbuildable. Lots under $200,000 are very rare and even a $300,000 one acre lot is quite rare these days

The scarcity in southern California is so bad that most lots that are relatively close to the major cities can cost much more than $300,000. Many lots are currently priced in the $400,000-$700,000 price range meaning that you would need to build a home valued at $1.2 - $2m or more in order to realise the value of the land.

The solutions? First, you can look further from the main commuting centers. If you are willing to drive an hour or so each way to and from work, or if you can work from home, then the lot costs are going to come down to a manageable level. Second, if you have contracting knowledge and can get build costs down, then you may be able to build that $1.2m home for $800-900,000 including the land costs. Third, consider a modular home - these are getting quite sophisticated and most people can't tell them apart from a traditional stick-built home.

The bottom line? If you want to live less than an hour from a major city in Southern California, you may not be able to afford to build unless your total budget is $800,000 or more. A total budget of less than $750,000 would make things very difficult unless you are thinking of a modular home.



This website has been written and developed by Rob Ransom, PhD. Rob has extensive experience working with buyers and sellers of vacant land in San Diego County, CA. Although Rob currently has a California real estate license he is retired from selling real estate.

If you have comments or suggestions regarding this web site, email Rob at the address below.


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