Lot Premiums Are Back! | John Burns Real Estate Consulting

Lot Premiums Are Back!


Our consulting team has noted a significant trend in the market: lot premiums are rising substantially! The premiums vary significantly by region, however, as the following regional summaries attest:

Southeast premiums are back. Atlanta SVP David Kalosis notes that most new communities offer base lots plus premiums now, even in townhome communities. As each new phase or building is released, lot premiums continue to gradually increase. He reports that “decreased incentives, coupled with increasing lot premiums, are compensating builders for rising materials and labor costs this year.”

Northern California price hikes are disguised as premiums. Northern California VP Dean Wehrli notes that a few Bay Area builders are raising prices by increasing the premium attributable to specific lots. Interestingly, some of these “premiums” are on lots with no premium condition at all. Dean believes this is really just a disguised price increase, which will allow them to ditch the premiums if the market cools a bit.

Florida premiums are on all but the worst lots. Florida SVP Lesley Deutch visited 10 projects in North Tampa this week and noticed that all communities have premiums on all lots, except for highway frontage lots. Back-to-back lots have smaller premiums, and views/private lots have premiums up to 10% of base price. Lot premiums only increase when a builder starts a new phase or a new community.

Northwest buyers are willing to pay up for large lots. SVP Ken Perlman reports that oversized lots are getting big premiums in Seattle, primarily because they are so rare. In the Pacific Northwest, builders have always priced each lot within a subdivision separately to maximize the lot prices and to capitalize on premium conditions. With rapidly increasing premiums in Seattle, Ken is doing more lot-by-lot premium analysis to help land buyers bid more confidently.

Southern California premiums have doubled (or more). Southern California Senior Manager Paul Faye noted that he recently saw a $100,000 premium in the Inland Empire masterplan of Morgan Hill in Temecula, which is probably a record for the long-time community. Also, SVP Pete Reeb reports that golf course premiums at new home projects in Oceanside have doubled in the last year, increasing from around $35,000 per lot a year ago to around $70,000 per lot today.

Texas premiums are no longer given away as incentives. Dallas-based Senior Manager Paige Shipp reports that lot premiums were never eliminated in Texas, although they were often reduced or removed during negotiations with buyers. Today, builders are standing firm on premiums as a way to control and capitalize on their better lots.

Midwest premiums are only found in the best locations. Chicago-based SVP Lance Ramella reports that lot premiums have also returned in the Midwest, but only in the most highly desirable submarkets. This region is generally seeing premiums in the 2%-4% percent range for larger lots and cul-de-sac locations. Lots with open space or water views can exceed 5% premiums.

DC premiums are low and dependent on the submarket. SVP Ken Perlman, who is in DC as I write this, says premiums of 1%-2% are common on the Virginia side of DC and even stronger closer to the capital . DC is still recovering, with 4% incentives still common (down from 6% 18 months ago). Senior Consultant Kathleen Ripley, who visited 2 dozen communities in Southern Maryland this week, reports that premiums are very low and only on a handful of lots, as the area is heavily dependent on the military bases and defense contractors who are leery of the sequester.

Buyer demographics impact lot premiums. Irvine-based VP Nicole Murray notes that builders are able to get considerable lot premiums for home orientation with good feng shui. In Southern California, builders have been able to command an additional 5% premium for homes facing north with average community lot size and open space. Cul-de-sac lots with good feng shui have commanded premiums above 20%. Home site orientation along a hillside also has considerable feng shui implications, characterized as a “home nestled into a hillside being blessed with material and non-material riches.” Communities with a large East Indian population should also be mindful of Vaastu Shastra principles, as builders may receive premiums for east-facing homes.

As you can see, the housing recovery is very uneven geographically. This is normal. Builders, developers, private equity funds, and building products companies who do a better job allocating capital to the right markets will clearly outperform their competitors.

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