How Do You Estimate Lot Premiums?
In a housing pro forma, the majority of revenue is typically in the category referred to as “base prices”. However, some sites may have significant “lot premiums” that can either increase your profits or provide the ability to be more aggressive with a land price in competitive land markets. For the most part, these lot premiums are generally derived from views, lot size, privacy, and cul-de-sac locations.
To begin the process of estimating these lot premiums, you would typically start with establishing the base prices. As example, maybe the majority of lots in your tract map are 5,000 square feet with no views and not on the cul-de-sac. These base prices are the result of your market analysis, comparing against other like projects that are selling in your market.
Once you have established what the market will pay for your homes on your standard lots, then comes the analysis of which lots have special features that can add to your base home price on those specific lots. I have often found that you need to analyze the site plan to look for the views, lot sizes, and special locations. Before even addressing how much the premiums should be, it is not a bad idea to grab a set of highlighter/markers and color-code your assessment on the site plan. As you move forward through the process, this colored graphic should be very useful for recalling what you assumed and helping the decision makers review the lot premium estimates.
Next comes the tricky part of estimating how much each lot premium – view, size, location – is worth on those specific lots. I think it is somewhat both art and science. First, your sales and marketing department probably has some historical results from previous projects that will factor into the estimates. But equally and if not more important, the market research of competitive projects within your submarket location is critical to understanding what the premiums might be on your specific site. View premiums in affluent locations will tend to be more significant than view premiums in more price-sensitive locations. And the same might go for the lot sizes and lot locations.
Also note that there could be some negative lot premiums due to smaller lot size, odd configuration, or adjacency to negative external uses. The analysis of lot premiums should be given its due attention as these premiums can be significant to your land price or bottom line.
As always, we welcome your comments and questions below.