What is a Lot Premium?
A lot premium is an extra cost a builder may charge if the lot you choose for construction is larger or in some way more desirable than other lots in your subdivision. This premium gets attached to the purchase price of your property. It’s considered a one-time fee.
What makes a lot “premium?” In many cases, it’s because it’s more private than many other lots in the subdivision. For instance, it may stand apart, or be a corner lot or cul-de-sac (a less busy street). It could even be because a ground-up build will face a certain way, like north or west, or have a great view or sun exposure.
Other typical premium lots:
- Views that face a golf course
- Views that face a lakefront or other type of waterfront
- Views that face a wooded area
- Lots that back up to private land
- Extra parking
Another way to look at it: most builders will advertise their homes based on standard, uniform features. This may be referred to as a “standard lot.” Anything above and beyond that may be considered “premium.”
Lot premiums can cost anywhere from a few thousand dollars to hundreds of thousands of dollars. For luxury lots, it can even cost into the millions — for instance, an unobstructed ocean view.
How is the lot premium calculated? It’s usually based on the builder’s data and market demand for the development.
Many buyers are willing to pay extra for the best lot. Builders and developers know this, and this is another way they can increase their profits.
Are lot premiums negotiable? In most cases, yes (as is everything). Builders often work with lenders — if you work with the builder’s lender, you may be able to negotiate a lower premium as a result.
Would you pay more taxes with a lot of premium? In many cases, yes. Your house will be worth more (perhaps it will be on a corner lot, for instance).
What to consider when considering paying a lot of premium:
The potential resale value of your home. Will it be valuable to future homebuyers?
Location. Does the lot premium equal the location of the property?
Appraisers. Most appraisers don’t consider lot premiums in their valuations.
The reason for the lot premium. If you can’t see exactly why the lot is above average, ask the builder, and ask for the reason they come to the specific premium price.
Remember that everybody has different preferences and tastes when it comes to buying a home. Not everybody will be willing to pay a premium for something that the builder thinks is valuable. Consider for yourself if you think paying a premium is ultimately worth it.
There is no guarantee that paying a premium will allow you to recoup that extra cost with time. It’s hard to predict the future: new construction may obstruct your current view, or the wooded area behind your house may be marked for development.
Bottom line: don’t just choose any lot for the construction of your new home. Do the research and see if a premium lot is your best investment.