Establishing Lot Premiums 401

In 3 previous posts, we canvassed the rationale for lot premiums and began the methodology for quantifying them. In this edition, we continue the “how.”

Shape premiums

Odd shapes will sometimes limit the home that can be planned and the uses that can be expected on the site. Most buyers will prefer to have more of their square footage in the rear, or even side of the home. This affords more privacy for the occupants. Watch for odd “remainder pieces” that add size but not any use to the owners. These may ultimately require a negative premium. Again, these little triangular pieces, very often at the end of a cul de sac, or adjacent to a civic-type use, could be a problem to irrigate, install and maintain, with absolutely no usability, or even privacy, can be discovered in the on-site analysis.

A trapezoid shape, with more of the square footage at the rear, will usually be preferred. (This is especially important in a feng shui sensitive market. Indeed, the reverse shape, with the front of the lot wider than the rear allows the good chi, wealth and good fortune, to run out of the lot.) Typically, the shapes at the end of cul de sacs are not uniform and the shape will be critical to examine.

Access premiums

Long accesses for flag lots usually indicate a premium condition. Privacy will normally be prized. However, if the access driveway is very tight, close by the side of the neighboring home, the condition becomes a negative. And a negative to the front home that has its privacy affected. If the lot configuration is such that the home is set with a side to the street, the garage is at the furthest point from the street, accessed by a driveway that crosses in front, and within 12 feet, of the living room window, the negatives are obvious. There is a poor front yard, it is of negligible use, and (Both these are real examples that were missed by the brains trust “back at the office.”)

State of title premiums

I have seen examples of the shared driveway owned by a Home Owners Association. If the sewer and water lines are under the driveway, be assured that there will be a delay in any needed repairs. Meetings, quotes, disputes, etc. all will occur before the blockage is resolved. The search for the culprit will seem more important than the resolution of the problem. (Also consider that ALL the owners in the HOA will pay the costs.) If the shared driveway is for a flag-and-front-lot situation, imagine the dispute if there is a sewer blockage. Who caused the blockage? Who should pay for it? Whose favorite contractor should do the work?

An opportunity for major confrontation, this is a matter that must be disclosed. Perhaps it is an example of a change to be made. Perhaps the cost of separate sewer lines is the better solution by eliminating the objection.

Watch for easements affecting each lot in favor of the HOA, the Landscape Maintenance District, the City, County, power company, gas company, etc. If these limit the use to which our buyer can put her property, clearly there is a negative premium.

Cultural issues

In markets where a particular cultural group is the target market, there should be no premium for lots that have the appropriate shape, lot number, etc. The community land should have been planned to maximize those attributes, such that the BASE price should reflect that market. Again, in feng shui (or "vastu" or any similar set of principles) sensitive markets, the negative aspects should be eliminated in the planning, rather than discounted in the pricing. With this base condition, premiums might be added for views, size, usability etc. Additional issues to be evaluated are the shapes of visible hills (e.g. turtle shaped are very auspicious), the shapes of visible architecture (e.g. arrow shaped is usually not preferred), etc. This, in turn, reinforces the need to have the tools above-mentioned to properly evaluate the site views.

And this is best done BEFORE committing to the construction plan!

Many of us have heard that in particular cultures, customs or countries that “all homes must face…” a particular direction. Those who believe that have never considered the illogic of such a statement. Does this mean that there are lots facing the other three directions that are vacant or unsold? Clearly not!

I do advocate cross-cultural training to help all of us in design, marketing, pricing and sales. However, it is insulting to believe that all Asians, for instance, share a common belief system. It is foolish to believe that all customers whose culture originates on the Indian sub-continent will buy their homes with the same motivations. How incredulous would Americans be if someone from Pakistan suggested that we all ride horses, rope cattle and yodel around a campfire?

And, since we most often hear that it is "Asians" whose homes must face XYZ direction, we really need to think. Are all Asian cultures, countries, values and customs the SAME? Nearly 3 Billion people with one set of standards?

Are we therefore prepared to say that all Chicagoans prefer ketchup on their hot dogs???!!

We must think about the specific market for our communities.

A community located, for instance in Hacienda Heights, CA, will appeal strongly to those who follow feng shui. The entire community, auspiciously on “the Dragon’s Back” will have a higher BASE value for these buyers. (Others, frankly, will not typically justify the higher base price, since their cultural values do not coincide.) Premium pricing should only be applied to those items which are different from the community norm. Better numeric addresses are a part of the lot premium analysis. Views over the golf course toward a turtle-shaped mound will attract more value. An absolutely flat yard gets no premium.

If the community clearly does appeal to a specific cultural group, an expert in that culture is a VITAL member of the team and should be part of the site visit to establish lot premiums.

Conclusion

Lot premiums can be a source of additional revenue that may only be crystallized by a thorough analysis at the site. Like all matters in our business, it is a mistake to impart the Seller’s preferences into the analyses. The Buyers will ascribe greater or lesser values according to their motivations. The Seller’s COST in providing a specific lot is completely irrelevant. The Seller’s preferences are totally unimportant.

To best approximate the Buyer’s reaction, it is critical to involve those who best represent the Buyer, i.e. someone like the Buyer, sharing the motivations of the Buyer. It is equally important to include those who daily receive the feedback from Buyers, i.e. the site sales team.

And most importantly, the Seller’s team analyses must all be made in the same location as will be made the purchase decisions by the Buyer: AT THE SITE, not “back at the office.” Those who believe otherwise should consider abandoning a model complex, avoiding a sales office and inviting Buyers to meet “back at the office.” The level of success in that approach should be a lesson to us whenever we try to take the easy route when establishing lot premiums.

Meyers Builder Advisors uses very sophisticated modeling in estimating lot premiums. They apply the models once they have walked the individual homesites. The irony is that some of their clients apply a simple percentage formula. From "back at the office!"

Like so much in homebuilding, lot premium decisions are made best when they are made in the field.

Where we expect buyers to make decisions.