My lot in St. George, UT closed today

December 18th, 2006 by Kenric

One of my St. George, UT lots closed today. That’s one down and one to go. Owning these lots has been a difficult learning experience for me. When the numbers and dollars are all settled I’m estimating about a $15,000 loss this lot. Obviously if I had to do this over again I wouldn’t have bought the lots.

So what have I learned?

With lots, you need a much larger discount from market value. I thought I purchased the lots at about 20% below market. People who buy lots and build have to be compensated for their building headache. For example, if I buy a lot at $50k and spend $150k to build a house, it had better be worth more than $200k. In fact, it better be worth at least $300k. This is because the person who goes through the whole building process is not doing it for free! They have to be compensated for the headaches and time. This is true even if it the person is ultimately going to live in the home themselves. Therefore, my calculations on what my lot was worth when I initially bought it was wrong. I did not have enough spread to make the lot attractive to a home builder. I think that if I spent an additional $180,000 to build a spec. home on the lot I could have sold the finished product and broke even. It wasn’t worth my time to offset a $15,000 loss to spend a year trying to build a home.

Lots have no cash flow. There is no way to generate any type of income from it without putting more money into it. Therefore, without appreciation or a plan to improve it, you are losing money every month.

It is difficult to get loans for lots. I paid cash because I thought I could do a cashout refinance in a few months if I needed the money. It’s very difficult to get money out of a lot if you don’t have plans to build on it. My loans are very short term with a balloon and have high interest rates.

When selling a lot, real estate commissions are higher. I found out that it is pretty standard for a realtor to charge 8-10% commissions on selling land and lots.

There are holding costs with land and lots. First, you still have to pay property taxes. That’s more money out of your pocket. Then there are unforeseen costs. Who knew that there was a law against weeds in Utah? I’m glad I never paid for the weed maintenance. The new owners will have to pay for it next year.

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