Steps in Building a House-How Much Should You Spend on Land?

Buying land is a very subjective process, and the cost of land varies greatly in different regions of the country.

One very important tip on buying land is to always keep the resale value in mind. I know that may not seem important to you, especially since selling is the farthest thing from your mind right now, but some day it may not be. Remember, resale value is always on the mind of your mortgage lender.

I recommend spending no more than 25 percent of your budget on the land. While this is not always possible, and gets harder to do every year, it is an excellent guideline.

If you have to spend more than that, something else has to give, and that will be the size and/or style of your dream house. Size and style determine building cost. (Size more than style.)

You’ll have to juggle hypothetical scenarios in the planning process until it all fits into your budget. In order to do this, you will have to know upfront approximately how much it costs to build a house.

The actual “cost to build” anywhere in the US is the most closely guarded secret in the industry, but here is how you can find out what housing costs in your area by going to my web site byoh.com and using the “Cost to Build Calculator” found on the “Getting Started” page.

Another method is to find a new home being built by a professional builder that is for sale and that is similar in size and style (and quality) to your dream house and do the following:

Take the sale price of that house and deduct the land cost, real estate commissions, and 25 percent builder profit and overhead and you’ll have the real “cost to build.” The land cost may be a bit tricky to determine, but any real estate agent can find out for you. You could even call the builder.

All homes, even used homes, have the site value broken out separately on tax records. Now you simply divide the “cost to build” by the square footage of the heated area of the house and you’ll have the cost per square foot.

Square footage refers to the heated (livable) area of a house, but ironically it is determined by measuring from the outside surface of exterior walls! For example: a simple house that measures 40 feet X 30 feet = 1200 sq ft. (No deduction is made for the thickness of walls).

If you are successful in keeping your land costs at 25 percent of your total budget, you will have 75 percent of your budget left for the cost of building the house. Take that number, divide by the “cost to build” and you will now know what size (square footage) house you can afford.

Now you can start looking at house plans by square footage, and of course style (design).