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Should This Land Be My Land?

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Posted On: 11/04/2009

Q: Real estate values in my town have fallen around 15 percent in the past couple of years, although in the past few months the market is starting to pick up a little. In the same period the value of vacant land in a new subdivision has gone down by as much as 50 percent. Builders are advertising homes for about 10 percent per square foot less then it would have cost two years ago. In this situation is it better to buy land and build or should I purchase an existing home? I can put down 20 percent on an existing home, but I do not qualify for the $8,000 first-time buyer tax credit.

A: Homebuilders often buy or option property years in advance of construction so they have a "land bank" for future projects. This is a good system when sales are steady or expanding, but when new home sales slow it means builders may be carrying land that represents a hard cost to them with little potential for immediate profit or revenue.

In your case you're not buying all land or all existing homes; instead you're considering the purchase of a particular parcel or an individual house. No one knows which is "better" because we can't know what will happen in the future. That said, you have some interesting options.

First, with 20 percent down you should be able to get a fixed-rate loan with no requirement for mortgage insurance. However, if you have high-cost credit card debt or other obligations then you may not want to put down so much.

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The abundance of cheap financing at this time is a huge plus and a major bargain when compared to the mortgage rates generally available during the past few decades.

Second, when you buy land you have not bought a home. You have started a project which will likely require considerable time and cash to finish. If you don't have experience as a builder then the purchase of an existing home may be a more practical option.

Third, average price changes may not reflect marketplace realities. Average prices in a given metro area, for example, can differ from price trends in individual neighborhoods, with homes in certain price ranges or with particular types of properties, say condos rather than single-family homes.

While home values have begun to show solidity in a number of markets, it's also true that in some markets homes have lingered on the market for months and even years.

In one case I know of a property that was originally listed at $749,000 and now - nearly 1,000 days later - is available for $495,000. That's a big discount in terms of both cash and percentages.

What about your area? Have you looked at price trends in terms of distressed and non-distressed homes? Right now, today, we have an abundance of distressed homes in many local markets.

These distressed and foreclosed homes will be absorbed over time and then there will be less pressure to reduce general real estate values, especially in communities that maintain good jobs and hold onto their population.

Should you have an interest in buying distressed property at this time instead of building? If it's the right property, sure. The point is not the status of the property -- whether distressed or not -- rather the idea is that if the property is attractive and desirable as a residence or investment then it makes sense to buy at the lowest possible price.

There are now huge numbers of distressed and foreclosed bank properties in many markets. Some of these properties are very good deals - others are financial sinkholes to be avoided. As always, you have to shop with care, and for this reason I recommend the use of a local and experienced buyer broker, as well as a professional home inspector.

The bottom line: In a market awash with good existing home deals I would not want to enter the construction business just to build one home. That's an education and experience that could be very costly.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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