Should I buy an empty lot?

[EverythingisNew]

Hi. Coming here for advice :) I grew up in a family that never talked about money and I often wish I had more direction.

I’m married and we have 3 elementary aged kids. I recently saw an empty lot that is for sale next to a lake. It’s not the main lake view lot, but it’s 2 lots away from the community access to the lake area with a nice shared deck and fire pit. It costs $175k. The taxes are $4k year. The HOA is $1,500 a year. We are thinking of buying this lot, but we don’t know if we want to build and move there anytime soon! The schools aren’t as good in that area. It’s a bit rural, but beautiful!! This lot is a bit of a dream because we have always loved this area! We vacation here every year and have lots of family nearby. Is it wise to buy this lot when we don’t know if we will actually live on it in the next 3-12 years? It is the last lot left in this neighborhood.

We are doing well and this is maybe part of the reason that we are considering this purchase. It’s almost like a mid-life crisis purchase because the main reason I want to buy it is that it represents a life that I would love to have. Husband works remotely so that isn’t holding us back, but we love our friends and schools were we live now.

Do you think this lot makes sense? Are we being impatient on a dream and we should just wait until we are actually ready to move? We could also build the house and then sell it if we don’t want to move when it’s complete. I think we would make a profit if we completed a house, but holding onto the lot I don’t think we would profit because of the taxes and HOA fees. We could also buy the lot and wait 1 year to see how we feel and then sell it if we decide not to pursue this over the year. With a house they say you should live in it for 4 years to break even on selling costs, I wonder if this is the same for a lot?

One thing that bothers me is that my husband doesn’t want the kids or my family to know. He doesn’t want them to think we are moving because it might affect their friendships. I agree!! But I also think it’s odd to own something this expensive that is a secret.

[FINate]

I can't give an option because you haven't provided enough info.

What's the fully loaded cost? Average cost of new construction in the US is currently around $250 per sq ft. That's average, could be higher or lower in your area depending on various factors. If around the average then a 1500 sq ft house should run around $375000 to build, plus the cost of the lot, which brings you to around $550000. Don't forget to add in the cost of hooking into utilities, landscaping, and permitting. And the inevitable cost overruns. All in, at least $600k, but potentially much higher if costs in your areas are higher. E.g. if the geology is difficult and/or the site requires earthworks you can easily add on a couple hundred grand.

Speaking of permits - what's the planning and permitting process like in the area? Is it low drama, or will you be facing off against a bunch of NIMBYs?

You really need to talk with folks that know construction in your area. Get some preliminary estimates. Talk with people that have recently built.

Once you know approximately how much it will cost you can make more informed decisions. Do you have, or can you access, the funds required to complete a home build. Is this in budget for your family. Is it worth the cost and headache to build. E.g. if it's going to cost $600k to custom build, but houses in the neighborhood are selling for $550 why not buy an existing house.

I would absolutely NOT buy a lot unless I had immediate and real plans to build on it. And I would not  hirer a GC to build a home with the expectation of making a profit selling it. I would only do this if the plan is to actually live there for a long time.

[EverythingisNew]

Once you know approximately how much it will cost you can make more informed decisions. Do you have, or can you access, the funds required to complete a home build. Is this in budget for your family. Is it worth the cost and headache to build. E.g. if it's going to cost $600k to custom build, but houses in the neighborhood are selling for $550 why not buy an existing house.

I would absolutely NOT buy a lot unless I had immediate and real plans to build on it. And I would not  hirer a GC to build a home with the expectation of making a profit selling it. I would only do this if the plan is to actually live there for a long time.

The stress of building a new custom home is real! I might not be able to handle it and be happy that year. I get anxious just reading your list of things to consider!

The homes on the street are $700k-$1.2m. They are big homes, 3,500 to 4,500 sqft and some have lake views. According to the HOA we must build 2,600 sqft minimum. We would probably build in the 2,600 to 3,100 range. I would want a high end kitchen if we built new. Everything else could be pretty standard. The lot is cleared of trees around the building area. Permits to build should be easy to get in this area. According to the HOA we have to complete the home in 1 year. It’s in Michigan so not a high cost area to build.

Your advice is good that I shouldn’t build if I don’t want to live in the home soon. It’s almost like I’m trying to hold my spot in this vacation area by buying a lot… maybe this isn’t financially smart.

[Fru-Gal]

I live in a VHCOL area and am FIRE. The cost of adding your second home to my plate would wipe me out — the biggest reason I can FIRE is because my housing cost is so low (very low interest rate mortgage, low property tax, house purchased long ago).

Most financial bloggers I’ve read say owning a vacation home is a bad financial decision, and rarely an “investment”. One FI blogger — I believe it was White Coat Investor, aimed at doctors (I’m not a doctor) — said the rule for achieving wealth was “one practice, one house, one spouse.”

If you are doing well, are you aiming towards FIRE?

I totally know the fun of looking at lots and thinking about alternate lifestyles. But it sounds like this is not an immediate priority. OTOH, MMM loves to build houses, and maybe you do too?

Personally I get so much pleasure from my primary home and garden, and living here is so relatively cheap, that I could afford to stay elsewhere for months at a time while still paying my mortgage. I would rather have this flexibility than more nooses around my neck.

Having said all that, I could see myself buying additional property if I considered it very cheap, and it did not come with an HOA and tons of expensive restrictions. Unfortunately, in my area that mostly means property that is hundreds of miles away from me, and I wouldn’t want to drive for hours to get to a different property either.

Final thought, the secrecy angle is a bit weird. You might want to try to better understand his concerns there.

[EverythingisNew]

This house wouldn’t be a vacation home, it would be our main home. After it is built we would move there. It would be 1-4 years waiting and thinking of plans. Then 1 year of building. We would immediately move or sell it after it was built.

We are aiming for FIRE but not in our current house and city. A big part of FIRE for us is moving to this town were the lot is located. Now I am worried about moving our kids because we have great friends in our current town and schools. Maybe this is why this lot is attractive. I want to move there but the timing isn’t right so I want to buy something to feel like we are working towards it. Building a house would be more than my original small house idea. I was think of buying for $400k there but building would cost maybe $700k… I think the home would have a $850k value because the other houses in the neighborhood are bigger and valued higher. But who knows?

I’m very nervous! The idea of moving away from our current town makes me sad. I don’t want to move soon. I also don’t want to miss this lot and the dream.

[FINate]

You need to de-conflate two issues:

1) When and where to FIRE.
2) This specific lot.

Decide (1) first. Yes, this means moving away from good schools and friends. Are the trade-offs worth it? These forums are a good place to get perspectives from others, but ultimately only you and your family can decide this. IMO moving to a vacation destination is tricky, because being in vacation mode makes it difficult to see the reality of day-to-day life. Since your husband remote works, maybe try spending an entire summer there and see what it's like to actually live there.

As for (2), how often do homes in this area/neighborhood come up for sale? Is this like a super rare event, or do homes/lots fairly regularly go on the market? If the former, then sure, I can see buying it as a way to keep your options open. But otherwise, I don't see the point in getting attached to the idea if you can just buy if/when you're ready to move.

If your plan was to buy in this area for $400k, but building on this lot will cost around 2x, that's a rather large shock to your FIRE plans. I'm not here to say you should or shouldn't do it. Just be honest with yourself about what this does to your finances. And I would really caution against thinking you can build a $850k house for $700k. This is not how markets work -- it's a question of value-add. A GC (hopefully!) makes money on a build because she's using her skills/expertise/labor to produce the house. If you hire a GC for a custom build you're paying for that value, so the end result is essentially net zero. Another way to think about it: If a lot can be built for $700k and sold for an additional $150k on top of all expenses and a GC's time and effort, then this is essentially free money and rational buyers will bid up the price of the lot to the point of equilibrium. Don't let magical thinking lead you down a path where you spend a lot more than you would have otherwise. It's quite possible, easy even, to build a home that ends up being worth less than cost. Many experienced developers have gone bankrupt.

[Fru-Gal]

If your kids would still be with you when you moved for FIRE, you might reconsider the goal of moving in FIRE as well. My family moved a lot due to home flipping and building. They were very good at building custom houses, actually! Most of their wealth in retirement came this way.

But we kids hated all the moving, changing schools, losing friends.

Having great friends where you live is, like health, a true measure of wealth.

OTOH some people are great at finding and creating community wherever they go.

Also FOMO, secrecy and purchase decisions are a bad mix.

[EverythingisNew]

Thank you @Fru-Gal and @FINate! You guys are really so wise! You make me see through the cloud in my brain and make me smile!

Yes it’s true that FOMO is my main motivation. It’s also a nice lot.

I called custom home builders and general contractors in the area and they said it’s between $260-500/sqft to build a home!! It’s on the low end if you buy a floorplan online and don’t do high end finishes and it’s probably $300/sqft to get what I want. Plus the $175k lot, that’s $1.075m to get a 3,000 sqft house. Hum… pretty pricey.

So I’m canceling the idea of buying a lot. Yeah it doesn’t make sense because I don’t have near future plans. It is FOMO and a distraction from my current life. This lot is special but the timing is off by 2-10 years.

[CNM]

Sounds like you already came to a decision. I was going to add that there is nothing preventing you from buying a home for sale in that neighborhood when the timing is better.  Deciding to forego the lot doesn't mean the dream is gone!

[Laura33]

Good job backing off this.  I get that feeling, believe me!  But the real problem is that you don't know what you'll actually need in the future, or what your priorities will be then.  So no reason whatsoever to jump in and spend that kind of money based on untested assumptions.

We decided probably 15 years ago that we'd spend months every year in a specific vacation spot.  When the kids were little, we bought a 2Br condo that we could afford, figured we'd rent it out full-time until the mortgage was paid off, then convert to short-term rentals so we could start using it.  10 years later, we had it paid off.  But (1) the kids were almost grown and couldn't comfortably share the small second bedroom (teenage boy + girl = significant privacy concerns), and (2) the town had changed the zoning and banned short-term rentals.  So just when we were at the point of being able to kick back and enjoy it, that condo no longer worked for what we needed! 

So now we're selling it, and we've just bought a different place, with 3 Br and outside of town (and a garage for DH's woodworking hobby).  The really good news is that we've saved far more than we had thought possible c. 13 years ago when we originally bought the condo.  So even though the kind of place we want now is more expensive than we could have afforded c.2011, we can actually afford that and more without interfering with FI. IOW, we were both stupid (couldn't predict what we'd actually want/need 13 years down the road) and lucky (better-than-expected finances meant we could afford better than we even dreamed of 13 years before); we still get the dream, and it's even better than we thought we could have back when we were fretting about buying someplace, anyplace in that dream locale.

IMO, these sorts of choices should be looked at as consumption vs. "investment."  Sure, the house might appreciate.  But the reason you want to buy it is to live there and never sell anyway!  You can't succeed financially by focusing on appreciation that you don't ever intend to actually realize!  And that means the extra money you'd be spending would be for "I get to enjoy a new house in this gorgeous area" (i.e., consumption) not "I'm going to make so much money on this deal I can FIRE a year earlier" (i.e., investment). And for a consumption decision, what really matters is how those extra monthly costs will affect your FIRE plans -- and whether the tradeoff is worth it. 

[ChpBstrd]

No, you should not buy a luxury lakefront lot with thousands of dollars in annual expenses when you don't have a plan for the property and you are not yet financially independent.

These "dreams" can quickly become an albatross consuming hundreds of thousands of dollars in wealth over the years. Get rich first; then buy nice things.

[sonofsven]

Thank you @Fru-Gal and @FINate! You guys are really so wise! You make me see through the cloud in my brain and make me smile!

Yes it’s true that FOMO is my main motivation. It’s also a nice lot.

I called custom home builders and general contractors in the area and they said it’s between $260-500/sqft to build a home!! It’s on the low end if you buy a floorplan online and don’t do high end finishes and it’s probably $300/sqft to get what I want. Plus the $175k lot, that’s $1.075m to get a 3,000 sqft house. Hum… pretty pricey.

So I’m canceling the idea of buying a lot. Yeah it doesn’t make sense because I don’t have near future plans. It is FOMO and a distraction from my current life. This lot is special but the timing is off by 2-10 years.

I build houses (although I'm not building any right now) and it's RFE: Really Fucking Expensive.

I have numerous friends in their 50-60's looking to downsize and/or move out of the city with loads of equity but the reality of what they want vs what they want to pay (and where they want to locate) is stopping them from taking action.
I moved to my "retirement home" in my 30's when it was cheaper here, because I'm a carpenter I can find work wherever.