A Builder's Take

You know things are getting strange in the local real estate market when a noted builder takes out a half-page ad (click to enlarge) not to market a home, but to persuade fence-sitting buyers that prices "will not and cannot come down another 10% this year."

We'll reproduce the text of the ad here and comment below:

The Crystal Ball Story

Advice for New Home Buyers

I've been in the real estate development and sales business in the South Bay for more than thirty years and you can rest assured that prices on new homes will not and can not come down another 10% this year. Here's why:

New homes currently on the multiple listings service that are between $2.1 million to $2.6 million were purchased as building sites in the ballpark of $1.3 million (cost to purchase an existing home as a construction site).

The development cost to build a 3,300 square foot home is around $1,000,000. This is higher than one would initially expect but breaking down the components of this high figure is telling. It includes building costs ($825,000 @ $250/ft.), interest ($100,000), sales commissions ($125,000), permits, liability insurance, workman's compensation insurance, etc.

Using these approximations, since sites and plans vary, one can see the break even point for the builder is $2.3m. In order to sell new homes under $2 million, the price of building sites needs to drop 40%, down to $700,000-$800,000. This will not happen in Manhattan Beach because there are too many investors and home buyers willing to pay much closer to $1 million for a site to build their dream house and still manage to accumulate equity. There are currently no homes in Manhattan Beach for sale under $900,000. So, my advice to you is to make the best deal you can on existing inventory now and enjoy your new home. Watch the value of your home rise in value by 20% over the next 5 years.

This is a fascinating window into a builder's perspective on the slowing market – particularly the glutted Tree Section new-construction segment. We'll break this all down in a minute, but let's try to translate the overall message:

Listen, you muddle-headed market-timers, the best you're ever going to do is to make a good deal on the stuff that's on the market now. Don't worry, even if you lose some paper equity, it'll all come back in spades. By the way, I'm selling some of that lingering inventory and would appreciate it if you all got your heads on straight and started buying.

Fair?

The argument is pretty simple:

1. On most current inventory, high lot acquisition prices ($1.3m on average) are going to preclude builders offering deals. They've got "break even points" to worry about. So prices are stuck where they are, sorry.
2. Lot prices will have to drop 40%, as low as $700k – doesn't that sound absurd! – for new homes to sell for less than $2m. (And only $1.9m, at that.)
3. Therefore, you can't get a big bargain now and you won't get one later. So buy now.
   

Surely you noticed the first flaw in the argument: Builders can lose money instead of breaking even. Let's consider 3 recent sales of new construction on which we're reasonably certain the builders lost money:

• 648 35th (5br/5ba, 3600 sq. ft.) – lot price: $1.33m; sold price: $2.075m – difference: $745k

• 2807 Elm (5br/5ba, 3550 sq. ft.) – lot price: $1.475m; sold price: $2.1m – difference: $625k

• 2310 Palm (5br/3ba, 3150 sq. ft.) – lot price: $1.45m; sold price: $2.2m – difference: $725k

For illustration's sake, if we just assume this builder's $1m flat estimate of building costs across the board, then on these 3 sales, builders lost $255k, $375k and $275k. So much for the break-even points.

Could lot values drop? By 40%? We're seeing modest deterioration already, if the start point is $1.3m in the Trees. (The lots referenced above were higher in '05 and '06.) Some sales of likely or certain teardowns in 2007:

• 3521 Elm: $1.150m
• 2103 Elm: $1.1m
• 3404 Pine: $1.2m
• 2503 Valley: $1.03m
• 1713 Oak: $1.08m
• 848 14th: $1.35m (a counterexample)

Now, few of these are good examples – several so-so locations, and all but 3404 Pine slipped to the MLS instead of being snapped up first by builders. That would generally mean that you should expect lower prices.

Still, we know builders aren't paying as much for lots anymore, pinching the market that this ad suggests is full of demand. As losses mount, banks grow skeptical and investors take a hiatus from new-home developers, of course demand can shrink further and lot prices can take a further dip. Is it 40%, or an average lot price near $700k-$800k? A bellwether to watch for now is 3009 Poinsettia, a lot in a great location that's had no takers at $1.4m.

Are you really better off buying now, rather than waiting for some future new home to come on the market at a better price? You almost certainly are better off buying now if this builder's numbers turn out to be right. His market projections are specific, and worth tracking: new homes "will not and cannot" go down 10% this year, and, if you buy now, your home will be worth 20% more in 5 years.

Yet the ad's author has surely seen down markets surprise builders, banks and buyers before. Has he never witnessed a 10% drop year-over-year in new-construction prices? Fat chance.

So why can't it happen now, again? Because builders have to break even?

The Mystery of 2310 Palm

A funny thing happened to MBC on the way to publishing a nice little exposé. The substance of the story changed – for the better.

So, while we don't exactly have a scandal to discuss, we'll walk you through the chronology of events, as we saw them, on the sale price at 2310 Palm.

Close readers of MBC know we've been on the trail of the mystery of the final sale price of 2310 Palm for a while. This home was newly built in 2006 (5br/3ba, 3150 sq. ft.), and we rather liked it for its distinctive, authentic-feeling Spanish details. We also noted some strikes against the property when we wrote it up (see "The 1-Year Club in the Trees").


When the home went into escrow in late October, after 443 DOM, the MLS listing was canceled, rather than being posted as "pending," so we feared we'd lose track of the sale price. Alas, a new MLS entry came up in early December showing that the property had closed for $2.325m. (Click on the little graphics here to see screen shots of the MLS posting of the price – the page is, of necessity, broken into halves.)

In comments on MBC several days later, someone noted that property tax records indicated that the sale price was, in fact, $2.2m, a discrepancy of $125k, or almost 6%. Why would the MLS record and the tax records differ?

First, we had to get the public records. The page you need to see (with names redacted by MBC) here notes the "documentary transfer tax" of $2,420.00. (Click to enlarge the closeup or click here if you want the whole page [PDF].) Since the transfer tax on all homes in California is 1.1%, you can use the reported tax payment to calculate the sale price. Sure enough, that tax amount translates to a sale price of $2.2m.

Next, we started asking around. Why might there be a difference?

Here's where your humble correspondent's eyes were opened a bit. Turns out it's not unheard of for the MLS-reported price to differ from the true sale price.

The practice is controversial even among agents, but here's the theory: If a home happens to sell to an agent, or for some reason one or both sides does not receive commissions, you might report the price as if full commissions were paid, to reflect what would have been the price but for the freebies. If you don't alter the reported price, that comp will drag down the neighbors and continuing listings unfairly. So, if no commissions were paid (in a hypothetical case), the MLS-reported price might be boosted by 5% or 6%.

The only problem in such a case is that the MLS now carries a fabricated number. Future comp reports are partly fiction. As a buyer, when you're trying to figure out how much to pay, you might be upset to learn you're being told that other buyers paid more than they really did. As a homeowner or seller, you might be happy that home values are being protected by adjustments like this to reported sale prices.

If that's the sometime practice, the next question was whether the circumstances of this sale involved zero or less-than-normal commissions. (Remember the reported price was almost 6% higher than the true sale price.)

Was the new owner an agent, as someone suspected? No, apparently – completely different field. Did one or both sides waive commissions? No one's talking, but it seems doubtful that both the buyer's agent and selling side took zero.

So who created the MLS entry with $2.325m as the sale price for 2310 Palm, and why?

MBC is certain that the answers are interesting, but now the story has changed.

In recent days, the entry with the sale price has been amended. (Click to enlarge the screenshot.) Now the MLS will tell you that the sale price was $2.2m, same as the tax records.

Oh, the entry is still a little bit bogus. For one thing, the construction date is still listed as 2007, rather than 2006. Also, this entry says the list price was $2.325m, but that's just an artifact of the, achem, adjusted sale price reported last month. But they did plunk in the proper CDOM ("combined days on market"), which mitigates the impression that this was a brand-new home that sold quickly for close to asking.

The reality is that 2310 Palm began at $2.699m in August 2006, and its final sale price is -$499k/-18% from there. The list was $2.399m when it went into escrow.

The lot was purchased for $1.45m in August 2005, meaning the final sale price was just $750k higher. If the home was built for $200/SF, the builder broke even. Do you think it was built for $200/SF?

Reasonable people might look at these circumstances and suspect that someone was trying to hide losses, protect comps – even specific current listings – or avoid reporting data that might show a market in decline. Those are reasonable inferences, but we're not yet sure which facts apply to the mystery of 2310 Palm.

First Newbie Under $2m

We know the situation is tough for new construction in the Tree Section.

Until recently, however, new stuff in the Trees always started over $2m. Certainly, since Spring this year, that's been the case. No new home has been priced at, or sold for, less than $2m.

Breaking the pricing mold: 1144 Elm, a 2-week-old listing that otherwise fits the basic profile – 5br/5ba, 3300 sq. ft., and a standard 4480 sq. ft. lot. It started $5k below $2m, at $1.995m.

The home has character inside, with good living spaces downstairs, nice detail work in the kitchen and baths, even kids' bedrooms that don't seem too scrunched. It's bright, too, despite a northern orientation – apparently a good use of skylights.

So why is a very decent new build priced, achem, low?

Consult your book on Cardinal Rules of Real Estate: Location, location...

1144 Elm is one door in from MBB, buffered from that busy street by commercial buildings. You really don't want to see your neighbors to the south. And being pinned in by MBB makes you realize you're not really close to anything except the Arco station. Do you really want to drive everywhere?

Demerits, also, for the tiny back yard (par for the course) and for the façade, which is confused and generally a turnoff for this viewer. The stapled-on stone is pretty awful – in fact, MBC has previously called out this dreadful garage arch. We don't think the whole look comes together.

The builders grabbed this lot for $925k in June '06, which suggests both that they got a good deal and that they threw this house up fairly quickly. Though the construction does not suggest a rush job, the pricing is the most aggressive we've seen so far in the Trees. Will that get them to a sale more quickly?

The 1-Year Club in the Trees

No one really denies that there's a glut in the $2m+ segment in the Tree Section. And no one seems to have any big ideas about what to do about it.

MBC focuses here on the special problem of new construction that has lingered for more than a year. What might these homes foretell for the fates of others that don't get snapped up fairly soon?

Of the 30 homes now active in the $2m+ segment, 23 are newly built. Three have been offered for more than a year. Let's look at each, and see what might be holding people back:

2310 Palm (click for details) is a bit of a surprise on this list. It's lovely. No stapled-on stone. The location is good. Materials inside are well-chosen, carrying an authentic-feeling Spanish flavor throughout. It has tons more character than your typical specky.

This one started at a heady $2.699m in August 2006 – over $850/sq. ft. (5br/3ba, 3150 sq. ft.). With no takers, it has drifted down $300k to $2.399m ($760/sq. ft).

Why are buyers passing? For one, useless outdoor space – the entry courtyard is not really a yard or an entertainment space, and the back patio appears too cramped for a table plus barbeque. (And what's with the ledge and the dropoff back there?) In the end: No yard. Also, three bedrooms upstairs are teeny (an MBC peeve).

2612 Poinsettia seems all but forgotten. Few open houses, near-zero price movement. This one began September 5, 2006, at $2.399m, and almost 14 months later it's down all of $49k to $2.350m – $734/sq. ft. for 5br/5ba, 3200 sq. ft.

This home was built by a prominent regional realtor/builder, one whose stuff MBC generally frowns on, but he's been successful. In this case, it could be that the margins are too tight for price cuts, or we may be seeing a strategy and attitude – born of the go-go days – that amounts to "build it, and they will buy." (Also: wait for the market to come to you.)

Why are buyers passing? Location is an obvious answer – between Marine and Ardmore, Poinsettia is a bit noisy and isolated. The exterior has very little going for it. (Oooh, stapled-0n slate tile, grrnnhh.) Poor-quality materials inside, in many parts of the home, convey that this was a low-priority, perfunctory project. Zero warmth.

2709 Oak is back, after more than a week off and a change of agents. (MBC wondered if it was a quitter and/or bellwether in this story; it could still be a bellwether!)

To recap, this one began at $2.395m in August 2006, and slid just a bit to $2.299m, where it lingered for months. The new price is $2.195m (with a bogus re-list, of course), down just $200k (-8%) in a year-plus. (Note: The movement matches that of a few others that all landed at $2.195m this week.)

Ah, but here's the real news. The new agent is going to try to help liquidate this one. From the listing (all-caps in original):

READY TO SELL. BRING ALL OFFERS.

Oak listings don't drive the market, but the final disposition of this one will be interesting.

This is the largest home in the 1-year club (3600 sq. ft.), and it's quite charming. The new set of photos (including some dupes) conveys this much better than before.

Why are buyers passing? Er... location, location, location.

Dear readers, you may not recall when great homes on Oak cost $800k, but you don't have to in order to see why folks can't wrap their minds around spending $2m+ to live 50 yards from Sepulveda, and a mile+ from everything else.

The Race to $2.1m, and Then...

Several weeks ago, the "lower end" of the Tree Section's $2m+ segment saw much new construction clustering around $2.3m. For instance, at the end of July, there were no new homes under $2.3m, and at the end of August there were 3 under $2.3m.

Now there are 5 new construction listings under $2.2m, and another at $2.249m.

Could this be the beginning of the builder-initiated price movement we've been watching for? (In "Quitter – Bellwether," just last week, we said it seemed that no such movement was happening. What a difference a week makes.)

This new clustering is partly the result of 3 price cuts this week. Let's look at everything at $2.249 and down to $2.0m – remember, these are all new construction (click any address for details):

• 2105 Oak (5br/5ba, 3250 sq. ft.) began at $2.349m in May. Now at $2.099m (-$250k).

• 3104 Pacific (5br/5ba, 3200 sq. ft) remains at the $2.149m where it started in late July. (They just pulled a bogus re-list.) No price cuts yet, but MBC noted in this story the price-cutting ways of nearby new homes in 2006.

• 1417 Elm (5br/5ba, 3000 sq. ft.) [pictured] hopes for $2.175m; this listing began partway through construction, in late August; the pics are better now.

• 648 35th (5br/5ba, 3600 sq. ft.) began at $2.450m on July 9, but has already cut quite substantially to $2.195m (-$255k in 100 days).

• 2309 Pacific (5br/4ba, 3200 sq. ft.) is at $2.195m, down $104k from the start in mid-May. (What's with the garish, huge plastic sign in front?!?)
  

• 1901 Poinsettia (5br/5ba, 3200 sq. ft.) is at $2.249m, down $250k from its start in late August. (This one has issues, as noted by this MBC story.)
  

Of all the homes above, 648 35th stands out as the most aggressive. MBC hasn't yet toured the home, so we don't know why it has lingered nor what its issues are. (We're told the interior is uninspired in parts. We invite your comments.)

Here, it's not news when we see a new listing in the Trees at around $2.5m – but it is news if the builders/sellers are acting like they want to make a deal.

Let's be honest – anyone who's now offering a house at $2.2m or so will be ecstatic to get a sale at $2.1m or so. Better to do a deal than hunker down for the winter, accumulating DOM. And as they sell, guess what happens to the remaining listings?

Quitter - Bellwether?

After more than a year on the market, the new construction at 2709 Oak is gone.

The house is still there, of course, but the agent's signs are down, it's off the MLS, and who knows what's next. We're guessing it went rental, as the home was offered for a time at $8,500/mo. (See "Just Rent It.")

New construction nearby at 2609 Oak similarly vanished from the MLS in July after 425 DOM. We also guessed rental there.

2709 Oak was listed at $2.299m for 5br/5ba, 3600 sq. ft. The listing began at $2.395m on Aug. 15, 2006, so it never took big price cuts from there. In parallel, 2609 Oak started at $2.399 a few months earlier, and never cut below $2.299m before quitting.

2709 Oak was (is) quite lovely, a spacious feel, bright, with big kids' bedrooms (no sardine cans here) and a bonus basement/media room. We didn't like the stapled-on stone, but it could be overlooked. There was just one un-fixable problem – location – and one that apparently was too hard for the builder to fix: price.

It's difficult to imagine that a sale below $2.3m was going to cause a loss. The lot was purchased for $920k in April 2005. That leaves almost $1.4m to cover construction, costs of holding and sale, and profit. Construction costs at $250/sq. ft. would have been $900k, so there might have been as much as a half million dollars' worth of wiggle room.

This cancellation is partly a story about Oak, but it's also about unwanted, overpriced new construction. Demand is slow in the Tree Section $2m+ segment (see, "Measuring Activity in the Trees at $2m+"), and obviously slower in poor locations. What is supposed to happen to all these new houses?

We've been watching, mostly in vain, for builders to take the first step and adjust prices downward. It's only logical that they would, but we don't see it much. (Not completely in vain, that is – we've seen some new homes near $2m take $100k-$200k off to sell, and some list prices are down by about that much.)

Another option is to just get off the market. As we all discussed in the "Just Rent It" thread, pressure to produce some income (especially from lenders) may force builders to the rental option, at peril to the future value of the homes. By renting it out, you lose the cache of "new" construction when the time comes for a future sale, and, if the market dips, you lose even more money than you might have by selling now at a discount. So it's a desperate move to quit.

One to watch on Oak: A slightly smaller new home at 2105 Oak (click for details at agent's site) is still active, now at $2.099m after starting at $2.349m in May of this year.

Another quitter on Oak: 3013 Oak is a different kind of case, as it was a small remodel, and only tried the market for 40 days. Its dropout this week mainly tells us that Oak is a challenging location, even on the "right side" (i.e., odd numbers, not abutting Sepulveda). But you knew that.

Back to the big question: What is supposed to happen to all the new houses – more than 20 in the Trees – priced over $2m for which demand has, apparently, softened so badly?

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UPDATE: One of the higher-priced new homes in the Trees, 1821 Walnut (click for details), cut its price today by $150k, now at $2.599m.

The $3m Club in the Trees

The higher end of the Tree Section includes 30+ homes listed at $2m+.

This segment is largely stalled, with very few sales or new escrows since mid-July. There are no sales from among MLS-listed properties pending at this time.

Drawing MBC's interest today is the even more rarefied $3m+ segment.

As builders have pushed up the price ceiling recently, they've had some success. Sales since Spring:

• 925 27th (5br/6ba, 4150 sq. ft.) – $3.0m
• 2104 Palm (5br/6ba, 4500 sq. ft.) – $3.025m
• 2802 Pine (5br/4ba, 3600 sq. ft.) – $3.1m
• 927 27th (5br/6ba, 4400 sq. ft.) – $3.15m
• 717 31st (5br/4ba, 3500 sq. ft.) – $3.2m (pictured)
  
• 712 31st (5br/4ba, 3800 sq. ft.) – $3.325m

Also, the capstones to this group are a few off-MLS sales, 2603 Laurel at $3.75m (sorry, no house details) and two 15th St. houses (604 and 608), each about 4,800 sq. ft. and pending at $4.2m.

Of the sales, two took $250k reductions from initial asking (925 27th and 717 31st, which just closed the other day), while 2104 Palm took $650k off. The rest sold fairly close to their list prices.

So, we've seen 6 sales from MLS-listed homes, 9 in total, and there are 9 active now:

• 742 33rd (click for details) (4br/6ba, 4025 sq. ft.) – $3.189m
• 3200 Pacific (4br/4ba, 4425 sq. ft.) – $3.199m
• 2100 Fluornoy (4br/5ba, 3600 sq. ft.) – $3.2m
• 644 33rd (5br/5ba, 4200 sq. ft.) – $3.295m
• 570 27th (5br/4ba, 4100 sq. ft.) – $3.299m
• 3305 Laurel (5br/5ba, 4350 sq. ft.) – $3.650m
• 613 15th (6br/8ba, 5500 sq. ft.) – $4.179m
• 1718 Pacific (5br/4ba, 4200 sq. ft.) – $4.299m
• 769 33rd (6br/4ba, 5000 sq. ft.) – $4.5m

Of these, 5 have made price reductions since joining the market – 3305 Laurel (pictured) is down $100k from initial list, 742 33rd is down $105k, 1718 Pacific is down $200k, 3200 Pacific is down $250k from this year's asking price (and down $700k from last year's shoot-the-moon price) and 570 27th is down $600k, as MBC noted here. One former member of the $3m club (3011 Elm) is now at $2.8m, priced below its purchase price from 2005 (as noted here).

Which of these listings is not like the others? It's 1718 Pacific (sorry, no Redfin link – but here's an MBC story on the home).

Someone ready to spend $4m+ will ask why they should pay more for Pacific when it's 1200 sq. ft. smaller than new construction on Martyrs hill (at $4.179). MBC has the sense that the sellers had no idea how to price Pacific and figured the lot (almost 10k sq. ft.) was such a plus that people would pay a giant premium. Well, a big lot is nice, but this one could well be overpriced by $1m or more. We'll see.

Much of the new construction is high-class, and should draw continuing interest despite the overall sluggishness of the market. This price range is where much of the action in MB has been recently.

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UPDATE: As we said, this is the most active price range. Wouldn't you know it, 1718 Pacific went into escrow within hours of this story's publication. That, or the agent is playing games to make MBC look bad :) – them's the perils of opinions and predictions...

Stapled-On Stone, Part II

It's time for another look at cosmetic stone veneers, and the hideous uses thereof.

As we noted in our first post on the subject, stone veneers can be great, in that they can make any surface look like stone for a fraction of the cost. But there is a hidden peril – it's much too easy to wind up with a final product that just doesn't look like it could have, or would have, been built with real stone.

In today's new-construction edition, we warn future MB buyers of the quirks and errors in some projects under way now. (Click any picture to enlarge.)

Our first entrant is l'arc du garage. To add interest to a regular old rectangular garage, our builder has added an arch-like detail across the top. Forgive us, but this just doesn't look structural. The irregular pieces suggest an unstable fit. The stacked stone above, below, and behind the arch cast further doubts. Not great stuff.

Next we have the "flying stone room." Upstairs from the entry to this new Tree Section home is a single room wrapped in blockier stone appliqués. No other stone details are visible from the front, so this really stands out.

Like the "flying chimney" in our first entry, this implausible design might warn you, subconsciously, to avoid the front door, or at least to rush inside once it's open. You can't be sure how long that room will stay aloft.

Finally, on a tip from a reader, we have an egregious one. This new South End walkstreet home could be a $4m+ listing if it goes on the open market. Might we suggest that, as a condition of sale, something is done to fix the dreadful stone work.

Imagine, first, that this single wall were, truly, a stone wall. It would be odd for a portion of a wall to be truly built from stone like this, but we'll grant you that to start. Why, then, does it grow wider, or, we guess, "thicker," higher up, above the patio roof?

Worst error by far – it's the ledge. The home was designed with an overhang from the second floor. Taking the fake stone up, up, up the wall to meet the overhang presented a problem: These stones are, in reality, about an inch thick, which is about to become obvious.

The builder apparently couldn't match the "bricks" on the vertical surface at the corner of the ledge with equivalents underneath to complete the illusion of a brick wall. So, instead, little thin slivers of rock were placed perpendicular underneath. They give the whole game away.

Got more examples of stapled-on stone around MB? Send tips or pics to mbwatcher@gmail.com.

Scaffolding is Down, So's the Price

The builders have made impressive progress at 4419 Highland (45th/Highland). With the stucco team finished, we just need to wait for the interior to be built out and this one will be ready for walkthroughs.

MBC has to admit, this home looks a bit better than expected, and of course it's a giant improvement over the wrecked shack that used to occupy this lot.

We do find it a very strange use of stapled-on stone for one corner to feature stacked rock. What structural purpose would be served by having a single corner built from stone, if it were real? This is just a perplexing accent.

To celebrate the end of exterior construction work, as the scaffolding came down, so did the price. The listing began at $1.695m – let's be honest, that was ridiculous – back on June 3rd, and now we're at $1.580m.

Will you love this house? The listing gives you many reasons. (MBC is retyping the language, which appears entirely in upper case, and therefore screams a bit too much.)

Stunning brand new construction!... Meticulous attention to detail and craftsmanship at it's finest. Extra large 4 bedrooms 3 baths with approximately 1,973 square feet! First thing that will win you over is the high ceilings, second, large open living room with stylish fireplace exquisite ocean and Malibu mountain views! Three levels of bliss! From marble in the bathroom to high-end stainless steel Viking stove and appliances this is truly a custom gourmet kitchen!

"Three levels of bliss!" We just love the alternative reality of promotional copy.

Problem: as we've all discussed before (here, here and here), this is possibly the worst lot in all of MB, certainly west of Sepulveda. (There's a home on a corner lot at Aviation and Marine that probably takes the cake for the utter worst.) Therefore, this one calls for the mother of all location discounts. But it's not priced that way, yet.

Ah, but there is this in the "addendum" to the listing:

Bring any and all offers!

Now that's more like it. So, what can the builder take without losing money?

Let's go back to our first post on this house, before construction began and the builder tried to unload the project on Craigslist:

Price for Land, Survey, Plan check fees, Permits, Approved Design,
Demolition, Grading, Utility hook-up, Retaining walls and foudation is
$1,089,520

The balance of the construction contract is $309,980.

$1,399,500 to complete. Comps are in the $1.6 million to $1.7 million range.

Assuming no construction cost overruns (ha!), and assuming just 5% cost of sale ($70k or so), the bottom line would appear to be around $1.47m. The builder might be OK with going lower if some profit were built into that advertised figure of $1.089m for land along with the permits and initial work. (They paid $730k for the lot.)

But MBC, and a lot of our readers here, are going to be shocked if 4419 Highland gets $1.4m or more. Yes, shocked.

Sound the Trumpets: John is Sold

Here we go with another big-dollar sale in MB...

512 John is pending at last. Most recent list price: $3.99m.

The full saga as covered on MBC includes:

• A discussion of the home as a "masterpiece" and evaluation of the rental option ($20k/mo.).

• News about the $400,000 price increase mid-listing, featuring this quote:

Do the people who bought 512 John earlier this year really mean to sell it?

• Description of the $750,000 price cut which guaranteed the current owners a net loss.

• A story this week estimating those losses at $316,000 (with 6% cost of sale, which may or may not apply here).

Yesterday marked 205 true days on market for this home – more than the 152 DOM showing in the listing, but less than the 450 days showing in the "CDOM" field. (That's a head-scratcher, but we believe our source.)

So at this point the question is only how bad of a hit the sellers take.

What's interesting about this one is that the financial loss appears to reflect a builder's misperception (overestimation) of the market value of the home in the first days of 2007. The home was essentially taken in trade, we're told, no doubt at a price the new owner believed to be a below-market bargain at $4.075m. Seven months later, the market has proved that opinion wrong.

We expect hard-core market watchers to have a fine sense of prices, but anyone can make a mistake – especially this year.

John makes 5 escrows for September SFRs west of Sepulveda, and a new contingent sale was posted today, too – 505 3rd on the South End, listed at $1.949m and purchased in 2005 for $1.6m. So we're at 6 now for the month, all of them over $1.5m.

A 41-Day Wait; A Big Score

At last, there has been a sale in the Trees at $2m+. And this was a big one: Over $3m.

The last reported new escrow in the Trees (from MLS-listed homes) came on July 31 – 2104 Palm, as noted in "A Trickle."

Fully 41 days later, we get the report that new construction on highly desirable 31st St. is in a contingent escrow (717 31st, that is).

Start price on this one was $3.449m on April 19. Three months later, the slate was wiped clean with a re-list and a modest price drop to $3.379m.

(An aside: You think the "CDOM" field ["combined days on market"] seen by realtors is the honest fallback number everyone can trust? Don't believe it – today, we're informed that the CDOM on this home shows 66 days, not the truthful 144 days.)

So, two months after re-listing, and having witnessed the near-stoppage in the market since early August, did the builder offer a significant discount? It would seem willing, qualified buyers in today's market can name their prices. We shall see.

This new escrow raised another important question – what else, from the MLS, has gone into escrow since Sept. 1? Our records say:

• Hill: zero

• Sand: 217 Sea View ($1.520m), 216 2nd (under construction, 1 DOM, $4.699m), 1212 The Strand ($10.9m)

• Trees: 717 31st ($3.379m)

Also, 217 9th St., new construction near downtown, went from sold with a final reported price and closing date, back to pending. We're sort of tiring of this back-and-forth.

So, we count 4 new escrows in our subject market segments (west of Sepulveda, SFRs only). We have a new record for a Tree Section drought – 41 days eclipses 25 days without a sale in the $2m+ segment.

But some folks are happy. And just imagine how those sales will skew the monthly median price when they close. Isn't it a sign of a healthy market when the median price keeps shooting skyward?

Guaranteed: Your Property Will Not Go Down in Value

Here's a new sales tactic – a builder is guaranteeing buyers that they cannot lose money on their home purchases. If you want to sell your home down the road, the builder will pay you the full price you paid, regardless of market conditions at the time.

Let's not get too giddy: The offer is good only on some newly constructed townhomes in south-easternmost Torrance.

For now.

You gotta love the sales pitch, courtesy of the RE advertising supplement to Sunday's Daily Breeze:

It's true! BC Urban Development will guarantee that you cannot lose on your new home purchase by offering the first ever 100% guaranteed buy-back program in the history of LA.

It's simple. If for any reason you decide you do not want your home, give the developer notice 3 1/2 years after your closing date and he will buy it back from you for the exact same price you paid. No closing costs to you whatsoever and no hidden gimmicks. Simply return the home in good condition (normal wear and tear is Ok), and get your original down payment and closing costs back and walk away.

Oh, yes, the BS alarms are ringing, and we imagine there is a lot in the fine print that a buyer will want to check out. But isn't the whole notion fascinating?

Consider the advantages to the seller:

• Log a purchase and clear inventory in CY 2007;
• Lock in 2007 prices;
• Most buyers won't exercise the option;
• Some of those who do try to sell back can be refused on technical grounds;
• Eventually (5 yrs, 15 yrs, whatever), the unit can be sold at 2007 prices again;
• The builder may never have to take a loss; certainly the whole development is more likely to be profitable in the short term if this tactic gins up sales.

For reference, these are the "Normandie Park Townhomes," all at 1445 W. 224th St. in Torrance. Several of them are on the MLS at a click below $500k for 3br/3ba, 1,600+ sq. ft.

This builder seems to be startlingly realistic about the current zeitgeist among buyers. He's got a bunch of new homes to sell and he knows what is stopping buyers from moving.

He's also taking the long view, which, among MB builders, isn't very common or, generally, even possible.

So, any chance we'll see "buy-back guarantees" some day on new construction in the Trees?

It's Back...

Your humble correspondent is not much into (American) football before Labor Day. And yet, when we see the new listing for 3521 Elm, the first thought is: They're punting already!?!

MBC's wayback machine tells us that 3521 Elm was first offered in March 2007 for $1.279m. It was pitched as "the perfect starter home." It later sold to a builder for $130k less (-10%).

But now 3521 Elm is back for $1.229m, or $79k more than was paid in July. The new owner is willing to unload it, along with plans for new construction.

And now, instead of being the "perfect starter home," it's now pitched as the "perfect remodeling opportunity."

Something isn't perfect, though. Maybe the bottom line on the buy/build/sell spreadsheet.


UPDATE: Turns out this one is also being offered for rent – $3,850/mo.

Just Rent It

Why buy now when you can rent?

That's a question that seems to be ever-present in our comments here.

Who knew that that would