430 W Walnut is a tear down on a 6700 sqft lot. West Walnut is about 3 blocks away from the LAX runways yet someone thinks they can make a buck buying a million dollar piece of land.
I find this amusing. Back when I was actively looking to buy a home in El Segundo I started to fantasize that tearing down or a giant renovation was the way to get the most bang for my buck. Back then we were looking at prices in the low to mid $700s for grandma’s house. A PoS home that needed a lot of work to get it up to a decent standard of living. Not a tear down like Walnut is; Grandma’s house would probably need new electric and plumbing, most likely a roof and more than likely additional square footage.
I talked to architects, builders, contractors and friends that had lived through their own renovation projects. My take away was that buying to fix was a bad idea. Everyone said not to do it unless I have a backup pile of money. The lessons I heard were:
- The project is going to cost more than they tell you (usually by 30-60%)
- It’s gonna take a lot longer than they tell you (could be as bad as 2x)
- To live in a home going through major renovation is grounds for divorce and during this extended period of time I would be paying a mortgage and rent and writing checks for overages and additional construction costs.
I also tossed around the idea of tearing down and starting over. In many cases the cost to do a major renovation along with its potential 30-60% in overages was bumping up to the cost to tear down and start from scratch . I talked to a friend that has built a lot of homes in the southbay as well as a couple firms and architects that specialized in pre-fab homes. During these discussions no one wanted to put their stamp on costs. Ask a builder how much to build a 2,000 square foot home and their answer will always be…”it depends”. I was finally able to pin a couple people down on some back of the envelope figures for me to use in my cost analysis.
Soft costs – permits, studies, architects, plans. All of that costs money. So after you buy your piece of dirt you have to wait. From a retail perspective I could expect this to cost $40-$60k and take 6-9 months to get settled. 650 W Maple Ave is a good example. It changed hand in July and they are just now demoing the house. Someone paid $1.1 mil six months ago. Now they get to knock the house down and start building. My bet is that it won’t be ready to sell/move in until May 2019.
Demo costs. I think I was told to use $7/sqft as a figure. In the case of Walnut that’s about $7000.
Hard costs. As opposed to renovation with so many unknown and unpredictable variables, once a builder has plans he can provide a cost that’s with a fairly small margin of error. I think I was told that the cost would be within + or – 5%. He said he needed to be this close because business loans didn’t often provide provisions for large variances. So unlike a renovation that could cost you double the original estimate and take twice as long, a build from the ground up is pretty straightforward in both time and costs. The big variance in price will be in build quality and finishes. A few years ago he said I might be able to get away with $200-$300/sqft. But at that end of the spectrum the finishes, fixtures, cabinets would be of the budget quality (think home depot and fake wood flooring). For a nice home with quality finishes expect to be in the $400-$500/sqft range. (This price compares to $400-$500/sqft for additional square footage renovation). The builder also cautioned on building a conservative sized home. I know that our family fits well in 1800-2100 sqft but he mentioned resell value as well as the lower costs to add a bit more now vs the pain in the ass to add later. So do you build your custom 2000 sqft home thats really all you need or do you build a 2500-3000 with room to grow?
Time: I was told the time from start to finish would be in the 12-15 month range AFTER all the plans were approved and finished. So you buy the land, wait 6-9 months and then start the clock. Even best case you might have a home to move in after 18 months.
The math and the timeline were both deal breakers. Not too mention the rings that bankers started talking in regards to construction loans. This is not for the faint of heart nor average joes that just want a nice home to live in. This is for developers and those with access to cheap credit. Not you and me.
Back to W Walnut.
Property and demo costs – $1 mil
Soft costs – $45k
Carrying costs on a mil for 18 months – $125-$150k Who knows what kind of shannigans go on in this department. Some say there are no carrying costs and that the lender gets a higher return in exchange for waiting. I guess either way he either gets his cut during construction or after.
Building costs – Let’s say you aren’t a retail shmo like me and get costs down to $300/sqft for a nice home. Back to the build it for the future figure and let’s pretend 2700 sqft (after 3000 sqft rules start to change. Plus at 60% of lot size you need room for hardscapes, driveways and decks. So much for your granny unit. $810K
Landscaping – $35k
Staging – $7k
Commission @ 5%. We are guessing but a new custom 2700 sqft home might list for $2 mil. $100k
So a developer has paid approximately $2 mil for a home that will retail for about $2 mil….
Even if you have an architect friend, run your own general contracting company and your wife is the listing and buyer’s agent the margins are thin. That’s a BIG ASS gamble to play with $2 mil over the course of 18 months to make 10%…
Let’s site back and watch.