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Lots, Builders and Property Values

Posted by Brett Silver on June 18, 2013
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Its seems that property values north of Montana were recovering nicely last year, until all of a sudden they catapulted up to what there lotswere at the height of the market in 06-07, seemingly disregarding the economy and the rest of the Country’s “slow recovery”.  There are other pockets in LA that have experienced a similar phenomenon, but none quite as pronounced as Santa Monica- North of Montana.  The mechanics of the sudden rise in values can be attributed to the limited supple of houses- specifically lot value properties, and the sudden plethora of builders looking for projects.

Although there are many obstacles that slow and hinder a builder from developing a house North of Montana, there are very few locations that can almost guarantee and quick and successful sale, once the house is complete.  Savvy builders also realize that there is high probability that the house will sell for more than projected, because of the unparalleled appreciation for which the area has historically realized.   Once it was clear that the LA real estate market was in recovery mode, every person who every had a contractors license decided that it was time to build a house, and naturally North of Montana lots became a hot commodity.

There are only a small handful of lot value or “tear downs” that come to market every year.  Many of them are very livable, even charming little houses that would never be torn down except for the high land value.  Builders have to bid against families that may be intending to live in the house and we so we get bidding wars that drive up the sale of these lots.  Builders like to make their money on the buy- meaning that they get such a great price for a lot it guarantees them a profit when the house is finished.   North of Montana works a bit differently.  There are no discounted lots to buy, so the builders who work the area do so because profitable and quick back end.   Builders do have limits as to how much they will pay for a lot- they need to make a certain amount of profit to be worth their time.  Because of the lack of quality lots, these builders have been reducing the amount of their “needed profit” in favor of getting a job and putting their crews to work.  Hence, they are willing to pay more for a lot than one may expect.

As we see builders bidding up lots, the rest of the neighborhood follows suite.  Part of the analysis of any property value is assessing the value of the land. Although we like to bash some builders for tearing down charming old houses and constructing new homes that seem too big for the lots.  In doing so, they are improving the value of homes for everyone in the neighborhood.  Furthermore, when these builders are ready to sell these houses 18 months later, they will price them a bit higher because of the higher prices they paid for the lots further pushing up the prices of property North of Montana.

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