Are North Redondo Developers Transitioning to Specs Over Townhomes?

If there is one thing that I have learned over the past 15 years in real estate, it is to “follow the money.”

And no, I do not mean “follow the money” like trying to bust a political scandal made famous by the film “All the President’s Men” in 1976.

I mean “follow the money” by watching what professional investors, developers, and big REIT money managers are doing in local real estate markets. Those investors can offer early indicators on the future of a market and if big gains might be had in changing areas.

Following these fellow real estate pros has given me a heads-up on areas to get in front of to capitalize on growth, or shift a strategy that will allow for more profits for my clients.

One very early, yet very interesting trend is North Redondo townhome developers trying out single-family home development on lots that are zoned for townhomes.

Let’s take a look…

Redondo Villas North Spec Home

Last week, an important spec home sale in the North Redondo Villas North submarket officially closed.

• 2112 Ruhland Avenue
  • 5 beds, 5 baths, 4,116 sq. ft., 7,500 sq. ft. lot
  • Sold Price: $3,150,000

To the non-professional, this looks like your typical 4,000 square foot home that you are likely to see in East Manhattan Beach. And in fact, this Ruhland spec home is just a few blocks from the East Manhattan Beach border.

Brand new spec homes in the Mira Costa submarket of East Manhattan can trade between $4 million and $5.5 million on 7,500 square foot lots just like Ruhland.

A similar Redondo home, just a few blocks east from Manhattan, offering a $1 million to $2.5 million discount might seem reasonable to some buyers if city boundaries and school systems do not matter to them.

The developer made a bold but reasonable bet there would be a buyer, and the purchasing party found what they believed to be a value for a large, new home on a 7,500 square foot lot.

What makes this sale so fascinating is that 99% of the time you would see a two-on-a-lot townhome development on this property.

Below are recent townhome sales in the area that the developer could have banked on as their resale price…

• 2421 Voorhess Ave #A
  • 4 beds, 4 baths, 2,556 sq. ft., 7,493 sq. ft. lot
  • Closed Price: $1,670,000

• 1908 Bataan Road #B
  • 4 beds, 4 baths, 2,540 sq. ft., 7,506 sq. ft. lot
  • Closed Price: $1,695,000

If you are good at math, you will have already computed those two townhomes equal about $3,365,000 in resale value. That exceeds the price the developer received on the Ruhland spec home by $215,000.

But not so fast, it is not always about the resale value but the costs that go into the build.

The two townhomes totaled about 5,096 square feet while the spec home was just 4,116 square feet.

If building costs were $250 a square foot for the builder, then they saved about $245,000 building the spec home.

The comparisons are not that simple as the spec home had a pool and landscaping, but the townhomes have two sets of kitchens, a great number of bathrooms, etc. that are higher price per square foot cost items.

In a nutshell, the profits are roughly the same.

Ten years ago, a professional developer would have never dreamed of building a spec home on an R-2 zoned property. Today, it is just as profitable and likely holds less risk.

This is an important development in the North Redondo marketplace and is something buyers and sellers need to factor in long term when making decisions on investments in townhomes/single-family homes in this submarket.

Redondo El Nido Specs Driving Market

The longtime affordable single-family home market in North Redondo’s El Nido is really starting to see spec development rise here as well.

To stay with a Manhattan Beach metaphor, if the Villas North submarket 7,500 square foot lots are akin to Mira Costa submarket 7,500 square foot lots, then you can think of El Nido as Manhattan Beach’s Liberty Village…eastern location that offers more affordability thanks to smaller lots generally in the 5,000 square foot range.

Take a look at the latest El Nido spec sales…

• 2604 Alvord Lane
  • 5 beds, 5 baths, 3,533 sq. ft., 5,252 sq. ft.
  • Closed Price: $2,050,000

• 2504 Fisk Lane
  • 4 beds, 4 baths, 3,347 sq. ft., 5,252 sq. ft.
  • Closed Price: $2,320,000

These are smaller homes in the 3,300 to 3,600 square foot range on lots just over 5,000 square feet. They go for a discounted price thanks to a smaller footprint and smaller lots.

Again, much like how Liberty Village operates at a discount to Mira Costa. Simple.

Now this pocket is zoned R-1 so developers are not sacrificing density here, but the interesting thing to note instead is what these specs are commanding from a price standpoint.

Why? Well spec homes drive land sales.

What is most interesting to me is that the median priced home over the las six months in El Nido is just $1.31 million. That is the median price for a single-family home on a 5,000 square foot in Redondo!

There are some developers that could buy the median priced home, tear it down, build 3,300 square feet and break even…maybe even turn a profit.

The numbers on that are tight, but it is close.

The point that I am trying to make is that buyers can find median priced homes in this market that have a very safe floor since they are so close to land value. If El Nido can run like Liberty Village has over the past few years, it could be a potential gold mine for buyers.

The secret, however, is out on El Nido.

The submarket has been hot since the pandemic started. Of the 24 single-family home sales in the past six months, 19 of them have gone for over asking.

Conclusion

If you “follow the money” by watching professional investors, you can locate shifts in a marketplace and potentially profitable opportunities.

Spec home prices in the El Nido market offer clues on to where prices could go for all single-family homes. If you believe those spec homes look cheap and can go higher, then the rest of the market is primed for big-time growth fueled by deep-pocket investors.

Or, if townhomes become less profitable for developers in Villas North, should you consider buying an old single-family bungalow as opposed to a duplex (new CA laws prevent single-family homes on a lot of duplex lots these days)? Or, should you buy a large townhome if there will be a supply squeeze in the future? Or, build your own spec home for bigger profits rather than just selling your smaller home?

There is no clear answer, yet, but what is clear is that the market shift represents opportunity.

Identify those opportunities and make the best investment decisions you can, and if you get it right, it will likely earn you some outsized profits.

Follow the pros in these markets to see what is working. My hope is it will turn out great for you.

Good luck!

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