Hermosa Data and Efficient/Inefficient Market Sales

For those of you that do not follow me on social media channels such as Instagram or are not subscribed to our mailing list, I will share some quick Hermosa Beach data before getting to the topic at-hand.

Additionally, for those individuals that do want access to more market data, each quarter I film a South Bay quarterly report with juicy data on my IGTV, which can be found here.

Hermosa Beach Year-Over-Year Data

The city of Hermosa Beach had its first median price drop in almost five years. Year-over-year for 2019, price data shows a median decline of 3.34% or a $57,000 pull back when compared to 2018 prices.

Much of the decline, if not all, came from the Hermosa Sand Section, which saw median prices drop by 13.5%. On the other hand, the Hermosa Valley and East Hermosa Beach areas were essentially flat.

As I mention in my quarterly newsletter, it takes $323,000 of annual income to afford the median-priced home in Hermosa Beach (based on CAR’s affordability calculations). Per the last U.S. Census, the typical Hermosa resident earns $125,000 annually, which might help explain why prices are weakening.

The Beauty of Efficient Sales

I oftentimes tell clients that the market is extremely efficient. What I mean by that is, it is extremely difficult to turn an amazing deal as the market dictates value.

You can, however, score a great deal if comps are tough to come by. You need to do your homework on long-term trends/drivers, or, take a risk and add value that might be slightly speculative. If your homework is right, it can pay off big time.

There are some wonderful Hermosa Sand Section sales that demonstrate how wonderfully efficient our markets can be through easy examples.

First, I want to compare two townhome sales, in a 4-unit complex, along busy Valley Drive.

• 1107 Valley Drive     
  • 2 bed, 3 bath, 1,653 sq. ft.
  • Asking Price: $1.35 million
  • Sold Price: $1.3 million
• 1109 Valley Drive
  • 2 bed, 3 bath, 1,653 sq. ft.
  • Asking Price: $1.299 million
  • Sold Price: $1.3125 million

These homes are as comparable as they come. These two units face busy Valley Drive, are the exact same square footage, bedroom count, bathroom count…and they are both nicely updated.

One unit came to market in September and one came to market in October, but asking a $51,000 difference in price.

Long story short, they closed only with a difference of $12,500.

Beautiful! Efficient markets prevailed and these sold about as close as possible with two at-arms-length transactions.

Secondly, I want to break down a new construction development in South Hermosa Beach. New construction properties make it very easy to demonstrate efficient sales.

Below is a three-on-a-lot townhome development with two being on the larger side, on corner locations, and the middle unit being smaller and sandwiched in between.

• 226 2^nd Street
  • 5 bed, 5 bath, 3,300 sq. ft.
  • Asking Price: $3.55 million
  • Sold Price: $3.5 million
• 222 2^nd Street
  • 4 bed, 5 bath, 3,457 sq. ft.
  • Asking Price: $3.618 million
  • Sold Price: $3.528 million

Both of the above townhomes are the corner units of the lot which allows for more light to enter the homes. The unit closest to the water sold at a $28,000 premium. We will not split hairs here but as you can see, none of this is rocket science.

The interesting part is the middle unit.

• 224 2^nd Street
  • 4 bed, 5 bath, 2,700 sq. ft.
  • Asking Price: $2.895 million
  • Sold Price: $2.83 million

The middle unit, due to it being sandwiched in between the corner two units, provided less privacy and light and also happened to be smaller in size by about 650 square feet in comparison to the two other sales.

It sold for about a $700,000 discount to its neighbors.

The price per square foot, however, was $1,048. That is between the $1,020 and the $1,060 price per square foot sales of its neighboring properties. Not bad and pretty darn efficient!

The third and final example, is a two-on-a-lot development right down the way and closer to the Pacific Ocean on 2^nd Street.

• 121 2^nd Street
  • 4 bed, 5 bath, 2,610 sq. ft.
  • Asking Price: $3.175 million
  • Sold Price: $3.085 million
• 131 2^nd Street
  • 4 bed, 5 bath, 2,681 sq. ft.
  • Asking Price: $2.995 million
  • Sold Price: $2.85 million

This is another great example of efficient sales. The two above townhomes were relatively the same size, had the same amount of bedrooms and bathrooms, but had a slight difference in the closing price. What caused this $235,000 difference in price? Well, the front unit has better views from the balcony and livable areas. So obviously, that unit landed a premium in price.

What’s most fascinating about these sales is they started at an asking price of $3.65 million and $3.4 million in early 2019.

The asking prices had the difference in unit price almost nailed! But, the market rejected those high asking prices.

It took the 2^nd Street sales up the street from the three-on-a-lot development to set the market price per square foot between $1,020 and $1,060. Eventually, these townhomes reset and took $600,000 reductions from their asking to achieve $1,060 and $1,181 a square foot, which feels very much in line with the market.

Like I said above, it is very easy to determine value when it comes to new construction and when the townhomes are relatively similar.

Now, here is where it gets tricky…

There can be inefficiencies in certain cases with existing construction and little to no comps. Let’s take a look at some examples.

The Beauty of Inefficient Sales

If you can find a listing that looks to be an inefficient opportunity, that’s were you can find value…if the value is hidden or at least speculative.

In my opinion, there was an amazing example of two sales that represented an inefficiency.

Cue two next door neighbors on a South Hermosa walkstreet:

• 49 7^th Street (Turnkey!)
  • 3 bed, 2 bath, 1,340 sq. ft., 2,848 sq. ft. lot
  • Asking Price: $2.8 million
  • Sold Price: $2.68 million
• 57 7^th Street (Tear-down!)
  • 2 bed, 2 bath, 1,000 sq. ft., 2,860 sq. ft. lot
  • Asking Price: $2.55 million
  • Sold Price: $2.525 million

You need to look at the listing pictures to really see the difference here. But it is clear, one is a tear-down and one is a turnkey walkstreet bungalow.

These properties from a land standpoint are almost perfect comparables as they are both 2,800 square foot lots. But, the 57 7^th Street property is a true tear-down, while 49 7^th Street offers an amazing turnkey bungalow that should garner a nice premium in price.

Is the lot with the turnkey bungalow only worth $155,000 more?

The answer is no.

And, that means one of these buyers got a great deal due to some inefficiencies.

The turnkey bungalow would cost at least $500,000 to re-create, which is likely the proper spread just from a cost-approach.

An inefficiency occurred because there are no recent MLS new construction sales on the South Hermosa walkstreets, so the land value is hidden or speculative in nature.

Land value could be $2.5 million for 57 7^th Street. Or maybe, it should have been closer to $2 million if the 49 7^th Street bungalow sold for $2.68 million.

Vice versa, land value could be $2.5 million and 49 7^th Street maybe should have sold for closer to $3 million.

There are no comps and as I mentioned, these sales can be slightly speculative in nature. But, as neighboring properties with different value propositions, these sales were far too close, and someone got an amazing deal.

Of course, there are nuances with both properties that make it all extremely complex, but I will leave this example as simple as possible for now.

Inefficiencies occur like this throughout the South Bay all the time, and down the road if you can get it right, that is how you can find inefficient value in a very efficient market.

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