South Redondo Home Auction
Did you hear about the wild real estate auction in South Redondo last month? The probate sale by public auction at 709 Elvira Avenue took place on Saturday July 8th. The initial asking price was $995,000 and it ended up selling almost 75% higher at $1,730,000. Hot damn!
Manhattan Pacific Realty had clients attend and I personally was working to convince many clients to come and take a swing.
To the untrained real estate eye, the crazy over-ask price might be a bit shocking. But to those in the residential real estate business, you knew it was coming. Let’s break down why there was a feeding frenzy…
709 Elvira Avenue
The subject property is a 1920s built home in desperate need of repair. The four bed two bath existing structure is only 1,610 square feet while sitting on a large lot of almost 7,500 square feet. Although there is great value in a large lot for single-family homes, the true value here is in the R-2 zoning which allows for more dense building of two rather large town homes. You can pretty much kiss this old home goodbye due to the rise in value of two-on-a-lot South Redondo town homes, especially new construction close to the Pacific.
Comparable Sales
Looking at past new construction town home sales, the best comp is virtually right across the street at 716 Elivra #A and 716 Elvira #B which sold for $1.67 and $1.6 million respectively. That is a bullseye projection for any investor/developer at $3.27 million in total sales expectation. If you look further, however, these new town homes were next to a very large and very ugly apartment building that most likely held back their value.
Digging deeper, I found 706 Catalina Ave #A and 706 Catalina Ave #B that sold for $1.68 and $1.7 back in late 2016. Perhaps a developer could expect more and yield an extra $100,000 sales price based on these comps?
Finally, the most recent comparable sale was a corner lot development at 700 S Broadway and 306 Topaz Street that both sold for $1,750,000 each. Those are great comps, but a corner lot is more desirable due to additional street frontage and a better driveway setup. Some developers, however, would reasonably assume that the subject property in two years could match that pricing due to inflation and some slight appreciation.
Breakdown
As a result of the comps, here were my numbers on the property for a client…
$3,500,000 total sales between two units
$3,300,000 after selling costs (about 6% expense)
Less
$1,500,000 building/soft cost ($250 per sq. ft. + 15% mark-up for soft costs)
$1,400,000 land purchase price
$400,000 in profit
Conclusion
A $400,000 profit sounds awesome but when you earn only $400,000 on a $3 million investment (that will take about two years to boot!) then that ain’t the greatest of deals! In fact, when annualized it is only about a 6.7% return for a whole heck of a lot of risk. Of course one would expect a developer to use bank loans to help amplify the returns but that would be one skinny margin to lever up on.
To add more fuel to the risk fire, my above proforma numbers was for a pair of young developers looking to build for themselves and move-in to raise their families. Having equity was a factor, but they were willing to get aggressive with their numbers where making a fair return was not a the main factor. Who could beat us?
We knew the property would go way over $995,000 based on our numbers, but $1.73 million was certainly a shock, even to us. Based on our numbers, the winning bidder only has $70,000 in profit which has the potential to be wiped out with holding costs alone. To me, the only possible buyer at this price is someone looking to fix-up the home, live in it, and bank on the land appreciation long term, but there HAS to be better investments than this.
Richard Haynes
DRE: 01779425
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The Richard Haynes Real Estate ShowA leader in South Bay real estate for the better part of a decade, Richard thrives as an advisor to his clients with over $248 million in sales as a broker or investment principal at his boutique agency, Haynes. Richard is known for his keen local market insights which have been featured in the L.A. Times, The Street, and Forbes, along with his weekly South Bay real estate blog. [read more]