This was written in early March and at the time I made the decision not to publish it. The comments on spec homes near the end of the article might be of interest…
I was flipping through several pages of real estate ads this weekend and noticed the word opportunity more than a few times. It’s no secret that many realtors have a unique gift when it comes to the use of superlatives or other engaging, if not ambiguous, language in their descriptions of properties. Nonetheless, seeing the word opportunity used the many ways that it was made me curious.
One online dictionary defines opportunity as a good chance for advancement or progress. This sounds great to me, especially because it has such a positive feel to it. Of course, it could mean so many things to different people, that the choice to use this word could end up being appropriate, if not clever. On the other hand, it can also be a classic example of over-selling.
For someone leasing a home or apartment, the prospect of buying their own place may very well represent an opportunity for several reasons. These include pride of ownership, having an investment that may actually appreciate over time, having property tax and mortgage interest tax deductions, building up equity over time even in the absence of appreciation, the possibility of being able to borrow money with a tax-deductible home equity line of credit or loan, and a potential capital gain exclusion upon the sale of the home. The list goes on, but these could be considered unambiguous opportunities for certain types of buyers.
Other examples of opportunities may be connected to location. It could be school district, sense of prestige, proximity to beaches or towns, views, and so on. Perhaps it could also be downsizing, upsizing, or better security. These all represent compelling opportunities for someone considering the purchase of a home.
So given this context, there are no doubt countless opportunities of different types available to Manhattan Beach homebuyers. In fact, one agent has a listing that purports to be the “once-in-a-lifetime opportunity” home being sought out here. You can’t beat that.
Another use of the word opportunity that I saw pumped the great investment or value opportunity for a few select homes. One ad I saw read “owner/user opportunity”, though I’m not exactly sure what this means. Historically, from an investment value perspective, this would have been true regardless of the purchase price. For example, everything purchased in Manhattan Beach back in 2000 has appreciated sharply, in spite of the recent correction of the past few years.
The median sales price for all home types here back then was under $800,000. Last year, it was close to $1.4 million. Clearly, over this particular time frame, homes as an investment class have done quite well. Will this happen again on a moving forward basis? Are there some properties that are, in fact, better opportunities than others today? In fact, how would one know a property is a better value opportunity, that is, one that could provide a higher rate of return if the home were also considered an investment vehicle?
The first of these questions is a bit difficult to answer given the uncertainty of the real estate and capital markets. There may be, however, ways to answer the other questions. This subject requires deeper treatment than can be provided here, but at a high level, there are a number of metrics that might provide clues to whether a home is a value opportunity or not when these metrics are viewed collectively.
One of the key steps would be to review recent sales data for truly comparable properties.
This may sound obvious, but it’s incredible what types of comparisons are made to support listing prices or appraisals. Homes in the same neighborhood with similar lot sizes, views, other features and possibly even age, would be relevant. It would also be better to compare homes with similar lot sizes and views or beach access, for example. Likewise, it may not be helpful to look at homes that were sold more than six months earlier as well. This is far from an exact science, but looking at a number of metrics for comparable homes could highlight properties at that are priced on the high side or that might be a value opportunity.
An extreme form of the value opportunity is the spec purchase, where the home is built with the intention of knocking down the existing home, building a newer and larger home, and then putting the new home up for sale. There used to be a time when many properties were bought on spec, but this trend slowed down considerably when home prices started falling off a few years ago. My guess would be that this may continue to drop off for a while.
In 2009, there were 172 single family homes sold in Manhattan Beach west of PCH, 32 of which were newly built. The new or relatively new homes sold at a median price of $2.38 million vs. $1.48 million for the existing homes. They had on average about 4,000 sq ft of living space compared to 2,500 sq ft for the other homes. If we assume the carrying costs for the properties were $100,000 and the average cost to build the homes was $300 per sq ft or $1.2 million, we have a total investment approaching $2.8 million. This exceeds the value that the new homes eventually sold for this past year. This is a very crude calculation, but serves to highlight a key challenge with spec building in the west part of Manhattan Beach today.
So will you be the lucky buyer of the once-in-a-lifetime property here or one of the many homebuyers who find opportunity of one kind or another in Manhattan Beach? You are probably on the sidelines if you build or develop spec homes for investment purposes, otherwise, there are any number of chances for advancement and/or progress.