Empty McMansion #4

322 Leda Ln.

322leda.jpg

Asking Price $1,999,000 ::: Sq-ft 4,450
Purchased Price $779,000 ::: Lot Size 9,840
Purchased Date 11/03/2006 ::: Beds 5
Days on Redfin 45 ::: Baths 4.5
$/Sq-ft $449 ::: Year Built 2008
20% Downpayment $399,800 ::: Area Santa Anita
Income Required $499,750/yr ::: Type SFR
Est. Payment* $10,107/month ::: MLS# W08008865

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Welcome back to another week at Arcadia Housing Blog. Today I will continue to document yet another empty, equity burning McMansion. Like #3 from last week, this brand new construction is also listed at $1,999,000. Except for the architectural style of the house, it’s very similar to 415 W. Palm Drive with the exact same listing price and number of bedrooms and bathrooms. Both were purchased in mid-late 2006, have similar lot square footage and were torn down to build McMansions of almost identical size for the same asking price.

$1,999,000 (asking price) – 6% commission – $779,000 (purchase price) -$1,001,250 (construction costs @ $225.sqft) – $55,520 (carrying cost @ $3470/month x 16 months) = approx. $43k profit

Purchase Price $779,000
Purchase Date 11/03/2006
1st Loan $623,200
2nd Loan $77,900
Downpayment $77,900

This is starting to get old, but it is what it is – another property bought at the peak of the bubble in 2006, only to be torn down for a McMansion put up for sale in late 2007 or early 2008. It took many months to get this house back on the market. Although experienced flippers can gauge the time it takes to acquire the necessary permits, construction costs and time, many fail to react to market conditions and choose to live in denial. See no evil, speak no evil, hear no evil – everything must be okay…right?

no_evil.jpg

Since 2006, the market has taken a drastic turn and it’s not a good one for flippers. In the past, new homes typically lead the way in price reductions and I see no reason for it to be different this time around. Once their prices start to give way, the older, less desirable resale homes will be forced to come to terms. This however does not start to occur until flippers recognize and accept the situation. The snowball is already rolling down the mountain and it will only be a matter of time before it reaches a critical mass. These sellers are in the same boat as all the others who are also hoping to find a knife-catcher to bail them out. From the looks of it, most of Arcadia is still in the late denial stage.

To be consistent, I’ve maintained the same assumptions and proceeded with the same calculations for this property as I have with the others in this series. Thanks to reader llking for pointing out that I did not account for the construction loan. If they don’t have investors with cash and did in fact take out a loan, then these folks could already be underwater. This is a likely scenario, but since I cannot confirm the financials of the construction loan, I will leave it out.

Of course, the mortgage industry was still doing plenty of silly free lending with very none to low downpayments back in 2006 so their carrying costs could be much lower if they used an option ARM of some sort. Unfortunately for them, there is only going to be more and more competition on the market and prices still need to go much lower. TheArcadian reported in yesterday’s Inventory and Market Report that volume and foreclosures both rose while median sales price dropped 13% in just one month.

Are you still in denial?

6 thoughts on “Empty McMansion #4”

  1. Why is the construction costs so high? 225 per sq! That’s even more than a contractor would charge to a private owner who would like to have a full custom home.

  2. Custom home construction could easily run up to and over $200 psf (hard+soft costs). You are right that a custom home can be built for cheaper but the “custom finishes” that the seller chooses during construction can easily add up to hundreds of thousands of dollars in the end.

    We are assuming a decked-out McMansion with quality material to go along with their Robert Tong floor plan. Since this house was being built right as the bubble popped, sub-contracting costs most likely haven’t decreased yet.

    But yes, a new home can be built for cheaper.

  3. My search on Google gives me an estimated construction cost of $125-$150/sqft in desirable California cities. Costs are highly dependent on location and places like the IE and Lancaster/Palmdale will have much lower construction costs. There are a multitude of factors that can affect the $/sqft number. In construction there are soft and hard costs.

    Soft costs are non-building expenses such as permits, architectural fees, origination points, transfer taxes, title insurance, appraisal fee, overhead, hazard/cost of construction insurance etc. These can be significant and raise the $/sqft by as much as $35-$50/sqft.

    Hard costs are the physical items such as land value, site prep/grading, labor, materials, cost overruns etc. From the look of it, this property can qualify as a custom home with its marble floors, landscaping and high end appliances/fixtures. The costs associated with this can further add to the building costs.

    $225 may be on the high side, but it’s not that far off. Since he frequently works with local builders, TheArcadian is better fit to answer your question. Thanks for your input.

  4. ic. I am just suprised to see the number being to high. Do you know why the insurance company uses only about $150 per sf when they calcuate the rebuilding cost?

  5. It would seem $150psf is the average cost to build a home in the area. We are talking standard basic materials, no high-end flooring, hollow doors, no/basic appliances, ect. In many in-fill areas of LA and OC, $130-150psf will definitely get you a livable home.

    Now throw in fancy landscaping, a pool, upgraded finishings and we’re reaching into the $200psf range.

    In contrast, it would cost a production home builder anywhere from $65-90psf to build the same home (in the LA/OC area).

    Since construction has slowed down significantly after the housing/credit bust, I have seen costs drop down to $55psf in the outlying areas (Antelope & San Fernando Valleys). Needless to say, subcontractors are hurting from lack of work.

  6. since it’s only the rebuilding cost, it would not incur the soft cost as that developers will have to include as part of their development cost.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>