Builders Are Back

Some people love them and others hate them. No matter what camp you are in, the recent market shift has awoken the sleeping giant. There are many tell-tale signs: starting with more fences surrounding the old, post-war 1,200-square-foot homes around town. Oh, and how about 18 offers on one old home that recently went up for sale in the Tree Section of Manhattan Beach? My phone has been ringing from local builders asking opinions of potential resale value for their new homes. Additionally, homeowners have been calling in to determine if I can get them more money from a builder or an end-user buyer.

In 2008, the market was about as bad as we had seen in decades. If you were a builder with inventory, you were guaranteed to lose money. The reason being was that when adding up the cost of the land purchased, the cost of construction, the cost of financing and the cost of selling, it almost always amounted to more than what the property would sell for.

Many property owners believe that the value of a home is determined by adding up what it cost to build plus the land value. The fact is that a property is only worth what the market will bear. The market doesn’t care what was spent to build it or what the initial cost was to buy it. The market decides value based on supply and demand. Buyers actually determine value. Sellers just get to decide whether they are willing to sell at what a buyer is willing to pay.

With very few exceptions, most builders in 2008 were forced out of the market. You could no longer buy land or old homes in the area at a low enough price, build a home, and make a profit. Builders usually look to make between 10-20% in profit and if they believe they cannot achieve those numbers, they have to forgo the risk. Hence, for the past four years builders were either forced into early retirement (or bankruptcy), and many became home remodelers or went on to build for private home owners.

One builder I know told me that nearly all of his subcontractors were former builders and general contractors. Builders had to find any work they could to keep food on the table. It is a feast or famine business. When the market is right they can make significant profits but it is risky, and with one slight shift in the market a builder can go from making a 20% profit to losing 100% of their cash invested.

Fast forward to today and builders are nervously stepping back in. They are hoping that the recent surge in activity and prices will again allow them to buy land at today’s value and then post a profit a year from now. Buyers looking in the market are anxious to find brand new homes but the inventory simply isn’t there. There are multiple cases already where a new home has been planned and the builders have locked in a buyer that will purchase it now and will wait the approximate one year it will take to construct it. As a matter of fact, I have been quietly marketing four new homes in Hermosa Beach on 21st street just west of Pacific Coast Highway. We have secured three buyers for the four homes already, two of which purchased it while the project was only in the framing stage. The same builder was marketing a project next door through me a few years ago with eight homes offered for sale and we couldn’t get a buyer to come and look at them until they were completely finished, the paint was dry and the homes were staged.

Whether you are in the market for a new home or you own an older one, it certainly appears that the builders are back. There is no telling how long this trend will last but it is here for the moment. As a home owner there are significant benefits of selling your property to a builder, including reduced costs and being able to sell it in “as-is” condition. There are cases where end-user buyers will pay more than a builder will.

You need an expert agent to guide you through the two options when you want to sell to help identify which path is best suited for you. For buyers wanting to buy a new home, there is not a lot to choose from. You may have to have some vision because you may have to lock in your purchase before it is done being built. Don’t let all of the fences around town fool you, many of the homes being built today are custom homes that will not be going up for sale.

To find out more about new homes or to determine if your home is worth more to a builder or an end user, you can call Ed Kaminsky at 310-798-1277, ext. 214 or drop an email to ek@itzsold.com.