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East Manhattan Beach Lot Sale is a Bullish Bet

East Manhattan Beach Sale

A recent lot sale signals that real estate developers are about as bullish as they can get on East Manhattan Beach (East MB) real estate. After being on market for almost a year, the 15,311 sq. ft. double lot offering at 1156 6th Street in East MB finally sold last week for $3.6 million.

I mentioned this particular lot in my June 2017 blog (Recent Lot Deals in Manhattan Beach) when it was asking $3.795 million after selling in late 2015 for $3.3 million.  At the time, that asking price did not pencil to build two homes. Instead, I speculated in my blog that perhaps a buyer in search of an over-sized lot like 233 S. Meadows would build a large estate home. At the time Meadows was asking $7.48 million, since then, Meadows has made massive cuts to $5.798 million and is still on the market today.

If the expensively built architectural “Modern Masterpiece” at 233 S. Meadows can’t find a buyer in the high $5 million range, then it is a good bet to assume the purchasing developer of the 6th Street lot is going to go the direction of building two homes.

Latest Lot and New Construction Sales

Let’s explore the latest East MB lot sales as well as some new construction sales to get an idea of the dynamics of 6th Street.

Comparable lot sales on 7,500 sq. ft. lots:

June 2017: 1320 9th Street sold for $1,505,000
July 2017: 1535 Curtis Ave sold for $1,600,000
November 2017: 1534 Curtis Ave sold for $1,659,000
February 2018: 1648 5th Street sold for $1,577,000

Looking at these lot sales with a quick eye-ball test we can assume that current lot sales are trending right around $1.6 million, per the MLS.

Comparable new construction sales on 7,500 sq. ft. lots:

November 2016: 1200 10th Street sold for $3,600,000 (5 beds, 6 baths, 4,746 sq. ft., 7,467 sq. ft. lot, built in 2012)
March 2017: 1315 9th Street sold for $3,650,000 (6 beds, 8 baths, 5,585 sq. ft., 7,396 sq. ft. lot, built in 2016)
February 2018: 1534 8th Street sold for $3,600,000 (5 beds, 4 baths, 4,550 sq. ft., 7,501 sq. ft. lot, built in 2017)

It is clear to see that newer construction homes have been consistently selling in the $3.6 million range for the past 18 months. The 10th Street sale, although not brand new construction, was a very nicely appointed home on a corner lot much like the 6th Street lot sale. Additionally, the 9th Street sale shows that adding a basement will get you top dollar, while the smaller 8th Street home sold off-market suggests a larger home could go higher in today’s market.

Why 6th Street is a Bullish Bet

If you’re good at math, you have already calculated that 1156 6th Street was purchased at $1.8 million per lot. That is significantly higher than the trend of lots selling around $1.6 million. Normally, when you buy in bulk you get a discount…but not in this case!

When you do a rough calculation of $325 per sq. ft. to build on about a 4,800 sq. ft. home, you get about $1.55 million to construct. With lot sales around $1.6 million, most developers are betting to be all-in around $3,150,000. That is a $500,000 spread if you can sell at $3.65 million (not including selling costs).

So with this buyer paying an additional $200,000 per lot, effectively lowering their margin to $300,000 on each home, they are most likely assuming one of two things:

1. They can get significantly more than $3.65 million in the near future.
2. Having two side-by-side lots will give them economies of scale to lower their construction costs significantly to make up for the $200,000 per lot premium.

With the soaring costs of lumber and rising cost of labor, my guess is assumption number one will be the case for this new buyer or developer if they choose to build right away.

It is a very bullish bet on the future of East MB new construction prices. Will it turn out to be right?