The topic for this week is a fun one – East Manhattan Beach land sales.
I find this an important subject because these sales can demonstrate the aggressiveness of developers or future custom-built homeowners in a specific neighborhood. It is a bet on the future based on past sales, construction costs, and supply.
While much of what we can conclude from land sales is still very much speculation, it is a valuable exercise to conduct for parties interested in building or purchasing new construction homes.
East Manhattan Beach is relatively easy to breakdown thanks to its fairly simple layout as a giant rectangular grid and focusing on its majority of 7,500 sq. ft. lots.
Below we will examine recent land sales in the Mira Costa and Manhattan Heights submarkets, along with some new construction sales to help as a barometer of what is happening right now.
Working Backwards & Estimating Costs
Before I jump into some of the property sales and examples, it is valuable to share how one might come to a proper land value price.
In the simplest terms – you want to work backwards.
What do I mean by that?
You want to find the most reasonable value of what a new construction home would be worth today, and then proceed to work backwards calculating construction costs, land acquisition, and the equity spread one desires.
So, for instance, let’s assume a new 4,500 sq. ft. home in East Manhattan Beach is worth $4.5 million. Further, we can estimate building costs between $450 and $650 per sq. ft. depending on the level of finishing, and finally, let’s take $400k equity spread for the two-year endeavor if you are efficient in the process.
This is how the number might work out to get land value:
- $4,500,000 New Construction Value
- $2,475,000 Construction Costs ($550/square)
- $400,000 Equity Spread
- $1,625,000 Land Value
There you have it! Of course, it is not that simple, but I like the napkin number example.
Developers or custom home builders will have holding costs, construction leverage, or be able to complete the build for far less (or in some cases, have no desire for a profit).
The breakdown can vary widely and is personal, but this is a solid beginner-level way to roughly calculate numbers quickly.
Mira Costa Land Sale & New Construction
I am going to start with the Mira Costa submarket and a recent land sale that closed this month.
- 1,211 sq. ft. tear-down on a 7,479 sq. ft. lot
- Sold: $1,650,000 (January 2023)
This listing started its journey in August of 2022 with an asking price of $1,850,000. It went to escrow in about two weeks but eventually fell out of escrow after 30 days.
From there it sat on the market for two months while making a $100,000 reduction in price and eventually made a deal another $100k lower.
Unfortunately, a failed escrow and tough location backing up to busy Artesia made for a tougher sale than one might expect. According to the assessor’s office and the MLS, the property is owned by an LLC and closed all-cash which likely means this one is going to come back as a spec development.
I want to approach this one as a developer with lower building costs and an investment angle where there is a nice profit to be had. Below is how a developer might approach this one.
- 4,750 sq. ft., 5-beds/5-baths with a pool, Built in 2022
- Sold: $4,650,000 (October 2022)
Nelson is one street over to the north and the same exact pocket, with the exception of busy Artesia. A developer might estimate a discount for the location, which we will say is $4.45 million resale, and be on the lower end of $450 per sq. ft. to build. Take a look at these numbers:
- $4,450,000 resale
- $2,200,000 construction costs (approximate $450 per sq. ft.)
- $1,650,000 land cost
- $600,000 Profit
Of course, I am not including holding costs and selling costs (Realtor and closing costs) but this is a back of the napkin quick calculation.
A profit of $600k on a $3.85 million investment over two years is not stunning, however, if the build was to be financed, then one can see how the ROI can jump when your investment is around $2 million, even if you subtract funds for holding/selling.
And…this is Manhattan Beach where developers have been able to count on appreciation for higher resale prices pretty much every year since the Great Recession. This is spec development after all and some of the profit could be assumed on an even larger resale price if one is betting on appreciation.
All in all, this land sale gives insight into how investors are betting and where that new construction price could be estimated into the future.
Manhattan Heights Land Sale & New Construction
Heading North to Manhattan Heights, a neighborhood that commands higher prices than the Mira Costa market near Artesia, let’s now explore another recent land sale.
- 1,175 sq. ft. tear-down on a 7,495 sq. ft. lot
- Sold: $1,930,000 (January 2023)
This is another listing that started higher asking $2,399,000 in September of 2022 before going to escrow and falling out. After price reductions to $2.1999 and $1.999 million, a deal was finally made and a close price of $1.93 million was reached.
According to assessor records and the MLS, it looks to have been sold to two individuals and 75% loan-to-value financing. Perhaps this is a custom dream home with little regard to profit but wanting to be near appraised value upon completion.
MLS new construction sales are hard to come by in Manhattan Heights, in fact, it has been almost two years since the sale below occurred at the start of 2021.
- 6-beds/6-baths, 4,600 sq. ft.
- Sold: $4,210,000 (February of 2021)
The Manhattan Beach market has been on a tear the last two years, so it is reasonable to assume a much higher price.
This pending pre-sale new construction in a less desirable location might give a clue on how much of a premium this land location might deserve.
- 5-beds/5-baths, 4,007 sq. ft., build new 2023
- Pending: $4,995,000
It might be fair to assume a $5 million or higher price for, say, 4,500 sq. ft. at a more luxurious construction point for a custom client at $650 a square foot. Let’s now run those numbers:
- $5,150,000 Value
- $2,925,000 construction costs (approximate $650 per sq. ft.)
- $1,930,000 land cost
- $295,000 Equity Gain
While not the same spread as the developer, if it is in fact a custom home owner, they can still rest assured that they have positive equity with their high-quality finishes and premier location.
Again, holding costs come into play, personal decisions on building costs, and even speculating on price that could be lower or higher.
These land sales are interesting because you can see how numbers pencil to estimate what resale value bets there might be in the future.
Additionally, what we did not explore were past sales that could be perceived as land value.
Per the MLS, in 2022, there was not one 7,500 sq. ft. lot sale that went below $2 million. For the most part, you had to assume $2.2 million or a bit more for land in East MB.
While not a drastic drop, it is notable that interest rates and inflation to buildings costs may have had an impact on developers and owners looking to build their new homes – and thus, the sub-$2 million recent closings.
All in all, these types of exercises give good insight into the market, in particular, what is happening in East Manhattan Beach right at this very moment for both land value and potential new construction values.
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