The East Manhattan Beach home market has fascinated me for years.
New construction home prices have sky-rocketed over the years, leaving many existing home prices in the dust. In fact, there were times when you could buy just about any home older than 30 years, tear it down, and build new without fear of being underwater.
I wrote about this interesting chasm in August of 2019 in my blog titled, “East Manhattan Beach Homes Sales and the Fascinating Dichotomy.”
As a result, I felt like this huge split in valuation between existing homes and new construction homes made the market feel risky. Something had to give.
In my 2020 fearless real estate predictions before the onset of the pandemic, I dubbed East Manhattan Beach as the riskiest new construction market in the entire South Bay. I could not have been more wrong.
Instead, the large lots of East Manhattan Beach grew in demand even more, new construction and existing homes alike. East Manhattan Beach homes continued their torrid price appreciation higher throughout 2020 making it one of the best performing markets of the year.
Think of me as the bearish investor studying the numbers of Tesla, and not believing the expensive valuation. The bulls on the opposite side of the trade have done extremely well in Tesla, and the same goes for believers of East Manhattan Beach real estate.
Much like Tesla doubters, I have thrown in the towel because obviously my way of measuring value does not apply to this market.
I think it will be impossible to accurately predict what will happen next in East Manhattan Beach, but Buyers (and Sellers) need to do more homework than ever in this fascinating marketplace…and deeply understand aspects of construction and development to make the proper investment decision for themselves.
Below, I am going to take imperfect examples of a variety of East Manhattan Beach homes sales on the same street over the last six months. My hope is to demonstrate to you how detailed you must be in understanding your ultimate goals in order to make the best decision for you.
Variety of Action on 8th Street
Below are five sales of various kinds on the same street. Yes, they are on different blocks and specific locations are more desirable than others, thus command specific valuations. But, for this exercise, I am using a single street for comparable purposes to focus on sales that sit on or around 7,500 square foot lots.
The comparisons are imperfect, but I believe it will help you understand how to truly underwrite what home will work best for your specific goals In East Manhattan Beach.
I have given a nickname to each listing to represent the specific opportunity each home represents:
- Land Value Home
- Covered Land Home
- No Man’s Land Home
- Newer Value Home
- Brand New Home
For the purposes of numbers, I am also going to assume $500 per square foot to construct a brand-new home. It could be much less for some to build and it could be much more. For this breakdown, I need to pick a number, so let us go with $500 a square foot, but please, do your research by speaking with a qualified general contractor as well as licensed architect familiar with Manhattan Beach construction costs.
Land Value Home
- 1826 8th Street
- 3 beds, 2 baths, 1,879 sq. ft., 7,504 sq. ft. lot
- Sold Price: $1,849,000
This property is the most poorly located of the bunch and that does affect value. However, this sale is the ultimate land value example. The home is lightly rehabbed to make it more appealing to a move-in buyer, but in a better location, an old tear-down bungalow would go around this price.
Assuming the $500 a square foot to build a 4,400 square foot home, the cost would be $2.2 million. If you add that to the sale price, this owner would be all-in around $4.05 million.
This is not terrible considering many brand new construction homes are selling right now around $4.5 million.
Further, you get to design and build a home to your exact specifications and have $500,000 in equity. But of course, you earn it through a lot of hard work to get the home out of the ground.
Covered Land Home
- 1315 8th Street
- 4 beds, 3 baths, 3,293 sq. ft., 7,562 sq. ft. lot
- Sold Price: $2,600,000
This property is what you have heard from me many times in past blogs as a “covered land play.” Essentially, you are buying as close to land value as possible, but covering your investment with an existing building that might help you break even while holding to build at a future date.
The home in this location is rather large at 3,300 square feet while being only 34 years old. Taking our land value sale above, you are getting this property at land value and paying an extra $750,000 for a large 3,300 square foot home.
You get the home for about $227 a square foot after land value is taken out.
That is compelling. If you can utilize the home personally or rent it out, it will hopefully cover your expenses and eventually, over time, the land value will rise above your purchase price. You can sell as a land play or tear-down yourself…or, even rehab later and potentially score a nice profit on a remodeled sale.
But, you need to wait and be OK with holding the property over time. You will not pick up a big home like this for much less and that is the appeal, along with upside.
No Man’s Land Home
- 1716 8th Street
- 4 beds, 3 baths, 4,415 sq. ft., 8,250 sq. ft. lot
- Sold Price: $3,185,000
This property sits on a lot that is about 750 square feet larger than your typical East Manhattan beach lot at 7,500 square feet. The extra lot square footage and large 4,400 square foot home built in 1967 were likely factors in the price.
All that said, I have dubbed this as the “No Man’s Land” home as it is difficult to see the strategy behind this purchase (at least through my lens of black and white numbers)…allow me to explain.
This home is far from land value at $1.85 million. And, as it relates to a covered land play, the buyer is paying almost $600,000 above the covered land play example for just an additional 1,100 square feet. That equates to a more expensive price per square foot of $545 a square for that additional square footage.
On the flip side, as you’ll see below, there is a “Newer Value” home sale that offers a newer home built in 2004. And, that newer home could have been purchased instead for a mere $115,000 more.
Lastly, if you were to completely gut and remodel this 4,400 square foot home, one will likely be in it for close to the same amount as purchasing a brand new construction home at $4.5 million…and it will not be nearly as nice. So, why go through the headache?
Now, there are many factors beyond pure numbers driving the decisions of buyers. I am not going to criticize the purchase because I am not privy to the details beyond numbers. It could be a direct neighbor to a property already owned, or across the street from a beloved family member, or the home may offer something beyond what we can quantify in numbers.
But, from a pure black and white standpoint, this sale’s price/opportunity gets shot from both sides of the fence. What type of play is it? It is hard to see the strategy here…
If your strategy is do a major remodel or tear-down…why not buy closer to land value?
Or, if you want a newer home with substantial size…why not buy a newer value home or brand new construction and save yourself the work?
Newer Value Home
- 1431 8th Street
- 6 beds, 5 baths, 4,435 sq. ft., 7,499 sq. ft. lot
- Sold Price: $3,300,000
This home sale above is self-explanatory…a well-cared for home built in 2004 offering 4,400 square feet. It is not brand spanking new, but it is on the newer side.
In 30 years, this home as well as many of the brand new contruction home sales might feel the same. If you like this home and can enjoy it as-is, then it is about $1.2 million cheaper than buying brand new.
Brand New Home
- 1721 8th Street
- 6 beds, 6 baths, 4,581 sq. ft., 8,750 sq. ft. lot
- Sold Price: $4,500,000
And finally, the brand new construction home option that is the best of the best in terms of quality, and that has continued to out-perform and grow in price substantially over the years. The rest of the East Manhattan Beach market will price off of these sales and the value of brand new homes is the single-most important driver in the East Manhattan Beach marketplace.
Why You Need to Do Your Homework
These five examples above show why you need to do extensive homework on every sale in East Manhattan Beach, along with gaining a deeper knowledge of construction prices to determine exactly what you want.
What if you want a brand new construction home, but would have been willing to build the perfect home if you knew you could obtain $500,000 in equity?
What if you want a covered land play, but would have preferred skipping the build down the road if you had known about a newer value home opportuntiy?
The combinations are endless and should be considered by each buyer individually.
I think the right metaphor when breaking down these homes sale is making a comparison to the various options within the car market.
Car Manufacturer = Land Value Home
The land value home is what professional developers go after to make a profit. This play is much like being a car manufacturer and being in the business of making cars and selling them for a profit.
Mechanic Purchase to Drive and Sell Later = Covered Land Home
This is like a local mechanic that knows the market well and who buys a car at a great deal. They plan to buy the car, use it, improve it over time themselves and sell it for a profit down the road.
Retail Buyer Unsure of What They Want = No Man’s Land Home
I like to compare this one to an unsure buyer who goes car shopping without knowing what they want or researching the market extensively, and unfortunately, they end up purchasing a car at neither a great price or with value to resell if they have buyer’s remorse.
Buyer Looking for a 3-Year Used Car = Newer Value Home
This is someone who knows that they would love brand new, but feel like a lightly used car offers more bang for their buck since brand new cars lose a ton of value the second you drive them off the lot. This will offer the most dependability at a discounted price.
Buyer Who Wants New To Enjoy = Brand New Home
And lastly, this is a buyer that knows they want a brand new car. They are willing to pay the higher, top-of-the market price for something no one else has owned.
My metaphors above might be a stretch but hopefully, it helps you understand how deep you must go to understand the East Manhattan Beach home market.
Figure out what type of buyer you are, exactly what property and price will serve your investment goals best, and then get after that deal.