If you look at the South Bay July home data, it is sitting at record high median prices on a rolling 12-month average. The past two years have been breathtaking when it comes to price growth, demand, and lack of supply – and the July numbers illustrate the results of that home buying frenzy.
With all that said, record price after record price does not last forever.
If you read my blog post a few weeks ago, South Bay July Home Data Gives a Glimpse into the Shifting Market, you will see record high median prices but with undercurrents of how the market may be shifting.
While South Bay properties selling at a loss are a rarity, they are not unheard of, especially in the luxury marketplace.
As we see the market begin to shift – let this week’s example can be a cautionary tale to do your homework, proceed with caution, and ensure you are getting sound advice from the right sources. This case study involves a substantial loss even with a medium to long-term time horizon.
Prestigious Palos Verdes Listing
In 2014, one of Palos Verdes Estates most secluded view streets saw an exclusive address come to market.
- 10,100 sq ft, Over an acre lot
- Asking: $14,900,000
- Closed: 12,999,900
At the time, no home had ever sold for a higher price on the Palos Verdes Hill on the MLS.
Thanks to its massive private estate lot, unobstructed Queen’s Necklace views, and behemoth living spaces – this listing could “wow” even the pickiest buyers across the globe.
After just three months on market, the listing made a deal and closed a month later at just under $13 million – about a $2 million discount from the asking price. That result was still good enough for the highest MLS PV home sale of all-time (which would be broken a month later).
While the $2 million discount may have felt like a great deal, many residents wondered if it was worth the price or if it was too reminiscent of the excesses seen in 2005 and 2006?
Did the buyer truly understand the significance and risks of taking on such an investment in sleepy Palos Verdes? It turns out that maybe not all the risk factors were fully considered.
Failed Listing After Failed Listing
A year and a half later, the home was back on the market asking $28,000,000 – more than double the original closing price and not a comparable sale in sight.
It lingered for a full ten months until it was reduced to $25 million.
From that point, the seller begin an six-year listing period with seven different listing agents before the home was finally re-sold last week.
See the full history below:
- 2016: $28,000,000
- Reduced to $25,000,000
- 2017: $25,000,000
- Reduced to $21,000,000
- Reduced to $18,900,000
- Reduced to $16,999,999
- Increased to $19,999,000
- Reduced to $15,999,999
- 2018: $14,900,000
- Reduced to $13,900,000
- 2019: $12,999,999
- Reduced to $12,888,888
- 2020: $11,888,888
- 2021: $11,888,888
- Reduced to $9,800,000
- Increased to $10,880,000
- Reduced to $10,500,000
- 2022: $10,500,000
SOLD: $9,900,000 (August 13, 2022)
What’s not shown in the above history are canceled listings, withdrawn listings, coming soon listings, increased commissions to buyers’ agents, and changing listing agents (local agents and out of area agents) seven times over…clearly, it is not your typical listing history.
Market Capitulation & Big Loss
It took the seller nearly four years on the market to finally reduce the price to $12,999,999 which is what they had paid in 2014. It took the seller another two and a half years to capitulate and sell at a $3 million loss.
The market is truly efficient, and property is only worth what a buyer is willing to pay for it.
If that $13 million was properly deployed into more predictable real estate investments, could that investment be worth close to $20 million today? Or, if the $13 million was invested in the S&P 500 it might be close to a double at $26 million.
Despite an eight-year holding period, a massive over-payment on the most expensive home in town can prove to be a horrible investment. If you are not careful and planning to be ultra-long term in the luxury home market, your hard earned dollars can turn into a bad investment.
So, what can we learn from all this?
- Real estate can hurt – you need to understand the market deeply. Never buy in a market you do not understand fully. Virtually every seasoned agent and long-time resident saw the potential risks of purchasing a property at this price point in Palos Verdes.
- Hire someone who has your best interests at heart. In this case, the buyer went directly to the listing agent and that was a big mistake. California law states that the listing agent is a representative to the seller first – their job was to get the highest price for the seller. In this case, the buyer paid dearly for not soliciting an attorney, an arms-length buyer’s agent, or another local vendor to help with valuation.
- Do not play games on the MLS. Buyers and agents are not dumb. It is clear to see the game playing, indecision, and mistakes the seller is making while listing. It only hurts a seller’s cause. Not to mention, keeping the listing on the market continuously, and slowly reducing the price to reasonable standards, over a long six years does more harm than good.
- You need to be willing to hold your real estate long term. In the event of unfortunate timing, a bad market/economy, or just a mistake on the acquisition price – the only true protection is holding over the long term. A property of this stature and price needs plans to hold for over a decade.
After an incredible run in prices over the last couple of years, and a market that might be normalizing, it is more important than ever to highlight that real estate is not always a profitable investment.
Proceed carefully, heed the points above, and work to make the best deal possible to mitigate your risks. Over the long term, things will work out just fine.
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