Selling Too Soon

Suppose we get a building permit on Calle Fortuna.  What we bought on January 4th is not the same.  It’ll be worth more, because we will have a permit to build a 5,685 s.f. house on that site.

Is there any demand for 5,685 s.f. houses?

Well, I can tell you that 12 of them sold in the past 12 months.

How many are available today on the MLS?


So is there demand?  Will ours sell?

I don’t know.

I know that the value of anything depends on four things and the acronym is DUST

D – Demand
U – Utility
S – Scarcity
T – Transferability

Whereas land in Riverside County is in abundance, land located one block from the bluff is scarce and getting scarcer.  If you want a desirable location, you have to choose from what’s available and your options are scarce and growing more scarce, so we have a monopoly on 6,000 square feet homes, located one block from Pines Park and one block from the bluff.

Is there an ocean view from the property?

One can see the ocean from the existing property, but we intend to tear down the existing structure and build a new one, with ceilings on the first floor of ten feet and ceilings on the second floor of nine feet, because we want the best ocean view possible and so we are attempting to use up all of the 28 feet of height we are allowed.

Will you have an ocean view or not?

We think so.  It won’t be an unobstructed view, because there is a huge palm tree blocking part of the view and some houses between ours and the ocean, which obstruct the view, as well, but there is certainly a ‘peek-a-boo’ ocean view and I’m sure one will see part of the water.  On hot days, they’re going to feel the cool ocean, breeze as well.

Is the location desirable?

Very much!

Are there many choices for a buyer?

There are many properties for sale with an ocean view, but if you want a 5,685 s.f. home, you have none available at present.  That could change in a day.  Wealthy people are buying in Capistrano Beach and prices of $2 million are not uncommon.  The trend is toward much larger homes and a home of 5,685 s.f. is not bizarre.  Within a short distance, you’ll find several homes of 10,000 s.f. or so.  Some people may not want to live on the bluff, where most of the larger homes are located, because there is fear that the bluff will erode in time.  If you drive Beach Road, you can look up at the bluff and see the erosion that’s taking place.  I wouldn’t want to live there.  One home has a swimming pool and some of the earth beneath it has been washed away.  There is nothing anyone can do to replace that earth.  One day, that pool will come down.  It’s not a matter of ‘if it will happen’, it’s only a matter of ‘when’.  The reason there is a bluff, in the first place is because of erosion.  Uplifting of the techtonic plates caused the bluff and the sea eroded the shore.  Rain will contribute to the erosion each year and the bluff is a temporary pleasure.  For long-term ownership, I’d rather be a distance from the bluff.  If you pay $10 million for a property on the bluff and it falls into the ocean, how much do you get back?

Everyone should think about risk, when they buy a home.  There are social, political and economic risks.  There is also the risk of one’s life and the lives of loved ones, to consider.  Have you ever heard of homes tumbling down the hillside?  I’ve been here for 25 years and every year,  during the rainy season, there are news reports of homes sliding down the hill, from Malibu to Mexico.  It happens consistently and mother nature is much more powerful than any real estate developer.  Yes, even Donald Trump!  Donald Trump is doing a project in Palos Verdes and he might learn a few things about Portugese Bend, the sliding earth there and the geology that was taking place, long before he was ever an entity.

Those who live on the bluff are having fun!  Today!  Our house is not on the bluff.  Today!  Maybe one day, it will be.  That would be a good time to sell it.  There may be another time to sell and I’ve marked off two of them on the following chart…..

We can get a permit and thereby increase the value of our Calle Fortuna property, take our profit and leave enough on the table to make someone want our position or we can stay in for the long haul and build it out.  If we sell when construction is completed, we might get $475 per square foot.  That would be comensurate with comps located as near as one block from our property.  A new home of 4,030 s.f. sold for $1.925 million a month ago.  That’s more than $477 per square foot.  If ours was worth as much, it might sell for $2.8 million and our cost to construct is estimated at $1.8 million or $153 per square foot.  That’s $1 million profit, but if we split that with a builder or a homeowner who wants a 5,685 s.f. home but can’t find one and wants to walk into an equity of $500,000 then we might be able to sell it for a nice profit.

Split with the investor and he earns about $250,000 on an investment of $200,000 in about six months.  So he has $450,000 where he had only $200,000 about six months ago.  He turns $200,000 into over $1 million in a year! That’s an annual growth rate of 406% with compounding.   We are allowed to compound, because one can certainly reinvest $450,000 in the second six months, can’t he?  That’s why I think it makes perfect sense for us to sell, after permits, take profit and give the investor a nice yield.  It make good sense for a builder to buy from us and build or for a homeowner to take over our position and build his family’s dream home.  Who wouldn’t want to walk into an equity of $500,000?  If coastal land remains in scarcity, the home could appreciate in the next year, maybe 10% or so.  That’s about $25,000 per month and the payments are only about $10,000 per month, so whoever buys this house just might enjoy the benefits of seeing his money grow, while he lives in luxury, near the beach.  It makes a lot of sense to buy and a lot of sense for us to sell.

Assume that it take six months to make $200,000  grow to $450,000.  In five years, the original investment grows, theoretically, to $665 million and in just seven years, one can save Social Security, singlehandedly!

Now look at the benefits to us.  We have the orthodox Jewish community of New York interested in backing us.  All we have to do is prove that we know how to make money in real estate.  I have 20 years experience and some ideas, however revolutionary, however controversial.  I’m willing to debate anyone.  The worst I can do is stand corrected by someone’s greater experience or knowledge.  If I’m right and we have a monopoly on homes for sale in Capistrano Beach, larger than 5,000 s.f., then our 6,000 s.f. home, located one block from the bluff has value and that value is increasing with demand for the scarce land in the vicinity.  The population is growing, in California, everyone wants the beach property and the supply is shrinking.  So, I predict that our beautiful new home will find a number of prospective buyers and we could get a very high price for it, since there is nothing for sale that comes close to it.