The valuation of land used for residential housing is mysterious and often misunderstood. The purpose of this post is to explain how residential land is valued. Once the forces governing land value are understood, it becomes obvious why the Irvine Company is so protective of house prices in Irvine, and why the Irvine Company wants to maximize salable density on its land holdings.
The equations which govern the valuations of large parcels are very similar those which determine the value of an individual lot; therefore, to better understand the valuation of large parcels, one should fully understand how to evaluate an individual lot.
Individual Lots
The market value of a individual lot is equal to the revenue it could generate minus the cost of creating that revenue. Sounds simple enough, but what is the potential revenue and what are the costs?
Sales revenue will largely be determined by what can be built on the lot and how much that house would sell for in the market. The dimensions of the lot, building codes, and the local zoning ordinances will all create constraints on what can be built. Most often there will be some variety in choices available to construct on a given lot. Each of these options will have a potential revenue and an estimated cost. The combination which yields the greatest profit is the product that should be built.
Imagine a 6,000 Square Foot lot that is 60′ wide by 100′ deep. A typical lot such as this would have a front setback of 20′, side setbacks of 5′, and a rear setback of 30′ leaving a 50′ wide by 50′ deep envelope for the house foundation. This site could comfortably accommodate a 2,000 SF house (some area is lost by not making the house a perfect rectangle.) For the sake of making the calculations easy, let’s say this house could sell for $1,000,000 (peak prices).
An individual speculator would be paying retail prices for house construction. This would be upwards of $150 SF. The cost of construction would be around $300,000 (2000 * 150 = $300,000.) There would be a 6% sales commission (1,000,000 * 0.06 = $60,000), plus financing costs, overhead costs, and other miscellaneous costs which will add up to about 10% of the project cost (1,000,000 * 0.1 = $100,000.)
Therefore, your revenue minus expenses would be $1,000,000 – $60,000 – $100,000 – $300,000 = $540,000. This is how much money would be available to pay for a lot at the breakeven point. Since a speculator would want to make a profit, the lot is discounted from $540,000 until an amount is reached to compensate for the risk and the headaches that go along with the project.
Perhaps the speculator would want to make $120,000 (approximately 12% of sales price) in order to do this work? If so, the speculator would be able to offer $420,000 ($540,000 – $120,000 = $420,000) for the lot. If they are the highest bidder, they get the lot, and the project is theirs. (BTW, this same basic calculation also works for tear-down projects — often called “scrapers.”)
Multiple Lots
Production homebuilders control the price of larger parcels with multiple lots because they can bid higher than individuals and still make a healthy profit (and they have the larger sums required to complete the purchase). They have a much lower construction cost than any individual because they are geared up for mass production. They have the buying power to squeeze costs down far lower than any individual working on their own or with a custom home builder. Production builders costs in today’s market average around $85 SF.
A note about the numbers: Part of the process when you sell a large parcel to a production homebuilder is to come to an agreement as to the costs to complete the infrastructure of the project. In order to facilitate this negotiation, both parties often turn to a neutral third party to establish costs. In Southern California, many cost estimates are handled by Developers Research. A real cost estimate is much more detailed than what I am presenting in this post, but the numbers are reflective of a typical situation. As for the builders cost structure, this comes from my experience from sitting on both sides of the table at different points in my career and another source whom unfortunately I can’t reveal because it would give away my identity.
So let’s look at how a production builder would analyze a 100-lot subdivision in which they believe they can sell homes for an average of $1,000,000 per unit.
$1,000,000 Sales Price
Fixed Costs
2,000 Average Square Footage
X
$85.00 Average Cost Per SF
===================================
$170,000 Average “Box” Cost
+
$40,000 Average Per lot Infrastructure Cost
===================================
$210,000 Total Average Fixed Construction Costs
Variable Costs
* 12% Profit
* 5% Marketing
* 3% Overhead
* 5% Finance
* 3% Other
===================================
28% Variable Costs Percentage
$280,000 Variable Costs Dollars
===================================
$490,000 Total Costs (Fixed Costs + Variable Costs)
$510,000 Land Residual (Finished Lot Value)
X
100 Number of Lots
===================================
$51,000,000 Finished Lot Land Value
The production builder can pay more for each lot because of their advantage in construction costs. Noticed the very large dollar amount builders were paying for finished lots during the peak of the bubble. Lately many of the builders have been taking “impairment” write-offs. Basically, they are admitting they over paid for land, and the asset on their books is not worth what they paid for it. Later in this post, we will examine the sensitivity of land price to changes in house price, and we will see why the homebuilders have been taking such huge hits to their balance sheets.
Land Price as a Residual Value
As you may have noted above, the value of a piece of land is whatever is “left over” after all the other costs of production are subtracted from revenue. This is a key point. If revenue increases — like in a bubble — the value of land increases; however, it revenue decreases — like after a bubble — the value of land decreases. If production costs increase, the value of land decreases, and visa versa.
The value of a piece of land used for residential housing is directly tied to the revenues and costs of production homebuilders.
Density and the Value of an Acre of Land
A builder is going to bid for the land based on the number of units. They don’t care if this is on a single acre or on a thousand acres: Builders pay for lots, not land. Therefore, if you are a seller of land — like the Irvine Company — you want to maximize salable density. In other words, you want to get the highest number of units per acre that you possibly can sell.
Once this point is understood, it becomes obvious why the Irvine Company is constantly trying to innovate with its high-density product, and why the density keeps increasing as they go along.
House Price and the Value of an Acre of Land
To fully understand why the Irvine Company is obsessed with maintaining high home prices, an understanding of how changes in home prices impact the value of land is required. Examine the above equation carefully, and notice that the variable costs are only 28% of the total.
This is another very important point: Land value is very sensitive to changes in house prices.
How sensitive? Let’s take a look at an example to which we can all relate: Irvine’s Woodbury.
Woodbury
Woodbury is one of the Irvine Companies newest communities. It is listed as 4,270 units. As this Village is constructed on a 1 mile square, it sits on 640 acres for a density of 6.67 dwelling units per acre (DU/AC).
Based on the equation above, we can estimate the total land value of the residential portion of the Woodbury Village:
$650,000 Sales Price
Fixed Costs
2,000 Average Square Footage
X
$85.00 Average Cost Per SF
===================================
$170,000 Average “Box” Cost
+
$40,000 Average Per lot Infrastructure Cost
===================================
$210,000 Average Fixed Construction Costs
Variable Costs
* 12% Profit
* 5% Marketing
* 3% Overhead
* 5% Finance
* 3% Other
===================================
28% Variable Costs Percentage
$182,000 Variable Costs Dollars
===================================
$392,000 Total Costs (Fixed Costs + Variable Costs)
$258,000 Land Residual (Finished Lot Value)
X
4,270 Number of Lots
===================================
$1,101,660,000 Finished Lot Land Value
$1.1 Billion dollars worth of land — that is Billion with a “B.” If the Irvine Company can build out this village for an average home sales price of $650,000, that is how much they stand to make (their land cost is almost zero).
Now lets look at another scenario: the housing bubble crash scenario:
$325,000 Sales Price (50% decline)
Fixed Costs
2,000 Average Square Footage
x
$85.00 Average Cost Per SF
===================================
$170,000 Average “Box” Cost
+
$40,000 Average Per lot Infrastructure Cost
===================================
$210,000 Average Fixed Construction Costs
Variable Costs
* 12% Profit
* 5% Marketing
* 3% Overhead
* 5% Finance
* 3% Other
===================================
28% Variable Costs Percentage
$91,000 Variable Costs Dollars
===================================
$301,000 Total Costs (Fixed Costs + Variable Costs)
$24,000 Land Residual (Finished Lot Value)
X
4270 Number of Lots
===================================
$102,480,000 Finished Lot Land Value
$102 Million dollars worth of land — That is million with an “M.”
Is that right? Does a 50% reduction in home prices really reduce the land value 90%?
Yes, it does.
Can you see why the Irvine Company is so protective of home prices?
Why is land value so sensitive to home prices?
As discussed previously, variable costs are only 28% of the home sales price. Remember, land value is a residual calculation, that means everything which isn’t a cost falls to land value.
Therefore, 72% of any increase or decrease in the price of a home flows directly to land value.
In essence, this makes land an extremely leveraged commodity. If the value of a house changes by $10,000, the value of the lot it sits on changes $7,200. Multiply that times the 6.67 units per acre, and you can see how each $10,000 change in the value of a house changes the value of an acre of land in Woodbury by $48,024. Since Woodbury sits on 640 acres, the total value of Woodbury changes by $30,735,360 for each $10,000 change in the sales price of a home. (If you want to see a really mind-blowing number compute this for all the land in the Irvine Company’s holdings.)
The Irvine Company will capitulate.
In the end, the Irvine Company will lose its battle to prop up the market. They don’t control the market, they only control the “ask.” Potential buyers determine the “bid.” If the bids don’t reach the ask, there is no sale (which is what is happening in Portola Springs.) If there are no sales, the Irvine Company has no revenue, and without revenue, they will cease to exist. They have more holding power than most organizations, which is why The Irvine Company has not been cutting prices and offering incentives like all the homebuilders, but the Irvine Company still must sell its holdings in order to survive. If they didn’t, they could just decide all houses in Irvine must sell for $10,000,000. In 300 years when those prices may be reasonable, they will start selling homes again. Do you see the absurdity of the Irvine Company holding to peak prices forever?
Conclusion
This is my world: I work for a company that develops raw land. The people who were actively investing in land development during the bubble made more money than you can possibly imagine. The extreme sensitivity of these investments to changes in home sales price resulted in properties obtaining sales multiples of 10 times or greater in just a few years.
As an example, I did some consulting work on a property in 2003 which was purchased by a land developer as raw, unentitled land for $2.4 million dollars cash. When they received their entitlements in 2005, they sold the land in three phases to a production builder for a total of $100 million dollars (4x for the entitlements and 10x for the bubble rally.)
If you thought the bubble rally was a good time to be a homeowner or a homebuilder, you were missing out on where the real action was: land development.
How does the Irvine Company get the land at no cost to them?
—–
Thanks for sharing your knowledge of this subject–although I’m well versed in real estate financing, your post helped me better understand the development side of things. I definitely appreciate the time you spend providing education and analysis.
Thank you for what is probably the most informative post I have ever read on a blog. It has cleared up a number of issues I had always wondered about. Could I impose on you? I would love to have your insight on a basic question; why are condominiums so expensive? By eye it seems that there is a 10%-25% premium in order to live in a condominium versus a house with a similar square footage.
I always assumed that resale condominiums should have a foolproof valuation: (depreciated building cost + land value) / total residential ft^2 * target unit ft^2. This formula is circular using your valuation since that depends on the value of the unit.
Is there a method of valuing condominiums from the fundamentals (other than rent equivalence)?
Cheers.
They bought a huge land holding 40 years ago. When you divide out their cost per acre of land (compute their basis), it is probably less than $2,000 per acre. When you compare this to the $1,721,343 per acre they would obtain in revenue at peak prices, their basis is insignificant.
“How does the Irvine Company get the land at no cost to them?”
They already own the land. Mr. Irvine stole it from the Indians
westwood,
Rent equivalence is the only method I would trust. All reliable valuations are based on cashflow, and the only cashflow from a condo is either rent savings (if you live there) or rental income.
You are correct that the formula you presented is circular. I would not use it.
Irvinerenter,
Thanks for a very informative post. One part that bothers me is your basis for the variable costs. Intuition would say that sales and marketing costs would increase as the price of a product increases but during the bubble was this necessarily true? The problem in you variable cost assumptions is that the marketing costs go down with the value of the house but I would counter that right now (although sales commissions should decrease as the percentage stays the same) marketing costs would actually increase as the competition for buyers increases. This seems like one more thing that would really hurt the typically levereged builder and why discounting is a better way to go then sitting on product.
You are probably correct.
The formula presented is how homebuilders try to evaluate their costs, but sometimes the market presents conditions which prevent them from sticking to their formulas.
During the rally, you didn’t need to spend much on marketing because houses sold themselves. I know builders who didn’t even bother with models during 2004.
Now, during the crash, they are giving away huge incentives and other “marketing” costs to keep sales going.
Rallies and crashes create unique circumstances which don’t neatly fit into a business sales plan.
IR, that is EXCELLENT! There’s a market for you to write books about this stuff.
I did visit Portola Springs on Friday, and was shocked by the courtyard, two-story, homes that are stacked right on top of each other. It’s unreasonable for the builders to expect people like me (family) to purchase one of these stacked boxes in the future. It’s simply not going to happen. These courtyard homes are going to eventually become the residences of DINK’s, singles, and retirees.
BTW, Portola Springs was a ghost town on Friday afternoon — no fancy cars parked in front of the models — no cars period. Opps, there was actually one car parked in the lot of each set of open models.
Sometimes you have to wonder if any amount of money is enough. Is there anything the second billion gets you that the first doesn’t?
The other casualties of TIC’s failure to come to terms with the market now are the schools and the HOA’s. IIRC, both buy land from TIC as well, and I suspect that both are charged square footage costs equal to that of the builders.
Now that I think about it, the homebuyer eats it three times. Once when they buy the home, once when they make their HOA payments, and once when they make their tax payments on the Mello-Roos bonds (that bought the land on which to construct the schools).
A great post, thank you IR.
An interesting question: just how desperate will the Irvine Company become? This boils down to a question of debt. If the Irvine Co has a lot of debt they will be anxious to sell land at any price. If they are unencumbered they can afford to be quite stubborn on land values.
When Donald Bren bough the Irvine Company it was a huge leveraged buyout, and the company had a ton of debt. Then the last real estate recession hit in the early 90’s and the Irvine Co was desperate for cash. Homeowners in Newport Beach on leased land suddenly had the opportunity to buy the land under their homes at fire sale prices so the Irvine Company could make their debt payments.
I doubt Donald Bren is in the same position today. After 10 years of printing cash, he is unlikely to be so encumbered (unless the Irvine Company has taken on debt to buy new land and developments – I hear rumors to this effect).
So, anyone know (or hazard a guess)? If they are largely debt-free, they can sit on the land for years. They can’t prop up the Irvine market forever, but they would be able to hold out for a mighty long time.
Currently the Irvine Company is owned by Mr. Donald Leroy Bren, one of the richest real estate moguls in the world. He is the ex-owner of Mission Viejo Company and bought complete ownership of Irvine Company over a series of acquisitions from 1977-1994 or 1996. His “cost” of acquiring Irvine is probably more than $2000/acre, but compared to current land prices it’s probably irrelevant.
Irvine condo prices are high, because the single family homes are too expensive. So if you can’t afford a SFR and want to buy, you go after the cheaper condos, which drives the market prices up.
Rather than those stupid courtyard homes, I think if they want to build high density, just go ahead and build 4 story tall apartment homes with elevators, 50-year land lease, and be done with it.
Bren’s cost is probably higher, but he most likely structured the purchase to keep the low tax basis. Either way, land cost is not an issue to the Irvine Company whereas for Lennar…
Top notch IR, bravo!
IrvineRenter,
One of your best post. Absolutely informative. I frequent the Irvine area and understand the power of the Irvine Company. Not many folks understand, aside from those in the area, how powerful this company really is.
You are right that they are extremely cognizant of land prices because of the multiplier effect on the way up (and down for that matter).
Keep up the great work.
Dr. Housing Bubble
My boyfriend and I were driving around one Sunday a few weeks ago and stopped by Portola for a peek. I had to use the facilities so I asked the greeter in the sales office (against my boyfriend’s protestations that I should just use the bathroom in the model) and he directed me, “Out the door and to the left.”
Confused, nonetheless I followed his instructions to arrive in front of an outdoor PORT-A-POTTY!
How can they attempt to sell multi-million dollar properties and ask their customers to use a port-a-potty? I would be horrified to tell a sales prospect to do that. I would understand if there were no structures standing and obviously no plumbing available yet. But in addition to the model homes there are already a couple of streets filled with homes there.
Needless to say we left immediately to find more civilized accomodations.
Not so many retirees due to mobility issues. I wonder what will happen when the boomers fail to move down to the 2 and 3 story configuration townhomes and condos that are proliferating. Besides the stairs issue, there is inadequate space for wheelchairs and walkers. It is so unfortunate because just a little foresight would have made a stacked townhome box senior friendly – 36″ doorways instead of 30″, wider kitchens and baths so that a wheelchair could turn, and connecting stacked closets between floors that could be removed so that an elevator could be installed. Hey, we’re all headed towards decreased mobility – I was on a flight yesterday that was delayed in the boarding process 15 minutes because 9 wheelchair assists were needed.
IR,
Excellent post, as always, but this one, like a strong pitbull, clearly bites hard on the butt of the real estate market and exposes the inner workings (entrails) of the land development world.
You have confirmed my long-held suspicion that the true cost basis of houses in Irvine is on the order of $200 – $250 per sq ft. If this is true, this factoid, taken in concert with your last post on a property (Choate Knife-catcher) breaching the $300/sq ft. barrier we may be close to approaching the magic $250 per sq ft. buying range that many of us are waiting for…
CT
Close, close… but not quite yet.
The cost of building is also tied directly to the final price. The higher the price, the more expensive the finishes and that’s has a huge impact on the cost per square foot.
Look at it this way, buyers looking into a 300K home will be happy with a 300 dollar stove, no crown moldings, cheaper rugs, etc.. Your basic Sears/Home Depot stuff.
The buyer of the $700K home will want a nice GE stove, a nice tile entry and Delta faucets.
The buyer of a 1MIL home will want 9 foot ceilings, Dacor or GE Monogram Stove, an ethernet switch in the master bedroom closet and Kohler fixtures.
The buyer of the 2MIL home will insist on granite counters, 12 foot ceilings, real wood cabinets, and faucets from a upscale brand. Think Pacific Sales now.
So. when you calculate the cost of building, the price of finishing the “box” goes way up too.
Oh… another thing, when the homes get more expensive, you gotta go for a two story layout. In fact the example you showed, in that 6000 sq foot lot, is just about the maximum because you gotta add a two car garage, which in Irvine requires about a 22 by 21 box.
The two story layouts suddenly shoot up in “box” cost because now you need a stronger slab, sturdier framing, earthquake design, etc…..
Last, in Irvine the typical front setback is 17 feet to the back of the curb, not 20.
IrvineRenter,
Excellent post. Thanks very much.
I’d like to ask you a few questions:
>> $40,000 Average Per lot Infrastructure Cost
In reality, is this the typical amount builders spent on infrastructure per lot ?
>> Variable Costs
>>
>> * 5% Marketing
>> * 3% Overhead
>> * 5% Finance
>> * 3% Other
The 5% for finance: is this the interest on construction loans ?
>> …sold the land in three phases to a production
>> builder for a total of $100 million dollars
>> (4x for the entitlements and 10x for the bubble rally.)
So, the entitlement costs also go up during a bubble ? Why ?
In your housing bubble crash scenario, the construction cost ($85 per sf)
stay constant. Wouldn’t construction cost go down ?
I always thought, given the same square footage (i.e. 2500 sq ft), it costs less to build a 2 story house than a single story. That’s b/c the foundation of a 2 story house is smaller & the roof is smaller. Does anyone know the correct answer ?
Nice! This is why I’m slowly saving, to finally invest when the market slows down. It is not an immediate profit, but given a little bit of time (5-7 years), the payout is WELL worth it. It just takes time, patience and planning. The 3 things most people DETEST.
anyway take it easy and don’t work too hard.
-bix
CT,
In reality, you “should” know this before you buy a house. Lots of people try to keep it secret, but its not really that secret. For me, when I redo or completely tear down a house, this is the cost I go looking for/try to build to (200-250/MAX 275 PSqFt.). Otherwise the plan ends up being a loser. I’m just waiting like the rest right now, but really once the cost get close to the fundmental value, i’ll be in the buying market just like everybody else.
-bix
The second story requires a much stronger frame and puts a lot more stress/force on the foundation. Also, you have to do a lot more mechanical design (OK, this may be a small non recurring cost for the volume builder but it’s costly for the individual).
You may use less materials on the perimeter and less roofing materials but you have to create a much stiffer structure. In my house, when we went to a second story we had to reinforce a lot of stuff, put in 6″ load bearing walls (not your typical 4″), add shear walls and then the cost to paint and finish the outside goes up because of liability.
Given the same 2500 sq feet, you wouldn’t want to go 2nd story unless you had to.
By and by, going to a second floor increases your labor cost as well. A crew can go very fast on a single story house, but on a second level they have to go and down….
Anecdotically, my builder was not happy at all about our decision to put an over sized cast iron Kohler tub in my upstairs bathroom… it took five people to bring it up and around the winding stairs.
The per lot infrastructure costs can vary quite a bit depending on site conditions, but the $40K per lot is a good representative figure.
Yes, the finance charges would be for construction loans and any other debt held on the property.
Entitlements are a whole separate issue from the bubble. Because obtaining entitlements is costly and by no means certain, there is a significant bump in value from unentitled to entitled land. This typically results in a 4x multiplier. Most land developers do their work only anticipating this 4x multiplier. Get a bubble and get a 10x multiplier on top of that, and you are making some major money.
Great article again. Thanks for posting it. A good view into the other side rarely mentioned.
It’s still happening in my city. We have Lennar still trying to buddy up to the locals and sell and monstrosity. They are getting desperate and are willing to pay anything just to sell their development.
It’s sad and pathetic local elected officials are playing into it.
Greeds knows no bound.
tonye,
You are correct, I was trying to keep the example simple, so I didn’t want to get into the details of how cost per square foot can vary.
Small units have higher costs than large units; opulent finishes drive up costs; builders generally don’t landscape the back yard because you only add 50% of cost in value, etc. There are a myriad of factors which can impact the cost per square foot.
I have never developed or built in Irvine, so I don’t know what their standards are. Twenty feet is a typical setback because it leaves you room to park the car without blocking the sidewalk. Setbacks also vary depending on where they draw the edge of Right-Of-Way. If the ROW is at the edge of the sidewalk, 20′ is the norm. If the ROW includes a few feet of greenspace for utility easements, the setback can be reduced.
This is true.
Irvinerenter,
You are dead-on! This is the reason new development in townhomes is seeing three story buildings to keep the costs down, provide more SF in homes over less land. Someone metioned about two story being more expensive than single story, they are wrong. Foundation, exploration, slab on grade, etc. isnt cheap. Its always cheaper to keep smaller footprint and go vertical up.
The replacement coverage for a typical homeowner insurance policy is generally about 15 percent less per sqft for a two-story home vs. a single-story. In other words, the insurance companies estimate that it cost about 15 percent more to replace a single story home of the same size.
LOL. How accurate.
I think that in OC, people detest saving the most 🙂
Great article! I hope that the lack of buyers and the pressure from builders will reduce land prices and thus home prices for upcoming developments. An agent at Columbus Square said that the prices at Woodbury east vs. Woodbury was reduced over 30%, not sure if that’s true or not, or due to less desireable land lots, but let’s hope its an awakening from TIC and a continuing downward trend…
In all deference to IrvineRenter, I’m afraid that is not wholly correct. Suffice it to say that I know exactly how they got the bulk of their property, and it wasn’t through purchase.
The Irvine Family basically had the land handed down through the years from an original Spanish land grant. The US government recognized these land grants and several of the original land-holding families retained their ownership. Familiar names, such as Avery, O’Neill, Moiso and Irvine dominated what is now Southern OC.
Different families did different things. The O’Neills, Averys and Moisos contributed a lot of their land to what is now Rancho Santa Margarita Comany. The Rancho Santa Margarita Company, in turn, became a 50% partner in Rancho Santa Margarita Joint Venture with the other 50% being a large insurance company. The insurance company provided the cash and RSMC provided the land.
The Irvines contributed most of their land into what is now the Irvine Company. The reason is simple. The Irvine family was concerned that, as the land was passed down through the generations or sold to raise cash, it would be broken into increasingly smaller parts. Also, there would cease to be “one voice” which spoke on behalf of the family. Imagine six great grandchilden all fighting (and maybe competitively lowering their prices) to sell several acres of land on which to build houses. Nobody wanted that. So by contibuting the land in exchange for shares of the Company, the land would have one owner who would pretty much have a monopoly on the land. And the shareholders could sell or distribute their shares without breaking up the land itself. So, over the generations, the shares of the company were diluted but the land stayed within one unit (the Irvine Company).
That, in summary, is how the Irvine Company got most of it’s land and, yes, most of it has a cost of zero.
Actually, a certain number of units in each condo must be made accessible, or reasonably easy to to modify. If you buy your home before they frame, you can ask about “universal design.” I believe that you will find such a brochure in the sales office of each new home development in Irvine.
I know that in my 8-pack, built circa 2002, one is ground floor only. From there, it’s mostly a matter of widening some of the doorways and lowering the thermostat and light switches.
Look at the Paloma Plan One. It’s basic bones are accessible, and if you look at the Plan One that serves as the sales office, it already has the wider doorways and accessible bathroom built in.
Thank you for the history of the Ranch.
Wasn’t IR refering to the cost to Donald Bren? Didn’t he have to purchase TIC from the Irvine family?
Can someone please help explain the *vast* difference in true cost basis of property values between Irvine and the rest of the country?
As an example, see this from ZipRealty:
http://tinyurl.com/ywtm42
What might be the true cost basis of this property, vs. your favorite sh*tbox townhome/condo/SFR property “valued” at over $700k or more in Irvine?
Thanks for any input…
Thanks for the interesting history.
IR was definitely referring to Mr. Bren. Who with partners bought out Irvine Co. for $337 million 1977.
The original post was “How does the Irvine Company get the land at no cost to them?” so that is the query to which I replied. As to Mr. Bren’s cost of the corporate asset and the manner in which it was financed, that I have no idea.
I think I could buy that, and let the mother-in-law move in and pay part of the mortgage, and she can live in a part of the house where I’d never have to see her! Of course, I probably couldn’t find a job in Texas making as much as I’m making now. I have a hunch that the price of houses has a lot to do with the typical salaries in an area. (or vice-versa?)
I get the price difference vs. salaries, and differences in local demand. What I am still not understanding is that this house in the link is over 4000 sq ft, and is priced at $500k. That is $125 per sq ft!
How does one back into a “cost basis” for this house (i.e. in light of builder’s cost discussed in this post, and the arguments above on two story contsructions costs being higher etc.)?
You would probably be surprised at how little the difference really is in salaries between the two areas. Most of the reason Southern California’s real estate is so expensive is because people here took out neg am loans in large numbers and bid up prices. The fundamentals of income and rents doesn’t account for the dramatic difference.
Actually, I am rather surprised Texas didn’t participate in this bubble they way they did in the commercial bubble of the 80’s. Both Texas and California went crazy in the S&L fiasco. For some reason, Texas did not participate in this bubble like California did. It would probably be an interesting topic of research…
Thanks for that information. I have knowledge of the accessibility requirements in the Bay Area, but didn’t know what was required in Irvine. My posting is more of a general commentary because many areas don’t require accessibility. And, it would be so easy to make every townhome accessible by conversion by always requiring wider doors etc and by careful placement of closets so that an elevator can be installed. After all, who wants to move in case of being rendered disabled?
The cost of construction is probably lower in Texas. I would guess closer to $75 / SF.
Even at the $125 / SF in Texas, you can still make a profit if the land is very, very cheap.
No big matter guys. The main point is that the Irvine Company has a very, very low basis in the land which makes almost all of their revenue profit.
http://www.irvineranchhistory.com/
I received this link from a reader. Apparently Texas may have some regulations in place which help prevent a bubble there.
http://www.occc.state.tx.us/pages/brochures/home_equity_lending.html
Not that it matters, but for those interested.
Per irvineranchhistory.com:
Irvine Buys Out Partners
“The year 1876 was the beginning of an historic drought that practically destroyed the grazing capability of Rancho San Joaquin. The rancho’s losses undoubtedly were substantial. Despite the drought, Irvine loved the land and he loved Rancho San Joaquin. In September 1876, he bought out his three business partners – for $150,000 – and took over the ranch operations.”
You skipped the important part. There was a tax law change in the 70’s that required the non-profit foundation that held most (all?) of The Irvine Company stock to sell it. That’s the point at which Bren and friends picked up TIC. From there it went public, and then Bren took it private again.
You can have a home built in Texas for about $100 per sq. ft. not including the cost of land.
IR, Great post! What a treat to see this post after coming back from my long vacation. Cost of land in Irvine is somewhere between 4.2- 4.8 million dollars per acre.
In order to justify this purchase price of the land there got to be 20,000 sf of saleable footage per acre. The 60’x100’ example you provided yields only 5.5 dwelling units per acre when the 57’ public right away (sidewalk, parkway and street) is added to the equation. 20,000 sf / 5.5 du/ac = 3,636 sf per lot. Your 2,000sf illustration on a 60×100 lot is unrealistic in Irvine but I understood your point is to keep the calculation simple. In order to justify the 3,636 sf would mean an imposing McMansion would be built on this lot which is much bulkier than IR’s nice 2,000 sf illustration. Juliet Balcony in Woodbury is a good example matching this lot size and its realistic footages.
The setbacks would also be compromised. Instead of a 20’ front yard setback it would be 18’ (Driveway depth per City of Irvine Standard) to the face of the garage door while the remaining front façade could come forward over the front yard to a 12’ setback. Rear yard is about 15’-20’ and some part of rear with a room may even protrude into the rear yard. 30’ of rear yard does not exist in today’s land equation. Cantilevering the second floor across the front and rear is common to capturing additional footage.
In this scenario there are 5.5 garages (21’x21’=441 sf per garage) and their driveways (18’x20’=360sf per house) is unaccounted for in the 20,000 saleable sf per acre. Selling price only reflect the habitable area and not garages.
Higher density like Decada (4-pack detached condo) at 10 units per acre would also need to satisfy this 20,000 sf/acre equation as well. The average size for each home should be 20,000sf / 10 unit = 2,000 sf. Decada did not achieve the goal with just 1,640 sf average. Land is penalized for building additional garages, more side yards between houses and longer roads to get to the garages and front doors. As a result, in order to make up for the lost 360 sf per home the value ratio selling price has to be raised.
This formula should answer why the denser the project the costlier the price per sq. ft. Luxuries like driveways and backyards are traded away for house separations and access roads.
Sienna will soon replace Decada with more average sellable footage per home at 1,850 sf.
Actually, the best way to understand TIC and housing prices in Irvine is to go down to the local Target store, pick up a Parker Brothers game call Monopoly and proceed to play by giving all the property rights to one player.
Hey, the less other people are into saving, the more you are rewarded for it. A rough philosophy, I know, but a true one.
Bk, maybe you can shed a little light on this question. Why no basements in this area? (Okay, VOC has like 6 houses that have them). Wouldn’t basements be a great way to use that cubic footprint of the land all that much better? It must be a cost thing. . . I’d kill for a cool basement with this hot weather!
Homes in SoCal are built on a slab. Why? I guess that’s tradition.
Besides, a single story home on a slab is pretty good at handling quakes. Even a two story on a slab can handle a quake quite well.
If you bring a basement into place, now you have vertical foundations -as opposed to horizontal slabs- that are very susceptible to shaking the walls on a quake.
We don’t have tornadoes, hence no need to hide. We just got The Big One.
But, stuff like a Viking range, crown molding, granite, etc… is cheaper in SoCal because of the sheer volume and concentration of the market.
Sure, you might be able to build for 100 bucks a square foot, but:
(a) how big is the house to achieve that cost ( amortized the Viking over a lot of hallways)
(b) what is the quality of a house built for 100 bucks? EG: are you putting a 100 amp panel with 15A romex or are you going for a 300amp panel with multiple homeruns of 30A romex.
I seriously doubt you can build a high quality home with plenty of amperage, built in networking, a dual sink very high quality kitchen, plenty of bathrooms with very good quality fixtures, etc.. for 100 bucks a sq. foot.
The cost of the parts will run over.
Or, you may be building a 5000 sq foot, 5 bd, 4 ba, home with a lot of empty space.
As IR noted, the larger the home, the cheaper it gets per sq. foot… all other things being equal.
Huh? Where did you see that?
Second story homes are more likely to be damaged by a quake. My quake insurance went up significantly -per square foot- after our 2nd floor construction.
If only Don Juan Sepulveda had not been such a gambler.. he night have kept his ranch and his ranch house by El Pantago de las Ranas ( Where the old Ford Road used to be) and today this would be known as Rancho Sepulveda.
Alas, he was a true “Don”.. glamber, drinker, womanizer and rich. He sold his NB/Irvine holdings and kept his land up in LA County.
Somehow, I think Don Juan Sepulveda was a lot more fun to be around than old Irvine Senior.
I’ve heard the reason why there are no basements is because of a safety reason due to earthquakes. I could be wrong but it makes sense to me.
Don’t forget Joan Irvine Smith sued Bren for more money because she felt screwed over. If you search the Register archives it seemed to go on forever. IIRC is was about four years ago that they settled out of court.
Land excavation, seismic foundation retaining walls, moisture penetration that cause mold are the major liability factor why home builders do not offer this type of solution. No one would pay $700 per sq.ft. for a basement when a third floor attic option are going for around $280 per sq.ft. at Campanile. Taylor Woodrow’s Watermark in Crystal Cove 7 years ago offered a 400sf. wine cellar basement for $300,000.
All concrete slabs are post tensioned slab today and having a hole in the ground severely complicate the continuity of the steel tendons embedded in the slab.
Most basements in the East Coast were built during the 1800’s due to warmer insulation attained in the ground during the cold winters. Mid West during the 40’s basement were built during the time of the Cold War as bomb shelters.
The nostalgic memories of the basement and Grand Ma’s attic are the list of things to be desired but the long term liability limits and tempers the imagination of the builders.
Um… been there, temporarily. And having the unit above the accessible one was unfortunate, but we worked it out.
Interestingly, we looked at some new condos in Yorba Linda for fun (a Shea development in Vista Del Verde – Foxfield?). It was on a golf course and was aimed at seniors. One of the second story only plans had the option of an elevator. It really gave us pause, as we expect the temporary accessibility problem to arise in the future at least once. Now we look at SFRs with a full bed and bath downstairs (if not a downstairs master).
I believe that the ADA, as well as the Calif. Building Code, require that a certain number of units in condo complexes be made accessible (not sure of SFR requirements). Frankly, even if you didn’t know they were accessible, I would still prefer them, as it feels like you have more room and the plans tend to be more open.
BK – Glad to see you back. You were missed!
Option One scraps popular subprime 2/28 loan
http://mortgage.freedomblogging.com/2007/07/16/option-one-scraps-popular-subprime-228-loan/
IR, you seemed like a real pro, and now you’ve confirmed it. Thanks for sharing your knowledge here, and providing a forum for a civilized and intelligent exchange.
>>Taylor Woodrow’s Watermark in Crystal Cove 7 years ago offered a 400sf. wine cellar basement for $300,000.
See, that’s a concept I could get behind, but not at that price.
Hmmmm, If I only buy 2 buck chuck…..how long before this equation works out ? Now that’s a LOT of drinking ! Paper cups for everyone !
IR, best post yet. Very informative.
Regarding salary, Texas actually have higher salary for engineers than LA. Apparently, it is very difficult to get engineers to move to Texas as many young engineers now days are foreign born/foreign students, and they usually don’t feel comfortable in a so called red-neck state. When I graduated from USC, I got three offers, one in DC for 150k+, one in LA for 110k+, and one in
Texas for 140k+. DC is high due to high clearance requirement so I will discount that one. The 110K and 140k are both for commercial companies. I don’t know the salary difference for other industries, but I think the general trend should hold
I do insurance.
Your insurance coverage (Dwelling – Coverage A), probably increased because you added additional sq. footage to the home.
The ins. co.’s look at a lot of factors when determining the cost to rebuild a dwelling, but two-story homes are typically about 15% less.
Your quake insurance is actually a state sponsored pool called the California Earthquake Authority, or CEA, and the rates are subject to state bureaucrats with PHd’s in Mathematics, not the insurance co.s. This system came about after the Northridge EQ.
Lee,
Can you please elaborate on why it costs less to build a 2-story house ?
Thanks.
IrvineRenter,
>> For some reason, Texas did not participate in this
>> bubble like California did.
The main reason is this:
In Texas, the state income tax is collected differently. For example, in CA, the state income tax is deducted from your paycheck. Not so in Texas.
In Texas, income tax is included with the real estate property tax (hence, the high property tax rate). This has the effect of discouraging speculation. If you speculate, you endup paying a lot of “income tax”.
tourbillon,
I was offered a nice relocation package to San Antonio previously. But after visiting the place several times, I decided that if there were 500 kinds of snakes in the country, 499 must live there. I took a stroll through the office gardens at lunch with my coworkers yelling at me to get back inside, it had not occurred to me that the “insect noise” was actually rattlesnakes.
On the plus side, for about $250k cash you can buy a shiny new SFR there close to the office. Plus, you get to telecommute whenever the roads ice over in the morning. When it rains really hard, I’ve been told that some houses float down the street.
The only thing I miss is Rudy’s BBQ. But I got their BBQ sauce bottle here and it makes up for it, somewhat.
As for Texas real estate, I’ve had several relatives who lived in Texas, and every one of them lost money when they sold their home. My extended family as a whole has a very negative perception of Texas real estate. My own unscientific opinion, is that you can buy when they elect a Texan President, but you should sell before the Texan leaves office.
“Can you please elaborate on why it costs less to build a 2-story house?”
GN, I can’t. I am not involved in determining how the ins. co.’s create the formula to estimate replacement of a dwelling.
When a potential client calls me for a homeowner insurance quote, I ask them a series of questions, then plug the answers into a program provided by the ins co, which automatically estimates a cost to replace the dwelling. I do not no how they weigh each factor.
Here’s what I do know; there are many factors that determine the amount of dwelling coverage necessary, or the cost per sq foot.
When Tonye’s avg cost per square foot increased when she added a second floor, it may have been a result of custom features. For instance, crown molding, large windows, french doors, wool carpet, wood or tile floors and the list goes on. Also, bathrooms cost a lot. Tonye may have gone from a 2 bath to a 4 bath, and that would also increase the dwelling coverage on a sq ft basis. Or, what type of roof did she replace? Did she go from composite to clay tile? All these factors are used by the ins co’s.
There are other, larger factors too, for instance if the garage is built in, meaning there is living space on top of the garage. A built in 2 car garage for typical two-story home is generally about 20 thousand dollars less in dwelling coverage than an attached garage with no living space above it.
momopi,
>> … you can buy when they elect a Texan President,
>> but you should sell before the Texan leaves office
That’s funny. 🙂 Seriously, why do you feel this way ?
What industry do you work in and what degree do you hold? Those seem like rather high salaries for someone straight out of school.
The Irvine Company would like to thank Paris Hilton for stopping by, sorry the portapotty didnt meet your standards
Best…Post…Everrr…
SCHB
“She”? Hmm…. my wife is in for a huge surprise. “Toni” is the female form of “Tony”….. surely you must know that…. are you trying to goad me?
Anyhow.
We didn’t build over the garage, but we had to rebuild the downstairs areas that got built over…. heck, pretty much we rebuilt the whole house with three different permits and contracts. The cost per square foot to build the single story parts was less than the second story (ignoring the kitchen).
And we used the same grade of construction, parts and and finishes everywhere. That’s why I said the 2nd story part was more expensive (per square foot) than the single story parts.
In fact, buildling a first floor bathroom and kitchen is more expensive since the rough plumbing has to go in before the slab.
OTOH, the structural bracing for a second story tub and cathedral ceilings is quite high.
I’m sorry for assuming you were female. When I read your name, Tonye, I figured it was unique spelling, not Tony E.
As far as your home rebuild goes, maybe the insurance co.’s have it wrong and need to correct their formula. I don’t know … I just posted what I see at the office.
It’s TR….. and it’s a custom home…. the comps are all over the map when it comes to custom homes in a tract.
Until enough rebuilt homes come on he market to make a reasonable baseline, the insurance and RE folks go by guess.
BTW- we’re seeing lots of 2nd stories going up in the Broadmoor. Pretty much anyone who’s being here longer than 6 years has enough equity to build out… even if you went for a 40% decline on your basic home.
momopi,
Even the comments about Texas are big,
Roads ice up maybe 5 days a year and they are clear by afternoon.
Heavy rain, yep this year is heavy, but a house floating happens about as often as a California house falling off a cliff after a heavy rain. Its rare.
Snakes, yep Texas has them. But guess what…California does too. I use to catch them in Fullerton when I was a kid and there was still places that had dirt fields instead of concrete. The snakes just haven’t been crowded out yet.
You usually will not make money off a house in Texas because there is so much land available. Put it this way, it is not unheard of to buy over 200 acers of land less than an hour drive from Dallas.
Property taxes, Texas is about 3% total, income tax is 0, nada, nothing. California property tax, 1.2%, income tax, 9 friking %.
Salaries, you would be amazed. Everyone loves to say California pays better but its just not true.
Now if you want to talk humidity…I am with you 100%, which is what the humidity is like during the worst of the summer. Just thinking of going outside starts a sweat.
Infrastructure cost is higher for the stuff under the street if the City/Public Utility is involved under a CFD arrangement (Communittee Facilities District) This stipulates that prevailing wages (Union) labor must do the work.
A caviate must be stated that Irvine Company is unique in So Cal because they develope land they already own. If the market goes south they can let it sit there and rot. The money they made will get them through to the next up cycle. They also get to dictate terms to the home builders and they have a long memory, if a home builder commits the ultimate treason against TIC and slash prices, they can forget about getting an invite to build when the good times come back.
The rest of the tract developers have to go out and buy vacant farmland. This is where the really sillyness has gone on in So Cal.
I recently finished some CFD work in Dairy land off the 15 FWY. The dairyman recounted to me how his grandfather “bought the land at five fity an acre.” I asked “thousands or hundreds?” NO came the reply, $5.50!
His brother recently sold for just shy of 1 million an acre.
This land developer now has vast acerages of pads raising a bumper crop of tumble weeds. The streets are cut below finish grade and miles of storm drain pipe stand like felled tree trunks. Even the most obtuse homebuilder can figure out that no amount of guilding will make the numbers work for this pig of a deal.
That is the funny thing about land residual value. Everyone else in So Cal has to determine that number before they even start. When sale prices are flying up you could overpay by a huge margin and still get away with a profit. Not anymore.
Not all slabs are post tensioned. The gagrage is always done but, the cheaper the home, the less likely it is that will be done. Look for a stencil or plate in the garage slab. “DO NOT DRILL OR CUT”
I had a guy walk up to me while I was installing a storm drain and asked if he could pay me to take one of my 6 foot diameter concrete pipes and lay it in his garage as a wine cellar.
In the back of my mind I had a twinkle of curiosity that I needed to see this thing through, so I told him I needed to see if my loader could manage to get it in.
I didn’t think for a second that he had already started making the hole. He seemed to be talking the talk of a seasoned handyman.
But sure enough he opens the garage door and I see a roughed out circle of broken concrete. I asked him if he heard any sharp, loud “BANG” type noises while he was hammering away. He said he paid some guy putting up stucco down the street to do it during his lunch break.
There were torch marks on the tension bars. I saw no blood stains, so I assumed that the stucco man melted them to failure or was just plain lucky.
I did a quick tour of the inside of the garage and asked him to read out loud what I was pointing to on the slab.
The look on his face when I explained the purpose of the stencil was truly priceless.
I told him to find the stucco man, because he owed him some free stucco work when it falls off the garage.
IR,
This is quite possibly the most comprehensive, most well researched and best posts I have read in awhile…and I’m in the blogging and social media industry (organize industry conferences related to). Even the commentary shows the intelligence of your community and you have elevated yourself several notches in my opinion in terms of qualifying yourself as an expert on these topics.
Congratulations and Kudos!
Joe
RE: BASEMENTS Suzanne’sEx has it right. In colder climates you have to dig below the freeze line. So you might just as well go down a few more feet and make a basement out of it.
Digging a basement is FAR more expensive than just putting slab-on-grade. Therefore – if you don’t have to…..why bother?
And for the last time – it’s NOT about earthquakes!!
(Surprised that IR, he of the Upper Midwest, did not weigh in on this earlier).
In the article Land Value 101 the total number of lots per acre is determined by dividing the square footage of each lot size into the square footage of an acre. As an example, if the average lot size was 50 feet by 100 feet this would produce a lot size of 5000 sq ft. Divide the total number of sq. ft. in an acre (43,560) by 5,000 and you should get 8.712 lots per acre. This is clear enough. But taking into consideration that there is always going to be public space on any given parcel of land (streets, sidewalks, etc….) By what percentage do you reduce the theoretical 8.712 lots?
Am I correct in believing that for purposes of finding the true residual land value you must calculate using the “real” number of lots the property can produce, and not the theoretical?
The calculations used here were based on the total unit count divided by the acreage, so it does take into account the streets and other public spaces.
If you want a useful, quick measurement for calculating the number of dwelling units you can realistically obtain on an acre of land, divide the average lot size into the number 30,000. This quick and dirty calculation accounts for the 25% to 30% of the land which is lost.
The only way to get more accurate than that is to actually lay out the subdivision.