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Market Analysis for Covenant Hills Custom Homesites

Very few neighborhoods in South Orange County can rival the custom home community of Covenant Hills for prestige, location and amenities.  Yet, sales of custom lots were crushed during the recession as owners abandoned their plans of custom homebuilding or saw their properties foreclosed on by banks.  For years, the custom neighborhood of Covenant Hills has sat dormant and half-finished.  Finally, we are seeing signs of life.  We have previously reported on the sale of 28 custom homesites to Warmington Homes for its Legacy Collection tract.  Now, we are starting to see signs of life in the custom homesite resale market.  Are lot sales from DMB Ladera on the horizon?

The market for custom homesites in Ladera’s gated Covenant Hills community has come alive this summer.  During the fourth quarter of 2011, not a single custom homesite was sold.  During the first half of 2012, only two homesites were sold (19 Broken Arrow and 90 Bell Pasture).  In the last 30 days, five custom homesites have closed escrow through the MLS.  It appears that buyers are comfortable that the market for these properties has hit bottom.  Sales during the last 30 days include:

  • 2 San Juan Bautista / July 25, 2012 / $483,000 / 22,376 sq ft / $21.59 per sq ft
  • 15 Columnar / July 20, 2012 / $365,000 / 15,206 sq ft / $24.00 per sq ft
  • 17 Columnar / July 19, 2012 / $430,000 / 14,876 sq ft / $28.91 per sq ft
  • 11 Columnar / June 27, 2012 / $350,000 / 13,267 sq ft / $26.38 per sq ft
  • 8 Franciscan / June 14, 2012 / $468,000 / 12,826 sq ft / $36.49 per sq ft

It goes without saying that any conclusions drawn from such a small sample size would be unreliable.  Further, each property is unique – unique views, location and configuration.  For example, Franciscan is a coveted “front row” location that looks out over Ladera protected open space.  The sellers’ circumstances are also unique and can distort the sales price.  For example, the San Juan Bautista property was listed on the MLS as a short sale, and at least two of the properties above were believed to be bank-owned foreclosures.  Finally, some properties may have included approved plans, saving the buyers both time and money.  Note also that our data are from the MLS and we believe it to be correct, but there may be inaccuracies.  Also, lots sold by the developer may not be included, although we are unaware of any developer-owned lots selling during the applicable time periods.

Photo courtesy of the CRMLS

Nevertheless, some interesting patterns emerge from the data.  First, custom homesites in Covenant Hills are selling for an average of $27.47 per square foot.  In fact, if you include all 15 properties that have sold in the last two years, the average sales price is $26.30 per square foot.  If you throw out the high and low outliers, the range during that two year period has been a low of $21.18 and a high of $36.49 with all but two of the properties selling for somewhere in the $20.00-29.99 per square foot range.  When you consider the many factors listed above that can impact the price of a vacant lot, that’s remarkably consistent pricing during a two year period of great uncertainty for a real estate asset class that is notoriously hard to value.

Now, the interesting question is what do these buyers see?  Let’s take a look at a hypothetical custom home and see if it pencils out.  While we understand that these numbers can vary wildly, consider the following custom home budget:

  • Home size: 6,000 square feet
  • Construction costs: $200 per square foot
  • Landscaping:  $250,000
  • Architect, Landscape and other Consultants Fees:  $50,000
  • Total construction budget: $1,500,000

If we assume that our hypothetical buyer purchased a lot for around $400,000, the total price is around $1,900,000.  For a 6,000 square foot house, that equates to roughly $316 per square foot.  How does that stack up to the custom resale market in Covenant Hills?

During the last six months, we have seen three Covenant Hills custom homes sold on the MLS:

  • 16 Thomas / June 29, 2012 / $2,050,000 / 5,980 sq ft on .32 acres / $343 per sq ft
  • 6 Franciscan / May 18, 2012 / $1,835,000 / 7,716 sq ft on .42 acres / $238 per sq ft
  • 1 Overlook / February 17, 2012 / $2,375,000 / 7,393 sq ft on .38 acres / $321 per sq ft

The first thing that jumps out here is that the buyers of 6 Franciscan got a smoking deal on a great house – note that it has the same premium, front-row location that the lot next door at 8 Franciscan has.  But if we assume that Franciscan was a bit of an anomaly, it appears that $316 per square foot (our all-in construction cost) is roughly equivalent to the price per square foot of the custom home resales.

In other words, the market value of the custom homes and the residual land value of the custom lots are in synch.  This is a sign of a healthy and balanced real estate market, and could signal a bottom for high-end real estate in Ladera Ranch.   It may also provide some price guidance for DMB Ladera if the developer is interested in pricing benchmarks for its remaining custom lot inventory.

Unless a buyer (for example, one who is also a contractor) believes that they can build for substantially less than our hypothetical budget numbers above, it is likely that those buying custom lots today intend to build something that they will actually live in.  There doesn’t seem to be sufficient margin to entice the spec builders back into the custom home market, and from a resident’s perspective, that’s probably a good thing.  Spec builders tend to build bigger and cheaper than owner-occupants, which maximizes profits but minimizes neighborhood aesthetics.   For those who want to jump in, the buyer’s market looks to continue as there are (at press time) 16 custom homesites for sale in Covenant Hills (not counting the developer’s remaining inventory of custom lots).  Just make sure you know what you are getting into.

Indeed there are signs of life in the custom home neighborhood, and that is a good thing for Covenant Hills.

1 comment to Market Analysis for Covenant Hills Custom Homesites

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