Luxury developers go after teardowns to build on spec
When Brian Sperry came across a two-story, waterfront home in Newport Beach, Calif., with an expansive view of Newport Harbor last year, the real estate developer knew it presented the perfect opportunity. Forty years ago, the two-story house, with its stone columns and dark wood beams, graced the pages of Architectural Digest. Now it was outdated, a candidate for a teardown – but with 113 feet of bay frontage and a dock in one of Orange County's priciest neighborhoods.
Sperry's company snatched up the property for a cool $9.5 million. He and his partners plan to spend 18 months redeveloping it into a custom, soft-contemporary style home, then hope to list it for at least $20 million. They're building on speculation – no buyer in sight.
"This will be an incredible house," Sperry said. "But the risk we face (is) what is that price going to be a year and a half from now?"
The home is the most expensive Orange County acquisition so far for American Coastal Properties, a boutique firm that's put an institutional twist on how it finances spec homes. The company has raised $75 million from private equity to purchase and redevelop homes on valuable lots in established communities up and down the Southern California coast. Among them is a Beverly Hills home that was owned by actress Mitzi Gaynor.
When the housing market crashed, so did speculative homebuilding. Real estate market values sank below replacement costs, or what it would take to rebuild the same house on a site. At the same time, lending froze. Even cash buyers weren't buying.
Now building upscale homes on spec appears to be in the midst of a resurgence across the U.S.
"We're kind of at the groundswell of the next real estate cycle," said Paul Habibi, a developer and professor at the UCLA Ziman Center for Real Estate. "I don't see any imminent end to this. The capital markets are only going to get looser as we go."
Scott Cross, president of SC Homes, is also banking on that vision.
"We're diving harder than ever because the market's just skyrocketing," said Cross, whose firm does complete teardowns, unlike ACP, which usually redevelops or extensively remodels the houses it buys.
Cross' company focuses on buying multimillion-dollar properties in Newport Beach's Cameo Shores and Irvine Terrace, seeking out pocket listings – homes not yet or ever on the Multiple Listing Service – to avoid getting into multiple-bid scenarios. In addition to hearing from real estate agents, sometimes Cross will get a call directly from a homeowner who is ready to sell.
The homes aren't just old. Often, they have not aged gracefully. "They're old to the point that a lot of banks won't lend on them unless they know there's going to be a teardown," Cross said.
The firm usually gets $7 million to $9 million for a home it builds, but Cross wasn't comfortable discussing profit margins. He did allow, however, that in the case of one Newport Beach house, "we tripled our money."
SC Homes, with typically eight to 10 homes a year, gets its financing through small banks and groups of investors that can include friends and family members, Cross said.
ACP, on the other hand, is redeveloping a much higher volume of custom homes through infusions of institutional megabucks.
The company has received $75 million in funding from Colony Capital LLC and the Pritzker/Vlock Family Office, and intends to buy and redevelop some 40 to 60 homes in Southern California each year. ACP has sold more than 50 homes since September 2012, and has 25 homes in the design, building or listing stage at any one time.
"We buy something in a high-demand neighborhood and we add value through construction," said Nick Sinatra, ACP president. Technically, the homes are redeveloped, or "deep" remodels, with perhaps just a single wall left standing when construction begins.
Though such projects may involve less bureaucracy and can be more cost-effective than completely razing a house, Sinatra noted, "They're brand-new homes when we're done with them."
Sperry, ACP's managing director, said the work can cost anywhere from $400,000 to $600,000, for a "simpler" redevelopment, to millions of dollars for construction on large projects.
The housing recovery is just one factor driving the spec-building trend.
Real estate agents say foreign and wealthy second-home buyers want new, turnkey houses without getting bogged down in meetings with architects and builders. And many of the houses are located in areas where even older homes don't frequently come to market.
That appears to be the case in various parts of the country.
The National Association of Home Builders does not keep statistics on spec-home building. But several publications have highlighted lavish residences being built for no particular buyers in such places as Aspen, Colo.; Miami Beach; and New York's Hamptons.
The Hollywood Reporter last Fall wrote about international billionaires buying spec-built mega-mansions in Los Angeles. One builder said he was creating homes for "the 1 percent of the 1 percent."
Rick Hilton of luxury brokerage Hilton & Hyland recently told Forbes that spec homes are being bought by "a lot of younger people, foreigners – the English, Chinese, Russians – and by entertainment people."
The magazine characterized a 16,000-square-foot, modern-style mansion in Holmby Hills, completed this year and offered as a pocket listing for $48 million, as the most expensive speculative house for sale in the Los Angeles area.
ACP bought Mitzi Gaynor's home in Beverly Hills in January.
The 4,167-square-foot, 5-bedroom Spanish villa, built in 1929, included a dining room for large-scale entertaining, a master's suite with a Juliet balcony overlooking lush greenery and a secluded swimming pool.
The company did some demolition on the house, but "we actually left a big chunk of it standing," Sinatra said. Their intent is to preserve the home's historic ambiance and restore its old-style Hollywood glamour, while adding modern touches.
Those goals gave ACP an edge over others who were interested in buying the house, said Tina Stern of Wish Sotheby's International Realty, the listing agent.
"That's one of the things that appealed to her," Stern said of the 82-year-old singer and dancer, who starred in "South Pacific" and other musicals. "They (ACP) saw the beauty in the property."
Sinatra, no relation to the famous singer, put it this way: "She had parties where Dean Martin and Frank Sinatra were dancing on that floor."
In Newport Beach, Sperry's waterfront project, in guard-gated Linda Isle, awaits its own transformation.
The old, 18-foot-high, double entry doors and wooden, cantilevered stairway now lead to empty spaces with worn carpeting and the bulky accents of a bygone era. It's a stark contrast to the home's 1970s heyday, when an Architectural Digest writer waxed about its "visual excitement."
But the home's large windows, deck and balcony still offer that sweeping view of the bay.
Demolition should begin any day.
"I don't think there's anybody out there spending $9.5 million to start a remodel," Sperry said with a laugh. "For a spec guy to be doing that, it's rare."
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