Why Pay Over Market

If you fall in love with a house and can afford it, go ahead and pay more. If you have a strict timeline in a constrained market, go ahead and pay more. Money talks, as they say, and this is of course the number one way for the consumer to make themselves heard. When there is only one and you want it, strike.

However, are overbids always the result of irrational exuberance?

Back in 2017, as I went over the numbers in the Highlands, one data point stood out. It wasn’t the biggest overbid: 15% over ask versus a high of 34%. What got me was the price per. The low comp was $607 a sq ft, which correspond to the fact it was a very large (3790 sf) and stylistically…unique. The second highest comp was $1282 a sq ft, due to, I expect, the flat, nearly 10K sf ft lot accompanied by an almost vintage Eichler, always a selling point to the architectural purist out there. Finally, my outlier, which clocked in at $1515 per. WTF??? Why would anyone do that?

Back then, I raised an eyebrow, but let it go. People do all kinds of odd things in this world. Tacking on 18% more per than the other highest bidder isn’t that out there, especially when the total purchase price was within 1.3%.

Revisiting the data set, I went back to that question of why. Why did someone pay so much a square foot back then? How is it working out for them today?

First stop was the realty websites, followed by Google Maps. Results? The visual reveals a new building being framed.

We are dealing with a teardown situation. There are two typical cases of a total redo. There is the discerning homeowner who wants to create a dream home from ground up and has the patience, vision and means to do so. Then, there is the speculator, or flipper, in HGTV speak. The investor pays $1515 per for $1140 and has a basis of 1.727. The you rebuild at the non-retail price of, say, $300 per for 2300 and now your basis goes up to 2.417 – enough to maybe get you a visa thrown into the investment mix.

Assuming someone is willing to buy it for today’s average sale price in the Highlands ($1500 per says Redfin), you sell at 3.45. Subtract a discount commission, you are taking in over 875K. Given the timeline under consideration, that isn’t terrible, but nothing which couldn’t have been accomplished with some clever Bitcoin trades and a hell of a lot less headache. Another problem with the notion it was purchased to flip is that it still hasn’t come back on the market. Contractors who know what they are doing can bang out a mini mansion in 18 months flat. It should have hit the market by spring of 2021 if the plan was to sell.

My fallback assumption was that someone built themselves a luxe dream home, money be damned. My guess then, was the place would be, upon inspection, gorgeous, no expenses spared…because if you have the money and want it enough, why not. Knowing the photos available lag real life by many moons, I went to investigate.

Final answer?

Both of those scenarios were incorrect.

From what I can tell, they paid extra because they wanted THAT lot. If there is a big lot you really want which has a small house on it, you are in luck. Most folks will be paying simply for the house, maybe a little extra. Therefore, going a hard on the price per wins you the hand. I mean, the house…

Why did this lot get this financially well-endowed individual all geared up to break out the Benjamins (and then some)?

1)      Oversized (8640), which allows a higher sq ft rebuild

2)      Quiet block off a cul-de-sac

3)      Good school to attract long term family renters

4)      Corner Lot

Wait a minute! Corner lot? Since when was that a plus? Doesn’t it limit the backyard due to having two setbacks from the sidewalk as opposed to one?

Sure. But that only matters if you aim is maximizing the size of your bucolic oasis. Not everyone thinks that way. For example, if your goal is a low maintenance revenue flow, you are throwing some pavers in the yard and calling it a day.

Beyond that, the corner offers a special benefit for anyone seeking to turn a single residential house into a rental which operates more like a duplex. Because the house has two sides facing a street one may design it so there are two separate driveways, one on each. The tenants benefit from a sense of privacy, as well as twice as much off-street parking.

That is the new setup of my comp. After untold amounts of money on construction, it is a very plain looking building, with a utilitarian, rock strewn yard. There are two entrances and two driveways, one on each side. Both of the off-street parking spots were occupied by sensible family cars.

Under the assumption the owners of this place are now collecting not one but two revenue streams, both which should be superior given the particular configuration of the lot in question, why wouldn’t you pay a little more to ensure yours is the winning bid? As a percentage of the total project, the 229K overbid represents perhaps 10% of the total project cost (HA!). However, if you are now renting a 3/2 (Realtor’s estimate $4600 a month for a house in that area) as well as a one bedroom ($2185 average in San Mateo per Zumper) your monthly revenue has been kicked up almost 50%. In the long run, that makes sense to me.