What's Selling . . . East Edina

Where: 4617 Tower St.
What: 5 BR/5 Bath new construction by Elevation (division of Streeter)
How much: $1.2 million asking price
When: sold in one day earlier this month (with more buyers reportedly waiting in the wings).
Who: listed by Marian Peterson and Noelle Varecka of Edina Realty

It's not hard to tell what the Buyer liked about this home: an exceptionally open, flowing floor plan; a state-of-the-art Kitchen; and wide halls, tall ceilings and oversize windows that make the actual square footage (just under 4,400 FSF) feel even bigger -- all on a big (.25 acre) lot.

The East Edina location, east of Highway 100 and south of Country Club, is attracting lots of attention from builders and remodelers because of the combination of large lots and older, modestly-sized (and priced) existing housing stock.

"Tear-downs," Cheap & Expensive

"Tear Down This Wall(paper)!?!"

No, Ronald Reagan didn't say that -- a Realtor did.

Earlier this week I attended a Realtor meeting in a very impressive -- but cosmetically dated -- home, where, after extolling the home's many virtues, the listing agent/host asked for input.

"Tear it down," came the first agent comment.

"The wallpaper," he clarified.

The other agents laughed . . . while the listing agent let out a huge sigh of relief!

(As feedback goes, that's a whole lot better than hearing "needs a new Kitchen").

Pop(Up) Goes the Neighborhood

Teardown-Lite

What do you get when you combine a high-demand, close-in neighborhood, smallish existing housing stock, and small city lots (typically, 120' x 40')?

Not tear-downs, because of the lot size.

And not bump-outs, for the same reason (there'd be no yard left).

Give up?

Pop-up's.

As in added second stories.

One of the areas where this trend is well under way is in St. Louis Park's Fern Hill neighborhood -- specifically, the west side of it (roughly between Monterey and Highway 100).

This six block stretch is prime territory for pop-up's because these blocks are full of smaller, $250k-$350k homes -- yet homes just to the east go for $400k-$600k (and sometimes much, much more)

The pop-up's are simply closing the gap.

Over time, this trend is driving all of Fern Hill up . . . literally.

Realtor-to-Realtor Letters

"X" Factor: Realtor's Credibility

First there was the "Dear Seller" letter, drafted by the Buyer ("We loved your home from the minute we walked in . . .")

Then came the "experienced short-sale agent" claims on MLS, dangled by listing agents trying to convince prospective Buyers that the odds of a deal will be better (better, but still not good).

Call it a "Dear Buyer" letter.

Now, there's the "Dear Listing Agent" letter, drafted by the Buyer's Agent to reassure the bank-owner of a foreclosure.

Who would write such a letter?

Me.

I'm currently representing clients competing for a foreclosed property that, due to its advanced deterioration, is in fact a tear-down.

Because the local municipality is known for strict oversight, that could create headaches for the bank trying to unload the property.

So, how -- besides price and terms -- do you make your client's offer stand out?

By letting the Bank and its Realtor know that, because you and your client have existing relationships with city staff, know the required procedures, and have already had contractors assess the property's condition (all true) . . . the odds of a consummated deal are much better.

June New Home Sales

Exactly Where Are All Those $206k New Homes??

As [new home] sales rose, median prices . . . continued to fall, slipping to $206,200 from $232,100 in June a year ago.

--Jack Healy, "New U.S. Home Sales Rise Sharply as Prices Fall"; The New York Times (7/27/09)

The big financial headline today is an unexpected monthly rise in new homes sales. According to the Commerce Dept., June sales of new, single-family homes increased 11%, to a seasonally adjusted rate of 384,000.

What caught my eye, though, was the median price: $206,200.

Suffice to say that that's not the price of new homes going up in Edina, around Minneapolis' city lakes, or in Minnetonka.

Rather, that's the price of new homes in places like Albertville, Ostego, and Farmington -- areas 30 miles or further away from the city center, where developers threw up tract homes by the thousands.

Closer in, new homes are strictly custom, one-at-time "leapfrogs" from former tear-downs to, well . . . something much nicer.

A quick look on MLS confirms that.

Since 2008, 24 new "spec" homes (built for resale) were listed in MLS Areas 300 and 309 (roughly covering from Cedar Lake to Lake Harriet).

Average price: $1.03M. Median Price: just under $800k.

(The difference is explained by several, extremely high-end new homes in Lowry Hill, which pull the average up.)

Urban Planning - Edina Style

Keeping Country Club . . . Country Club

My law-practicing days (in the early '90's) are fading fast, but I do recall a basic principle about constitutional (vs. unconstitutional) zoning restrictions: general rules with a strong public policy component work, overly specific ones don't.

So, cities that don't want Wal-Mart's can't simply pass an ordinance saying, "no Wal-Mart's." Rather, they have to pass an ordinance prohibiting "retail buildings bigger than 200,000 square feet within city limits."

What makes me think of this is various local cities' efforts to control tear-down's, and specficially, McMansion's.

The city's goal may very well be to ban tacky, lot-devouring McMansion's. However, for legal reasons, the city's tack has to be more general.

Like, "no tear-downs of historically significant, pre-1944 residential structures in the Country Club neighborhood" (my paraphrase).

That's how Edina does it, anyways.

Is it effective?

Take a drive through Country Club, and you'll have your answer.

Tear-down Prototypes

Attributes of Tear-Down Neighborhoods

I've posted previously about the somewhat counter-intuitive attributes of tear-down houses ("Tear-Down Economics," "Contender . . . or Pretender?"), so I'm not going to revisit the analysis here.

However, tear-down neighborhoods -- areas with lots of tear-down activity -- also have their own attributes.

Here's what they seem to have in common.

Location. Duh, right?

Actually, there are two kinds of locations that are popular.

The first is what you'd expect: the premier, A+ lots in the premier locations -- on Lake of the Isles in Minneapolis with skyline views, beachfront property on Lake Minnetonka, etc.

However, many if not most of those locations already have existing, trophy homes sitting on them. You don't dismantle a Lamborghini to build a Ferrari (at least, not usually).

So, in practice, much of the tear-down activity actually occurs in adjacent areas where the location is only slightly less desirable -- call it "A" instead of "A+" -- but where the existing housing stock is much more modest (and therefore cheaper).

As a result, the potential upside is much greater. This is the second type of tear-down neighborhood.

Ultimately, it is the size of this gap -- between existing and new construction -- that determines whether a neighborhood has tear-down potential (the bigger the gap, the more tear-down potential).

Examples include the areas just west of Cedar Lake and south of Lake Calhoun in Minneapolis, and South Harriet Park in east Edina.

Contender or . . . Pretender?

"They're Asking How Much??"

Where: 5500 Park Place, in Edina's South Harriet Park neighborhood
Asking Price: $549,900 (white picket fence included)
Key Stats: 3 BR/2BA; 1,500 FSF. Year built: 1947
Lot Size: 60' x 134.8'
Time on Market: 64 days

In any other Twin Cities neighborhood, this unassuming 3BR/2BA home with a white picket fence would be worth $150,000, tops. If there were any foreclosures nearby, that number could easily drop to $100,000.

But it's not (in just any neighborhood, that is).

It's just south of Minnehaha Creek, in Edina's up-and-coming South Harriet park neighborhood. The lots are nice-sized, and the location is prime -- just south of Edina's tony Country Club area. Best of all, the existing stock of housing is older and undersized.

Voila! Tear-down territory.

As someone whose clients have bought and sold several tear-down's the last few years, I've found that a good rule of thumb is to multiply the projected selling price of the would-be tear-down by 3.5. If the resulting number makes sense for new construction on the immediate block . . . the house is a bona fide tear-down candidate.

So if a house is worth $300,000, to be a tear-down, the neighborhood would have to support new construction over $1 million (I call this "tear-down leapfrog," or "the last shall be first" phenomenon, because the former tear-down often gives way to the nicest home on the block).

Contender . . or Pretender?

So is this house for real? Or more to the point, is the land underneath it worth anywhere near the asking price?

To find out, you start at the end -- namely, by determining the upper price limit of the immediate block (and to lesser extent, the surrounding neighborhood).

In this case, a brand-new, 4,000 FSF house just sold for $1.5 million a block away (in fact, it sold before hitting the market, a good omen). So clearly, the block has lots of upside.

The next step is sizing up the particular lot.

At 60' x 138', it's not gigantic, but it's still more than 30% bigger than a typical, 40' x 120' city lot. It's also comparable to other East Edina lots that now have new construction.

It's also a corner lot, which is a plus to some, and a negative to others. Net those out, and it's a wash.

More important is the fact that the lot gently slopes towards the rear. That makes it suitable for a walkout, which allows more light in the lower level and allows better access to the backyard.

So what's the verdict?

Contender. (If you want to know what it's likely to sell for, though, you'll have to call me . . .)

Tear-Down Economics

From Worst to First,
or, Housing "Leapfrog"

More than one would-be Seller has quietly harbored the hope that they wouldn't have to spend big money getting their home ready for market -- or face Buyers beating them up on their home's condition -- because, after all, "it's probably a tear-down." Unfortunately, more than 95% of the time, they're wrong.

Forget that many people are retrenching now in the face of a tough economy, or that new home construction is down dramatically and many builders are in full retreat. Most homes aren't tear-down's for the simple reason that the block won't support the new home's price.

Saved by the Wrecking Ball?

First, a caveat. Subject to local zoning rules and your neighbors' forbearance, your home is still your castle. If you want to tear it down and build a new one -- and have the money -- you probably can, even if it makes no economic sense whatsoever. There are plenty of examples where, either because of the owner's attachment to a particular piece of land, long-standing social ties on the block, etc., the location is decided first, the home (and building budget) second.

However, most people contemplating doing a tear-down at least pause to calculate whether it's a good investment. And if it's a builder contemplating doing a new "spec" home (as in "speculative," or, "build it and they will come"), that's the ONLY consideration.

Rules of Thumb

So, you start at the end: How expensive can a new home on the block be before it sticks out? If prevailing prices nearby are $600k - $800k, you can probably go as much as 20% higher (to around $1M), especially if the neighborhood trend is clearly up. However, anything more than that is risky. After all, if your budget for a new home is $1.5M, you'd probably want to build it on a block where the other homes also cost that much.

The other relevant consideration is the established ratio of land to home prices. Conventionally, land accounts for 25%-33% of the total land-plus-home cost. So, most $1M homes sit on lots worth $250k to $333k. Again, common sense suggests why: a $1M home on a $500k lot would feel undersized, while the same home on a $100k lot would seem ridiculously out-of-place.

Combine the foregoing and you come up with a fairly accurate rule of thumb: if the cost of the tear-down multiplied by 3.5 doesn't overshoot the top of the block, the home's a legitimate tear-down candidate. If it does, the answer's "no."

Housing "Leapfrog"

Note that the condition of the home isn't necessarily a consideration.

There are plenty of well-built, well-maintained homes scattered through expensive parts of Edina, Minnetonka, and around the City Lakes that have been torn-down that were not in disrepair. Rather, they typically were the "runt" on a choice block where the surrounding homes gradually became larger and more valuable (or abruptly -- I can name at least a couple Twin Cities neighborhoods that have seemed to metamorphose overnight!).

Because the margins on a luxury home are fatter than on a more modest home, builders will typically try to find the least expensive house on a block and replace it with the most expensive -- a process that can look like a game of "Housing Leapfrog."