Can we take advantage of the market?

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Shade_IHB

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I am looking for some advice as my wife and I have been kicking around a few topics lately. Essentially it boils down to three items ...



1) We would like to build a home in Irvine to our specifications opposed to buying a prebuilt.

2) With a downturn in the market, this seems like a good idea to look into opportunities

3) Does such a thing as unbuilt land still exist for people like us in Irvine or is it only mass site developers



A few facts maybe to frame whats been rattling around our head. We are currently homeowners in Irvine with about 400K equity at current market prices, great credit rating, and make about 250K a year pre tax with no other significant debt. We both work in or near Irvine, love the area in general, and have freinds / family nearby so we do not want to flip out of state just to build the "dream home".



The fantasy is to jump into the bottom of the burst bubble market, scoop up something cheap in terms of land, build a dream home of roughly the same dimensions as our current home (4 bed, 2.5 bath) and then after construction loans and building is complete sell the first home paying off as much of the new home debt as we can.



We could try and remodel, but the renovations still leave us with a home that is 30 years old along with all the fun issues that come with that.



We could tear it all down and rebuild, but I suspect my homeowner association may have a variety of opinons on that and the neighbor hood is starting to walk that fine line between quaint and old.



Any thoughts / suggestions ?



I feel that this downturn market and our current financial position may offer us an opportunity here but I am still a bit murky on the details.
 
Go to today's rain thread (<a href="http://www.irvinehousingblog.com/2008/01/24/rain/">http://www.irvinehousingblog.com/2008/01/24/rain/</a>) and search for the comment by "Kottan" before you take the plunge...
 
I do not believe there are any lots in Irvine not owned or controlled by the Irvine Company or the HOAs they established. If you want to by a house to tear down and do whatever you want, look into The Ranch, El Camino Real and a few other neighborhoods in that area where there is no HOA.
 
<p>Certain parts of Northwood have been (or can be) remodeled as well. Check out homes off Irvine Blvd and Yale. There are some interesting build outs there.</p>
 
Well I read the "Kottan" post and it was scary enough to make me double check some stuff.



Maybe I need to phrase the question in a different way (and maybe my thinkng is a bit simplistic).



OPTION A ~ Build a new home, sell first home



Home A has 400K debt and 400K equity

Land for Home B = 400K

Demo + Build of Home B = 400K



I carry 1.2M of debt until home B is built and then on the sale of home A apply those proceeds + refi to Home B leaving me with 400K debt again.



End result I carry the same debt but the overall quality of the home goes from 30 years old to modern with all the earthquake safety, asbestos removal, termite damage, etc problems removed. Also I get a floorplan and format more to my taste.





OPTION B ~ Demo Current home and rebuild.



Home A has 400K debt and 400K equity

Demo + ReBuild of Home A = 400K



By fixing up my own place I end up carrying MORE debt than before as I do not benefit from the sale.



OPTION C ~ Retrofit Current Home



Any improvement that is substantial will require more debt to finance raising my overall payments and I still end up with only a partial fix.



==================



Overall I FEEL that somehow I am missing something key in my ponderings. It doenst seem right that tearing something else down and rebuilding and selling my own home should be the best solution. Its like there is a peice of the cost I am missing. Option B shouldnt be so ugly compared to Option A is what I keep thinking.
 
Shade,





Option A sounds better to you because you are missing the $400K in debt you must pay off out of the proceeds for your first home. Options A and B will both leave you with $800,000 in debt and consume your equity. Option C will consume some of your equity, but you may end up adding some value to the property with your renovations.





The best thing you could do is sell your current property, put the $400K in the bank and rent for 3 years. You will be able to avoid watching another $250K of your equity disappear, and you will have a substantial downpayment to buy when prices are at the bottom.
 
Ever wake up in the morning and realize that you may be one of the sheeple?



Its a very BaaaAaaAaaaad feeling (hopefully the poorly done sheep pun worked there).



Looking at Option A I am just not seeing the 800K debt which is scaring me.



Home A with 400 Equity and 400 debt

Home B with 800 Debt (purchase, teardown, rebuild)



At that point I am fairly certain I am in neck deep with 1.2M of debt payments and very unhappy. Actually according to a "loan consultant" my current mid 700 lender rating + salary says that that is no problem. I guess I have to love eating cat food or something.



6 months to a year later when the house is completed I sell home A.



Assuming the market freezes magically and home prices remain the same (I know , I know its a horrid assumption) the sale of home A should net me 800K



Thats 1.2 M of debt (400K from Home A, 800K from home B) and a sale of home A at 800K market value.



Applying the proceeds of the sale to the debt I think I end up with 400K debt still.



I feel I am missing something and IrvineRenter is telling me where it is but I STILL do not see it.



To me it seems that if I could wave a magic wand and tear down and rebuild overnight minimizing the risk of market shifts during building and the problems of shouldering a temporary spike in debt that the option A comes out smelling like roses. Risk mitigation I am much more comfortable with but when you tell me I am missing 400K of debt somewhere I do get that palm sweaty nervousness going on.



=======



P.S. I appreciate any input ... part of me cringes at the fact that my education and job which are in the economic and business areas didnt allow me to slam this out in my sleep.
 
Maybe this is where my math is off ... I consider the following statement to be true



Market Value = Debt + Equity (and equity can go negative)



800K home = 400K Debt + 400K Equity.



A sale of said home generates 800K cash assets and 400K trailing debt liability



Assuming you apply the cash assets you walk away with a net 400K profit.



Applying that 400K profit to the other problem of 800K debt for McMicroMcFun Mansion drops that debt to 400K ???



That just leaves the owner to manage all the risk, and deal with the 10,001 taxes and frictional fees that exist on the deal.
 
Shade - i agree that you should probably be able to slam this out in your sleep - no offense.





Option A leaves you with 400K in debt, assuming you can sell your place and net 800K and buy land for 400K. If you sell your current home and net 800K, 400K goes to pay down the loan, which leaves you with 400K in cash. At this point you have sold your house and purchased land for your new home and have no more proceeds from the 800K. Then you get a construction loan for 400K and build your new home on your own land and you are now 400K in debt, the same as you were with your original home.





Option B leaves you with 800K in debt. Your existing 400K plus an additional 400K in to build the new home. Option A is better (assuming you can net 800K and buy land for 400K).





Dont do C.





I agree with IR that you should just sell your place now and just rent for a while, otherwise you will lose more of your equity.
 
<p>Shade</p>

<p><em>"Market Value = Debt + Equity (and equity can go negative)" </em></p>

<p>I would respectfully disagree with the above statement. </p>

<p><strong>Market Value = what an informed buyer will pay to an informed seller as an arms length transaction</strong>. Your debt and equity has nothing to do with market value. Market value is more set by recent closed comps. In that equation it is hard to quantify Equity unless you selll or have a recent closed comp. Looking into the future for a value is pretty scarey.</p>

<p>And I am somewhat of a bull! </p>

<p>I also believe that this is a good example of what risks builders and speculators take in building homes. It ain't an easy business. Unless you have delt with subcontractors and city building departments then I feel you will get one big education or a good skinning.</p>

<p> </p>

<p>Good luck!</p>

<p> </p>

<p>


</p>
 
<p>Recently saw the movie "Mr. Blandings Builds His Dream House" <a href="http://imdb.com/title/tt0040613/">http://imdb.com/title/tt0040613/</a></p>

<p>It's so funny that something filmed in 1948 still rings true!</p>
 
Okay ... asumming my math and querty agree.



Why do I not see more people doing this? Even if you end up with say 100K more debt in the transaction it has to be better off than spending 100K remodeling the existing home as you pick up all the additional fixes that come with upgradeding a home by a few decades.



Can anyone suggest any resources that talk about tear downs and rebuilding in Irvine area or risks in general so I can continue researching my options there?
 
Shade



You may want to start at the building department to find out what they will require from you as far as plans, set backs, floor area ratios, engineering, fees, demo permits, structual calculations, and other items. They are the critical path.



There is usually a requirement that some amount of the original dwelling remain or it will will trigger new conditions on the permits.



Please keep us informed on your progress.



Regards
 
I will ... unlike some of posts on speculators listed I am not trying to build a gilt edge palace of gold, simply a place that has better quality than my current abode and has a certain layout / specific features with the same rough square feet and rooms.



To that end there are several Southern California home builders in the modular area (yes I know 10 years ago their floor plans were ... "do you want a box or a rectangle?", but some seem to have impoved to the point that they may meet my desires) that have my attention. The fact that they come in far cheaper, build faster, have better quality, and are much safer (earthquake wise) than stick built helps too. Well that and I had positive experiences with the new breed of modular homes in upstate New York recently.



The world of demo permits, contractors, market timing issues, and of course the age old real estate saying of "LOCATION LOCATION LOCATION" has me locked down at the moment trying to do research.



I have a sinking feeling that even if I go ahead, I will never be able to see the true cost of this project until after it is done.
 
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