How to Reduce Selling Price of New Homes.

NEW -> Contingent Buyer Assistance Program
bkshopr_IHB

bkshopr_IHB

New member
The selling price of a new home is based on the following criteria.



Land cost (4.5 million dollars per acre)

Building construction cost (range $60-150/ sf)

Site improvement cost ($28/sf)

Soft cost (varies)

Company profit (6%)



The most important component to the price of the home is the land cost. In order to lower the home selling price TIC has to lower its land cost substantially and that is very unlikely. The small declining home prices that we are seeing are the result of the builders re-negotiating their land deal with TIC. Many builders prefer to build on the Ranch due to a no risk factor. Slow time like this Irvine builders are not carrying the cost of the land. Many Inland Slumpire builders accumulative interest and standing inventory of un-built land could BK a company overnight.

Due to the no risk from the builders end TIC limit the builders’ profit margin and any amount over goes to TIC. Builders must submit plans to TIC for approval. TIC has in house marketing experts, architect, planners and landscape architects to review design to meet their higher standard. For many other cities the city planners are the aesthetic and floor plan reviewer. The carrying cost of the aesthetic panel is very high and no cities could afford it unless design professionals volunteer their time like Rancho Santa Fe, Palos Verde, San Marino, Santa Barbara, Montecito and Floral Park. Places like VOC and Ladera did not have the strict aesthetic reviewing process like TIC therefore the end result is not the best. The city planners are not trained to seek for a good floor plan function or the accurate interpretation of the architectural styles.

The overhead of TIC is incorporated in the high land cost. We would not be seeing a huge price drop here.



Building cost is directly tied to the selling price. Complicated house shape like a 16 corner house with numerous courtyards could double the foundation, structural, and roof cost. Richmond American project in Portola Spring is a good example of an expensive structure. Consumers pay for the extra cost in the selling price. Houses with 4 corners with simple plans are the most cost effective to build so the selling price is most affordable such as the detached condos like Decada. Town homes and condos are the most expensive to build due to the larger structure, sound attenuation, double wall, extra shear wall and fire separation. High rise is the worst of all and that is why a unit could cost about a million. Good architect with strong discipline can design to meet the goal of floor plan and structural simplicity to help reduce the cost of the selling price. (It is extremely important to create a good house to meet the design criteria with simple forms and avoid any attachment to the neighbors’ house. The reduction of $10-30 per sf could translate up to $45,000 price reduction for a 1,500 sf home.



Site improvement such as utilities, drainage duct, street and sidewalk, landscape, irrigation are just some of the cost but the most expensive are the retaining walls and stairs for slope. Some 3 story designs with the bunkered garages in retaining walls and lifted walkways are the most expensive to build. The selling price of the home is not worth the product purchased. Architect should not even go there to complicate a house. Most consumers hate climbing 3 flights of stairs between bedrooms. (It is very important to consider the building type in reducing the site improvement cost)



Soft Cost encompasses the marketing PR, brochure printing, consultant’s fee, employees, design office, and operational budgets. Employing fewer staff and paying the architect, engineers and interior designers less could lower the overhead but this method often produces inferior architectural design. (It is not likely a factor in reducing selling price)



Company profit is limited to 6% by TIC (not likely a factor in reducing selling price)



The higher the number of homes per acre also increases the building hard cost proportionally. By attaching the units the builder could pack in more units. Logic tells us the unit should be much cheaper since the land price is constant. The high price reflected in the attached projects is paying for the high construction cost of the building.



The key for the builders is to hire the best architect who understands all the parameters of todays demanding buyers' market. A good designed house can translate to lower construction cost and yet looks good. It is a win-win solution for TIC, builders and consumers.
 
<p>You don't think TIC will eventually reduce the land cost? From what I understand, many builders were cutting deals in the early 90's and that included in areas like Irvine.</p>

<p>With all the projects going up in Irvine, it is hard to imagine TIC not dropping the land cost eventually if none of the builders are able to sell. </p>
 
<p>bk,</p>

<p>I have attended college in Irvine way back in the 80's. And even back then, a small condo in Irvine would cost 100k more than a SFR in other part of the county. This hold true even today.</p>

<p>What is the reason behind this price differences?</p>
 
<p><em>>></em><em>Site improvement such as utilities, drainage duct, street and sidewalk, landscape, irrigation are just some of the cost</em> </p>

<p>I'm not really sure you can count these into the cost for new projects in Irvine, as much of those expenses should be covered by the Mello Roos and similar bonds issued. Or at least the purchaser pays for it via their tax bill rather than the purchase price of the home from the builder. </p>

<p><em>>>but the most expensive are the retaining walls and stairs for slope. Some 3 story designs with the bunkered garages in retaining walls and lifted walkways are the most expensive to build. The selling price of the home is not worth the product purchased. Architect should not even go there to complicate a house.</em></p>

<p>That's the what the Liang sales lady said of the StanPac homes at Crystal Cove. Perhaps she was channeling you. </p>
 
Thanks for the great post as usual!



Several questions:





1. Based on your number, the landcost for a 6000 sq ft lot is $614K, or $204 sq ft for a 3000 sq ft home. Your range of construction cost 60 to 150, let's say a mid - high range home, let's assume it is $120 / sqft...so if i add up the $204 for land, $120 for construction, $28 for site improvement, $7 for builder profit, and not counting Marketing,etc, I have a grand total of $359 sq ft. That is very very clost to some of the 3000 to 3500 sq ft new homes in Woodbury, etc. Since some of us is waiting for less than $300 a sq ft for a 3000 sq ft home, that means irvine company has to reduce their land price to the builder by a min. $59 / sq ft, which is 30% from today's landprice. My question is: will irvine company cut their landprice to the builder by 30% or they will simply wait it out. I don't know if Irvine Company has any carrying costs other than real estate tax on those vacant land?



2. When you say, the builder profit is at 6%, it is 6% of the total construction cost? If it is , does that mean builders can make more margin when the cost of building increases?
 
Branding is really important to TIC. From a psychological point of view lowering prices immediately and repeatedly could hurt the image of the brand. I would like to use retail as an example. The high end and very exclusive handbags are Hermes, Louis Vuitton and Channel. The companies will shred the remaining inventories before considering a “sale”. Consumer will travel thousand of miles across the continents to acquire these bags at regular price. I have seen a rare 5% invitation sale and the women were balling over the saving.



Consumers purchase goods from the higher end store such as Saks and Neiman because they know the items purchased there will not lose value next week due to sales. I remembered the BK Robinson May trashed its brand and lost its dedicated clienteles. At any given time there were sale and additional savings before noontime and newspaper coupons to save even more. This tactic may be effective for the immediate situation but could harm the brand in the long run.



Cosmetic is another product that never goes on sale. Companies will offer incredible gifts and free tote bags instead. Preservation of brand is really important for the long run for reputable companies.



IMO TIC will offer gift incentives and attractive upgrades for individual buyers who have good negotiation skills. The policy is not published and is discretionary for some buyers who feel that they are getting something that no one else got. The feeling of “special” and “exclusive” in finding a good deal is one of the techniques in offering a product without depreciating the value of a brand.



What took place in the Inland Empire is a good example but an unfortunate one. All builders slashed prices and existing home owners did not have the faith believing in the homes holding value when price of new homes dropped so quickly and willingly. IMO some were still capable in paying the adjusted mortgage but just lost faith in the “Empire” brand.

Land price in Irvine has always been much higher than other part of inland OC and even the postage stamp lot for the condo is valued way more than the big detached lots else where in flat land OC. That is why condos in Irvine cost more than a single family in Costa Mesa.



The early suburbs of OC were designed to lure home shoppers away from Los Angeles. The newly opened Disneyland in 1956 was the main draw and attracted folks who desired single story living, more elbow room between neighbors and a homogenous neighborhood that all houses blended together. The idea of a cal de sac was first employed and shoppers thought that was the neatest thing where Timmy could skateboard in a circle all day long and mom never had to worry about cars passing through the neighborhood running over Timmy. The kidney shape pool was a big draw also. Many LA homes except for the big estates could not fit a pool due to the detached garage that occupied a big portion of a backyard so home owners flocked to OC for bigger lots.



Many communities like Stanton, Cypress, Garden Grove, Buena Park, Anaheim, Fountain Valley, Westminster and Costa Mesa were designed with minimal community amenities no landscape parkway, no community pools, no pocket parks, no monument walls, and repetition of street patterns and endless cal de sacs. Affordability was the target. These communities except for just a few matured quickly into suburbia ghettos. Good community design hold real estates value and pride of home ownership like Irvine. Santa Ana on the other hand was never developed as affordable community but during the urban renewal during the 50’s and 60’s all the politicians in Downtown encouraged zoning for high density affordable apartments and allowed many destruction of old mansions to made way for a progressive urban city. The aftermath is clear and it was a mistake.



60x100 sf lot is similar to Stan Pac’s Mille Fleur and Laing’s Juliet balcony lot sizes. Both are in Woodbury. As I recalled they are about 1.3 millions. These lots plotted at about 7 units per acre if plotted efficiently. That is about $642,800 per lot. FAR (floor Area Ratio should be at least 60%) footage proposed on this lot size should also be 3,600 sf . $178/sf is the land cost. $120/sf is the construction cost of this move up McMansion. Most site improvements such as storm drain and utilities are included on delivered TIC lots so the cost is minimized at $12/sf. Overhead is about $20/ and the grand total is $330/sf or 1.188 million at cost. With a selling price of 1.3 million the profit per house is net $112,000. That is 7.1 million dollars pure profit for a total of 80 homes (1.3 million selling price x 80 homes =104 million). 7.1 millions pure profit / 104 millions sales revenue = 6.8 percents profit.



Irvine 123 you are right. Unless TIC reduces price dramatically the equation will not reach $300/sf when it is already at $330/SF AT COST!.



Another way is to pump up the house sf on the same 6,000sf lot to 5,000sf then the value ratio will drop to $280/sf. We actually see this scenario a lot.



TIC owns all the land free and clear. I see all kind of construction activities in its apartment, office, retail, and hotel groups. 3 high rises are being built at the Spectrum and the most expensive destination resort is about to finish at Pelican, A landmark tower designed by I.M. Pei is starting in Downtown San Diego. I believe the energy is shifted from residential to other active TIC entities. I think TIC immediately will release its best land parcels at the best locations. Buyers know there is only a limited inventory of jewel locations left with topography and view potential. They will have to seriously make quick decision regarding the last remaining crown jewel sites. Laguna Crossing, gateway to Laguna Beach, and only 3 minutes from the Spectrum and Orchard Hills with immediate city lights, distant ocean and Catalina view. TIC will entice the buyers by offering the best locations during the buyers market hoping to spin the pendulum back to the seller control. This psychology may work. From what I heard, the products at Laguna Crossing will be amazing. Homes at 2,100 sf with 3 parking spaces will include 5 bedrooms and even a granny studio over a detached garage at the back of the property with its separate outside stairs. That is a lot to pack carefully into a 2,100 sf house.



Meanwhile waiting for the sluggish market to pass I think there are many TIC communities are being secretly designed under the radar and using this down time to process legal matters and entitlements. As the market turn around the full arsenal will be ready to accept the buyers’ hard earned cash and all the flippers will be coming out of their Bin Laden style caves.
 
bkshopr,



Thanks again for the explaination.



In terms of the land asking price from TIC at around 4.5 mm/ acre, it has huge built in profits since they had the land for a long time, and owns the land "free and clear" as you mentioned. So, IF Irvine company really wants to sell, they can...I guess it is a matter of deciding to sell it cheaper or keep it for a higher price in the future when the housing price comes back.



I am sure you had read IRVINERENTER's various articles. What impact if any do you think TIC's potentially unwillingness to sell their land at a discount will have on Irvine's all over housing price?
 
Donald Bren is the richest man alive in real estates holding. He makes extremely calculated decision and aims for a long term effect. He never follow trend and his development and always have a timeless permanence in his creations. The twin towers by the Hyatt was built in the 80’s and remain timeless and classic while I see other trendy towers in need of an extreme make over. The towers at the spectrum and the office complex at Jamboree and freeway 5 is another example of his philosophy.



I seriously do not think he will lower his land prices. He only has 8 hours in his workday and there are plenty of other projects that could occupy his time. TIC does not have the pressure of investor and it is privately own. The land will not suffer for the next few years. There may be some condensing of staff and new innovative designs would take several years to develop anyway. The downtime IMO is perfect for developing the ultimate house to unveil in the market place at the right time.



I think he will hold tight on his housing supply and ride out the next several years. He will release his best crown jewel locations. The “limited editions” are rare and God only made so much land with view of ocean by day and city light by night. There will never be any more new development closer to Laguna Beach but only 3 minutes from the Spectrum. I think buyers would favor the trophy communities.



The new products coming in to the market will bury the ill fated Portola Springs. The Ipod concept of offering so many rooms in a small footage is going to challenge the resale market.



I think the newer homes will be headed toward “green” direction with efficient energy and solar capability to reduce utility bill and consumer could afford more house. I also think smaller homes with a detached casita could generate rent to help the mortgage payment.



Rather than just lowering house prices to satisfy the appetite of the bears The price would be stabilized but come with unexpected bonuses like smart appliance energy saving gadgets, fully furnished and upgraded with high spec level finishes, better and superior locations and might even come with a Mercedes Smart Car. I think the “smart house” concept could do well in a price sensitive market.



I believe the remaining obsolete products will be liquidated for a re-adjusted price but the remaining vacant parcels will be planned with cost efficient “smart house”



The resale market is the one going to be hurting because it will lack all the bells and whistles of the “smart house”.




 
Where do you learn all this BK? What kind of job do you have that requires this kind of extensive knowledge? I think it would be great to feature one of your posts on the main blog one of these days.
 
bkshpr,





Thanks for the great info. Do you think the pricing of Laguna Crossing is going to be similar to Orchard Hills? Or Woodbury? Or even in between?
 
<p>Whats the deal with VOC? I didn't know who won the land auction a few years back, but these are not TIC owned? I couldn't have guessed, but then I never did any research in this project. But I think that the housing price in VOC doesn't paint 100% of the picture in this case because in communities like VOC you are slammed with HUGE costs like mello roos and association fees </p>
 
bkshopr,


As rkp mentioned a few comments up, if you are interested in posting something on the main blog, please let us know (zovall at gmail dot com). You have some great insight into the Irvine market and we've learned a lot.
 
I slept on this and have a few more thoughts. With the exception of custom lots, all of these lots will have production homes - three maybe four models of the same thing. That shouldn't get any price premium at all. Say all you want about "trophy" properties, but at the end of the day it's still about affordability. Home costs are still remarkably higher than wages. You can have DINKs that are both doctors and lawyers at a $450K combined annual, and at the 3x income guideline, that's only a $1.35M home. It's Las Colinas, but it's not Juliet's Balcony, nor does it account for the massive mello-roos "hidden" home cost. And once you get to high earners, doctors, lawyers, business owners, good sales people, high level executives, etc., Irvine isn't the only city in the running. Irvine has good schools, but isn't the only local community that has good schools. Irvine might be close to one's business, but not all business in the County is found in Irvine. If there's one thing many on this board can agree on, it's that Irvine is nice, but it certainly isn't the center of the universe.





Further, although high end earners want the nice home, they also want a nice vacation, toys, etc., and the budget has to give.


<em>


"I think the newer homes will be headed toward “green” direction with efficient energy and solar capability to reduce utility bill and consumer could afford more house. I also think smaller homes with a detached casita could generate rent to help the mortgage payment."





</em>Sorry, BK, but that's just crazy talk. A utility bill reduction won't help but a couple hundred bucks, if that, unless it's a massive home. And the fact that you need a renter on site to help with the mortgage payment is the surest sign that you have just bought more home than you can afford.





If Don Bren wants to fill Irvine with Hermes, Louis Vuitton and Channel bag carrying and status chasing Asians, he's welcome to. But for me, the comparison of the $1.7M homes in JB and Laguna said it all.





Irvine can still be a trophy and still be affordable to higher end wage earners. It was that way for a long time, and the only thing that changed in the last five years was the availability of easy credit which allowed "the poor huddled masses" to buy in and even some medium and high wage earners borrowed more than they could afford, which allowed demand for higher priced properties to spiral. Not lowering land costs to levels that would cause homes to be affordable to medium and high wage earners isn't about making Irvine a great community, it's about simple greed. And if Bren's waiting on anything, it's for wages to catch up to his selling point. That's his prerogative, but let's not put lipstick on a pig.

 
My definition of trophy properties doesn't include production homes. In Irvine, the only thing that might qualify is something custom in Shady Canyon.
 
<p>IMHO, the place to put low energy features is in the lower end stuff. The first-time buyer crowd will be the hardest hit when we discover that global petroleum production is unlikely to ramp beyond 85MM barrels per day. I also think we're going to regret these tiny windows when we need to get some air flowing through the house. Small windows are energy efficient for a home with affordable A/C. Once households start giving up on A/C, they'll be looking for ways to force more air through the home.</p>

<p>Are OC builders installing low-e glass these days? </p>
 
If they're going to build "granny studios", I hope the room will be on ground floor and not on top of a garage with exterior stairway. Heaven forbid if I bought that, I'd have to tear down the stairs and install an elevator for my 90-year old grandmother.





What builders need to do, or perhaps we need updated building codes for this, is build more elderly and handicapped friendly units with slopes instead of stairs on ground floor. For 3+ bedroom town homes or SFR's, there should be at least 1 bedroom on the ground floor, with wheel-chair (and pregnant wife) friendly bathroom that has walk-in shower and hand rails next to the toilet. Whatever that's on the 2nd/3rd floor can be exempt, they can install a toilet that requires you to jump through dancing monkeys for all I care.





But then I suspect some cities don't want this. They want elderly folk to suddenly realize their dream home was not designed for old folks, so they have to sell it to younger people and move to retirement communities like SeizureWorld(TM). This way they prevent their local community from graying, where homes are all held by stubborn old folks who pay less in RE taxes and actually have time to look into city council corruptions.

 
<em>What builders need to do, or perhaps we need updated building codes for this, is build more elderly and handicapped friendly units with slopes instead of stairs on ground floor. For 3+ bedroom town homes or SFR's, there should be at least 1 bedroom on the ground floor, with wheel-chair (and pregnant wife) friendly bathroom that has walk-in shower and hand rails next to the toilet.





</em>Momopi, you're in luck with new construction. Via ADA, builders are required to offer "accessible" or "universal" design in a certain number of units. If you go to Paloma, look at the unit serving at the sales office. The doorway to the toilet is very wide. All the bedrooms are on one floor. If you buy older resale, some of the changes are not very hard to make. Assuming there is enough wall space, you can have a doorway widened. Installing hand rails is something that you or a handyman/woman can do (make sure you sink into the wall studs!). The shower can be replaced, or you can buy one of those walk-in tubs I see advertised.
 
bk,



Those are great information based on the perspective of TIC’s marketing and operations departments, but neglect to take into account the decisions that must be made by the executives beyond these numbers. Fact of the matter is, TIC is a company that sells land. They can’t just “sit” on pieces of land because prices aren’t right. The likelihood is that they have land designated for commercial and residential, and divisions that are responsible for each of these segments. Just because they think one segment is still profitable at their current asking price and the other is not, they won’t just shut down the business of one “until the demand comes back up to match their desired selling price”. That’s just not how business is done. Both divisions must operate viably, and the only way to do that is to meet customer demands. If the demands call for lower pricing, that is what must be done to sell. After all, if the division doesn’t sell, it doesn’t generate revenue.



The offering of extras is one way of packaging the pricing of a product, but it will only work if the customers are willing to make that trade-off between lower price and more stuff at the higher price. The buyer market is past that point; the customers now want lower prices, not a new refrigerator. The market demand is dwindling for that type of package pricing.



Another factor to consider is that TIC is not on an island, it has partners in its channels (builders) that can’t afford to let their houses sit on the lots just because TIC doesn’t want to lower the land price. Secondly, there are competitors in the market in the forms of other neighborhoods. We can talk all we want about how “exclusive” Irvine is, but the fact is towns such as Mission Viejo, Aliso Viejo, Laguna Niguel, Anaheim Hills, Huntington Beach, and even parts of Orange and Fullerton are all competing for the same customers. And even towns such as Anaheim, Garden Grove, and Santa Ana are probably competing against Irvine for the lower income buyers that are looking for starter homes. In addition, resellers in Irvine are another set of competitors for TIC. As they lower prices, it puts tremendous pressure on TIC (not to mention pressure from the builders) to lower their land prices. Void of other pricing alternatives, TIC will be hard-pressed not to do the same if the market keeps on its current path. “Lying Low” in residential products until the market comes back up, I assure you, is not part of their plan.
 
My desire to live in Irvine at this point in time is for the location, short commute time, good school, and low crime rate.



When it’s time for me to have a trophy address in SoCal, I will move to Newport Beach/Coast, Laguna Beach, etc. not Irvine.
 
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