Projected Selling Price: $171,400
Actual Selling Price: $155,000
In a post more than 4(!) years ago titled, “Tear-Down Economics: From Worst to First, or Housing ‘Leapfrog,” I posited a three-step test for determining how much the land underneath a given home was worth.
In other words, how much the home would sell for as a tear-down.
To refresh your memory, here are the steps:
One. Determine the top of the immediate block, i.e., what is now the most expensive home?
Two. Add 20%.
That’s how much a well-conceived, well-built new home can overshoot nearby existing homes before it “sticks out” or otherwise gets ahead of development on the block.
Three. Divide by 3.5.
That formula serves as a short-hand for developers’ gross margins — in other words, how much profit they need to project realizing before tackling a given project (I arrived at that number by backtesting literally dozens of Twin Cities teardowns).
Real-World Test
Does that three-step formula still work?
To find out, I tested it against the recent sale at 27th and Joppa in St. Louis Park’s Fern Hill neighborhood, discussed in my post yesterday titled “Multiple Offer Multiple Choice.”
Step #1. Determine the top of the block.
From selling many homes near this one over the years, I’d peg the current top of the block at $500k.
Step #2. Multiply by 20%.
In this case, that equals $600,000.
Step #3. Divide by 3.5, which equals $171,400.
That compares with an actual selling price of $155,000.
The verdict?
Whoever bought 27th & Joppa did well.
