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.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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