Glenhurst_New

Anatomy of a Tear-Down, 2008 vs. 2013

As the listing agent marketing 2810 Glenhurst Ave. in St. Louis Park’s Fern Hill neighborhood last Winter, I suggested that prospective home buyers who couldn’t find what they were looking for instead . . . create it.

See, “Create Your Dream Home on Fern Hill’s Glenhurst Ave.”

Fast forward 8 months . . . that’s exactly what’s happening.

The foundation of the new home is going in now; you’d project a completion date sometime next Spring.

Tear-Down Math

Over five(!) years ago, I posited a 3-step process for determining whether a given home was a bona fide tear-down candidate.

The gist:  a home is a tear-down when it can be bought  — or more accurately, the lot it sits on can be bought — for less than 30% or so what the most expensive homes on the block fetch.

Or, if you prefer, divide the top of the block by 3.5 to see what neighboring lots are worth.

Result?

In an area where new homes are selling for $2 million, any nearby home that can be bought for $600k or less is potentially a tear-down.

See, “From Worst to First, or Housing Leapfrog.”

Does that math still work today?

Glenhurst Case Study

Not as well — at least for prospective home builders and buyers.

Multiplying Glenhurst’s sale price of $371,500 last Spring by 3.5 equals $1.3 million.

1_FrontBy comparison, 2810 Glenhurst is now pending on MLS at “only” $1.050 million.

If you’re doing the math, that 3.5 multiple has now shrunk to about 2.85.

Since the home doesn’t close until February, 2014, it’s premature to put a final price tag on it.

It could be a discount from the $1.050 million list price.

Or, it could very well be more, depending on the upgrades and finishes in the final product.

For now, the only ones who know for sure are the Buyer, the Buyer’s Agent (Patti Oakes), and the builder, Pinpoint Construction.

Four Reasons

Assuming no change in that $1.050M list price, though, what’s the explanation for a shrinking “tear-down multiplier?”

I see a combination of four, inter-related factors — all ultimately combining to drive up the cost of prospective tear-downs — starting with increased Buyer demand (Reason #1).

The 2013 housing market is a story of limited supply and lots of multiple offers, especially at the market’s lower rungs, especially earlier in the year.

That trend was pronounced enough by last March — when 2810 Glenhurst was about to come on the market — that the owner (with my blessing) bumped the list price from low $300’s to $350k (they also did some additional home prep).

Even at that higher price, there were four offers almost immediately, driving the ultimate sales price well over ask.

Profile of a Tear-Down

There’s also less supply these days — specifically, a scarcity of buildable lots in high-demand, close-in neighborhoods (Reason #2).

If you weren’t aware, upper bracket new construction is on a tear in high-demand, close-in neighborhoods like South Harriet Park and Morningside (Edina); Linden Hills, Fulton, Minikahda Vista, and near Cedar Lake (Minneapolis); and Fern Hill (St. Louis Park).

Desirable lots in those neighborhoods that might have sold for high $200’s to low $300’s a few years ago now routinely fetch low to high $300’s.

Like 2810 Glenhurst.

And there are fewer of those lots/homes:  in fact, on the 2800 block of Glenhurst, 2810 Glenhurst was the only home meeting the “tear-down” profile (the other homes are foundationsignificantly bigger and more expensive, disqualifying them as tear-downs — at least for now).

Exactly how rare is new construction on this stretch of Glenhurst?

The last new home on the block went up in 1952, when Harry Truman(!) was President.

“New” vs. “Old” 2810 Glenhurst

Of course, heading into 2014, the economy is now stronger — at least for those at the top of the pyramid — than it was five years ago (Reason #3).

The stock market is making record highs, bigger companies are posting record profits, and raises and bonuses for upper level executives seem to have recovered as well.

A chunk of that money is clearly making its way into residential real estate in many markets nationally, including the Twin Cities.

That leaves Reason #4:  renewed preference for city amenities, culture, and density.

Yes, gas prices are back down — at least for now.

But, I think Buyers’ preferences for walkable neighborhoods, urban culture and diversity, and proximity to the Lakes (this IS Minneapolis, after all) are here to stay.

The takeaway(s)?

Buyers who want to build — and builders looking to put up “spec” new construction — should expect higher acquisition costs.

And some homes that wouldn’t have qualified as a tear-down before . . . now do.

*Why the preference for new construction?

Or at least why not reuse the existing home’s foundation?

One of the biggest trends in new homes is an especially deep basement, with high ceilings, lots of egress and lookout windows, etc.

Basements from ’40’s and ’50’s homes (or ’20’s and ’30’s) don’t allow that.

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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