What Developers Want: A Tale of Three Promising L.A. Flips
It has always been a goal of mine to sell real estate to developers. This year is off to a fantastic start and seems to be promising; I already have three redevelopment opportunities listed—and all of them are on L.A.’s most desirable side of town: the Westside.
The reason I love selling to developers is simple; they’re often the most profitable, and easiest, client. Unlike residential clients, who are typically emotion driven, developers purchase real estate based solely on the numbers. They could care less what a current home looks or feels like, they concerned with location and whether the home can be redeveloped to maximize resale profit.
In oder to succeed in this niche market I’ve learned how to analyze properties from a redevelopment perspective. And that is what I want to share with you.
The three developer-targeted homes I currently have listed come in at three different price points, so I’ll be able to offer a wide perspective.
Property 1
856 Flower Avenue, Venice Beach, CA
Venice Beach is known for intriguing architecture, fantastic retail and restaurants and, of course, the hip ocean vibe. 865 Flower Avenue is a larger lot for the neighborhood, at just under 7,000 square feet. Fortunately, and also useful to be aware of when presenting, the location of Flower Avenue is east of Lincoln Boulevard, which is the border for homes impacted by the Coastal Commission jurisdiction. That alone can eat into a developers profits because the oversight of the strict Coastal Commission slows a project. Most developers often carry high interest rate debt to finance their flips, so delays can significantly affect the bottom line.
By the numbers:
Purchase price: $1,700,000
Closing costs at resale: $300,000
Building costs: $1,300,000 (4,000 sq. ft. house @ $325/ft)
Debt costs: $100,000
All in cost: $3,400,000
Divided by Exit Price: $4,500,000
= 25% return or $1,100,000
Keep in mind:
-In Los Angeles a developer will more often than not be interested in deals that offer a 25% Return.
-This deals pencils and is why the calls from agents and developers have been steady.
Property 2
455 N Bundy Drive, Los Angeles, CA
Brentwood is a tony neighborhood perfectly situated on the Westside, not far from UCLA, Bel Air and with easy access to the I-405 Freeway. 455 N Bundy Drive is in a quaint, wholesome-feeling neighborhood, and North Bundy offers sidewalk-lined streets, which is never a guarantee in L.A.’s hillside communities. This lot is winner, with 15,000 square feet of dirt, perfectly flat.
By the numbers:
Purchase price: $2,600,000
Closing costs at resale: $450,000
Building costs: $2,275,000 (6,500 sq. ft, home @ $350/ft)
Debt costs: $200,000
All in cost: $5,075,000
Divided by Exit Price: $7,000,000
= 28% return or $1,925,000
Property 3
1204 Chickory Lane, Los Angeles, CA
Lastly, this property is a rare and special opportunity to buy what could be one of the best view properties in all of Los Angeles. 1204 Chickory Lane is at the top of Tigertail Road in Brentwood and has a massive view, spanning from Catalina Island all the way to downtown L.A. This is a promontory lot that juts out into the canyon with no obstruction on either side. This is a big play for any developer, so may not be suitable for most, but the bigger risk could result in a much higher return.
By the numbers:
Purchase price: $7,000,000
Closing costs at resale: $1,300,000
Building costs: $7,500,000 (13,000 sq. ft. home @ $600/ft)
Debt costs: $1,200,000
All in cost: $17,000,000
Divided by Exit Price: $25,000,000
= 32% return or $8,00,000
Keep in mind;
-This deal holds true to the “thirds formula” (which is useful when considering larger flips): property cost, building costs and resale profits should all be approximately one third of the exit sales price. Using this formula is a quick way to calculate if a project is worth pursuing.
-If Project 3 takes two years to complete, you’ve realized a cool $4M/year for your efforts—not bad. If you’re considering embarking on a flip project (and you have some experience) why not go big and double your income? Of course, the risk is greater, but so may be the reward. These are the common questions and concerns developers raise.
As a listing agent, I present the opportunities and know my target buyer market. When pricing the properties, I have a full understanding of the numbers so I can discuss options with developers, and I attempt to keep pricing at a level that attracts a wide variety of prospects.
The numbers for the developers can shift, for instance, if there’s a ton of interest in a property which drives up the sales price. Like with any business as the margins tighten, so do the profits, and that’s when costs must be scrutinized. Cutting costs too much can result in a house of lesser quality, and in these Westside neighborhoods, poor quality homes don’t fare so well. This is all to say, there’s a lot to consider when positioning a listing to target developers. And, there’s a lot for developers to consider when purchasing a property.
To learn more, or check out my listings, visit my YouTube channel [ADD LINK] for an up-close, drive-by of each listing. Then follow along as we see how each of these opportunities play out. Or better yet, contact me to make an offer!