Friday, November 30, 2007

Overbuilding In Alexandria

Question: Frank,
I just finished my design your dream home class, and the teacher (a retired architect) made some helpful comments on our existing 8000 sq ft design. Anyway, my concern is a realtor
said if we build a house thats big and we would want to sell it for $2 mill, we don't want to build it in our neighborhood since no one in that price range wants to live in our area, is that true generally? The guy said everyone looking at big houses wants N. Arlington, Oakton, Mclean or Great Fall.

  1. Do you agree with the guy's assessment of the market generally?
  2. Do you think we are even crazier for wanting to put a nice big new house on our lot?


My Reply:

Jane, From a high level perspective, for the most part he sounds right. Ultimately everything is a function of price. I swear you can sell a 8000 SF place there for $500k overnight, right?
So the real question is what amount of losses might you expect for overbuilding in the neighborhood? You "save" $1M by building there versus a $1M more expensive land option in Great Falls, but you might "lose $300k" since there isn't a market for it.

Yes that new house is more marketable in Great Falls, but the lot would have cost $2M (vs your $800k), and add a $1M house on it and you would have to sell it for $3m in Great falls vs $2M in your area. So it is all relative.

I looked up ALL sales in your zip code 22312. There have been only 7 homes that have asked for over $1.25M. 5 were in Pinecrest, so for one, you are in the most expensive neighborhood in that zipcode.

The two highest started at $1.6M and $1.5M and closed at $1.3 and $1.2.

So yes, building a place that would require a $2M sales price would be a zip code record, and therefore very risky! You bought your house for $900k (maybe worth now $800k). How much is the cost to build what you want to build? Over $700k? Only $400k? All that matters too.

Generally speaking, you've heard that you don't want to have the best house on the block, and that still applies here.

But then again if you have a 10 year horizon, love where you are living, can make it tasteful and not too McMansiony, you might make $300k more elsewhere, but does that really matter?

I personally would never do it because I hate construction. Too many things go wrong, it ALWAYS costs much more, and the mental hasslefactor for doing a one off isn't worth it for me. As a builder that can do 5-10 and have a system in place, great. But making just one, would result in stress and therapy beyond any savings vs just buying (for more) that perfect house elsewhere. Or better yet, RENT! You can get an AMAZING deal renting mansions!

So now I take your question and I flip it around:

You bought in 2005. Are you willing to take a $20,000 to $80,000 loss to sell your place?

The initial gut reaction might be "hell no." But what if you bought a place that was $100,000 or $200,000 from it's high. So effectively you are trading up, fairly efficiently. You could wait until your house is back to break even, but I can guarantee you that the $1.5-$2M that you are looking at now, will have gone up by the same %. Same %, means double the actual dollar amount*. (*yes higher priced homes sometimes have different problems in selling, but you get my point)

Hope that helps,

- Written by Frank Borges LL0SA- Virginia Broker (please report typos)