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Uploaded: Wednesday, October 17, 2012, 1:21 PM
Real Estate Matters
New buyer dynamics: builders, end users and outliers
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by Wendy McPherson
Palo Alto Weekly Staff
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 | It used to be that when a builder bought property on which he was going to build a house (or houses) he wanted to feel that he already made a profit on the day he closed the escrow.
He used to be able to do this by being an experienced local builder that knows his market. He has ready cash from a bank or investors and can close the property quickly. He can approach a seller, offer his cash and close quickly. The seller does not have to do any preparation of the property; no repairs, no paint, no fix up, no clean up, obtain no reports and has absolutely no hassle. Also, many times the builder allows the seller to stay in the property for a couple of months after the close of escrow at no cost (although many lenders will only allow the sellers to retain possession for no more than 60 days).
For these benefits, the seller might be willing to sell at a reduced price. Builders also knew the ropes for searching foreclosed properties and distressed properties (now known as short sales). However, our current heated, appreciating marketplace, which started earlier this year, has put greater pressure on these builders. End users (people who buy the house for themselves to fix up or build) now also offer all cash, no repairs, quick closes and let the sellers stay in the property for as long as can be negotiated. End users also now have access to foreclosed properties and short sales. Most foreclosed properties are listed with real estate agents by the asset managers that serve as intermediaries for the lenders who own the properties. This competition from end users, who are looking for a long-term investment for their families, is generally going to be greater than from a builder who is looking to make a quick profit.
Based on these facts, you would think that builders would have stepped away from the marketplace. However, instead of these builders folding up their tents in the night, they have stayed in the game. On many multiple-offer situations on well-located, decent-sized lots, at least one or more of the offers is from a builder. Just last week, a home came on the market for $1,685,000 in a well-located part of Menlo Park on a 10,250-square-foot lot.
The house was livable but needed a fair amount of fix-up to make it comparable to most houses in the surrounding few blocks and it was only a 1,600-square-foot house. This is a common scenario for our 50+-year-old housing stock around here. This was the perfect type of house that appealed to builders, end users and outliers.
Outliers are the seller's favorite kind of buyers. Builders would like the good, conforming sized lot, end users would like the ability to live in it "as is" or build later and outliers are ready to buy anything that works for them. Outliers are folks that will pay a substantially higher price than any comparable (even considering a rising market) or anyone else who is bidding. Why? They are sick of looking, sick of losing and finally have made a decision to get ahead of the rising market by making a quantum leap over any possible competition. No one can compete with outliers.
In this particular case, the house had four offers, one of which was from a builder. The offers ranged from $1,725,000 to $1,900,000. The builder's offer was second to the highest so it went to a family that was going to remodel or build new.
Many times the builders do prevail, hence the healthy numbers of newly constructed houses you see going up in our Midpeninsula cities. These individual projects have almost all been bought from homeowners living in "tear downs." This trend speaks to the confidence that builders have in the continuing strength of our market when they are willing to outbid end users for projects that will be coming online anywhere from eight to 12 months out. Instead of the upfront profit on the closing of the purchased property, builders feel that the "deal" is simply getting the deal from the other buyers. Their profits will come from their skill and the marketplace they sell into.
Wendy McPherson manages about 145 agents for Coldwell Banker in two Menlo Park offices, plus Woodside and Portola Valley. She can be reached at WMcPherson@cbnorcal.com. Are you receiving Express, our free daily e-mail edition? See a sample and sign-up for Express.
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Posted by Maeve, a resident of Menlo Park, on Oct 21, 2012 at 5:48 pm I'd love to take advantage of the up-tick in real estate, but as a now single homeowner, I get only half the tax break that couples do. this means that after all the other costs, I can't afford to move. I can't live in half a house but yet I'm penalised for being single. I have several friends in the same situation.
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Posted by Jan H., a resident of the Old Palo Alto neighborhood, on Oct 22, 2012 at 1:58 pm We have a nice house in a good neighborhood, but the house and lot are too small for our growing, extended family. The City of Palo Alto will not let us add on because of the small lot size. We put it on the market at a discount, but people either tried for a further discount, which we could not afford to take, or wanted to tear it down and build a larger house, which the City will not allow. The situation is becoming untenable!
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Posted by anecdote annie, a resident of Stanford, on Oct 22, 2012 at 2:06 pm "We have a nice house in a good neighborhood, but the house and lot are too small for our growing, extended family. The City of Palo Alto will not let us add on because of the small lot size"
Interesting comment, Jan H., but a while ago you stated:
Web Link
"BUT, the local real estate agents treat us like losers because we cannot afford a house more expensive than $1.3 million, which buys a small, junky house on a sub-standard size lot in the first block of a street off a very busy street near the railroad track!"
So is the house nice or small and Junky? Is the neighborhood nice or is it a busy street near the tracks?
An anecdote for every occasion.
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Posted by Jan H., a resident of the Old Palo Alto neighborhood, on Oct 22, 2012 at 6:55 pm It is a nice, small house in Old Palo Alto, too small for four adults and two children. Unfortunately, we cannot afford to upgrade in Palo Alto because we cannot afford much more than 1.3 million, which would only buy us another small house, but one in bad condition, in a bad location. In other words, we cannot even make a lateral move in Palo Alto. But, first things first, we have to sell the house we are in before we can consider upgrading elsewhere. So far, the people who want our house have not been able to get financing, which I thought one was supposed to do before even looking. The ones who can afford it want a bigger lot in order to build a McMansion.
So, we are stuck in an untenable situation! Since the City says the lot is too small to expand the house.
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Posted by palo alto mom, a resident of the Duveneck/St. Francis neighborhood, on Oct 23, 2012 at 12:49 pm Jan H - Unless you live on Alma, any house in Old Palo Alto should sell for more than $1.3 million. You need the advice of a good real estate agent.
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Posted by Jan H., a resident of the Old Palo Alto neighborhood, on Oct 23, 2012 at 1:46 pm
Jan H. is a member (registered user) of Palo Alto Online We do need a better agent, it is true. We fired ours because she could not get a good price for the house we are in, not could she find us a larger house for under 1.4 million in Palo Alto. We do not want to leave, but there are six of us living in a house built for three.
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Posted by anecdote annie, a resident of Stanford, on Oct 23, 2012 at 1:54 pm Web Link
"(we have 4 adults, one small child living in a 3 bdrm, 2 ba house...need a larger one"
Wow, a 3 bedroom, 2 bath house is only for 3 people???Wow
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Posted by Jan H., a resident of the Old Palo Alto neighborhood, on Oct 23, 2012 at 9:51 pm One bedroom for us, one for husband's office, one for a child. Living room, dining room, kitchen.
Now it is one bedroom for us, one bedroom for son and DIL, one for toddler, husband trying to work in dining room, we eat in covered patio, no place for baby -on-the -way who will be born before house goes on the market again. No room for another crib or other furniture in the toddler's room.
Not exactly executive living, is it? Not a Palo Alto standard of living, is it?
Oak so happy for you, Annie, that your life is so peachy-keen.
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Posted by anecdote annie, a resident of Stanford, on Oct 24, 2012 at 6:13 am So really, Jan, you only have "lost" your dining room. Does not sound like to much of a hardship to me--but I guess some people need to tell tales of woe all the time. Is this the son that you wrote about that was such a sucess in college? So what happened? Why does he not live on his own?
There are many people that have it much worse than you--but they do not go around spreading their anecdotes for every occassion on a regular basis.
The story still sounds fishy to me
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Posted by Jan H., a resident of the Old Palo Alto neighborhood, on Oct 24, 2012 at 1:12 pm My son and DIL were laid off within a week of each other, and my DIL decided to go back to school full-time, since she was not making much progress going part-time. At the time, it was obvious they needed help, so,we let them move in.
My son quickly got another job, and then a promotion. We found we LIKE being an extended family, we had actually talked about doing this when he was still in middle school, as we had spent plenty of time in Europe and liked that style of family life. Also, I grew up in an Italian neighborhood and was exposed to,that extended family household at an early age, and admired it then. We concluded that we would like to live this way always.
Then my DIL unexpectedly became pregnant,since every form of birth control eventually has a failure rate, even the PILL! Everything was fine, except now my husband, who works at home from 5-7 am, from 8-11 pm, and half-days on weekends, had to give up the quiet of his home office.
Also, with. 5000sf lot, there is no room for a play area for my now-toddler granddaughter. The back,yard is all patio, no lawn. She falls, she gets hurt. So, we spend a lot of time walking to the park. Also, the house is two-story, not very safe for someone who has ankylosing spondylitis, nor for a toddler.
Now there is another baby on the way, and since we have the largest home of anyone in the family on either side, all family entertaining is done here. As an executive, my husband has to do,a fair amount of entertaining, and our living area is too small for family or executive entertaining.
We have simply outgrown our house and it is uncomfortable and inconvenient, as well as being unsafe. We are looking for a single-story house with four bedrooms and three bathrooms. That is not selfish or extravagant, especially since we will have to move somewhere less expensive than Palo Alto to afford it. We live too close to a busy street to be safe for two small children .
It is simply cheaper for us all to,leave Palo Alto, buy a bigger house on a bigger lot, and send the children to Catholic Schools than to try to upgrade in Palo,Alto. All we could get here is a 3 bedroom, 2 bath dump on Alma near Mountain View. What would be the point of moving, then.
Yes, there are people who are doing worse, but they do NOT own a home in Old Palo Alto.
I am glad you have such a nice, trouble-free, uncomplicated life, but GIVE IT A REST!!!
Awn .
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Posted by palo alto mom, a resident of the Duveneck/St. Francis neighborhood, on Oct 24, 2012 at 2:01 pm Jan H - My suggestion would be to find a rental, move out of your house, stage it and sell it, then buy a new home (you could take advantage of renting to try-out your new community). It was very nice of you to let your family move in, your granddaughter is lucky to grow up with so much grandma and grandpa time!
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Posted by Ducatigirl, a resident of the Old Palo Alto neighborhood, on Oct 25, 2012 at 8:44 am Sounds like an expensive solution: mrtgage payment + rent + monthly payments to a stager. May not be financially possible for some people, but it is a nice idea, if not a practical one.
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