Palo Alto Weekly

Real Estate - October 19, 2012

Real Estate Matters

New buyer dynamics: builders, end users and outliers

by Wendy McPherson

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.

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