The Price of Dirt in San Carlos.

June 18, 2013

Vacant-Lot

Rehab or Tear Down?

There comes a point in the life of many properties in San Carlos where its value is driven more by its dirt, rather than the structure that sits on it.  That's a polite and roundabout way of saying that the home has become a tear-down.  With a significant chunk of the housing stock in White Oaks and Howard Park now reaching 65+ years — much of which has seen only a few owners — we're running into more and more of these homes where it makes more sense to just scrape the lot and start over, rather than try to rehabilitate the existing structure.

For these cases, it's critically important to understand the value of the dirt that the structure sits on.  Because it really doesn't matter if there's a just a chicken coop sitting on the property — the size and the location of the dirt will drive the value of the property, NOT the condition house that sits on it.  And if you're not tuned into the difference, it's very easy to incorrectly price a property that you think has very little value.

And you'll probably be shocked to see what dirt is fetching in San Carlos these days.

Size, Location, and Build-ability.

Before we dive into what prices some tear-downs are fetching, it's important to understand what buyers are looking for in a patch of dirt.  There are three basic elements that determine how desirable a piece of property may be:  Size, Location, and “Build-ability”, which I think is a word that I just made up.

  1. Size:  According to the San Carlos Municipal Code, the maximum allowable lot-coverage for a home on a relatively flat lot is 40%.  That figure de-rates slightly as the slope of the lot increases.   This means that if you were to look directly down on the lot, the entire ground floor of the structure — including the garage — cannot exceed 40% of the lot size.   If you need more square footage beyond that, you either need to get a variance, or add a second floor.    So when you consider that most people who are planning on doing a ground-up re-build would like to build a 2,500-3,500 square foot home, the bigger the lot, the better.   Consequently, the minimum that buyers are looking at for this purpose starts at around 6,000 square feet.
  2. Location:  Let's face it…A tear-down on White Oak Way will be worth far more than the exact same structure on San Carlos Avenue.  So location is a huge factor when people look to build their dream home.   Quiet streets with great curb appeal are high on everyone's list.   And being in the flats close to downtown seems to be a huge plus for buyers.
  3. Build-ability:  Just because you've found a 7,000 square feet in White Oaks doesn't mean it's automatically a good fit for a new structure.  The shape of the lot is also a big factor.  Some large lots have an abnormal shape which takes away much of the benefit of its size.   The house at 1383 Chestnut Street is a prime example of just that.   And corner lots also have their own unique limitations because they're bordered by streets on 2 sides.   Generally speaking, the more geometrically proper (i.e. square or rectangular) that a lot is, the more build-able it is.

So now that you've found the perfect lot to build your dream home, what is the tear-down worth?

Million Dollar Dirt.

This may or may not shock you, but the going rate for a 6,000+ square foot flat rectangular lot on a good street in either Howard Park or White Oaks is now over $1Mregardless of what is sitting on it.   And the larger the lot, the further over $1M it will fetch.  We are seeing more and more sales recently that confirm this recent phenomenon.

When you do a bottoms-up analysis, that price makes total sense.  If you use the figure of approximately $275/sq foot for new construction, a 2,500 sq foot house would cost $687,500 to build.    The aggregate cost for the lot and construction for a this brand new 2,500 sq foot house is $1,687,500.  But in this market, the finished product would be worth well more than that.  So paying a million dollars or more for the lot is very justifiable in this market.

As I mentioned at the outset of the post, it's critical to understand when you've got a gem underneath your feet.  Here's a very good recent example of what happens when you don't:  131 Alberta Avenue was a an old, tired home 3 bedroom home.   If you had seen the house, then you'd know that it needed a new roof almost immediately, an entirely new hall bathroom, and a complete upgrade to the kitchen — pretty much the entire house needs to be touched.  Not to mention that it seemed to have a heavy smell of cigarette smoke throughout the home.   The bottom line is that it was arguably a good candidate for plowing it under and starting all over.

BUT..  it's also sits on a prime 6,050 square foot lot located mid-block on a great street in White Oaks.

The $879,000 asking price was probably reasonable if one only considered the condition of the structure, and not the location and size of the lot.   So needless to say, this price was a head-scratcher to many agents who know this market well.    And what happened to this property just demonstrates the point I'm trying to convey in this post:   The value of the dirt often becomes the overriding element in assessing the value of  property, and it's important to work with an agent who realizes when this is the case.

So what happened with this home?  The word on the street was that it got nearly 20 offers and sold for over $1.2M — that's over $300,000 (or a whopping 35%) over the asking price…for what was arguably a tear-down.    Clearly, the value of the dirt was not factored into this one.

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3 Comments

  1. Ken Williams on June 18, 2013 at 11:11 pm

    Hi Chuck, we have built 3 houses over the past 10 years here in the Peninsula and agree with your post. We are contemplating doing another house and we are seeing construction costs closer to $350 versus your $275 (especially for the quality of construction/contractor you would want in San Carlos). When you take your Alberta example, you have $1.2 million purchase price plus $875k for construction which gives you a brand new house in a great location but you are into the house for 2.1 million. If you had to sell the house (relocation, etc), you need a sales price over $2.2 million to break even. Based on the market, does this seem doable?



  2. ckaught on June 19, 2013 at 2:51 am

    1409 Cordilleras which recently sold for $875K, 100K over list, sits on a nearly 6800 sqft lot and is currently being rebuilt.



  3. Bongsang on June 19, 2013 at 8:40 pm

    Yes.. I am the one who understands the situation pretty exactly.



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