In real estate, the highest value paid for a property is typically tendered from an entity we call the owner/user.  Simply put, he/she is buying a La Jolla home to live in and, theoretically, the can afford to pay “retail” or the highest market price.  The developer is a wholesale buyer and is often-times competing for properties which “need work”, or are otherwise candidates for redevelopment.  Here is how a La Jolla developer calculates or “backs-in” to value.

Often-times, a residential site in La Jolla is under-developed relative to modern upgrades and to what we call FAR (floor area ratio).  This is the total amount of square footage which can be developed on the site per its zoning designation.  Frequently, existing sites may be underdeveloped by as much as 50% in La Jolla.  The developer would calculate the greatest FAR for a La Jolla development:  let’s assume the FAR is 60% and the lot is 5000 square feet.  The maximum developable space is 3000 square feet not including the garage. .  If the market price for a new home in this area is $800/SF for example, in this case a completed value of $2,400,000.  Sales and transaction expenses (title/escrow/taxes etc.) might total 6% or $144,000, leaving net proceeds of $2,256,000.  Construction costs, architectural fees, engineering fees, city permits, bank interest etc. would be at least $400/SF for high-end construction or $1,200,000, leaving $1,056,000.  Let’s further assume that the developer is not a philanthropist and anticipates making a profit…let’s say $300,000, which would be minimal for the risk of taking on a two-year project.  In our fictitious example, the developer should pay no more $756,000 for the existing property.  Property in La Jolla requires coastal permits which lengthens the development process.

Even if this underdeveloped La Jolla property were but 1500SF, in original condition, and worth but $600/SF, an owner user might still pay $900,000 for the property…more than the above developer could afford to offer.  Then how does the developer compete?  He looks for properties with challenges that tend to scare away owner/users… properties that have complicated problems.  The developer does his best in a rising market, where the value-ad is assisted (sometimes dramatically) by inflation.  In a down market, the developer is lucky to break even.  For more information contact Sue at snystrom@san.rr.com