An insiders view on the pricing policies and inner workings of the Irvine Company. This post is from multiple sources, but I claim no first-hand knowledge of what is written. I think you will find it interesting.
Asking Price: $699,000
Address: 6 Lakeside #33 Irvine, CA 92604
Whether you’re a brother or whether you’re a mother,
You’re stayin’ alive, stayin’ alive.
Feel the city breakin’ and everybody shakin’, people,
Stayin’ alive, stayin’ alive.
Stayin’ Alive — Bee Gees
Have you ever wondered how prices on The Irvine Ranch evolved? Why are they higher than other Orange County communities? I have recently had long conversations with a few people familiar with the process, and today I am going to share it with you. Much of what is written below came from former company insiders who declined to be named for this post.
First, it may we worth reviewing Land Value 101 to provide a conceptual framework for how land is valued. Some of the concepts in this post build on the foundation of that one.
Land planning is a process whereby the elements of community are woven together in a framework that maximizes land value based on proximity to major sources of jobs. On the Ranch, The Irvine Company defines the lot sizes/density, product type, approximate price range, buyer profile, number of homes, etc. for each planning area (and parks, schools, etc.). Efforts are made to try to position the product array such that builders are not competing with each other head to head. That is part of the process of good land planning.
The Irvine Company selects a few builders to develop a line of floorplans, exteriors, financial proforma, etc. to be presented to TIC — at the builders expense. TIC project managers have a number in their mind as to what that financial proforma causes the price of the land to be and they work toward that end. It’s an easy formula that takes into consideration all the elements necessary, including builder’s overhead, their cost of financing, building materials, profit, etc. (see Land Value 101).
It’s no coincidence that the builders who present financial proformas with the highest residual land values are the ones selected. Rarely does design, style, excellence of architecture — except as a function of density — win out over high cost of land. Architectural competition becomes a race for higher density, not excellence in floorplan. But all the builders know if they don’t play the game, they won’t be invited to the party again, so they get creative with features such as bonus rooms, garage space conversions, spec levels, and other techniques. For more detailed information on this process, please visit our Architecture Forum.
Builder profits on the Ranch were often in the 4-6% range, if that (builders usually make 12% in a stable market). Building costs were a bit high, even early in the bubble, with the amenity level in homes on the Ranch, those costs were closer to $125-$145/sq.ft instead of the $85 found elsewhere. Sales staff (except for the custom lots) varied from builder to builder, but were either a flat rate (“box rate”) with small commissions for selling options ($50 for Air Conditioning, etc.) or up to.05%. The higher the sales price, the lower the commission. Sales managers were salaried (so came out of overhead) with bonuses. But even small builders rarely got anything close to 6% and that had to cover on-site people compensation (often without a draw), some level of management oversight, some level of advertising/marketing/sales training.
Back to the process…. Once the builders are selected, they close escrow on the land. In Woodbury, land prices got up to $5M/acre (see Land Value 101). A single family home on a 50 x 90 lot yields about 5 homes per acre when you take out streets, etc. So you begin with land cost of $1M, add overhead, materials, etc. to arrive at a final selling price.
Then, (it may be 2 years until they are ready to open for actual sales) before they can offer anything for sale, the builders must first present their individual lot prices (base prices and lot premiums) to TIC for review. The reason for this is that TIC, in addition to the price already garnered for the land, also participates in the builder’s profit when the home closes escrow with Joe Lunchbox/original consumer. Thus, in a rising market, TIC actually gets more for the land they sold 2 years ago.
In a declining market, the builders often make little or no profit, but they will be invited to The Irvine Company’s party again. Often builder’s profit levels are less than what they could achieve if the same money was invested in simple CD’s. To make the most of their investment in Irvine, they bought much less expensive land in Riverside, San Bernardino, Temecula, Arizona, etc. and used the same floorplans again, and again. But they were convinced that they needed a presence on the Ranch.
The builders did this because being on the Ranch brought in bus loads of developers from other companies and other states/countries and enhanced their image. Like in retailing — a loss leader — something you sell cheap hoping to make it up later. All those same builders built projects in Rancho Santa Margarita, Los Flores, Ladera Ranch, etc. Many of those projects debuted in Irvine.
Occasionally, the sequence was reversed; new product debuted in RSM, came into Westpark II at 12% higher prices. With all the same players; Standard Pacific, William Lyon, Brookfield, Richmond American, RGC, Baywood, K.Hovnanian, Taylor Woodrow…on and on. Same products, community specific themed exteriors, advertising, etc. We looked at community specific pricing and compared them — Irvine always came out on top — access to jobs locations was key (and still is). The theory was that a mid-level manager who worked in Irvine would travel a bit of a distance to buy what he perceived as a home nearly as nice as his boss who lived in Irvine. Therefore, price discounts were defined.
IMO, this process is a brilliant example of a powerful landowner leveraging their power to extract maximum profit out of the deal. The demand for housing puts pricing at a certain level, and The Irvine Company wants to extract whatever profit it can out of that demand. I wish I could set up a system whereby every new resident of Irvine gives me $400,000 cash profit (at least at the peak). That’s how you get a net worth of $12,000,000,000.
Asking Price: $699,000
Income Requirement: $174,750
Downpayment Needed: $139,800
Purchase Price: $655,000
Purchase Date: 4/15/2007
Address: 6 Lakeside #33 Irvine, CA 92604
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 2,190 |
| $/Sq. Ft.: | $319 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Contemporary |
| Stories: | 2 |
| Floor: | 11 |
| Year Built: | 1977 |
| Community: | Woodbridge |
| County: | Orange |
| MLS#: | P693353 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
SHOPPING CENTER , SCHOOLS, RESTAURANT, MASTER BEDROOM IS ON MAIN FLOOR
,OWNER HAS A R/E LICENSE
This property was purchased by a relocation company then deeded to the current owners. The owners put 20% down, so this does not look like it will be a short sale. Of course, they are asking for enough to make a profit, but I rather doubt this property has appreciated over the last two years.
Wow – -such a short description…yet they have “WALK IN DISTANT TO BEAUTYFUL LAKE”…it took me a while…but translated it is probably “walking distance to beautiful lake”…oh, right, this explains it: “OWNER HAS A R/E LICENSE.” Scary.
Similar homes are all over the Dallas and San Fernando Valley markets. Dallas $200-250k, slowly dropping. San Fernando Valley, nicer parts, $300-400k, dropping 2-3% per month.
They might be almost free in Phoenix.
This leads me to a question for people from Irvine. Is anyone relocating TO Irvine from outside OC? Why?
Not sure why any are coming IN either…a house near us is one of the only ones sold in the last 6 months in Newport where we rent, and the car tags were from Arizona of all places. They supposedly paid 1.4m for the house. No idea what would bring them into the OC at this point. Maybe AZ lawyer heading up a booming bankruptcy practice?
One couple buying in our area is in the high-tech field; relocated from the East Coast.
This is why the housing ATM is permanently broken:
MBA: Record Home-Equity Loan Delinquencies
U.S. Home-Equity Loan Delinquencies Set Record in First Quarter
When HELOCs go delinquent it is often part of a foreclosure. The loss severities are running about 95% because these defaults occur on houses with no equity left. Basically, people are defaulting and banks are losing everything. When the risk on these loans is properly repriced, they will either not be extended to people, or the cost will be at usurious credit card rates.
Saw this too – the credit cards are next.
“Soaring unemployment and a shrinking economy drove delinquencies on credit card debt to an all-time high in the first quarter as a record number of cash-strapped consumers fell behind on their bills.”
http://www.usatoday.com/money/industries/banking/2009-07-07-consumers-overdue_N.htm
Wow. And all this time, I thought the ranch used one of these to figure out pricing.
[img]http://www.occultblogger.com/wp-content/uploads/2009/03/ouija-board-game.jpg[/img]
LOL!
+1 for No Vaseline.
Actually, all kidding aside, Donald Bren is brilliant, and could probably buy The Donald (Trump) several times.
Yes, you do have to give the man credit. He had the vision and executed it very well. I am always amazed at how efficient the Irvine Company is at extracting all the profit from their properties. They do the same thing with tenants at their commercial centers.
And not to further stroke the man, but in due credit to Bren….
There is a comperable company to TIC – the Newhall Land and Farming Company. Both of them are almost the exact same age. In the early 1970’s NLFC dwarfed TIC in scope, assets, cash flow……..and now they are busto.
It’s amazing that Bren has structured things that make it so that people actually think that a condo is worth seven hundred grand.
Maybe one of you knows the answer to this one. I remember reading some where that Donald Bren paid far less than his current net worth for the Irvine Ranch when he bought it from the heiress of the Irvine family. He pulled off a savvy purchase of an undervalued asset. Does any one know what he paid for it?
Have you heard the name Cary Bren. He is(was)the president of California Pacific Homes. They have had 1st choice in each of TIC’s projects from Oak Creek to woodbury. He also happens to be Donald Bren’s son. Let’s call it like it is……………..B.S.
Jul 02, 2009 Price Changed $699,000 — SoCalMLS #P693353
Jul 01, 2009 Price Changed $609,000 — SoCalMLS #P693353
Jul 01, 2009 Listed $719,000 — SoCalMLS #P693353
I wonder what the price will be this afternoon.
I forgot to mention in the post that it took 10 years for this property to appreciate enough to cover the commission on the sale:
Jun 09, 1998 Sold $348,000
Sep 29, 1988 Sold $320,000
Wow. According to the calculator at inflation data.com http://inflationdata.com/Inflation/Inflation_Calculators/Inflation_Rate_Calculator.asp#results the period from 1988 to 1998 had a 36% inflation rate. But this house only appreciated 8.75%
But, my feeble brain says it makes sense. It seems to me houses should appreciate slower than the inflation rate, because a 10 year old house is generally in worse condition than a brand new house.
It really underscores the problem with buying at prices above their fundamental valuation. Back in 1988, the market was in a bubble and the price paid was 20%-30% inflated. As that bubble deflated and prices slid back to fundamental levels, it was not until 1997 that prices began to appreciate again. The nominal breakeven price took 10 years. The only way it would ever make sense of an inflation-adjusted basis is with another real estate bubble. The implication of that fact is that those who purchased in our most recent real estate bubble — a bubble that saw 100% price inflation rather than 30% price inflation — will take 15-20 years to get back to nominal breakeven, and on an inflation-adjusted basis, they may never get there — unless we inflate another housing bubble.
“unless we inflate another housing bubble”
It will need to be a bubble even bigger then The Great Housing Bubble. I am sure we will see bubbles again. But bigger than The Great Housing Bubble, this I am not so sure of.
You’re forgeting the most important aspect of marketing stocks and RE. Pump and Dump. Repeat the cycle in different areas. Return to the original area only after the original foolish investors forget, greed overcomes their fear or brainwash with the montra buy before it too late.
too late for RE industry to collect more fees.
IrvineRenter: “…they may never get there—unless we inflate another housing bubble.”
It pains me to suggest this, but I believe double-digit inflation (as in the 1970s) can also increase home prices.
If in a few years, our government decides to inflate away its large debt, I would think tract homes would be on their way to costing a million dollars without any bubble at all.
I read that houses are depreciating assets, it is land that appreciates. Take any home out to infinity – it will be gone, but the land will still be there.
Maybe, but there are millions of buildings throughout the world that are one hundred, two hundred, five hundred years old. A well built building, properly maintained, lasts forever. Of course, maintenance costs do increase as a building ages, but not excessively so. In any case, a lot of “repairs” older houses “need” aren’t really repairs at all, but are upgrades due to technological advances or changing styles. That is, an avocado green stove from 1973 probably still can cook food perfectly fine. Replacing it is remodeling, not a repair.
I assume those are all made of brick.
Blueberry, I doubt even that. Even brick starts to erode after about 50 to 100 years, or at least the mortar. Current mortars are better. Try stone, dry fitted for best results. When I lived in Germany, I lived down the street from the house where Goethe wrote the famous “An die Freude” (Ode to Joy) written in late 18th century. Every building around it had been torn down in favor of 19th and 20th century “Altbau” (Older brick 5 story walk-ups) in contrast to the concrete “Neubau” (Newer buildings) of the 1940s to 1990s. It was still standing, but it required substantial upkeep due to mortar being used that included things like eggs and horsehair. No kidding!
Chuck Ponzi
Sorry, I meant the Schiller house, not Goethe. I was thinking one thing and typed another.
chuck
A friend of mine has long maintained that the Prop 13 movement came out of Orange County, where huge tracts of land were being held empty to maintain orderly development (high prices)
Prior to Prop 13, housing prices were rising fast, with the highest component being the underlying land. Without Prop 13 bare land tax rates would rise enough to force its sale or development, lowering land scarcity and bringing overall housing prices down. That led to large landowners like TIC underwriting the Prop 13 campaign.
The story makes sense but I have never read any credible press account to support it. Anyone?
I appreciate informative posts such as this one.
When I was looking to buy back in 2002, I knew Newport Beach was beyond my affordability at median price of over $600K, more than 4x my gross income; I don’t regret not having bought there, although prices there appreciated considerably higher than Irvine and they retained their value better too; it would have been an immense risk to my financial health to have undertaken an unconventional loan and maximized my leverage.
I like my location in Irvine because it’s a short couple mile drive from the beach through Culver & Newport Beach drive. I let the Newport Beach residence pay the Mella Roos and special bond asessments to pave the road to my weekend trips. Personally I’d rather be a quick ride to work than live at expensive beach areas which I visit only once a week at most. Statistically, being on the road is the greatest risk to one’s health and life. Minimizing that without breaking one’s back is arguably prudent planning.
Human nature is such that people will always overextend themselves in order to experience wealth; wealth is in “relation to others.” To feed that compulsion, if you must, buy in at most, a mid-range neighborhood and when your savings earn enough interest, use the interest to remodel your home into something exquisite, perhaps worth $500 sq/ft. Beware, it may make your relationship with your neighbor a bit tense for a while.
As a rule, I would overextend in saving, not in spending. Given all the temptations against saving and paying off a mortgage, I would never fool myself into thinking that I would accelerate mortgage payments using a 30 year mortgage; *no one* has proven to have the discipline to do that; compare the daily cost of a 15 yr vs. 30 yr mtg… and the massive positive feedback the 15 yr provides you as you pay it off fast (1/3 in the first 7 yrs, 40% of your payment from day one). When you THINK like long-term investors, you’ll begin to change your spending habits and shun bad deals; I regularly review at daily cost of my expenses and compare it to daily earnings of my passive investments.
There you have it… fresh from Nancy’s kitchen.
I may be misunderstanding your post but, my parents bought in a beach town in the southbay in 96, a 3/3 for $320K. 15 yr mortgage and paid it off in 10 years…livin free and clear for the past two years and counting. But I will give it to you that “virtually” no one has that similar discipline.
Do you know anyone who pre-paid a 30-year mortgage? I don’t. That was my point; people deceive themselves into thinking they can get a 30 year mortgage and with discipline, they can amortize it at the 15 year rate by extra payments. Never seems to work (I read a research study on the same claim). When the cash is in your hands, there’s one thousand and one ways to spend it.
Kudos to your parents.
You may not know anyone who paid off their 30 year early, but then, you live in California.
Ours was paid off our 30 year in 10, but it makes more sense to do that in a place with a reasonable cost of living. (Mid West), We paid off our house in full and it is still less than 25% of our net worth. In California to pay off a house early makes it a much bigger, very illiquid percentage of one’s net worth.
If every mortgage over the past 10 years had been a 15 year fixed rate mortgage we would not have had the housing bubble. For a 450k home with 20% down, the mortgage only payment (no taxes/ins) is around $3k. A person might say, I can afford 3k a month, what will a 30yr mortgage give me – 500k loan, or a 590k home with the same dp. Move to a 2% I/O teaser option arm and you can 1.8M. You can do the same math with a 25%, 33%, 40%, 50% debt-to-income ratio. The bigger income percentage one is willing to pay towards a home the higher home prices get bid up.
Does anyone here argue against lower debt-to-income ratios and more conservative underwriting?
I know lots of people who took a 30 year loan at 7 to 8%. The rates when down and they were no longer owner occupied, so they paid off the loan. Some of the owner occupied ones also did the same.
I think there are a few RE agents on this board that think the past debt to income was just fine and IR et al. are talking the market down with the market timing and fear mongering. I’m not in that came. A house is a house is a house until you sell your soul for them. House is not a home, but can be a debt prison.
Two dolla too much?
My friend works for a builder company, she said most builders do not really like to do business with IAC because the profit margin is to small.
Also, the selling prices need IAC’ approval and IAC has a profit sharing schemes that will take additional profit away from builder.
Is this true?
I don’t believe the Irvine Company has direct control over selling prices as that would be price fixing; however, they do control so much of the cost structure that if a vendor does not charge the desired amount, the vendor would lose money. This indirect control is so powerful that they do determine prices on the Ranch.
It is remarkable to think about how much of an Irvine resident’s income goes to the Irvine Company through either a home sale, rent, or profit sharing on the price of goods and services.
I don’t want to make the Irvine Company even richer so I moved from one of their communities to a privately owned apartment. Feels much better. It is amazing to see how many crappy apartments from the 70ies and 80ies that never have bee properly renovated the Irvine Company manages to rent at rents of $1500 per month and more. What a rip-off for the tenants and what a cash cow for the company. But I guess that’s the benefit of monopolistic power…Also, the low supply on the rental side further fuelled the real estate bubble in Irvine since it is hard to find something appealing at a reasonable price…
I also moved from Rancho Santa Fe in Tustin Ranch. Something within me tells me to stay away from IAC and i don’t know why? I never have any convincing argument to tell to my wife for staying away from IAC. May be their monopolistic influence on the region in general.
IrvineRenter,
The Irvine Company controls the raw material cost (land), specifications for the house and community, and developer selection, they will control the price of new construction, so only variable remaining are the incomes of the buyers, profit margin and final prices. For used houses, they should almost no control except availability of new houses and rentals.
Does the Irvine Co, TIC or sister corp own the commercial RE land in Irvine? That is: long-term lease the land out to developers, so call land lease.
“I let the Newport Beach residence pay the Mella Roos and special bond asessments to pave the road to my weekend trips.”
It’s a shame we have to pay for roads when we all pay CA taxes in many avenues, sales tax, state tax, property taxes.
The problem with CA is the extreme overpayment of all the state workers along with very high pensions that we all pay for yet they still have to charge us more to live somewhere with mello roos taxes.
The taxes in CA are totally unfair to all who have to work and live here. And now the greed is coming home.
So the Irvine Company formed a monopoly and set prices. Somewhere this too does not sound fair.
but we have the weather right?? LOL—
Once I went to an Irvine city hearings that proposal by our community to against TIC to convert a commercial zone to high density apt zone.
The results seem make both happy, TIC were original planning to build high density apt and instead now the give us a ‘favor’ to just build high density condo. And they will donate additional few million dollars to improve the traffic etc.
The hearings and the outcome of the results is just like an unrated and very cheap detective story that written for 3rd grade kid only. it is so fake to me.
Form this zone change, TIC can make huge amount of money but since the size of school was planned and built a few years earlier so it cause overcrowded school and other implications too.
My question is how much the Irvine city councils really work for us, do they or their relatives and friends get some business from TIC (rumors?)? Does TIC donate money to city councilors to affect policies?
The city council does the bidding of the Irvine Company. If someone were to run on an anti-Irvine Company platform, the would likely be smeared by some major campaign dollars. To oppose the Irvine Company in Irvine would be the end of a career in local politics, so the politicians do what they are told.
A close relative of my has a lot of land in one of most desired city in Asia. They dominate some parts of the city as TIC does here. But to be honest, a lot of things are not possible in there all happened here. It is very sad that Irvine just likes some 3rd counties (such as Nigeria, Philippines), except it’s just regulated illegal with TIC’s business practice.
My point here is TIC is much weaker than you perceived, because in a way I kind know what rich people think. They are actually very afraid of lawsuit of troubles. They try to take advantage everything but as long as people start defending themselves, they will know it is time to stop.
In order to make the Irvine city and our community become better, we should start make some noise now.
Nah, I’m good!
And yes, you were witnessing a completely staged presentation to make it look like TIC was giving up something; the politicians look good and TIC gets what they want. It was likely orchestrated by a political consultant…. I know because I have been involved in similar political theater in other jurisdictions.
Re: Don Bren and Irvine Çompany
The Irvine Foundation was poised to sell The Irvine Company to an oil company, when Bren arranged financing from Ford, Taubman et al and out bid them.
Do you think our quality of life would have been higher the past 35 years if Exxon-Mobil was the owner of The Irvine Company?
I sent somebody over to you guys who wanted a Cali blog. Hope he/she got there.
Hey guys
Irvine Company is inviting people to their Woodbury East inauguration on July 11th. Have we covered Woodbury East somewhere else on the blog?
Thanks
We have a thread in our forums on the new products:
New Homes coming to Woodbury in 2010
Nancy..
“Do you know anyone who pre-paid a 30-year mortgage? I don’t.”
Now you do. I didn’t take a 15yr. note because I knew I had the discipline to pay off a 30 yr. note and leave myself some wiggle room in case of unforeseen emergencies. The place is paid for, and while I wanted a bigger one I’m not willing to pay these prices. It’s a great rental now, (in demand being walking distance to a major university), and I’m leasing a bigger place.
I’ll buy when I feel it’s right and keep the income from the old place coming in.
Kudos to you. Did you pay it systematically in 15 years, or just a big chunk? Did you ever skip one month and double up the next?
I can’t speak for JK, but for me it was in a series of chunks.
Whenever I accumulated enough cash savings that I had to make an investment decision with it, I made the call of stocks / bonds / CDs. or mortgage pay down.