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.
Highly desirable Plan 3, the largest Alexandria model within the
