Buying Santa Rosa lots to build on after fire

[Kristy F.]

Hello, I'm considering purchasing an empty lot in Coffey Park neighborhood of Santa Rosa that burned down in the Tubbs Fire. I have a contractor willing to do it for a low price since he is building three other houses in the same area.

My concern is, after I build this house in a year, will it be able to sell for a good price? The entire neighborhood burned down. Will buyers want to buy this house in a neighborhood of wasteland assuming not everyone will be rebuilding? 

Also, if many people are rebuilding now, they will likely finish around the same time as me. Will there be a flood of new houses on the Santa Rosa market early next year that drives down the price? It seems like a good opportunity but I'm a bit nervous because my profit margin may be slim. 

[Brian Burke]

@Kristy F. and @Jenelle H., normally the first caution I’d bring up is not your exit but your execution risk.  Finding trade labor is going to get challenging and costs are going to be elevated. I question your contractor’s promise to do it at a low price—I’m hearing guys that I respect saying it’s too early to know where the cost will land.

As to your question about exit:  Word on the street is roughly 35% of the owners are not planning to rebuild. We lost just over 5,100 homes so that means that there will be about 1,800 homes built by new owners.  The rest will probably be reoccupied and not go on the market.  Some lots will likely be bought by people building homes for themselves, but probably not many. Let’s just say 100.  So that leaves roughly 1,700 spec homes. I’ll bet that 20% of those are built in year 1, 30-40% in year 2 and 30% in year 3 and the rest over the subsequent three years. 

This means two things. First, a lot of lots will come on the market over the next few months and most builders expect prices of lots to come down.  Second, homes will start to hit the market in a few months.  

Sonoma county has 4,000 to 5,500 home sales in a typical year. Last year was in the lower end of that range, not because of demand but because of supply. Right now we have only around 350 homes on the market and more than half of those are over $1 million. If we had the homes to sell I’d guess we’d be at the top end of the annual sales range. 

So can our market support an additional 1,700 homes over the next three years or so?  Without even so much as a blip, yes.  You’ll hardly even notice it. 

But be careful as you set price expectations. The ash hadn’t even stopped falling from the sky before the desperate buying commenced.  Stuff started trading way over earlier values with multiple offers immediately.  This will begin to normalize and prices will likely stop rising for a while, or even perhaps drop back to pre-fire levels now that the “panic buying” starts to wane. 

I know some of the buyers of lots and there are very sophisticated buyers in the mix that have decades of history developing here and they have extensive relationships. They’ll get priority over the one-off builders from the subcontractors.  So you’ll compete with them for trades and you’ll compete with them for lots and you’ll compete with them for sales. You can do it, just don’t underestimate the challenges.