Investment Info:
Single-family residence other investment in La Jolla.
Purchase price: $1,700,000
Cash invested: $750,000
Sale price: $2,675,000
Original plan was to remove existing home and build 6,500 sf single family home on 20k sf territorial view lot.
Instead, we sold as shovel-ready project, fully entitled, to another developer for significant return.
https://www.redfin.com/CA/La-Jolla/6389-Castejon-Dr-92037/home/4922498
What made you interested in investing in this type of deal?
Have completed other similar projects. This property is in my neighborhood, so I'm familiar with the market and potential exit values.
How did you find this deal and how did you negotiate it?
The deal came from a local broker who was familiar with my acquisition criteria. Although the existing home was not distressed, it had never been updated (1963) and was in disrepair. We negotiated a quick closing and short inspection period, knowing that eventually the house would come down. We were willing to pay near retail price, because the margin would be realized at exit.
How did you finance this deal?
Acquisition:
25% equity
75% leverage - hard money
Construction loan was approved and ready to go, but never started construction.
How did you add value to the deal?
- Found the right development site with minimal coastal development requirements, which allowed ground-up construction without a CDP (coastal development permit).
- Developed architectural plans and supporting studies. Submitted to city and managed permit approvals.
What was the outcome?
Decided to test the waters and put up for sale as ready to build project, expecting ultimate buyer to be a retail buyer, ready to build and move in. The eventual buyer was another developer - we sold as fully permitted/shovel-ready project.
Negotiated some seller financing to help with sale
Made nice profit and sidestepped construction risk.
Lessons learned? Challenges?
1. Learned that it's possible to sell fully entitled project if there's enough juice in the deal - another exit to consider.
2. Appraisers stumble on the value of entitlements in this area. Original appraisal did not meet sale price. But after appeal and additional comps, worked out fine.
3. Took awhile to negotiate and close the sale. In the meantime, we couldn't start demo because it would have jeopardized the buyer's ability to close loan. This put us in a difficult spot as escrow delayed.
