The teardown lowdown

Profit margins could soon shrink for contractors building pricey spec homes

Jun.June 05, 2017 01:00 PM

David Hansel and John DiStaulo

Suburban living in Northern New Jersey remains as in-demand as ever. Inventory of single-family homes slid more than 25 percent across Bergen, Passaic, Morris, Essex and Hudson counties from March 2016 to the same time this year, according to New Jersey Realtors, the state branch of the National Association of Realtors. Eager buyers are primarily in the market for new builds, and developers have been trying to meet the demand by snapping up outdated homes and demolishing them to build structures that satiate today’s buyers’ taste for open living spaces and modern amenities.

And there are few signs that the teardown trend is slowing down. “Costwise, renovation is more expensive on these older homes,” says John Paul Di Staulo of Di Staulo Construction, which after years of working in Bergen County is expanding into Essex County due to high demand.

However, builders could make less from the trend in the near future. Jeffrey Otteau, president of the real estate analysis company Otteau Group, says that increased lumber and labor costs — due in part to the Trump administration’s policies — will likely shrink profit margins. “Much of the construction labor comes here from foreign countries, so the homebuilding industry is dependent on affordable building costs and labor costs,” he said. “That’s going to create some cost pressures.” On the other hand, the financial deregulation that’s also proposed by the president could offset any damage by putting more money into the pockets of potential homebuyers working on Wall Street, allowing them to pay steeper prices, Otteau said.

The Real Deal spoke with experts in the field to get further insight into the future of New Jersey’s continuing teardown trend.

John Paul Di Staulo
Co-owner, Di Staulo Construction

Where are you doing the most teardown-rebuild construction? We primarily build in Bergen, where we’re very busy. Almost 100 percent are knockdown homes. Anything built before the ’80s gets knocked down.

What do buyers want from new homes? I see people going for higher quality and less square footage. And that means everything from the building material they want used to amenities in the home like more sophisticated heating systems. We’re doing a lot of radiant heating systems and adding finer interior finishes. The floor plans tend to be a more open layout.

We previously reported that land prices dropped in 2016. Does that match what you’ve seen? We are not yet back to pre-2007 prices, before the market crash, but I don’t think they dropped in 2016. They just stopped rising briefly. The market seems to be rising. I think it’s not going to move much either way.

David Hansel
President, Alpha Capital

Your firm specializes in loans to construction companies that are building on teardown properties. Does the current market makes it easier for builders to get loans? Are you seeing lots of competition between builders to secure loans? It’s such an active investor market. There’s activity everywhere, so competition isn’t really an issue. It is getting easier and easier to get loans. Some lenders are uncomfortable with ground-up construction. We think the quality of the builder and the risk of the unknown is better with new construction.

Sometimes we’ll partner with the builder and take on the debt. We get all our equity capital after the bank, and we take some kind of a preferred return and split the profit with the builders. We’re partnering with the good builders. The problem with some builders is liquidity, so we try to be a capital partner with builders and developers.

Are there many other companies like Alpha Funding that are specializing in teardowns right now? Well, it depends what you’re talking about. When you start getting to $6 million, it’s a small market of people who would buy those homes. But at lower prices, the lending space is getting tighter and tighter because there’s a lot of competition on the lending side. And now there are some big national players like LendingHome that have stepped in. But people discount how hard it is to rehab and lend for those projects. It’s a massive risk. If a project sits for two or three years, that could destroy your returns.

Dennis McCormack
Broker, Prominent Properties Sotheby’s International Realty in Alpine

What are your buyers looking for? I’ve found that buyers are more willing to renovate homes. Once we get over a certain price point, luxury buyers don’t want to settle. About 80 percent of my clients are from Manhattan, and one of the driving factors is that the schools are so good.

Are sellers of teardowns getting above-ask prices? When a home is priced correctly, it usually sells in close proximity to asking price. There are homes that sell over asking price; however, that’s not the norm. There’s always a little room for negotiation.

How are zoning laws in the Alpine area impacting just how big you can build? Alpine has adopted an ordinance that will allow no more than 9 percent floor ratio for the footprint of the home in regards to the total lot of the property. The total coverage of the lot, which includes driveways and walkways, cannot exceed 20 percent of the total lot. But it’s not really a problem for people.

Vincent LaBarbiera
Co-owner of LaBarbiera Custom Homes

Have rising labor and materials costs increased the price tag on your homes? Absolutely. Material prices are always rising, and labor prices are always rising because less and less people are willing to do a hard day’s work. Anybody can find labor that isn’t very skilled, but your reputation suffers. Everybody needs to be legal, and everybody needs to have insurance. But I like to say it impacts [the final cost of the home] in the way you try to be the most efficient with what you’re doing so that you don’t have to raise prices.

What amenities are buyers looking for in these high-end homes? The trend has gotten away from the traditional style of many divided, heavy rooms. People are more into cleaner lines, brighter colors. A lot of them will have pools in their lower levels … and many of them have two-story closets.

Won’t there come a point when there will be no more old homes to tear down? By the time we get to all the older homes, all the new homes will be old homes so the process will begin again. I don’t see the end of the world coming.

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