During times of relative boom, mistakes are made. Mistakes are made during times of relative bust as well, but those mistakes can be more easily forgiven because of the toxic guidance from fear and panic. During the good times, which we are certainly experiencing of late, mistakes are made not out of fear, but out of confidence.
Today, we have a number of factors causing increased construction, both of the renovating and of the new build variety. We have extremely limited inventory on the lake and in our lake access markets, and that alone is enough of a condition to cause a building boom. If you own a $500k house with a slip and you like your slip and you like your location, you still might be tempted to find a $1MM house that offers you something that you don’t currently have. But with the $1MM house not available, and you content in your location and amenity package, you could easily decide to tear down your existing house (in this pricing scenario that’s a terrible idea, by the way) and build a new house for $500k. You like your association enough to stay, so you build a new house.
On the lakefront, the same principle applies. Limited inventory means your dream home is likely unavailable. In this case, you should be wise and set out to find the best land you can afford and demolish whatever terrible house is currently squatting where your dream home would be built. This has happened at an alarming rate over the recent market cycle, and today there are no fewer than 15 new lakefront builds either underway or about to commence. The construction business is booming, and the combination of low interest rates, low inventory, and the wealth effect stemming from the stock market indices has created the perfect storm.
With this in mind, there are mistakes being made, and if you ask my wife, I’m nothing if not a capable mistake-pointer-outer-guy. First mistake being made: An abundance of new construction in locations that simply do not warrant the investment. This is the case often with off-water homes being built in associations that lack boatslips. If I’m in Knollwood, in the back, not near the water, should I buy a cottage for $300k and tear it down? If I do this, I build new for $450k, and I’m $750k into an association home with no view, no slip, and no chance at recovering my investment. This is a mistake. Owners make this mistake because they tell themselves it doesn’t matter, that they’ll never sell. Then I’m in the position of playing bad guy when I tell them their $750k house is worth $550k. Don’t make me be the bad guy. Be smart.
The next mistake is made by failing to build to the standard of your market. If you’re off water and you have a slip, let’s say you tear down a $450k home and build a new home for $500k. I wouldn’t necessarily recommend this math, but let’s say you’re stubborn. You’re cost conscious as well, so you build your new home for $450k. In meeting that number, you skip on the nice appliances ($10,000 saved), install terrible direct-vent gas fireplaces, the ones with those glass fronts that fog over time ($10,000 saved), you opt for cheap Schlage hardware ($1000 saved), and you dumb down your trim package ($15,000 saved). You’re shrewd, so you just saved $36k on your new build. Look at you!
But what you’ve actually done is cut your own nose off. The house you’re building is already too expensive for the neighborhood, but instead of making it so nice that a buyer might be tempted to make a similar mistake and buy your overpriced house, you’ve dumbed it down to the point where it is now just a new cheap house that’s way too expensive. The same theory applies to the lakefront, and it’s always that lost bit of cost savings that blows the whole idea. You buy an entry level lot for $1.2MM, and you’re not an entry level sort of owner, so you tear the cottage down. You build new, knowing that you need to stay reasonably priced if you’re ever going to recoup your investment. So you build a brand new house for $600k. You cut the things I mentioned above, and you build a house that’s ugly, because architectural style would have cost you $20k in architectural fees and another $30k in framing intricacies. You saved $100k, and delivered an ugly, boring, middle of the road house. When you call me to list it someday, I’m going to pretend to like it but I’m actually going to hate it. Schlage, in your lakefront house? Really?
Beware these simple concepts. Don’t build new if your basis is too high to warrant the project, and if you do, build it right so you might convince a buyer that your house is worthy of a premium. I guess I really wrote this because I don’t want to see any more of those direct vent gas fireplaces. Let’s stop doing that.