Often, when someone buys something that’s ridiculously overpriced, they point to the price that the seller paid when the seller was the buyer. Or, if the seller didn’t buy the house, and instead built it, they’ll point to what the cost of the construction was. See, I’m buying this house for $2MM and it cost $3MM, that sort of thing. This is what every seller of every oversized albatross mansion will claim is the key to their value. If they built a castle of a house, one that really looks like a castle with moats and guards and boiling oil in giant iron kettles, and that castle cost them $10MM, they’ll offer it to you for $5MM and proclaim it to be an outstanding value. They’ll say, look at what all of this cost me! You, if you’re a gullible sort, will be impressed. You, if you’re a value hunter, will think better of the entire thing. Are there broad market comps that suggest $5MM is a reasonable ransom? Of course not. Besides, who wants to own a castle, anyway?

In the same but contrarian way, if someone buys something that’s priced far beyond the actual replacement cost, they’ll say that they bought that house with the work done for them because they didn’t want to deal with it. They didn’t want the hassle of construction. They didn’t want to pick their own fixtures and paint the walls in their own color. They’ll say that they didn’t have the vision to accomplish what was already accomplished for them, and so they’ll buy for a price that measures above the replacement components. In fact, the sum of the whole is worth more than the individual parts, because a buyer didn’t want to entertain the effort. This is the opposing viewpoint to the first scenario, and buyers will shape their own justifications for why they paid whatever it is that they paid. There is rarely a consistent approach.

This is why the lakefront at Bayview Road sold last week for $2.75MM. The house was nice, the frontage wide (134), the location within Geneva Bay Estates more than acceptable. The side note to this story is that the home that just sold had received a second floor and complete facelift, courtesy the developer owner. That home sold in 2013 for $1.765MM. The developer then put that second floor on, and fixed what ailed that smallish ranch. While we cannot know what the cost of the construction was, I will venture a personal guess- $550k. I only base that off of having built two homes from scratch in the last few years, and having remodeled four more over that time frame. Perhaps that’s not the right number, because I can’t say for sure what someone else spent on a project that I was not involved in. But it’s a reasonable estimate, and one that’s backed up by a bit of personal history with that particular house.

Whatever the case, whatever the number, this sale should go down as another print that proves my lakefront theory. Buy a property based on the property and location, and figure out the actual house part later. This will not always be gospel, as homes in different price ranges require different approaches, but to consider buying a house for $2MM and putting $500k into it will generally make more sense than buying the same property already dolled up for $3MM. This, of course, will be largely dependent upon your ability to add and subtract whole numbers.

There are variations to this general rule, and those come in the form of finding value within an established market segment that registers less than the replacement cost. For example, my listing at 1014 South Lakeshore Drive in Fontana. That lot is 165′ wide and level at the lake, and 2.8 acres in manicured depth. If that lot were for sale, what would it be worth? Well, 150′ and far less land is under contract in the 700 Club with an ask of $3.15MM. Fontana’s south shore is currently far more desirable than nearly every other spot on the lake, so we’re likely worth far more than that. I think $3.7MM is a fair estimate.

If the land is worth $3.7MM, what’s the cost to re-build a 12,000 square foot home outfitted with the finest finishes money can buy? Add in a three pier and tennis court and two bedroom guest house and landscape the entire thing with perennials, then irrigate and light the entire property. That’s not going to come cheap. If the pier is $100k and the tennis court is $70k (it’s lit), the guest house will be $500k and the landscaping another $500k. The house itself is going to cost $350-450 per square foot. The math encourages a buyer seeking to build a new lakefront to first come to this home, because it’s the right house at the right price ($7.95MM ask). This is an example of when it would make absolute sense to buy built over building new.

The current drought of quality inventory in the $2.75MM to $6MM price range offers up plenty of reason for a buyer to consider land first. By entertaining the concept of a new build or a thorough renovation buyers can look past current asking prices and the current condition of the countertops and the make of the appliances. They can focus on what matters- land and location- and find a way to negotiate a price that will make a renovation not only make sense, but make money.