Still Rising: Spec Houses Worth $20 Million

Enzo Morabito, a luxury real estate broker in New York's Hamptons, saw a line of people at his open house on Aug. 29. The property was a new, $25.95 million spec home by Michael Davis Design & Construction at 232 Parsonage Lane in Sagaponack, N.Y. -- the country's most expensive small town, according to Businessweek.com. By the end of the day, more than 75 people had passed through the mansion. "That is an extraordinary turnout," says Morabito, executive vice-president of Prudential Douglas Elliman Real Estate in Bridgehampton, N.Y. Equally surprising, given the tough environment for builders: This is Michael Davis' biggest and most expensive house ever.

 

Amid concerns about unemployment, an uneven housing rebound, and difficulty getting financing, some elite developers continue to build ultra-luxury homes on spec -- for sale on the open market, not for an owner. Some cost even more than the residences they built during the housing boom. In high-end markets such as the Hamptons, Beverly Hills, Calif., Palm Beach, Fla., and Aspen, Colo., a number of new spec houses have entered the market this year in the $20 million range. A few are asking for far more.

 

The costliest new spec house for sale is 1220 South Ocean Boulevard, an estate in Palm Beach that recently listed for $84 million.It is the most expensive house that builder Addison Development has built in its 30-year history, and one of the most expensive homes for sale in the entire country.The company also recently completed a house on El Bravo Way that is asking $47.5 million.

 

"A lot of people think I am a big risk-taker. I really don't see it that way," says Dan Swanson, president of Addison Development in Palm Beach. "We do something special. We see a market for this."

 

Some of this luxury inventory entered construction during the housing bubble. "No one knew how bad it would get and what the depths were. Not that we would have stopped anyway," says Swanson. While the timing is not ideal to list an $84 million house, "I don't know that I regret it. If we could see the future, I may have waited."

 

Timing is critical, but with spec houses, location is number one. Swanson began building 1220 South Ocean Boulevard in 2007, just as the housing market was crashing. The 27,300 sq. ft. residence sits on 2.5 acres of valuable waterfront land near the Bath and Tennis Club and Donald Trump's Mar-A-Lago. It has eight en suite bedrooms, nine bathrooms, a 60 ft. pool, a separate guesthouse, and room to park 50 cars. "We got stuck in this economy in the middle of building," Swanson says. The upside is that he now is selling the only new oceanfront homes in Palm Beach.

 

"That is the right street to be on for $84 million. It's right on the ocean," says Philip White, president of Sotheby's International Realty.

 

The house has attracted some interest this summer, and Swanson estimates he has so far had about 12 showings to qualified cash buyers. Nearly all were from the U.S.

 

In the Hamptons, Michael Davis started building 232 Parsonage Lane during the summer of 2008. The English country-style house is set on 7.5 acres, which is exceptionally large for properties in Sagaponack and includes a pool house, a restored 1700s antique barn, and a carriage house with a three-bay garage. At $25.95 million, it is Davis' most expensive listing ever. (His previous record was a home asking $19.5 million that sold for $18 million three years ago.) Morabito, Davis' broker, says he received a $20 million bid from a European buyer shortly after the house listed in March, although the deal fell through when the euro depreciated.

 

The economic downturn still has not deterred Davis. Last year he started pursuing a new project in Sagaponack and in February 2010, he began construction on an additional area home at 243 Hedges Lane. Listed at $19.5 million, this one is scheduled for completion in March 2011. Rather than use the term spec house, he prefers to call his products "custom houses without owners." "We're building speculatively, but at a level that is much higher than the normal competitive house built on spec," he says.

 

Davis adds that a lot of people want new homes and in the Hamptons, "there is very little product." So far this year, his business is up 50 percent over 2009.

 

Data on the nation's $20 million-plus market was not available, but according to the National Association of Realtors, sales of houses in the $1 million-plus category outperformed other price classes in July, growing by 6.1 percent year-on-year as sales across lower-cost groups decreased.

 

White says that Sotheby's International Realty has sold twice as many homes in the $1 million to $2 million range this year as in the same period in 2009, and that the jump was even higher in the $10 million range. Prices came down about 30 percent from 2007's peak levels but have since rebounded some. Because of that price correction, "the buyer is getting a good value," he says.

 

One of this year's biggest sales, the Bootjack Ranch, sold for $46.5 million, nearly half its original asking price of $88 million. That deal involved some creative financing, with the buyer trading a property in Telluride, Colo., to the seller as part of the payment, White says.

 

The Hamptons in particular had a good year so far, in terms of transaction volume. "Inventory continues to increase as a result of sellers seeking to take advantage of positive market news," states a quarterly report on the Hamptons market by the Corcoran Group, a division of Parsippany (N.J.)-based Realogy.

 

According to the report, the volume of luxury home sales, defined as the top 10 percent of all residential sales, increased by 104 percent in the Hamptons during the first half of the year, compared to the same period in 2009. While unit sales are up, the median price in the luxury segment stayed about the same in the South Fork and dropped 13 percent in the North Fork.

 

Morabito says his record year for sales was 2007 until this year surpassed it by 15 percent -- with four deals currently in progress and four further months to come.

 

While the wealthy are again showing interest in residential real estate, the market for properties in the $20 million-plus range is small. In a buyer's market, luxury consumers are picky. According to the "2010 World Wealth Report" by Capgemini and Merrill Lynch Wealth Management (NYSE:BAC - News), the number of people with investable assets of $30 million or more in 2009 totaled only 93,100 worldwide, or less than 1 percent of the wealthy and a tiny fraction of the planet's overall population.  

 

A further question facing developers is what share of the super-rich would prefer to buy a spec house than a historic home or a custom-built home. Residences selling in this price range come with all the bells and whistles expected of a megamansion -- sweeping views, huge bedroom suites, swimming pools, tennis courts, wine rooms, and exceptional building materials and finishings -- but there's no guarantee that the design, no matter how meticulously put together, will appeal to buyers.

 

Although it was not a spec house, one illustrative example is a mansion in Johns Creek, Ga. Software entrepreneur Larry Dean originally custom-built the house for himself and his family at a cost of about $25 million, then unexpectedly listed it shortly after it was completed. The property sat on the market for 17 years and finally sold this year, for $7.6 million, to director Tyler Perry, who plans to tear it down and build a new home. Said nytimes.com: "Its incongruity of interior styles, combining Egyptian, Renaissance, Vegas, and more, has been a source of amusement, if not horror, to some who have attended charity events there or seen pictures online."

 

Dean's problem underlines the biggest stumbling block for developers playing in the mega-mansion market. That someone has spent millions building a luxury house doesn't mean buyers will want to pay the asking price. At such high price points, buyers can afford to wait -- a luxury not always available to developers, who may find themselves out of pocket millions of dollars until a contract is signed. In a bubble, buyers may be willing to spend whatever it costs to win a prized property. In a down market, they can make a low-ball offer, knowing the seller may not have many alternatives.