What gives an undesirable and cheap piece of real estate cache and value? Is it scarcity?
How does a community builder like Pardee take a tract of desert in Nevada or a garbage dump in California and turn it into a desirable address commanding hundreds of thousands of dollars or millions of dollars per acre? Is it merely the creation of a slick name like Desert Estates at Henderson or Temecula Valley?
Real estate fascinates me because this business is about far more than mere economics. It is real estate developer as high-fashion couturier.
I was helped guide Pardee's involvement in Temecula from the very beginning.
In 1987 Pardee signed an option to purchase some land in Riverside County. In 1990 we purchased the valley, miles from the closest road or utilities, for $12.5 million. The stagnant polluted creek ran along a hillside covered with abandoned cars, washing machines and piles of assorted garbage. The closest city, Lake Elsinore, has a tawdry reputation being populated with motorcycle gangs and pensioners living in trailers on the edge of poverty. The area is the nation's largest producer of illegal drugs cooked clandestine labs in run-down garages and sheds. Who would want to live here?
It was hard to believe that 4,272 homes and a shopping center would be built in seven phases on these 1,942 refuse filled acres, far from anything of consequence. I planned the construction to take place in seven phases over an 18 year period.
After obtaining the option on the land we finished the engineering plans in 1988 in order to obtain approval from the County and other agencies. Pardee floated a quasi-governmental bond issue to provide the infrastructure which Pardee built for the entire new city, of which our valley is a small part. In cooperation with other landowners and builders the new area will be marketed as "The Temecula Valley", hopefully taking prominence over the tarnished Lake Elsinore name. Next we essentially terra-form the valley.
After the garbage is removed, all trees are dug up, boxed and stored in one corner of the site. Heavy earth moving equipment terraces the valley and moves the locations of the creek 600 yards away from the hillside. This way, view premiums can be charged on both sides of the creek as well as the hillside. Under the direction of biologists, the new creek bed is clayed and rocks, plants and suitable wildlife is brought in at appropriate stages. The old trees are replanted in appropriate locations, supplemented by twice as many young trees. Finally, the entire valley is sprayed by a gunnite truck with a blue mixture of newspaper pulp and poppy flower seeds.
Two years later, the valley of garbage is a verdant, pristine nature sanctuary almost too good to fill with new homes and condos. Amazingly no trees will need to be cut down - the homes and street will be built between them. Of the original 1,942 acres, there are 942 acres of finished lots. The remaining 1,000 acres are scenic hillsides, the beautiful creek, with the remainder taken by streets and utility locations.
Several new freeway interchanges connect the area to local roads with new schools, and areas designated for new commercial activities. The bare bones of a community.
But it's equally, if not more, important to appeal to the buyer's vanity. Certainly Temecula Valley must have been very historic. Historians are employed to discover what that history might be. They create exhibits and write subsidized books and pamphlets.
Now that Pardee has put the utilities in place, water is available. Land which will not be developed in the near future is leased to farmers. Vineyards are planted and new wineries are opened. Farmer's Markets spring up offering local produce.
Originally, the first phase of the homes were scheduled to be sold in 1989. But this was delayed by the collapse of the real estate bubble in 1990. Most home builders and many land speculators file for bankruptcy. Pardee, and other investors with deep pockets, take advantage of this opportunity to acquire vast additional tracts of land in the new Temecula Valley for less than 5% of the price that the bankrupt builders and speculators had paid to purchase these parcels just a few years before.
By 2004 a excited home buyer, recently moved from Boston, tells everyone on Silicon Investor of the incredible opportunity to buy new homes in the beautiful and bucolic "farming community" of Temecula Valley. He is euphoric about the opportunities presented by investing in beautiful new homes in this pristine and historic community which is virtually crime-free, (now that the motorcycle gangs have moved on).
This is not accidental, for each month Pardee, and other builders in the area, are careful to increase their List Price on the homes for sale. Prices rise 25% annually.
Has new regulation increased Pardee's costs? Certainly not. The monthly price rises are an important part of the sales program. It provides the illusion of rapid appreciation of value and scarcity of land in the new "farming community" being slowly converted to residential use.
Most builders will also follow Pardee's model whereby the initial mix of homes of sale are smaller homes on less desirable lots. The larger estate style homes on lots with commanding views will be offered in later years when the amenities in the new community have become established. At that point, well-appointed buyers will clamor to spend millions on their exclusive piece of this former garbage dump.
Through this method, the average sales price will continue rising for decades providing the appearance of economic vitality. Is it scarcity that provides real estate value or careful planning? Just like a party, a town can be the event of the century with invitations being a scarce and valued commodity, or simply a disappointment with former guests politely failing unable to recall their presence at that event. |
