Greedy developers? Greedy homeowners?

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Greedy developers? Greedy homeowners?

Are developers and builders greedier than others?

Judith Battista is not the Gordon Gekko of Jefferson Park.

Greed

Judith Battista is not the Gordon Gekko of Jefferson Park.

Are developers greedy?

When I Googled the words “greedy developers,” I came up with 1.4 million hits.

“Greedy developers Denver,” landed 206,000.

The world’s most well-known developer soon will be our President. Given that Donald Trump is likely to be the first President to ever have crowed about being greedy and given some of his questionable business practices, once in office he likely will do little to reform the image of developers.

Yet, do developers deserve the scorn heaped on to them by so many?

“I would not call builders any more greedy than any other group. They are risking capital and should be rewarded,”  answered Jason, an infill developer, broker and mortgage banker whom I know, when I posed that question to him.

I tapped Jason because he is not only smart, but is a straight-shooter who has often been critical of people in his own field.

One definition of greed is to be excessively  or inordinately desirous of profit.

If you are greedy, I’m not sure building homes is the best way to meet your goal, even though it might seem like a sure-fire way to get rich, given the unprecedented appreciation of houses in the Denver area in recent years.

While there is no way to definitively track the profit margins of small, privately-held developers and builders, Denver-based M.D.C. Holdings Inc., parent of Richmond American Homes, recently reported gross margins of 15.5 percent on the homes it builds.

M.D.C. is a company that prides itself on controlling costs.

It doesn’t hesitate to slash its workforce quickly and dramatically, when home sales slump, for example.

And given its size, M.D.C. can tap cheap Wall Street funding, which is unavailable to small and even mid-sized builders.

But its margins pale compared to Apple, which are in the neighborhood of about 38 percent.

One reason that M.D.C. doesn’t make more money on every home it sells, even in today’s sizzling housing market, is because labor prices have never been higher. Just because builders charge more for homes doesn’t mean their profits are soaring. If a builder can’t pass on all of the rising costs to buyers, it eats into profits.

An infill developer once told me wrote checks to about 75 different people who worked on a Denver triplex he developed over a two-year period.

In addition to the framers, carpenters and electricians, he paid money to Denver’s building department and to Realtors.

Yet, no one ever pillories “greedy” plumbers — nor should they.

But I think because so many hands are required to build homes, is of the reasons developers are considered greedy.

If you buy an iPhone, basically every component has to be perfect, or the phone doesn’t work. If it doesn’t work, you trade it in for a new one.

You can’t simply swap your new, flawed home for one more to your liking.

And unlike an iPhone, no home is perfect.

Greed

Snapshot of operating margins for homes built by M.D.C. Holdings Inc.

In his 1999 book House, Tracy Kidder followed a couple building their first home.

Kidder noted that in the Orthodox Jewish tradition, every home constructed needs a deliberate imperfection until the Temple of Jerusalem is rebuilt. So the couple had their contractor add an imperfection.

I guarantee you, there are plenty of imperfections in every home, deliberate or not.

In addition to the horror stories about shoddy workmanship making home uninhabitable, too many developers cut corners to pad their profit margins, in big and small ways.

I know a developer who built a $630,000 townhomes about a decade ago, and an installed an 80 percent efficient furnace. Not only is that bad for the environment, he knew that in a few years the refrigerant would be phased out and would become extraordinarily expensive to replace, as it would no longer be manufactured.

All he cared about is that he could save a few hundred dollars by not installing a 93 percent efficient furnace.

At the same time, there are developers that are so confident of the quality of their buildings, they are willing to build condos and risk being sued under Colorado’s construction defect laws.

But for companies like Western Development Group in Cherry Creek North and Nava Real Estate at Sloan’s, they spends thousands of extra dollar to make sure buyers have no reason to take them to court.

The higher price to make their homes bullet proof, doesn’t make them greedy. They are the antithesis of greedy in fact, as they are paying the extra money upfront to be good builders and citizens, with no guarantee that their extra care will be rewarded.

Yet, many seem content to paint all developers with the same greedy brush.

And it’s not just developers who are being called greedy, but homeowners, too.

I was recently reading FUGLY, Brad K. Evan’s always thought-provoking and often educational and insightful site, and I was struck when one writer opined that Judith Battista was greedy for trying to sell her home in Jefferson Park for top dollar.

You might recall that Battista last month was captured in an unwanted public spotlight for fighting an unwanted historic designation for her Victorian-era home in Jefferson Park.

greedy

Judith Battista is willing to sell this home to the highest bidder, whether the home is saved or not.

Although she eventually won when the council voted 7-4 not to deem her home as a historic landmark against her wishes, a vocal number of people sincerely believe the decision was another notch in the belt for greedy developers.

I can certainly understand people saying that it is a shame that another Victorian-era gem might be lost to the wrecking ball.

But is she greedy?

After all, Battista in no way orchestrated the insane appreciation of developable land in neighborhoods at the edge of Denver.

Indeed, it’s not clear at all that she would even make a profit if she tried to sell her home on the open market.

According to public records, Battista paid $325,000 for her 1,739-square-foot home in 2008, which, adjusted for inflation, is the equivalent of $378,900 in today’s dollars.

Records then indicate she refinanced the debt in 2012 with a new loan of $344,250.

According to Trulia, the average sales price per square foot in Jefferson Park is $382, which would make her home worth $664,298.

But she testified at a City Council meeting last month that her home needs at least $100,000 in repairs to make it saleable, giving it a net sale price around $560,000.

But I’m skeptical that she can sell her home, as beautiful as it is, for that kind of scratch.

There is another home, of the same era, two minutes from her house, on the market for $539,000. And that house is 24 percent bigger, with 2,159 square feet.

Greed

This Jefferson Park home, built in 1890, is 24% larger that Judith Battista’s home and is on the market for $539,000.

If Batista received a more reasonable $250 per square foot for her house, it would fetch $434,750. But if she needs to spend $100,000 on repairs to put it on the market, she basically would sell it for what she paid for it. And if you adjusted the sales price for inflation and include the real estate commission, it’s quite possible she would lose money on a sale.

Her other choice is to sell the home to a developer, who would likely raze it and replace it with homes that many would not find as aesthetically pleasing as the current home, which for many years provided shelter for two home-grown architects, Burnham and Merrill Hoyt. The Hoyt brothers, together and individually, designed iconic landmarks such as the Red Rocks Amphitheatre, the Cherokee Castle and the north wing of the Denver Central Library.

Some people estimate the dirt under Battista’s house could be worth $1.2 million.

If she could sell it for that much money, it would be a tidy profit, indeed.

But I would challenge anyone who watched Battista’s tearful testimony in front of the City Council to somehow think she is Jefferson Park’s Gordon Gekko.

“My house is my only investment and my only nest egg for retirement,” and she cannot afford the needed repairs, she told council members near the beginning of a very lengthy council meeting.

That is a far cry from the “greed is good,” mantra from the Michael Douglas character in the 1987 movie Wall Street.

Indeed, if instead of buying the house she had used the money to buy Apple stock and held on to it, she would be sitting on a more than 700 percent profit.

And no one would be accusing her of being greedy if she decided to cash in some of her Apple chips.

Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com. DenverRealEstateWatch.com is sponsored by 8z Real Estate. To read more articles by John Rebchook, subscribe to the Colorado Real Estate Journal.

 

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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.

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