Home Buyers Beat Odds : ‘Lotto’ Houses Still to be Built

The developer of new luxury homes in Rancho Palos Verdes held a “lottery” for some of them--but it was no giveaway.

The lucky winners got the right to pay $749,000 to $1.2 million for the houses to be built in Wallace Estates, at the top of the Palos Verdes Peninsula. Although construction has yet to begin, 18 people have put down $75,000 deposits on the homes. Thirty-eight were chosen as alternates, in case any of the original buyers drop out. In fact, two already have and their money has been returned, boosting two of the alternates to the purchase list.

Both the developer and the buyers are happy.

Buyers see it as a way to move into homes next year at today’s prices in an area where housing costs are escalating. The developer has succeeded in selling homes before building a single one.

Some builders and real estate agents call the sales method unusual but not unprecedented. Drawings for new homes are common, but typically are for average-priced property, not luxury homes with expensive options. And most pre-selling is done after models have been built and home construction is under way.

Cayman Development Co., for example, which has been a major peninsula developer, sold only one local project without models, according to the firm’s vice president, Davie Eadie.

In the case of Wallace Estates, prospective buyers put their names in contention after examining floor plans, viewing architectural renderings, and questioning the developer and the architect in May at a wine-and-cheese preview of the development at the Norris Theatre for the Performing Arts in Rolling Hills Estates.

The 450-seat theater was packed on two successive nights and the event capped a 9-month marketing campaign that began with small newspaper ads inviting those interested to telephone and leave names, addresses and telephone numbers. About 950 did, and in succeeding months, they received informational mailings and invitations to “the preview.”

In June, 75 people eager for the homes submitted their names and 18 were selected during a 45-minute drawing beneath a tent pitched in the parking lot of the Rancho Palos Verdes office of developer Ronald Florance.

Each selected a specific floor plan, architectural style and lot within the 24-acre development, which is on property once covered with the tall antenna poles of the radio ranch of the late amateur radio operator Don Wallace.

Florance is required to deliver the homes within 18 months, although it is expected that they will be built in a year.

Tomorrow, 23 more buyers will be picked in the same manner, but their homes will be priced 5% higher than those in the first phase. Names will be drawn from the alternate list first.

The 18 original buyers are between the ages of 40 and 55 and have families and children, said Bryan Hardwick, who handles marketing and public relations for Wallace Estates. Many are doctors, others own their own businesses. Three plan to pay cash for their homes.

One of the buyers, attorney Michael Barth, said he achieved two things by optioning a $1-million, 5,500-square-foot Wallace Estates home with three bedrooms and a den. The home is expected to be worth more by the time he moves in, and it will be large enough for his family of four, which Barth said has outgrown its beachfront home in Portuguese Bend.

“I’m locked into a price today,” he said. “California real estate appreciates very quickly, and there is fear among anyone in the market that the market will pass him by.”

Barth said he took money out of investments in order to come up with the $75,000 deposit, but he does not regret the loss of income. The new home, he said “will have plenty of room for the (5- and 7-year-old) boys to have their own room. They can have a play area they can clean up or leave a mess as they choose. There is room for a live-in maid if we choose to have one. It looks like we can entertain in this house. It’s difficult in the present house.”

Florance, the owner of Carriage Realty, co-developer of the Courtyard mall in Rolling Hills Estates and a former Palos Verdes Estates city councilman, said he devised the advance sales plan because of demand for his homes.

“I talked to over 100 potential buyers . . . and they said they wanted to buy now,” Florance said. He said most of the buyers are people who already live on the peninsula but are dissatisfied with the homes they have.

Florance said the success of the plan underscores the demand for new and large homes on the peninsula, where property suitable for development is limited. Home prices on the peninsula have climbed 50% over the last three years, Florance and several real estate agents said.

The $75,000 deposit bought an option to purchase a specific home. If an individual fails to complete escrow for reasons of his own--such as a financial reversal--the equivalent of 3% of the sales price of the home is forfeited to the developer. But the buyer has the protection of being able to sell the option to someone else at any time.

Florance said that while he knows of none that have been sold, one person refused a $50,000 profit on his option, while another was offered for sale for $150,000 in a newspaper ad.

Initially, the $75,000 deposits were said to be totally non-refundable in the event the buyer failed to complete the purchase. But the situation was clarified this week by Florance and the state Department of Real Estate.

Normally, deposits on options are fully non-refundable. But because the Wallace Estates option deposits also go toward the purchase price, refunds are controlled by state law setting 3% of the purchase price as the maximum that may be withheld as liquidated damages in instances where buyers default. If a buyer disputes the amount, it is subject to arbitration.

The two prospective buyers who dropped out did so within a 10-day recision period and their deposits were returned.

Florance contends that because of the pre-selling feature, buyers are getting a bargain price. Some real estate brokers said they believe the homes fit into the prevailing peninsula price range.

From a business perspective, the option plan for unbuilt homes protects Florance from sitting on empty houses, and paying interest on them, should there be a real estate slump due to recession or high interest rates, Hardwick said.

Florance said some builders have told him he is taking a risk, arguing that in a year, rising construction costs and real estate values could render the homes unprofitable.

But Florance said he feels he is protected. The Wallace land was purchased three years ago and has increased in value. Only half of the 82 homes he will build are being sold through the drawings, which leaves the remainder to be marketed at going market prices after they are built.

“This is a big project, $75 (million) to $80 million,” Florance said. The option plan “makes the lender happy, it makes me happy, it makes the buyers happy. They tell others. If they get a bargain, it’s great. . . . We sell half (under an option) and keep half and sell them at higher prices. We come out.”