Creating luxe homes on speculation in hot neighborhoods is gaining steam – and private equity funding helps
Published: May 2, 2014 Updated: May 5, 2014 6:25 a.m.

When Brian Sperry came across a two-story, waterfront home at the northern tip of Linda Isle with an expansive view of Newport Harbor last year, the real estate developer knew it presented the perfect opportunity. Forty years ago, the two-story house, with its Paso Robles stone columns and dark wood beams, graced the pages of Architectural Digest. Now it was outdated, a candidate for a teardown – but with 113 feet of bay frontage and a dock in one of Orange County’s priciest neighborhoods.

Sperry’s company snatched up the property for a cool $9.5 million. He and his partners plan to spend 18 months redeveloping it into a custom, soft-contemporary style home, then hope to list it for at least $20 million. They’re building on speculation – no buyer in sight.

“This will be an incredible house,” Sperry said. “But the risk we face (is) what is that price going to be a year and a half from now?”

The home is the most expensive Orange County acquisition so far for American Coastal Properties, a boutique firm that’s put an institutional twist on how it finances spec homes. The company has raised $75 million from private equity to purchase and redevelop homes on valuable lots in established communities up and down the Southern California coast. Among them is a Beverly Hills home that was owned by actress Mitzi Gaynor.

When the housing market crashed, so did speculative homebuilding. Real estate market values sank below replacement costs, or what it would take to rebuild the same house on a site. At the same time, lending froze. Even cash buyers weren’t buying.

Now building upscale homes on spec appears to be in the midst of a resurgence across the U.S.

“We’re kind of at the groundswell of the next real estate cycle,” said Paul Habibi, a developer and professor at the UCLA Ziman Center for Real Estate. “I don’t see any imminent end to this. The capital markets are only going to get looser as we go.”

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