Triplex Discount on a Prime Lot?

A prime corner lot along Ocean Drive near downtown has just sold for $5.100M.

Sure, that's a lot of money for dirt, but here, it's all relative.

116 9th hit the market in early September at $5.950M. So the sale price is a shocking $850K below start, -14%.

Was the original price simply that far out of line?

Not necessarily. Let's look all around the neighborhood for comps. Looking, looking... oh, hey, right next door!

See that new build in the photo above? It's at 120 9th, where the lot traded in 2017 for $5.600M.

Shouldn't a corner lot be worth more, 7 years later, than an interior lot? Why would it sell $500K lower?

Oh, if only things were simple.

There's a pretty significant restriction on the nature of new development at 116 9th. Whatever goes up there is going to need to have 3 legal units. That's because what used to be there – before a fire in 2022 – was a triplex.

We discussed this in detail in a post titled, "This Law Applies Even If the House Is Dead."

There's a 5-year-old state law, SB 330, which created the "no net loss" rule. In sum, wherever a certain number of units is torn down in California, the same number of units must be built to replace them. 

So 116 9th is not purely suitable for a new single-family home. Instead, it will need to have two more units, which arguably can be accomplished with some combination of a nested apartment-style unit/ADU, and another smaller ADU. The ultimate setup requires not just city signoff, but also the California Coastal Commission's approval – adding a layer of uncertainty.

(We are not the lawyer, city planner, coastal commissioner or architect in this situation, so we're just sketching this out broadly.)

So what we're looking at here, with the sale at $5.100M, is a measure of the impact on value from a new build needing to have 3 units, and some lack of clarity on how that shall be accomplished.

There are other sales as reference points – we needn't lean too heavily on a single, 7-year-old comp (120 9th) to see how the 3-unit requirement may have hit the value of 116 9th.

Here are some more recent sales for 100-block lots south of the pier:

128 8th (2-structure 1930s duplex w/ upgrades), sold in April 2024 for $5.950M. (There's your start price on 116 9th.)

124 2nd, sold in Sept. 2023 for $5.900M.

124 8th, aka the "Weeds" house, $5.100M in Oct. 2021.

Most buyers will view 9th St. as more valuable than 8th, but here we have a corner lot matching one 3-year-old lot sale on 8th and falling behind two others.

Worth noting: The listing for 116 9th didn't even get any action until they cut the price from $5.950M down to $5.499M.

We've seen that over and over again. When buyers see the "proper" value as being notably lower than list price, they often need to see the seller make the first move to correct the price, to bring it closer to where the property will, eventually, trade. Only then do the buyers feel that they can step in and negotiate. (And, yes, homes with price cuts do tend to sell even lower than the adjusted price.)

The sale at 116 9th surely has implications for another triplex with high land value that is on the market today.

113 25th is, similarly, right along Ocean Drive, albeit in more of a midtown location than a downtown spot.

Unlike 116 9th, here you can actually buy a functioning structure and maybe hang onto it for a while before doing any development.

The current list price: $4.995M. (Listed by Daniel Lemieux, Re/Max Estate Properties.)

That's the price where they started less than 3 weeks ago, clearly learning the lesson from 9th St., and adjusting for location as well.

A couple of final notes here...

The lot at 120 9th actually once hosted a 4-plex. Yepper. 4 units. They called it a "quadruplex" in the listing back in 2017.

Why didn't they have to replace it with 4 units? Well, the "no net loss" rule was only passed in 2019. Assuming they got their project permitted before that law took effect, they dodged a bullet.

Also, are you of a mind to think this "no net loss" rule might go away some day?

Even if SB 330 is hated by some, it's not likely to be withdrawn, overruled or sunsetted any time soon. The state is on a warpath to create more housing. Allowing new development to reduce the number of housing units is not something you can expect the state to do any time soon. Related laws have already been renewed and extended.

That just means, expect whatever rules you see today to be around for a while.