The Emerging Marketplace for Burnout Lots

Rick Wallace

Let’s just put aside, for one moment, the miserable Malibu real estate market this spring. As reported last month, very few homes are selling. Very few homes are even going on the market. The inventory of listings is very low, the number of sales units even lower.

Into that vacuum, a new market emerges. Homes that burned down in west Malibu have now become undeveloped lots with the debris removed—and sources of budding opportunity.

Homeowners with burned-out lots face three basic choices: Rebuild the home, sell the vacant lot or do nothing and hold for a future decision. The majority of homeowners will rebuild their homes and are actively seeking permits, just as we saw soon after the 1993 fire in east Malibu. (There are about 700 homes lost in the burn areas that include the incorporated boundaries of the City of Malibu, as well as higher in the hills or west that are unincorporated areas of LA County and Ventura County.)

But some folks won’t immediately rebuild. It has been about seven months since the Woosley Fire. Some consequences are known. First, the mass majority of burned-out residents left town and found new housing outside Malibu. On the other side of the hill, rentals in Calabasas, Agoura and Westlake Village took in many burnout victims. Same with Santa Monica, Venice and West LA. Many of those fire victims have settled into their new lives, and perhaps have come to like it. Over time, the urge to be back in Malibu fades.

That minority of the 700 burnouts that have not immediately sprung to obtain rebuild permits enter the decision zone between the second or third choices noted above. A handful have already decided to sell their lot.

Mind you, as I said during one of the Malibu Times’-sponsored Operation Recovery sessions, it is my opinion that every dollar spent to rebuild a home brings back $2.50 or $3 in increased value. You can possibly triple your money invested in rebuilding and add to your net worth. Here is a basic example:

Say your home was worth $3 million before it burned down. Now, you have perhaps a $1 million vacant lot and are sitting on $1 million insurance, as a general example. You have lost $1 million in value from the fire. But opportunity looms.

If that $1 million is successfully applied to rebuilding the house (or even mostly rebuilding the house), it will be worth $3.5-$4 million after you are done—all things being equal, in pre-fire values. A successful rebuild in this case would bring a $3.5 million home almost certainly where there was previously a $3 million home.

There is no other place on earth a person can count on doubling if not tripling their money in the next year. That privilege comes with seeing your house burn down. It comes also via the easier permitting that Malibu and LA County offer for rebuilding, particularly if it is very similar to what you had standing before.

One does not even have to finish the house. Just get the insurance money applied to increasing the value. This also ignores the matter of outstanding mortgages on the property. It is purely using insurance money—and adding cash or other loans, if necessary—enjoying simpler permitting opportunities and improving the value of the property in a profitable fashion. Additionally, the soft costs (architectural costs, reports, application fees, etc.) all bring the same boost in value. A hundred thousand dollars of soft costs will generally bring $250,000 in improved property value to the vacant lot if it is sold on the open market. These are rough estimates and mostly a theoretical discussion, of course.

Perhaps not all property owners know this analysis, but possible buyers and developers do! The permitting rules for burnouts go with the property, not the owner. If a property is sold, the new owner can rebuild quickly and add terrific value to be enjoyed as a user, or cashed in on a sale.

Two truths are apparent: First, a burn-out lot with special permitting opportunities and nice upside potential is more valuable than a standard vacant lot with no plans, reports or permit action taken. Maybe that $1 million in the example is really worth more? Much less time with red tape is definitely worth money in Malibu. Second, the number of these burn-out lots offered for sale may become plentiful, slightly gutting the market. We will see.

Some vacant burn-out lots have hit the market, and a handful have sold, but there is little distinct market trend discernable yet. Nevertheless, there is no question this is a unique, special time in west Malibu. The rebuilding of that area offers hope of prosperity for homeowners in place, or new owners buying in.

Rick Wallace has been a Realtor in Malibu for 31 years, and has contributed real estate columns to the community for 25 years.