By Ed Kaminsky | Rocket Bay | Week 10
Why luxury homebuyers in the South Bay sometimes spend millions more than their homes are actually worth
One of the most expensive mistakes in luxury real estate starts with a perfectly reasonable idea.
Someone wants to build their dream home.
They have the financial resources to do it, they know what they like, and they’re willing to pay for the finest architecture, materials and finishes.
They hire an exceptional architect, design something extraordinary, and begin construction.
Then something unexpected happens.
Perhaps their circumstances change. Perhaps they need to relocate. Perhaps they simply decide the project is no longer right for them.
They decide to sell.
And that’s when they discover something that can be financially devastating.
What it costs to create a home and what someone else will pay for that home are two entirely different numbers.
I’ve witnessed this repeatedly during nearly four decades of selling real estate in Manhattan Beach, Hermosa Beach and the surrounding South Bay communities.
And as we continue our Rocket Bay series examining how SpaceX-related wealth could influence our housing market, I believe this is an especially important lesson for anyone experiencing a significant liquidity event.
Having the money to build whatever you want doesn’t necessarily mean you’re making a sound real estate investment.
The Manhattan Beach Project That Cost Its Owner $2.3 Million
One example stands out more than almost any other I’ve seen.
I originally listed and sold a property in Manhattan Beach’s prestigious Hill Section for $3.3 million.
The buyer had ambitious plans.
They wanted to create an architecturally extraordinary custom residence — a home unlike almost anything else in the neighborhood.
It was a dramatic design requiring substantial preparation and structural work.
The buyer invested approximately $2 million beyond the original purchase price.
That money went into foundation work, pre-construction grading, architecture, shoring and other infrastructure necessary to begin the project.
By that point, the owner had approximately $5.3 million invested in the property.
Then, for reasons I don’t fully know, the owner decided to sell the unfinished project.
The eventual sale price was $3 million.
I wasn’t involved in that later sale.
Think about those numbers.
The property was purchased for $3.3 million. Another $2 million went into the project. And when it was sold, the owner recovered just $3 million.
The difference was approximately $2.3 million, before financing, carrying costs and transaction expenses.
The seller didn’t recover the $2 million spent on construction and preparation. The eventual sale price was also $300,000 less than the original property purchase price.
Part of the problem, in my assessment, was that an unfinished, highly specialized construction project presented challenges to a new buyer.
Taking over someone else’s ambitious architectural vision can be complicated and expensive.
And not every buyer shares the original owner’s enthusiasm for that design.
I can’t tell you every factor behind the decision to sell. But the financial lesson is clear.
Spending millions on a project does not automatically increase a property’s market value by millions.
In fact, under certain circumstances, expensive improvements and unfinished construction can make a property more difficult to sell.
The Two Mistakes I See Affluent Buyers Make Most Often
When someone is purchasing a home between $5 million and $15 million, I see two recurring financial misunderstandings.
Mistake No. 1: Assuming Renovation Costs Equal Added Value
A buyer purchases a beautiful home in Manhattan Beach and decides it needs updating.
They want a new kitchen, bathrooms, windows, flooring, cabinetry, landscaping and perhaps an entirely new floor plan.
They spend $1 million or $2 million creating the home they want.
Then they assume those improvements have increased the property’s market value by the same amount.
But that’s not necessarily what happens.
In my experience, I’ve seen luxury renovations where the owner might recover only 60% to 70% of the expenditure in additional market value.
That’s my professional observation, not a fixed formula or an industry-wide average.
A homeowner who spends $2 million might find that the improvements add only $1.2 million to $1.4 million to the home’s eventual market value.
Why?
Because buyers don’t evaluate a home based on how much the seller spent improving it.
They compare it with other properties they can purchase.
A buyer might love the remodeled kitchen, but that doesn’t mean they’ll pay the full cost of the renovation.
And sometimes improvements are highly personalized.
A feature one homeowner considers essential may have little value to the next buyer.
The renovations may make the property more beautiful and enjoyable, but they don’t necessarily deliver a dollar-for-dollar financial return.
Mistake No. 2: Assuming Building at Cost Means Buying Below Market Value
The second mistake is often even more expensive.
Someone buys land and builds a completely custom home.
Because they’re paying the architect, contractors and suppliers directly, they assume they’re creating the home at cost.
And because they’re building at cost, they believe the completed property must be worth more than they spent.
But that’s not how the economics of custom construction necessarily work.
A professional speculative builder designs with two objectives in mind: creating a beautiful, desirable home and controlling costs sufficiently to achieve a reasonable profit.
An individual building a dream home often has a different objective.
They want the very best of everything.
They want unique architectural features.
They want specific materials and finishes, regardless of whether a less expensive alternative would create essentially the same market appeal.
There’s nothing inherently wrong with those decisions.
But they can produce an extraordinarily expensive home that doesn’t have an equivalent market value.
Why Unusual Architecture Can Become So Expensive
One of the biggest cost drivers in luxury construction is architectural complexity.
An unusual roofline, dramatic cantilever, oversized opening or unconventional structure can be visually spectacular.
But what looks beautiful on architectural drawings can become tremendously expensive to build.
Sometimes a relatively small architectural decision creates a substantial additional requirement for steel framing, engineering, foundations or other structural elements.
And structural steel can be extremely expensive.
Experienced architects and builders often know how to achieve a beautiful design while minimizing unnecessary structural complexity.
A slightly different configuration might accomplish much of the same architectural effect with substantially less steel or specialized construction.
Those savings can be enormous.
But when someone is designing their personal dream home without paying close attention to the budget, those efficiencies may not be the priority.
They fall in love with the architecture first.
Then they discover what it costs to build.
And by the time they realize how much the project has escalated, they may already be committed.
How Individual Design Decisions Can Triple Your Costs
It’s not just architecture.
The cost of many major home components can vary dramatically depending on the selections you make.
Consider some examples.
A window package might cost $30,000, or a more elaborate selection might cost $90,000.
A roofing system might cost $30,000, or you could choose an alternative costing $90,000.
A kitchen might cost $40,000, or you could design one of essentially the same size costing $120,000.
Those are illustrative examples of the range of choices I’ve encountered, not price quotes for a particular project.
There may be meaningful differences in quality, durability, technology, materials and appearance.
But the question every owner should consider is how much of that additional expense a future purchaser would actually recognize in the home’s value.
Now imagine repeatedly selecting the most expensive option.
Windows.
Roofing.
Kitchen.
Flooring.
Cabinetry.
Doors.
Lighting.
Plumbing fixtures.
Architectural details.
If each decision substantially increases the cost, the total construction budget can grow dramatically.
But tripling the construction cost of a home doesn’t mean you’ve tripled the home’s market value.
This is where luxury construction can become financially dangerous.
And I understand it because I’ve made some of those decisions myself.
My Own Experience: The $120,000 Cabinetry Decision
I’ve built three homes for myself.
So when I talk about custom construction, I’m not simply speaking as a real estate broker observing what other people do.
I’ve personally gone through the process multiple times.
When we designed our most recent home, our original budget for cabinetry was approximately $30,000.
Then we received the first bid.
It was $120,000.
Four times the budget.
We looked at the plans, discussed what we wanted, and decided we weren’t willing to eliminate the cabinetry we’d designed.
We wanted custom features throughout the home. The cabinetry wasn’t limited to the kitchen; it was part of the overall design and the way we wanted the house to feel.
So we proceeded.
And I have no regrets.
The home is beautiful, and I love the result.
But I understood something important.
I didn’t assume that spending $120,000 instead of $30,000 would increase my home’s resale value by another $90,000.
It was a personal choice.
I was building a home for my own enjoyment, not simply trying to maximize an immediate return on investment.
That’s a very different mindset.
Sometimes spending more money is absolutely worth it — not because you’ll recover the expense when you sell, but because you’ll enjoy what you created while you live there.
The mistake comes when homeowners confuse the value of that personal enjoyment with the property’s resale value.
Why the Underlying Lot Matters So Much
In the South Bay, and particularly in Manhattan Beach, the underlying lot can have an enormous influence on the value of a property.
I pay close attention to several characteristics.
Location Within the Neighborhood
Not every street is equal.
There are what I call A+, A-, B and C locations.
The difference between an exceptional street and a compromised location can be substantial.
In a strong market, buyers may be more willing to overlook disadvantages.
But when the market becomes more challenging, location compromises can become more important.
In my experience, properties in exceptional locations tend to attract interest and remain easier to sell during weaker markets.
That doesn’t mean they’re immune to price declines.
It means they often have a broader or more determined buyer pool.
Lot Orientation and Natural Light
The direction a property faces can influence the way it lives.
In Manhattan Beach’s Sand Section, southern exposure can be particularly valuable because of the natural light it brings into a home.
In other neighborhoods, having a south-facing backyard can create desirable sunny outdoor living areas.
These characteristics can materially affect the experience of living in a property.
And they aren’t always easy to change through remodeling.
Lot Slope and Usability
A sloped property can require additional engineering, grading, retaining walls or complicated foundations.
It may also offer less usable outdoor space than a flatter property of similar size.
A home where the main living areas connect easily with the backyard may feel dramatically different from one where the outdoor space is difficult to access.
The lot’s characteristics can affect both the enjoyment of the home and the cost of building or improving it.
That’s why I believe buyers should evaluate the land as carefully as the house itself.
You can remodel a kitchen.
You can replace flooring.
You can change the architectural finishes.
But you generally can’t change the street, the shape of the lot or the fundamentals of its location.
Why A+ Locations Matter When the Market Changes
I’ve been selling South Bay real estate since 1987.
I’ve experienced the early 1990s downturn, the financial crisis that began in 2008 and several periods of changing buyer confidence.
One lesson I’ve taken from those experiences is that location becomes particularly important when the market weakens.
In the upper price ranges, I place significant value on prime Hill Section locations in Manhattan Beach and Hermosa Beach, as well as exceptional Sand Section properties.
Those locations have characteristics that buyers consistently seek.
During challenging markets, an exceptional property may still sell when a home with more significant compromises struggles to attract buyers.
But no location is completely protected from economic conditions.
Even excellent homes can decline in value, and there is no guarantee of appreciation over a particular holding period.
What you’re trying to do is position yourself to own something with enduring desirability and strong resale appeal.
The Most Important Question: How Long Will You Own the Home?
Before someone commits millions of dollars to a custom home or major renovation, I want to understand their intended ownership period.
Are they planning to live in the home for three years?
Five years?
Fifteen or twenty years?
That changes the entire financial analysis.
If someone intends to live in a property for 15 or 20 years, spending additional money on features they love may be completely reasonable.
They’ll enjoy those improvements for a long time.
And a longer ownership period may give them more opportunity to benefit from general market appreciation, although that outcome isn’t guaranteed.
But if someone might need to sell within two or three years, I’d approach an expensive renovation or custom construction project much more cautiously.
There may not be enough time for market appreciation to offset construction expenses, acquisition costs and selling costs.
The financial consequences can be significant.
What Working With Professional Athletes Has Taught Me
I’ve spent decades working with professional athletes, helping them purchase and sell homes as their careers develop.
That experience has reinforced how important the expected holding period can be.
An athlete signs a major contract and decides to purchase a luxury home.
They may have a substantial income and the financial resources to buy something extraordinary.
But what happens if they’re traded?
What happens if the team changes direction?
What happens if their next contract takes them to another city?
Suddenly they may need to sell a property much sooner than expected.
If they’ve purchased a highly customized home or invested millions in improvements, recovering those expenses may be difficult.
That’s why I often encourage athletes facing uncertain relocation timelines to prioritize homes in exceptional locations with broad resale appeal.
If they’re likely to move in a few years, I may advise them to be especially cautious about expensive personalized improvements.
Sometimes the best decision is to buy a property that is already a good value rather than creating something completely customized.
And sometimes the best financial decision may be not to purchase at all.
The objective is to match the real estate decision with the buyer’s circumstances.
How This Connects to SpaceX and Rocket Bay
Throughout this 16-week Rocket Bay series, we’ve been discussing the potential influence of SpaceX-related wealth on South Bay real estate.
One of the themes is that additional purchasing power could increase competition for highly desirable properties in an area with limited housing inventory.
But there’s another issue that’s just as important.
Some buyers experiencing significant liquidity events may suddenly have the financial freedom to make housing decisions they could never previously consider.
They may decide to buy a $5 million property and invest another $2 million in renovations.
They may purchase an exceptional lot and build a $10 million or $20 million custom home.
They may select the finest architecture, materials and technology without being particularly concerned about the cost.
For someone with substantial newly available wealth, those decisions may be financially manageable.
But they don’t automatically become good investments simply because the buyer can afford them.
This is where experience matters.
I believe the goal should be to understand whether you’re purchasing a home primarily as a lifestyle asset, as a financial investment, or as some combination of the two.
And if you’re spending extraordinary amounts of money to personalize the property, understand that the eventual buyer may not place the same value on your decisions.
Someone may love a $120,000 kitchen.
But they may not be willing to pay $80,000 more for it than they would for another beautiful kitchen.
Likewise, an architecturally unusual home may cost millions more to construct without attracting buyers willing to pay a corresponding premium.
The financial ability to create something extraordinary doesn’t eliminate the importance of sound planning.
What if Home Values Don’t Increase Over the Next Five Years?
This is a question I think every luxury buyer should consider.
We don’t know exactly what the economy will look like over the next several years.
Interest rates, financial markets, government policy, employment conditions and consumer confidence can all influence housing demand.
There have been periods when South Bay homeowners benefited from substantial appreciation.
There have also been downturns.
My experience has been that owners who were able to hold desirable properties through difficult markets often benefited from the subsequent recovery.
But I would never advise someone to assume every downturn will be brief or that their property will necessarily appreciate within a particular timeframe.
Instead, I’d ask a simpler question.
What if you purchase a $10 million home and it’s still worth $10 million five years from now?
Would you be comfortable with that?
What if it’s worth $9.5 million?
Would you still be satisfied because you spent five years enjoying a spectacular home?
For some buyers, the answer is absolutely yes.
And that’s fine.
But if the buyer needs to recover every dollar they’ve spent, those possibilities should be considered before committing to the purchase or construction project.
Five Questions to Ask Before Building or Remodeling a Luxury Home
1. Am I building for personal enjoyment or financial return?
Be clear about your objective. A highly personalized dream home may be an excellent lifestyle choice without being an equally attractive short-term investment.
2. What is the realistic market value of the completed property?
Compare it with finished homes in similar locations. Don’t assume acquisition costs and construction expenses determine value.
3. Which improvements will future buyers actually value?
Consider the difference between broadly desirable features and expensive personal preferences. The latter may provide tremendous enjoyment without producing an equivalent resale premium.
4. Is the lot and location worthy of the investment?
Consider the street, neighborhood, natural light, orientation, slope, outdoor space and long-term desirability.
5. What happens if I need to sell sooner than expected?
Life changes. Employment opportunities change. Financial markets change. Make sure the property and the investment make sense under more than one possible scenario.
My Final Perspective
I don’t believe wealthy buyers should be afraid to create extraordinary homes.
I’ve built three myself.
I understand the satisfaction of choosing exactly what you want and enjoying the finished result.
And I’ve made plenty of decisions where personal enjoyment mattered more to me than whether I would recover every dollar.
But I also believe buyers deserve to understand the difference.
If you’re building a home to enjoy for decades, the financial analysis may be very different from building a property you expect to sell within a few years.
And if you’re coming into substantial new wealth, whether through SpaceX, another business or a major investment, it’s especially important to understand how your real estate decisions fit into your broader financial plans.
The South Bay offers extraordinary places to live.
But not every expensive home is an extraordinary investment.
The most beautiful architecture, the finest materials and the highest construction budget don’t automatically produce the highest resale value.
You can spend $10 million creating the home of your dreams. You just can’t require the next buyer to believe it’s worth $10 million.
That may be one of the most valuable lessons a luxury homebuyer can learn.
“I’m not selling my house. ...Unless someone meets my buy-it-now price.”
Name your number. What’s yours? Tell Ed privately.
Not every home draws a premium, and some sellers ask far more than any buyer will pay.
Sources and notes: The Hill Section example is described from Ed Kaminsky’s records and recollection. He listed and sold the property for $3.3 million; the later $3 million sale was a separate transaction, and he was not involved in it. The later sale date is not stated. The address is withheld. Construction spending of approximately $2 million, and the resulting approximately $5.3 million invested and $2.3 million difference, are as stated in the article, before carrying and selling costs. The 60% to 70% renovation-recovery range is Ed Kaminsky’s professional observation, not a published average. Window, roofing and kitchen cost ranges are illustrative examples of choices he has encountered, not quotes for a particular project. Opinions are Ed Kaminsky’s. Nothing here is an appraisal or a value opinion for any specific property.
Photo credits: Rocket Bay cover art, Kaminsky Real Estate Group. Headshot: Ed Kaminsky.
Ed Kaminsky | Kaminsky Real Estate Group | eXp Luxury
Selling South Bay real estate since 1987 | Over $4 billion in closed transactions
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Ed Kaminsky Kaminsky Real Estate Group · eXp Luxury
#1 Real Estate Agent in the South Bay · Top 15 in the Nation (RealTrends) · Over $4 Billion Sold