Rental Value

Things I don’t Understand — Coldplay

How much is a property worth? The ultimate answer is whatever someone is willing and able to pay for it. With the remnants of kool aid intoxication still gripping the market, there is no shortage of people with the willingness to pay any price to own property, but with the constriction of credit, there is certainly less ability to pay for it. This is to be expected in the initial stages of a price decline. People’s memories are of the rally and all the money people made, although we will start to see a reduced willingness to buy as the bear market grinds on.

Once the poison of kool aid has been purged from the collective consciousness of the populace, people will require a new motivation to purchase real estate: it is cheaper than renting. I first wrote about this phenomenon in the post How Inflated are House Prices? I later followed up with a more detailed analysis of the Rent vs. Own decision. Today’s featured property is offered for sale at a price far in excess of its cost of ownership. This property is being offered for sale at $589,000, and it was available for rent in January at $2,300 per month. There is a comparable property currently for rent at $2,500 a few doors away. That puts the value between $368,000 and $400,000 for an owner occupant using a 160 GRM.

{adsense-ir}

31 Potomac Inside

Asking Price: $589,000IrvineRenter

Income Requirement: $147,250

Downpayment Needed: $117,800

Monthly Equity Burn: $4,908

Purchase Price: $625,000

Purchase Date: 12/29/2005

Address: 31 Potomac, Irvine, CA 92620

Beds: 3
Baths: 3
Sq. Ft.: 1,300
$/Sq. Ft.: $453
Lot Size: 1

Sq. Ft.

Property Type: Single Family Residence
Style: Dutch Queen Anne, Edwardian
Year Built: 1985
Stories: 2 Levels
View: Park or Green Belt
Area: Northwood
County: Orange
MLS#: S533522
Source: SoCalMLS
Status: Active
On Redfin: 105 days

Unsold in 90+ days

Inside location,Three bedrooms and three baths, with two car garage.
One ved room with bath in main floor. High ceiling, Living room with
fire place. Detacged home in Northwood, close to community pool,spa,
awarding northwood high school.

ved room?

{adsense-ir}

There is a reason for this seller’s reluctance to lower his price: he has a huge downpayment in the property. This was a pure speculative purchase made with much of the owners money. If he could have rented the property for $2,300, he could have covered his payment on the $375,000 mortgage. Now, it is only a matter of how much of his money he is going to lose. If he waits until the property hits bottom, he will lose all of his $250,000 equity investment. As it stands now, if someone is willing to pay his asking price, and if he pays a 6% commission, the total loss will be $71,340.

Why would someone buy this property? The monthly cost of ownership would be about $3,700 per month. The cost of renting a similar property nearby is only $2,500. Also, when you factor in the monthly equity burn of $4,908 due to the declining market, this purchase makes no sense. There is only one compelling reason someone would buy this property: they believe the market is at the bottom and they have fantasies of endless appreciation. Perhaps there is someone out there who is only concerned with “owning” a property to provide for their family, but overpaying for real estate for psychological and emotional reasons is not doing the family any favors.

Someone stands to lose $250,000 on this property. The banks are not lining up to offer 100% financing because they are tired of being the bagholder. If this guy does not lower his price quickly to meet the market, he will be the big loser. If he does lower the price to sell, perhaps he can split the loss with the knife catcher. In whatever form it happens, there is $250,000 that is going to disappear into the ethers. Needless to say, I will not be bidding on this property any time soon.

.

How tides control the sea, and what becomes of me
How little things can slip out of your hands
How often people change, not to remain the same
Why things don’t always turn out as you plan

These are things that I don’t understand
Yeah, these are things that I don’t understand

I can’t, and I can’t decide
Wrong, oh my wrong from right
Day, oh my day from night
Dark, oh my dark from light
I live, but I love this life

How infinite is space, and who decides your fate
Why everything will dissolve into sand
How to avoid defeat, when truth and fiction meet
Why nothing ever turns out as you plan

These are things that I don’t understand
Yeah, these are things that I don’t understand

I can , and I can’t decide
Wrong, oh my wrong from right
Day, oh my day from night
Or dark, oh my dark from light
I live, but I love this life

Things I don’t Understand — Coldplay

37 thoughts on “Rental Value

  1. AZDavidPhx

    This place should have been put on the market 12/29/2007 (better odds of someone catching the falling knife at the current price).

    He waited until an extra year into 2008, probably not wanting to settle and ‘give it away’ in the down market.

    Bad move.

    1. George8

      Typical behavior of chasing the market down.

      PS: IR, is there a general problem of your blog have been slower since a few days ago?

        1. rvw

          It’s download speed – almost seems like the site is overloaded or suffereing from a denial of service attack or whatnot.

      1. Bitter Renter

        Yeah, pages are so slow to come up (not in terms of throughput, but in terms of latency) that the browser on my Treo can no longer view the site. It takes so long after a request before you start receiving the page that it exceeds the Treo browser’s timeout and it gives up.

        I believe this started yesterday.

  2. no_vaseline

    The OC Regester had an article yesterday titled “Why buy when you can rent?” yesterday. I need a place to live, but I certainly don’t need to own it.

    1. r€nato

      clearly, Larrygg, you are an ignorant hick who is jealous of everyone lucky enough to live in southern California and incapable of appreciating that Irvine is a very, very special place.

  3. ipoplaya

    I put the current market value of this property between $480-520K based on the last two purchase prices. His list is probably $50K above what it should be…

  4. SoOCOwner

    If you look at the street view, this home seems to share a driveway with the neighbor – very odd. It’s like something you would see in a condo. I don’t think you could get two cars on the driveway without blocking the neighbor’s entrance. This would be enough to keep me away.

    1. eastcoaster

      If you do a 360 w/ the street view, you will see almost every house on that street shares a driveway w/ the neighbor. It’s like the builder said, “these people don’t need a yard, let’s squeeze in one more house”. Might as well be in a condo.

      1. Priced_Out_IT_Guy

        Share a driveway! What a great idea! How generous! What a visionary builder!

        Lets all start living in peace and harmony and share share everything. Lets share all of our driveways! Lets share a yard too, and the blow-up pool! Lets share our living room and the leather sofa! While we’re at it, lets share our bathroom!

        Excuse me neighbor, can you please pass the soap? Can I use your towel too?

        By the way, I need to share your bank account too.

        Personally, I don’t mind sharing, I’ll lend you my bike, $100, or a hard drive for your dead computer, but if I have to pay $589,000 and still share my living space and personal privacy, well…I think you get the point.

  5. Beinformed

    This is an interesting listing. The history of sales on this seems to be a little weird. Back in 1995 this house sold as a repo for $190,000. It again sold in 2002 for $351,00. A lot of money was drawn out. Final sell while in the bubble was back in 2005 for $625,000 OUCH! MLS lists now for $599,000, don’t know why REDEf has it listed for lower? Maybe the agent is on vacation and their lettng their kids sell it? Anyway it is a rental, (bad news) and has been on the selling block for 232 days. Owner probably lost their job and is having a hard time coming up with the difference. The bank had it once, probably will have it again.

    1. MalibuRenter

      In the last downturn, I saw several properties that were foreclosed twice. It typically went something like this:

      1. Owner bought at peak for $500k, couldn’t afford it, couldn’t resell above loan value. Property became a REO.

      2. Property sold for $420k.

      3. Prices kept dropping. The new owner needed to move, couldn’t get $325, became a REO again.

      When looking for raw land, I saw a title history on a parcel that was foreclosed three times between 1990 and 1996.

  6. alan

    IR,

    Just curious, yesterday you put up one profile and pulled it because it was a rerun and then your replacement profile also turned out to be a rerun.

    If you are profiling 20 properties/month and there are only 772 properties for sale, many of which have been on the market for >90+ days, then it is likely that over the last 2 years you have already profiled over 30% of the inventory and maybe approaching 50%.

    Looks like you may start running out of posts at some point. You may have to expand out of Irvine.

    1. MalibuRenter

      Personally, I would be interested in a “How has Irvine changed” post. It could be an overview of the number of people, housing units, income, bankruptcies, foreclosures, etc., maybe from about 2000 to 2008.

      1. Hormiguero

        Would be interesting, but we won’t have good data on current incomes for quite some time – and if the coming winter is as harsh as the stock market seems to be telling us it will be this morning, we won’t have THAT data for even longer.

        And, of course, we could have a japan-style scenario where things grind lower for the next decade. It is hard to write a good recap of a football game in the second quarter, even if it already is 28-3!

      2. Anonymous

        I’d be interested in a table for each Irvine neighborhood showing # of preforeclosure/NOS/REO properties, # of total properties in the neighborhood, and % of properties in the neighborhood in foreclosure. Then a price graph over time to see if that % correlates with the price changes.

    2. IrvineRenter

      Some of the problem with the reruns is the search function on this new blog software either failing to find the old property or turning up so many that I can’t see if it has been done before. I do get to a point where interesting properties are less common, and so much of the story of the bubble (HELOC abuse, REOs, short sales, etc.) has already been told. I lost Brittney, my research guru, for a while, but she is sending me new properties to profile again. I think the blog is going through a lull right now as the summer selling season winds down. I believe the fall and winter will be more interesting when prices start dropping again.

      1. eLCee (East Coast version)

        If anything, the comments (with an exception for this one) have never gone through a lull, IR. I think that reruns that focus on comparisons of homes that have been on the market for lengthy periods of time would be interesting: why, for instance, does one seem to hold more value than another, etc…

  7. Anthony

    I have a question regarding properties listed on Redfin or any other listings.
    I’ve been following a few of the listings. First they came on with active and then backup offers accepted and then back to active. On some they just simply disappeared after “backup offers accepted” and then reappeared as active. There were no movements in the asking prices or slightly up or down.
    Is this a ploy to attract knife catchers to bite? Are there any regulation as to how a status of a listing can be changed?
    Are things just getting more and more deceptive as stakes are getting higher and higher?
    As always, thanks for sharing and helping!

    1. IrvineRenter

      It is one of two things: either all the buyers are falling out of escrow, or the realtors are playing games to entice knife catchers as you suspect. It is probably a combination of both.

    2. tryingtobuy

      Anthony, all great questions. I just assume the brokers are lying again to create that demand. The minute I show interest in a house I am told it has multiple offers. I am curious if someone has another take on this.

    3. camsavem

      Another thing they do is list a price very low, below bank approval on a short sale. This gets lots of interest and offers and gives them an out saying “the bank didnt approve the offer”.

      IMO if they list a house at a price without the banks approval they should be fined.

    4. buster

      Anthony – Anybody can make an offer. Closing the deal is a different story. Financing is getting ever more dear, so a lot of these are dropping out of escrow. Correction – most of these. The “pending sales” numbers the Realtards throw out are worthless. It’s only a sale when the deal closes. But they count the same property falling out of escrow six times as six separate sales.

  8. Dog

    Lest readers think ‘these things will never really get to rental parity,’ I offer the following:

    In 1998 I rented a terrific condo in Venice (CA, that is), 20 steps from the sand. The owner decided to sell, and for some reason I never even thought about buying — just moved to a different rental (even though I had enough saved for a down payment — but why buy a house when you could buy Internet stocks — ‘Doh!).

    I recently looked back at what he sold for. With a 30 yr fixed mortgage at 1998 rates and 10% down, my rent payment would have covered the mortgage.

    I’m amazed that I never even thought of buying that place. My friends loved that condo, but none of them encouraged me to buy. No one was saying ‘you need to get in the game’ or ‘buy now or be priced out forever.’ There was no real estate mania, really no interest at all.

    Which makes me realize: to all the people on this blog who ask, ‘When will it be time to buy?’ I think the answer is: when no one wants to buy, and no one is talking about real estate.

    A good proxy for this will be when very few people are commenting on this blog. I’ve noticed the comments per day have dropped considerably from a year ago.

    So how about it, IR: A chart showing comments per day on the blog. I bet when it bottoms will be a great time to buy.

    1. alan

      Comments per day metric assumes that many different people are blogging.

      Last year there were a few regular bulls on the board, they seem to have faded away and I think that is the difference.

    2. Priced_Out_IT_Guy

      I have personally experienced the recent pick-up-in demand mania due to falling housing prices. Co-workers who have sat on the side line for a while are now getting excited that prices have fallen, and everyone is telling them that now is a great time to buy so they are looking. I think some are still having flashbacks to the glory of “owning” real estate. Sadly, all of the people who I have spoken with that want to buy still cannot afford to do so since they now have either tarnished credit from foreclosures or have perfect credit but do not yet have a large enough down-payment saved.

      The kool-aid may still be flowing here and there, but without the ability to buy, the market will continue to sour.

      1. Matt

        I’m one of those perfect-credit, not-enough-down saved up guys.

        I’m relatively sanguine about it…my lack of down simply keeps me from being a knife-catcher. I’ll probably end up missing out on the bottom, but at least I’ll have peace of mind that it’ll be a bottom when it’s 6 months in the rearview mirror.

  9. Red

    Why OWN when you Can RENT for LESS? THATS HALF the cost for many lucky renters!
    YES, Rent NOW and you can:
    Have the LANDLORD pay all repairs!
    NO Mello-Roos! No surprise HOMEOWNERS ASSESSMENTS!!!! No Property tax! No HUGE DOWN PAYMENT!
    NO risk of PROPERTY DEVALUATION! Did you know some buyers have lost HUNDREDS OF THOUSANDS OF DOLLARS? !!!!
    Be MOBILE! with renting, you can move in just 30 days! without losing 6% of a homes value!
    Easy Monthly payments! Rent NOW!!!!

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