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.
Attention occupant of today's featured property: it is for sale. From the MLS description, "Driveby Only Please! Do Not Disturb Occupant. No Sign, Tenant not aware Property is For Sale." Well, they are now. If any of you know this renter, please go tell them what is going on -- the power of the internet.
Today is a great case study in what a property is really worth. We have both an asking price and a statement of what the unit currently rents for. That should eliminate most of the conjecture concerning rent. I am going to show the calculations for cost of ownership and calculate the breakeven amount for an owner occupant.
During the Great Housing Bubble, many speculators tried to make money through trading houses. The vast majority of these traders were not professionals but amateurs who thought they could be professionals. Most amateurs ended up losing money because they did not understand what it takes to be successful in a speculative market. The first and most obvious difference in the investment strategy between professional traders and the amateurs in the general public is their holding time. Traders buy with intention to sell for a profit at a later date. Traders know why they are entering a trade, and they have a well thought out plan for their exit. The general public adopts a “buy and hold” mentality where assets are accumulated with a supposed eye to the long term. Everyone wants to be the next Warren Buffet. In reality this buy-and-hold strategy is often a “buy and hope” strategy — a greed-induced, emotional purchase without proper analysis or any exit strategy. Since they have no exit strategy, and since they are ruled by their emotions, they will end up selling only when the pain of loss compels them. In short, it is an investment method guaranteed to be a disaster.
There is plenty of evidence houses were used as a speculative commodity during the Great Housing Bubble. Since the cost of ownership greatly exceeded the cashflow from the property if used as a rental, the property was not purchased for positive cashflow, and by definition, it was a speculative purchase. Confirming evidence for speculative activity comes from the unusual and significant increase in vacant houses in the residential real estate market.
National Homeowner Vacancy Rate, 1986-2007
If markets had not been gripped by speculative fervor, vacancy rates would not have risen so far above historic norms. If houses had been purchased for investment purposes to make money from rental income, the houses would have been occupied after purchase and vacancy rates would not have gone up. A rise in vacancy rates would have resulted in downward pressure on rents, and the investment opportunity – if it had existed initially (which it did not) – would have disappeared with the declining rent. There is only one reasonable explanation for increasing house prices and increasing rents during a period when house vacancy rates increased 64%: people were purchasing houses for speculative gains and leaving them unoccupied while the owners waited for prices to rise.
When house prices stopped their dizzying ascent, many speculators found themselves with large monthly debt service costs and no income to offset expenses. Many chose to quit paying their mortgage obligations and allowed the property to be auctioned at foreclosure. Many chose to rent the properties to reduce their monthly cashflow drain, and they became accidental landlords. In the vernacular of the time, they became floplords – flippers turned landlords.
Becoming a floplord was fraught with problems. First, they were not covering their monthly expenses, so the losses on the ”investment” continued to mount. This was a convenient form of denial for losing speculators because they believed they were buying themselves time until prices rose again allowing them to sell later either at breakeven or for a profit. Since they bought in a speculative mania, prices were not going to recover quickly and the denial soon evolved into fear, anger and finally acceptance of their fate.
Another problem floplords faced was their own inexperience at managing rental properties. Most had never owned or managed a rental property, and none of them purchased the property with this contingency in mind. They often found poor tenants who did not reliably pay the rent or properly care for the property. This created even more financial distress and greater loss of property value as the property deteriorate through misuse.
The problems of renting were not confined to the floplords. Sometimes the renters were the ones who suffered. Many floplords collected large security deposits and monthly rent checks from tenants and failed to pay their mortgage obligations. This situation is called “rent skimming,” and it is illegal in most jurisdictions, but this crime is seldom prosecuted. Most of the time, the first indication a renter had that their rent was being skimmed was finding a foreclosure notice on their front door. By the time of notification, several months of rental payments were gone and the renters were evicted soon after the foreclosure. Renters seldom recovered their security deposits.
Valuations in Northwood for homes 2,000+ SF are still bubbly. Recently we featured a floplord looking to cover about 2/3 of his ownership cost (or ask 50% more than the property is worth depending on your point of view.) Today's post features another floplord in the neighborhood with Secret Gold. The property is going to be a big loser for the owner, and since you can rent an identical property for $3,900, it doesn't make much sense to spend around $5,500 a month to buy it, unless of course, you like the $7,400 a month equity burn on top of your oversized payment.
WOW!! Take a look at this Beautiful home in Desirable gated commmunity of Northwood II. OUTSTANDING SCHOOLS, PARKS, POOL AND CLUB HOUSE. ! Beautiful quality upgrades. Gorgeous gourment kitchen with cherry cabinerty, stainless appliances includes, wine refrigerator. Island breakfast bar, beautiful granite counters. Prestine wood floors, upgraded carpet, window coverings. French doors lead to relaxing patio with soothing waterfall. Short distance to shopping, library and the NEW GREAT PARK IN PROGRESS. Move-in condition. Low homeowner association fee.
WOW!! This realtor can't spell commmunity, gourment, cabinerty, or Prestine. I am not a stickler about spelling, and in fact, I am not a great speller, but when the computer puts a big red line underneath it, I have to go out of my way to ignore it. Please, someone at the MLS needs to get spell check software.
What does the Great Park have to do with anything?
Interesting that $120 a month for an HOA fee is considered low.
This property was purchased at the peak, and now if they get their asking price, the sellers stand to lose $245,280 after a 6% commission. This is their best-case scenario. If they become a floplord and hold the property all the way to the bottom, they will lose close to $500,000. Of course, they could always hold it until prices come back... in 2030.
Let your arms enfold us
Through the dark of night
Will your angels hold us
Till we see the light
Hush, lay down your troubled mind
The day has vanished and left us behind
And the wind, whispering soft lullabies
Will soothe, so close your weary eyes
Let your arms enfold us
Through the dark of night
Will your angels hold us
Till we see the light
Sleep, angels will watch over you
And soon beautiful dreams will come true
Can you feel spirits embracing your soul
So dream while secrets of darkness unfold
You dress me up, I'm your puppet
You buy me things, I love it
You bring me food, I need it
You give me love, I feed it
And look at the two of us in sympathy
With everything we see
I never want anything, it's easy
You buy whatever I need
But look at my hopes, look at my dreams
The currency we've spent
I love you, you pay my rent
I love you, you pay my rent
That is the question today's seller needs to answer. Today's featured property is being offered at $1,120,000. If you divide by 160, you arrive at the monthly cost of ownership of $7,000 a month. There is a house in the same neighborhood that is a very similar comparable for rent at $4,500 a month -- which I suspect is negotiable. So why would I spend $2,500 a month extra for today's featured property? I can't think of a good reason, but then again, I could not understand why people were willing to pay a 100% premium for ownership during the bubble either.
This Great Home Located in Prestigious Gated Harvard Square Is The End Unit and Has a Great Lot Size. Spacious Living W/ 5 Beds Plus Open Bonus Room and 3 Full Baths w/ New Travertine Floors. Main Floor Bedroom and Full Bathroom. Large Family Room and Breakfast Nook, Light and Bright. Open Kitchen w/ Granite Countertop/Backsplash, Oversize Pantry. Hardwood & New Polished Travertine Floors Thru Downstairs. Designer New Paint and New Berber Carpet. New Baseboard Thru the House. Jacuzzi-Like Bathtub in Master Room. Large Size Backyard w/ Covered Patio, Fruit Trees, Vegetables and Stone Water Falls. 3 1/2 Acre Community Park In The Center of The Community w/ Pool, Children's Play Area & Much More. Enjoy This Community's Amenities.
Why Is This Written In Title Case?
Here is a seller betting on the high-end-is-immune theory. As I look at listings around town, I am noticing a great deal of this. The people who own the largest homes in the neighborhood are clinging to their $1,000,000+ asking prices while properties all around them are dropping like bombs. Good luck with that asking price.
Take or leave it or just don't even bother.
Caught in a craze it's just a phase
or will this be around forever.
Don't you know it's going too fast
Racing so hard you know it won't last.
Don't you know what can't you see,
Slow it sown, read the sign so you know just where you're going.
Stop right now, thank you very much,
Stop -- Spice Girls
Another song about the housing bubble... or is it romance... or was there a difference? Everyone got crazy about real estate thinking the rally would last forever. Prices were going up so fast people ignored the signs, and now the music has stopped. Do you have a chair?
Finding comparable properties for sale and for rent provides a good way to check neighborhood fundamental values. Today, I am featuring a for sale property a few doors down from a rental of similar size and configuration.
Spacious Julliard Model. Wow!3 Bedrooms each with its own bathroom. One bedroom and bathroom downstairs. This home boasts a sunroom, cozy fireplace, catherdral ceilings, skylight and track lights in Living Room. 2 Large private enclosed patios to entertain your guests. Newer windows in all the rooms. Recessed lighting in Kitchen. Cook to your hearts delight on the 5 plate range. Tile entry way and formal dining room. One wall fully mirrored. Near acclaimed schools, shopping, University and excellent community amenities. Very QUIET! NO MELLO ROOS! LOW TAX RATE! This home is built for entaining. A Must see! Bonus Room was converted to master bedroom
How many people would remember a model design from 1968?
No pictures of the kitchen, so I am suspect of its quality.
So how much would a property like this rent for? Try $2,500.
I would like to thank tonye for suggesting this song and the Grateful Dead.
With the extreme leverage and volatility of residential real estate, it does cost a lot to win and even more to lose. It is a very important decision one should spend some time thinking about. Right now is a horrible time to buy, and here at the blog we watch each property as it comes into play. The game right now is to wait until your deal comes around...
I profile Turtle Ridge frequently because the prices are so high, it is easy to find WTF listings -- they all are. This isn't to say Turtle Ridge does not carry a premium. It is a desirable neighborhood. This desirability is reflected in rental rates and amplified in house prices.
The two-bedroom market in Turtle Ridge will cost you $2,400 to $2,500:
The fundamentals of property valuation are the same for the high end as they are for the low end. The breakeven cost of ownership for these units will be near 160 (perhaps a bit lower due to high Mello Roos fees.) This puts the value of two-bedroom units at $384,000 to $400,000. The value for the entry level three-bedroom units would be $464,000 to $480,000. So what would you guess these properties are priced in the market?
Drastic 200K price reduction below market value!!!!!!Stunning turtle ridge home, completely remodeled throughout. Plank hardwood flooring, Travertine flooring in kitchen and all bathrooms. Master bathroom has custom travertine shower with designer sinks and hardware. Custom built-in closets and garage. Added recessed lighting, ceiling fans, crown molding and baseboards throughout home. Surround sound in family room and master bedroom. Garage also has granite flooring. Gorgeous and turnkey. Furniture optional, owners are very motivated!!!!!!! Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!
This is the most incompetent listing I have seen in quite some time. First, how do you like the sideways pictures? This isn't a problem with Redfin. Look at the MLS logo in the corner. The pictures were put up sideways, and rather than correcting the error, the MLS logo was put on them, and they have been there over 90 days.
It really annoys me when a realtor tells me a property is priced below market value (and adds multiple exclamation points.) Market value is whatever someone is willing to pay. Unless someone comes in and pays $200,000 over asking price, the property is not priced below market. In fact, they will probably have to lower the price further to sell it, so it is still priced over market. What the realtor is really saying is "this property is priced $200,000 below the fantasy/wishing/WTF price the owners thought it was worth."
Furniture optional? Can I have the shirt off the seller's back?
Can you just feel the emotion (desperation) of the realtor holding down the exclamation point button on their keyboard. I don't have the patience to count them, but this must be a new record: Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!
One of the two 3 bedroom rentals featured above is identical to this unit, and it shares the same alley access. You can't get a closer comparable. The breakeven cashflow value for an owner-occupant would be $464,000 to $480,000 -- which is what they paid for the place in 2003. Unfortunately, it is about half of their asking price.
There are other comps in the neighborhood that are priced even higher:
There are always bargains in the rental market. Something has to define value, and as has been discussed in numerous posts on this blog, rents are where it is at. Today I want to look at the rental market for 3 bedroom units. I am excluding pseudo-apartments and looking at both attached and detached properties to see where the leading edge of rents (and thereby house values) can be found.
This property is the least expensive 3/2 with an attached two-car garage I could find. It does not appear to be updated or particularly well kept. It is located in University Park in a quiet, interior location with an easy walk to 2 community pools.
This looks like a particularly good deal. It is relatively inexpensive, fully detached, it doesn't look to bad from the one interior picture shown, and it has a very spacious yard by Irvine standards. An address is not given, but the Walnut/Yale intersection would put it in El Camino Real.
This unit is in Northwood just behind the small shopping center on Yale and Trabuco Canyon. It is a short walk to a tot lot and community swimming pool. I have seen units in this neighborhood, and I would guess there is a small, concrete-patio back yard. Very good price though.
I put this one in just for fun. I have seen lower priced rentals in Turtle Ridge. I guess you just need some kool aid...
Based on the above comps, we can establish the leading edge of rental values for non-updated, small 3/2s with attached garages are going for $2,300 in the market. This puts their fundamental value at $368,000 assuming the rents remain stable. This time last year, I was looking for rentals, and I do not remember so many 3/2s being offered for under $2,500. One of the reasons I wanted to do this series of posts on rentals is to document the rise and fall of rental rates over time. We will check back again later.
If properties of this description are worth $368,000, how much are they currently asking in the for-sale market?
BEAUTIFUL IMMACULATE HOME!!! REMODELED WITH HARDWOOD FLOORING, TILED BATHROOMS, AND CUSTOM TOUCHES THROUGHOUT. STAINLESS STEEL APPLIANCES. CATHEDRAL VAULTED CEILINGS. FIREPLACE IN LIVING ROOM AND MASTER BEDROOM, BRIGHT AND OPEN KITCHEN. LARGE PATIO.
Gorgeous townhome in highly sought-after tract. Premium interior location + one of the largest models available! Inviting floorplan enhanced by soaring vaulted ceilings + custom upgrades. Expansive living room features recessed lighting, custom slate-wall fireplace & a myriad of well placed windows. Charming chef's kitchen boasts raised ceilings + eating area & attached patio. Huge master suite w/ lavish bath & private balcony. Easy access to shopping, entertainment & freeways. WOW!
Northpark community. Great corner unit, very private. Balcony with view of the pool and green belt. Spacious living room with fireplace, bright kitchen with view of the green belt. ceramic tiles in all the bathrooms, kitchen, laundry room and berber carpert. Lowest price for a 3 bedroom unit. Submit all reasonable offers. Lender owned sold "as is" no warranty. All information believed to be correct please verify for your client.
STUNNING SHOWCASE HOME! Very PRIVATE END UNIT w/ Larger PATIO than most. Lots of High Quality Upgrades featuring; Corian Kitchen Counters w/ full backsplash & Maple Cabinetry, High-end GE Profile Appliances, Designer Italian Porcelain Tiles, Custom-Designed Entertainment Center w/ Surround Sound, Security System, Ceiling Fans & Recessed Lighting throughout home. Elegant French Doors leading to Flagstone Patio. Functional Loft/Tech Area & Upstairs' Laundry Room. VERY LOW ASSOCATION FEES.
As you can see, GRMs for this product are hovering between 200 and 220. This is real progress from the 250-280 units like this were going for at the peak. These products are the least desirable of the 3/2s in the market, so there is the very real possibility they may drop below parity with rents because not everyone will want to be an owner-occupant. The bottom for these will probably be closer to 140 which translates to a bottom price of about $325,000. We still have a way to go.