Friday, December 26, 2008
A rent vs buy lesson
You might be tired of me harping on about price levels and how when the rent versus buy ratios are in line we are back into a normal market. Over the last 7 or 8 years those levels were way out of whack. You could rent a house for 1/3 of the cost of buying it. While cruising the new listings today I ran across this fine example of:
1) why we ain't there yet
2) Who's going to buy for double rental costs
3) How not to list your house
6941 Orozco Dr in Riverside. This is a big mansion up in Hawarden Hills. The most posh area of Riverside. This is a real mansion with pool, tennis court and all the bells and whistles. At over 6000 sq/ft this isn't your average big tract home. The current owners bought pre-bubble in 2001 for very boeing price of $777k. Not wanting to go with the current prices levels they have listed at a more "peakish" value of $1.6M (yea like that's gonna happen). But just in case you can't afford the $1.6M sales price you can rent this house for only $4500/mo. Obviously the sellers are just hoping to find some sucker that didn't get the memo about the housing bust. The rental costs is probably close to their holding costs (assuming they didn't HELOC the house during the bubble). I bet they are thinking, "we can just lease it for a couple of years until prices come back". Well, prices ain't coming back for decades! If you want out, price it like you want out.
Now comes the lesson part of the post. Let's figure value based on rental costs. Let's just do it the quick and easy way by estimating 10 years rent (or 120 payments @ $4500). That gives you a value of $540K. Or you could figure how much of a mortgage would give you a 4500/mo payment. For the sake of simplicity lets just leave out taxes (both property and income tax credits). This is a jumbo so we will figure 7% interest. Even if you could get 100% finanicing the loan amount for a $4500 payment would be $670K. Add taxes, PMI and your much higher. And of course, in the real world these days you need a down payment. These would all work to lower that principal amount (down probably closer to $600k). For the sake of simplicity let's just say the value based on rent potential is $600k +/- $100k. That's a far cry from the 1.6M asking price! If you were to buy this place, even with 20% down you are looking at a payment of well over $8K per month once property taxes are factored in.
Now the how not to list a house lesson. Dear Realtard (Brad) if you are going to list a house for 1.6 million you probably should not also include the lease option at $4500/mo. That tells us buyers that the real value of this place is some where close to $600K.
$600 or $700k is probably way low in today's market for this house. That might be closer to what this will sell for 2 or 3 years from now. I bet if this listed for closer to $1M he would get some action. At 1.6M he better hope that some NBA star wants to move to the hood.
One thing that I will mention. Even though I say $700k is way low for this house in today's market, there is little data to back this up. Why? Because nearly nothing over $600k is selling these days. Not much over $350k is selling but once you get over $600k the market is DEAD. If you look at the past 3 months sales over $600 on Redfin you will see about 20 closings. But many of those are actually foreclosures going back to the banks. If you change that search to over $1M there are only two sales closed in the last 3 months. The high end is DEAD, DEAD, DEAD!