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!


alan said...

$4500 may be asking rent, but do you have any idea what you could actually get if you were to lease it out in today's market? If the most you could get in Riverside is $3800 then they rental equivalent value is substantially lower than your estimate.

Oldtimer said...

The number of over 4,000 sf homes built in recent years in the IE is stunning.

I'd hate to see the utility bills with over 6,000 sf and a swimming pool during the summer months.

Renee' said...

Rent is still over the top - I pay alomost $2k for a 3bd room condo - though the condo is new it's in the ghetto - it's ridiculous.

fumbling said...

I had a 4000 sf house in the San Fernando Valley, sold it earlier this year and downsized to a cozy 1300 sf apartment in Orange County. Here are the "extra" costs I had to pay every month when I had that big home in the hot summer:
$200 gardening (big lot)
%400 water (grass lawn)
$400 electric (a/c only, no pool)
That was $1,000 extra on top of the HOA and PITI. Fortunately someone else bought the house. But it takes a lot of extra money for a big house.

Allison said...

Drove by this one today - its not even that attractive. Not $1.6 mil attractive anyway.

Renee' said...

While renting - I pay NOTHING for maintenance.

My water is not bad considering water in Corona and Norco are at a premium: $75.00 a month average for 4 of us (no lawn to water either so that's a big help) and luckily the monthly trash cost is divided by all the tenants here so it comes to $3.00 a month per tenant. Electricity (even in the summer months) is very good because again - I live in a 1600 sq ft unit.

I say all this to state that people have to really consider how much owning a home does indeed cost. While you may be able to afford a bigger home now during the crash - make sure you can afford those maintenance and utility costs.

vipertom1970 said...

I got a 1,7000 sf home in a gated community in corona Linclon/River. How much can I rent it out for ?

golfer_X said...

a 17000 sq/ft home, WOW that's big!

But it's not the size so much as the number of bedrooms. Checking Craigslist, 3 bedroom homes of similar size are going for $1600 to $1800 a month. Add or subtract about $200 to $300 per bedroom if your's has more or less.