(c) copyright View from Silicon Valley, 2005. All rights
reserved.
Another house in our neighborhood sold this week and, what do
you know, it's already up for rent. (Technically, it's not actually sold yet but the buyer has already listed it for rent.) I don't know the exact sale price, yet, but it figures to be up ~$1.05M, or higher. (Depending
on how aggressive the bidding was.) Is ANYbody buying a house around here expecting to actually occupy it?
The prospective buyer is asking $3,400 per month for a 45-year-old
(at least) house with less than 1,500 square feet. A comparable house down the block (same age, same size)
sat empty on the market for about five months at $3,000. We assume the tenants who moved in a couple months ago paid
less than the $3,000 asking price rent.
If the new buyer does get $3,000, that's $36,000 per year.
If he (we do know it's a "he," unless his g-mail account is purposely hiding the gender) gets it up to $3,500, that's
$42,000.
Even at 4% for a one-year interest-only ARM, the buyer needs $42,000
cash. (If he's actually making an effort to pay off the principal, add ~$11,000. I'll spare us both the rant about 100%
financing and I/O mortgages.) Property taxes should be ~$12,000. Gardener service maybe only runs
$2,000 since it's such a small lot.
That's $56,000 annual cash out-of-pocket to own the place vs. $36,000,
or less, to rent it. If the owner has enough other income, maybe he rationalizes it's nearly break-even
on his balance sheet after accounting for (~2%?) depreciation (assuming he can still dodge the AMT).
As the property "inevitably" appreciates 20%, he gains $220,000
by May, 2006. Paying 5% real estate commission ($66,000) he probably expects to net out to ~$95,480 after
taxes. (Or $86,240 since we conceded the earlier point about having additional income, putting him
a higher tax bracket.)
All in all, not a bad payday for buying, renting & sitting
on your behind for a year. Assuming it stays rented. Assuming no major repairs are needed. Assuming
prices really do go up another 20%. If he "only" gets 10% appreciation, the after-commission/after-tax net falls
to $29,925 which is still ahead of 3.625% two-year T-bonds ($38,062 gross or $21,696 after taxes).
What's not to like? Buy at a $1M+ with an upside
at $86,000+. I'll tell you what's not to like --a 10% decline falls right to the bottom line --a loss of $152,000. When
you add this to the range of options, $22K after-tax on $1M+ in T-bonds look pretty reasonable...
Meanwhile, our "BRAND NEW SINGLE FAMILY HOME IN MONTA VISTA SCHOOL"
strategist is being forced to recalibrate his "strategy." His cost numbers are a little lower than the above real estate
tycoon and he was expecting $4,000 rent since the house was brand new. We marveled a few weeks ago at the brazen "strategy" of asking an above-market rent in exchange for the right to buy the house.
"The rent of this home is $3500, and may be negotiable based
on how fast you can move in, and also your credit score. Please email me and/or call me at XXX-XXX-XXXX to see this
beautiful home and I will give you the address/directions."
He switched from only taking appointments to see the house to
having an "open house" last weekend. Now maybe he is staring at those mortgage payments and caving on the rent.
The obvious "problem" is $4,000 didn't fully cover his costs (although
maybe it was close), so you know $3,500 doesn't either. Since the home is new, maybe $3,000 or $3,200 is do-able.
With just a few minutes searching, we found many nice houses within a few miles of this location which are nearly as modern,
and bigger, much bigger and/or cheaper.
I still
don't get this modern finance. Judging by the apparent difficulties for these tycoons to get their palaces
rented out, maybe I'm not the only one?
* * *
ps, the morning after this missive went out, the local paper published, "As of Friday, about 2,340 properties were for sale in Santa
Clara County, and buyers faced less competition from fellow house hunters.
``It's good because buyers can actually get offers accepted now,'' said Dave Clark, a Coldwell
Banker agent. ``It's not lopsided, like it used to be.''
"Most houses are selling for close to their asking
prices," he added, though occasionally a bidding war will drive prices on ``really
good properties'' up 10 percent or so over asking price."
If the residential real estate market is going to roll
over, these quotes are exactly what we would expect as the initial signs. Hmmm...
