February 4, 2008

View from Florida, 2007 (Part VI)

(c) copyright View from Silicon Valley, 2008.  All rights reserved.



If we just keep beating on this horse, surely it will get back up.  Once it does, surely it can pull us out of this morass of debt, taxes, HOA dues and insurance.  We beg your indulgence as we re-visit this year's Florida series one more (last?) time.  There are a couple more points about "cost" and what sellers need to escape ---err, succeed.

You may recall the gated community we visited with 60 listings (out of ~730 properties) declined to "only" about 40.  The listings we visited line up as follows:

# Bd/B/G   SqFt   Buy$ $/SqFt BuyDate Zestimate
1  5/3/2  2,748  $407K  $148   02/05   $432K
2  4/3/2  2,935  $590K  $201   12/05   $525K
3  4/3/3  2,675  $352K  $131   04/04   $449K
4  4/4/3  3,417  $529K  $155   05/04   $628K

Sliced this way, the data doesn’t look toooo bad.  Zillow shows three of the four houses are still above the price paid.  The one guy underwater committed the most obvious, and measurable, of sins --he paid too much per square foot.  Paying $201 when others in the neighborhood run 25% less, is an easy mistake to avoid, right?

Let's look a couple more data points on these same properties.

# Bd/B/G   SqFt   Buy$ $/SqFt BuyDate $/mo.* Tot-Spent
1  5/3/2  2,748  $407K  $148   02/05  $3,364  $118K
2  4/3/2  2,935  $590K  $201   12/05  $4,705  $118K
3  4/3/3  2,675  $352K  $131   04/04  $2,961  $127K
4  4/4/3  3,417  $529K  $155   05/04  $4,259  $187K

*= For total dollars spent per month, we assume:
+100% financing at 6% interest,
+zero(!) principle payment,
+2.3% real estate tax, $2150 HOA,
+$2.4K insurance and 0.5% maintenance.

We ignored tax deductions but low-balled insurance and maintenance while ignoring opportunity cost to (at least partially) balance out the net.

Sliced this way, over periods ranging from 25 to 44 months, these lucky buyers are all $118K, and more, out-of-pocket.  The real estate cheerleaders will point to the tax deductions but, we insist, cash is cash.  You either have the cash to make the monthly nut or you don't.

Spending $118K in 22 to $187K in 44 months sounds a bit grim but hey, you have to live somewhere, right?

That's easy to say but a little checking finds comparable houses renting for ~$1,600 per month.  Conceding the pseudo-security from the guard and gate makes these houses "special," let's assume they're $1,800 and the bigger one is even $2,000.

Backing out "rent" from "spent," you get:

# Bd/B/G   SqFt   Buy$ $/SqFt BuyDate $/mo.*  Tot-Spent Over-Spent
1  5/3/2  2,748  $407K  $148   02/05  $3,364   $118K     $55K
2  4/3/2  2,935  $590K  $201   12/05  $4,705   $118K     $73K
3  4/3/3  2,675  $352K  $131   04/04  $2,961   $127K     $46K
4  4/4/3  3,417  $529K  $155   05/04  $4,259   $187K     $88K

This slice shows buyers spent $46K to $88K extra for the privilege of "owning" instead of renting.

One last slice, may change your outlook on this whole exercise:

# Bd/B/G   SqFt   Buy$ $/SqFt BuyDate List$   Chg
1  5/3/2  2,748  $407K  $148   02/05  $385K   -$22K
2  4/3/2  2,935  $590K  $201   12/05  $340K  -$250K
3  4/3/3  2,675  $352K  $131   04/04  $449K   +$97K
4  4/4/3  3,417  $529K  $155   05/04  $550K   +$21K

Wow!  That puts things in a different light.  Tow of the houses are listed for less than the last sale price!  The other two prices are up.  One of those up shows an increase of nearly $100K.

What's the differentiating factor?  We can explain the big loser since they over-paid per square foot by the largest amount.  How do you explain the other three?  Is there a key to successful investing reveled in this data?

We cheated.  We omitted a key slice of data for these houses.  All four of them are empty!  The way you tell them apart is:

1) Foreclosed, empty, needs work: -$22K
2) Foreclosed, empty, needs work, over-paid: -$250K
3) Empty: +$97K but competing with houses selling for $100K less
4) Empty: +$21K but the owner's employer is helping him carry the house.

Conclusion:
Finally, we get to the point we felt wasn't emphasized sufficiently is past missves:

There is no key hidden in this data.  Any way you slice it, all four of these houses will sell for prices far below prices paid in 2004 and 2005.  By no stretch of the imagination will these four losses be unique, or even unusual.

Adding insult to injury, even if you want to bottom fish, in the hopes you're not actually knife-catching, there is no single decision-maker who can agree to accept your offer.  (Unless you want to pay 2004/2005 prices...)

We believe it's going to take at least another year before you could even make an offer and close with less than two or three months between.

Maybe we'll give everybody a break and go to San Diego next year...;=)