If you don’t want to overpay in real estate, it is important to know your objectives and your hold time in advance as much as possible. What are you trying to achieve? This answer is as various as the bids received. What is important is to not allow what might be a rational bid to someone else distort your view of what you should have spent on that asset.
What is most interesting to me about
a comp is the story behind the data, as well as how that one little puzzle
piece fits into the macroeconomy. Most transactions are unnoteworthy. They are
part of the median, and regulate the data when the outliers threaten to trash
its logic.
Which brings me to one of my
favorite comps - as if I could pick one.
Nothing brings out the voyeur in
me quite like a high-end flip. For one, they tend to set the market. Two, it is
like HGTV live.
So it was that in the spring of
2017 a house for sale in San Mateo caught my eye. Sold for 1.65 at the end of September
of 2016, it had been rehabbed within an inch of its life in a mind boggling six
months and relisted at 1.995 at the end of March 2017. It went pending within two
weeks and closed in nine days for a huge (at the time) 2.4 before the end of
April. The home was immediately listed for rent on Craigslist for 6K a month.
This is all so delightfully
juicy.
First, let’s start with the
flipper, who absolutely knocked it out of the park. The work was perfect for the
discerning buyer, whether homeowner or investor. The school district was very desirable.
The buy price was judicious and under ask. The sale price didn’t go overboard. If
their work timeline was a sprinter, it would be Usain Bolt.
With a total hold time of less
than seven months they took in ¾ of million dollars. Unless one goes too hard
on the high-end finishes or personal style front, which they did not, anyone
generating a gross return of 100K a month is probably making a decent money.
On to the buyer…
At that moment in time, 2.4 was an
astounding price for a single family home on a corner lot of a busy street, hot
school district or not. Beyond that, the time pending gives you another bit of
information, because nine days is not the speed of an underwriter. Only cash
closes like that.
The rent requested for this gorgeous
home, 6K, was under market - designed for a quick rental and stable tenant. This
indicates an investor wants to treat the asset more like a bond than an equity.
They found a tenant at that price with ease.
Looking at the math:
Cost = 2.4
Annual costs on cash with a tenant
paying all utilities include tax and insurance
Tax: Max 30K a year
Per the Internet, taxes have been
running about 30K a year. However, we cannot truly understand the tax cost of
the buyer. The urgency of the bid suggests a 10-31 swap, which gives a buyer a
very limited window in order to identify a property. Such a bidder has an incentive
to ‘overspend’ in order to ensure they preserve an important tax advantage.
Insurance: Roughly 6K a year
Assuming no costs on the house
for a few years given its updated status (HA!), and no property management
fees, which is questionable for an investor with enough sophistication to go
flinging 2.4 million around, the best-case scenario for the cash flow on the investment
at 30K per year of tax would be 3K a month, or 1.5% on their money. If the
owner instead paid 10K a year on tax, this perks up to 4.66K a month, or about
2.3%.
As for the so-called market value
of the home today?
After a roller coaster of valuation
predictions, Zillow reckons it is a hilarious $2,415,981.
Oct 2017 – 2.23
June 2018 – 2.14
Dec 2018 – 2.075
Feb 2018 – 2.4
Sept 2020 – 2.26
Jan 2019 – 2.045
June 2019 – 1.84
June 2019 – 2.75
Oct 2020 – 2.24
Mar 2020 – 2.91
Jul 2020 – 2.27
Final Answer?
No one knows. Unless the investor gets bored of the cash flow, can’t rent for an extended period of time, or suddenly needs to access the capital behind what has to be one of many financial instruments they have available by selling alone, we aren’t going to find out anytime soon.
No comments:
Post a Comment