A Comp Only an Investor Could Love

When Keynes spoke of ‘animal spirits’ he was referring to the irrational in humans: emotions, essentially.

Before the recent pandemic, investors, in competition with homeowners, were pushing sale prices higher given the outstanding rents which could be generated once they gained possession. One contractor I have worked with in the past had transitioned into a full-time gig converting single family homes into duplexes for one well-funded landlord. The math worked out fine because rents were so high.

The pandemic brought rent down, making this kind of investing less attractive. A flip in San Mateo which had redone the house (small 2/1) and turned the large garage into a stylish 1 bedroom went for 1.855 in January. Less than six months later, a gorgeous 2/1 around the corner sold for 2.365.

This is animal spirits at play, because two rentals for less than the price of one, even if one is nicer, makes more sense. However, one did not tug on the heartstrings of a homebuyer and the other did. In this case the difference amounted to 912 a sq. ft. for a cash flow from two units versus 1404 a sq. ft. for an adorable place to live, a premium of over 50%.

What I also find interesting if that as soon as the fancy 2/1 comp closed, an investor decided to test the market by trying to flip not a house, but a lot, essentially. After closing on the perfectly located dump in March for 1.325, the property is now back on the market with a list price of 1.498 and nary an improvement.

I have been waiting for a comp like this – one that really tests what the market is doing today. Up or down? This one is a beacon, for me, because it is unlikely to attract a lot of emotional buyers, both due to its shamelessly ugly condition and the fact that most of the people who might want the place already had the opportunity to bid earlier this year.

Clearly the last purchaser thinks it might move at list, netting a little under 200K (minus any fixed costs) for doing nothing. That is no jackpot, but it does remove the risks inherent in flipping, especially amongst rising construction costs. No cosmetic makeover will suffice for this home – it requires a complete renovation, putting one at the additional mercy of the city’s planners.

Will another buyer agree that the price of a lot and the shell of a house on the Peninsula is worth over 10% more a mere 3 months later?

We’ll know by July  1^st !