Tuesday, June 22, 2021

Planning for the Future, Bay Meadows Considered

Dear Planning Commission,

I am writing this afternoon out of concern that approving the construction of the Bay Meadows project as it is currently conceived will have a detrimental long-term impact on affordable housing in San Mateo. While well considered and beautiful in conception, the fact of the matter remains that adding nearly 500,000 sq. ft. of new development to this city, of which less than 15% is residential, will exacerbate the jobs/housing imbalance. 67 units is not enough compensation for the number of new jobs created.

A more balanced approach is being pursued at Concar Passage. In this development there are nearly 1000 units on offer, and only 40K sq. ft. of office and retail. If this ration was applied to the amount of commercial space Wilson Meany is proposing, it would mean adding over 10,000 new units of housing.

There is a development in Montreal called LaCité. It is a tall apartment building above retail and supermarket, all on top of a subway stop. The residential units spur sales at the shops and make the area more vital at all hours. No one living there needs a vehicle. Anyone who recalls the dismalness of downtown Redwood City after the close of business before efforts were made to revitalize the city center should understand why all commercial can ultimately fail to bring the best results. These are some of the multifaceted design ideas which are required to make San Mateo a dynamic, walkable city as opposed to a crawl of cars trying to get from one parking lot to another.

It is not only our responsibility to our city which requires we pause before building. The housing crisis in the Bay Area has been fueled by one city after another approving more office and retail than housing to support those industries. Without more affordable units locally we will continue to a have a situation where a friend’s nanny drives in from Gilroy, my son’s pediatrician’s receptionist commutes from Fairfax, and it is not rare to meet a waiter in for the night from Vallejo. These are the unsustainable consequences of perpetuating the housing/jobs imbalance, and should be addressed in conjunction with the present proposal.

Kind regards,

Kara Cox

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  1st !

Friday, June 4, 2021

S*&T Happens

My grandparents moved to San Mateo from Detroit in the 1950s, seeking open space and opportunity. They purchased a classic rancher (3/2, approx. 1600 sf. Ft.) on a nearly double sized lot for around 35K. This was on par with the sale price of their house in Michigan.

At one point in the first few years of their relocation they considered moving back East. After flying into a snowstorm while undertaking a house scouting trip to Detroit, my grandfather found a phone and immediately called my grandmother back in California. Take the house off the market, he said, I can’t go back to snow. The property remained their home until my grandmother’s passing in 2018.

The trustee fixed it up a bit from its ancient glory and put it on the market for 1.95 at the end of August. Another house of comparable size listed for several 100K under. Though a smaller lot, the renovations were top of the line, and the property is more walkable to downtown.

On the day bids were due, the real estate agent representing the estate was frantic. They hadn’t gotten anything higher than 2 million. It was inconceivable!

Then, at the moment you thought the wave wouldn’t crest any more, it did. Once a bid for the other house was accepted, at well over ask, the losing bidders did an about take. After a little jockeying from two of the castoffs, the house sold for 2.1 in October.

At the time, my natural route through San Mateo still took me by the house. One day as a slowed for a touch of nostalgia, a resident caught me staring. I looked sheepishly at the friendly, breaded man who stood with his two young daughters, and explained myself.

He smiled warmly.

“We love it here.”

It was filled with a sincerity so compelling I was touched to the core. Visions of their family staying 60 years, filling it with several generations at a time for decades on end, danced in my head. This is not a family who would raze a beloved landmark of my childhood in order to erect a mini mansion.

The young family was comfortably settled in their brand-new dream home, happy as could be.

What could go wrong?

Less than two years and one pandemic later it hit the market for 2,288,000 in August of 2020.

Now as exuberant as the market may be around the Bay Area, it is also rarely completely stupid. Here were some people who had to sell. Job loss, divorce, flight to family, all of the above – who knows. Point is, this is a deal that gets circled by the vultures.

It sold at the end of September for 2.155, a mere 2.6% above the 2018 sticker price. Including moving costs, and closing costs, staging charges, realty fees, the lovely and very long fence erected in the front yard, and their losses soar into the low six figures.

Based on Realtor.com’s estimate, it is now valued about 2.215, or 5.5% above the sale price in 2018. They also contend that the value of said home went up 111% in the last 10 years. If this is the case, over 100% of that value came between 2011 and 2018. This does not bode well for today’s buyer.

If I recall, my grandparents spent about 35K on that house. Based on the sticker price, the asset’s return was 6000% over 60 years, which blows the national average out of the water. Good thing he went house hunting in the winter, because Detroit’s stats lack the same luster.

Thursday, May 27, 2021

2005: Maybe Not Ancient History

Having lived both in the Bay Area during the dot.com explosion and NYC during the MBS explosion, I know a thing or two about financial bubbles. Or at least how they feel in the moment: akin to being at a frat party at 2 am. Everyone is spewing garbage but thinks they are a genius, and the only way to make sense of it all is to drink up or take yourself home.

That’s bubbles.

It is hard to resist the dopamine of collective euphoria. It is only in retrospect in which everyone saw it coming, knew it couldn’t last, etc. We didn’t, for the most part. It is easy to look back with derision about the Dutch and their bout with overpriced tulips, but is that so much different than what happened with Pets.com? Or when folks rushed to own homes in 2005?

Data presented on the major realty sites tends to focus on the gains of the last ten years, more or less. This is handy to their purpose…making a home seem like a great investment, on top of providing other practical and emotional benefits. The last ten years have been great!  However, to fully reap those financial rewards you would have had to buy around 2010, and this was precisely the moment lending was in shambles.

For example, a friend of mine bought a place in San Mateo in late 2010 (3/2, approx. 1300 sq. ft., slightly oversized lot) for a little under 650K. According to Realtor.com it has gone up in value 135% in the last 11 years, and will go up an additional 9% over the next year. She said, at the time, they worried they were overpaying. Despite such potential gains, her non-tech propelled family isn’t going anywhere, short of winning the lottery.

With prices soaring and a constant stream of reasons why prices can’t possibly go down, I start to get nervous. It’s not that I don’t think there is a lot of value in a home in San Mateo. It’s that I can’t shake the feeling there are a lot of outliers in the data which are disguising the facts the overall gains are being distributed in far less democratic manner than they might seem with additional context.

For example, there is an adorable comp on the market in San Mateo which came up pending in the standard two weeks or less (2/2, approx. 1650 sq. ft., oversized lot). The ask price is around 1200 per sq. ft., for a list of 2 million.

Estimates of the property’s value:

Redfin = 2,274,831

Collateral Analytics = 2,445,000

CoreLogic = 2,420,700

Quantarium = 2,328,339

Zillow = 2,305,555

What is of special interesting to me about the comp however is its past sale history.

It sold in the summer of 2005 for 1.4.

It next sold in 2013 for 1.41.

It took eight years to recoup the sticker price, to say nothing of the losses of interest, commission and other ownership obligations. Should the house sell for the low side of the projection, 2.3, it would be easy to tout this as a miraculous achievement. Having bought in 2013 for 1.41 you sell for 2.3. Minus the commission only (4.5%) you are walking with approximately 800K.

Assuming you put the standard 20% down this is 285% return on your money over 8 years. Not bad, on paper, but it goes down significantly when you start stripping out other ownership costs. Then, keep in mind, if you do the math for the guy who bought and held in 2005, had he continued to hold, the return on the property is sliced in half. As it was, he lost a great deal of money. Such are the numbers showing how long it took for a top-notch trophy property located in San Mateo to rebound after the last dip.

I came across another property which tells a story of much greater financial woe and heartache stemming from that period which, for a while, burst with enthusiasm. This one is located in the outskirts of Hayward. Way, way out…I passed a yak.

The house was built in 2003 (4/3, approx. 2700 sq. ft., large lot with Bay view). Its stats are as follow:

Early 2003 – sold for a hair over 800K

Mid 2005 – sold for 1.19

Late summer 2012 – sold for a hair under 700K

Current estimate on Realtor – a hair over 1.4

Realtor points out that the house has appreciated 90% over the last 11 years. However, the bulk of this benefit goes to the most recent buyer. The previous one lost 500K of value between the years of 2005 and 2012. Let’s assume the sale price estimate is correct. If you calculate the return of the asset itself over the span of its first sale and today the overall return looks, to me, a lot more like 75% over the last 18 years. Individual investor results may vary.

Wednesday, May 19, 2021

How to Lose Money in Real Estate Like a Rock Star – The Hollywood Edition

As a full-time house voyeur, it is important to follow the LA market. This is where celebrity and single family combine in one multi-million dollar frenzy. Nor Cal may have expensive homes, but for the most part they are about as sexy as Mr. Roger’s sweater.

A few celebrities have a reputation for real estate savvy, such as Ellen DeGeneres, Arnold Schwarzenegger, and Jeremy Renner. However, most simply make the news when they buy or sell a home. Recently, a few celebrity sorts had this distinction.

First, in the final blow to the most contentious mega mansion ever conceived by a true Hollywood archvillain, Mohamed Hadid sold his incomplete Bel Air project for 8.5 million. As part of the deal, the structure must be removed, a demo job that won’t come cheap. On the upside, it would be difficult to piss off the neighbors more than the last developer, so you are riding in there as a bit of a white knight. This never hurts when you are dealing with some well-funded, and clearly legally savvy, adjacent owners.

Hadid has thus demonstrated how to take a piece of perfectly good land, invest years of your life and millions of dollars into its development, and walk away in bankruptcy. This is how the pros lose big. It also is a reminder of one of the key differences between spending 45 million on a trophy house and a Picasso. When the government decides to start breathing down your neck, you can’t just roll the thing up and take it to a safe deposit box in Switzerland.

When amateurs lose money on real estate it usually isn’t that extreme. But celebrities losing money on the resale of their house is surprisingly common. This week we examine the case of Motley Crüe drummer, Tommy Lee.

The property in question was purchased by the performer for 5.85 in 2007, per an article compiled by Realtor.com. It looks exactly like the kind of home you should own if you are a rock star. There is a pool taking up most of the yard, a movie theater with concession stand, retractable roof, and tricked out recording studio. Its style is bold and elaborate, and one would expect, customized a great deal by Tommy Lee.


Unfortunately, in doing so he broke many a cardinal rule in real estate. For one, he now has the most expensive house on a block of similar houses. The house is a unicorn amongst a stable of dull, identical ponies. It is twice as large and exponentially fancier.

Further, there is too much style. It is a tall ask for a buyer to absorb it whole. However, renovating almost 10K sq ft is not for the faint at heart.

Additionally, let’s consider the main buyers of houses of houses located in the Westridge development in Calabasas. Google map reveals it to be exactly the kind of place family buyers flock to live, and rock stars fear to tread. Tommy Lee, while clearly building a home he could enjoy to the fullest, was also actively constructing a toddler deathtrap destined to drive away buyers in droves.

And finally, in what I can only assume was the coup de gras to the whole “Build-Your-Dream-Home-And-Hold-Forever” strategy, Tommy Lee fell in love. While the house in question has been on and off the market since 2016, this month he went ahead and closed on a new one in Brentwood for 4.15. One can only imagine the new Mrs. appreciates a fresh start in a new space two years on from the wedding.

As for the fate of the one on the market?


This could take a while without a major price cut or change in marketing strategy. Buyers for such a product are few and far between. On the upside, Tommy Lee doesn’t seem to be suffering all that much financially over the matter. Blowing a few million on a sick pad an walking away at a loss without missing a beat? Nothing more rock star than that...

Tuesday, May 18, 2021

Tale of Two Bungalows

On the east side of the block of South B between 9th and 10th there sit a row of same plan duplexes, each consisting of two 2/1 of approximately 1K sq ft per unit, arranged on long, thin lots around 7500 sq ft. This weekend I went along with my friend Sam to inspect two properties with nearly identical layouts which she was considering for rent. What we discovered were such stellar examples of the Dr. Jekyll and Mr. Hyde of landlords the whole episode felt like a parody.

Both landlords have properties purchased long ago. Both landlords have properties which have been sitting empty for many months due to the slower rental market post-Covid. Both landlords had units with similar layouts on the same block. Here the similarities end.

At the first unit we were met by a sweet little old lady who had been chatting amenably with the tenant in the back unit. The unit she was showing was freshly painted, inside and out. The carpets were clean and recently vacuumed. The bathroom and kitchen were updated. There was an adorable back patio with the perfect orange tree (you have to pay extra for that). She explained how, in order to make the place more appealing, they had moved a few fences to enlarge the space. They had owned it for 40 years, she said, and you can tell she felt real affection towards the property.

The front yard, she explained, was in the process of being redesigned. She had tried for years to maintain a nice lawn, but she was ceding the war to the neighbor’s gophers. She would not, she insisted, make it plain stone. Her aesthetic ambitions were higher minded than a cheap stunt like that.

Finally, in a gesture which made me want to sell my house and move in myself, she apologized for the state of the windows, which did not appear dirty to me. Whoever moved in, the landlord promised, could set up a cleaning to suit their schedule. She would pick up the tab. For all this, she was asking $3150 a month.

Our next appointment was a few units south. The expectation was that this place would be cheaper, for a reason. It was purchased in 2000 by another landlord who has rented to friends for years. I understand that getting lower rent often requires compromise, but this guy, who I’ll call Bill, is beyond, in my opinion. Codes are broken. Service providers are sketchy. Fix times are extended. I mean, the man didn’t even pave their driveway after cars kept getting stuck in the mud. He bought a dump truck of gravel, which they had to spread out themselves. In San Mateo! Solidly into the 21st century!

Anyhow, I was prepared for this unit to be down market from the one we had come from. Bill did not disappoint. As an indifferent young man (not Bill) opened the place for us to look around, I was instantly transported to the most beat up rural properties I have had the opportunity to inspect in person. The condition was deplorable.

The floors wood floors were scuffed. A tile was missing off the tub, which reminded me of what you might find in a cut rate hostel. Dark scum was apparent on the tile floors. The kitchen appeared to be original, and none of the cupboards closed all the way. The backyard was a tangle of weeds, and contained a rusted old shed, a barbeque covered in spiderwebs, and a large, broken screen. All this was going for $2700 and one month free with a year lease.

In the end, it is unlikely Sam will take either. Her timeline for moving out of her current place is flexible, as is the part of the Bay where she settles. A friend gave her the number of a property manager in SF, and insisted they were offering better deals than in San Mateo. For once, it is renters who have options, and they plan to exercise them.


*Please note, despite the ridiculous discrepancy in condition Redfin predicts their sale price to be within 1.5% of each other. Such is the power of stale data…

Wednesday, May 12, 2021

Feeling Bearish in a Bull Market

Perhaps the most famous naysayer to the notion a home is an investment is Robert Kiyoskaki. Per his seminal book, Rich Dad/Poor Dad, the conventional wisdom is bunk. Committing to 30 years of mortgage payments represents a liability, not an asset. Even when owned free and clear there are associated expenses, such as tax, insurance and maintenance. Sure, you can sell, but then where would you live?

Conversely, Kiyoskaki considers an investment a passive stream of income that is profitable today, not, potentially, at some nebulous point in the future. My boss in NYC had this discipline back in 2006 when the name of the game was pay now for income streams that will “inevitably” come to fruition as rents rise every single year forever. If he couldn’t get a little bit of upside from day one, he didn’t buy. Please refer to the new book Saving Stuyvesant Town: How One Community Defeated the Worst Real Estate Deal in History for an example of how you can make a few billion disappear in less than a decade by betting on future cash flows that never materialize.

While it may be a personally satisfying to watch your predicted value rise on the realty websites, you can’t eat equity. Having Zillow tell you your house is worth a million dollars more than what you purchased it for ain’t bad. However, it is a far cry from having a million dollars in the bank.

Americans loves to own their own homes. It’s our thing – an essential part of living the dream, we are told. According to Princeton University’s The Eviction Lab 45.67% of Californian’s rent. San Mateo County is a hair more, at 46.72%. Comparatively, an article published this week by Isacc Würmann on housing activism in Europe estimates population of renters in Berlin is 85%.

But does it actually make financial sense, based on the numbers, to own a home in the Bay Area?

For people who have only followed the Bay Area housing market it might be hard to believe that people in other parts of the country buy a home to save money on rent. If you are able to come up with the down payment in the rural Illinois town where I hold property, your monthly payment with mortgage and insurance on a 70K house is about $400. Rent on the equivalent home would be at least $900.

This could not be further from what is happening right now in the single family market in the Bay. Consider a comp which closed earlier this month. It was a cheerful little house on a quiet block in Shoreview (2/1, 820 sf ft house, 5250 sq ft lot). It closed at 1.14, for an estimated monthly payment of $7665 with a conventional mortgage. This is more than twice the estimated high rent of 3800 (Redfin).

How is this justified? Asset appreciation, they say.

On a base level, this is true. My favorite Illinois rental is predicted to have risen less than 7K since 2016, and this doesn’t take into account the 7K we put into it at purchase. However, it brings in a positive cash every month like clockwork.

Compared this to a home sold in San Mateo in 2016 which is said to have appreciated 533K in the same amount of time, or 38%. Yet one should take out the approximately 125K in interest paid in the first 5 years of the loan. Now, from the 408K remaining you can back out the commission at 4.5% of the sale price and you are down to a profit of approximately 319K, or 22% over 5 years. This also assumes no other capital expenses in that period (HA!).

Additionally, unless you sell, it is hard to call it an asset when the expected fixed monthly payment is over 7K a month and the expected rent per month during the equivalent period was around 5K. If you aren’t living there, you are losing actual money day in and day out for the benefit of counting on the future benefit of undeterminable gain. If you are living there, you still ought to back out the 2K a month for the 60 months you have been paying more to own than rent from the profits. Down to a profit of 199K, your return at sale would be predicted at closer to 13.7% over 5 years. The situation does not improve if you are subject to capital gains.*

If the psychic value of being a homeowner outweighs the math, go forth and own my friend. Ditto that if you have piles of cash or an overwhelming fear of inflation. Otherwise, Kiyoskaki’s point on the heavy liability of homeownership is worth considering in the heat of the current bidding environment.



*Yes, there may be SALT tax benefits to consider, but they have been capped now. Also not included in this model is the impact of closing costs, such as staging, as well as the unexpected costs of ownership which tend to crop up all too regularly, such as appliance replacement, mold mitigation, window replacement, yard maintenance...