Seeking Higher Ground

 

At some point in 2017 I considered buying a house in the Highlands area of San Mateo. I know this, because I recently came across an old list of comps from the area. All were sold in mid-2016 and mid-2017.

Out of curiosity, I revisited them all. 34 out of the 38 have not changed hands, and one was pending for its first sale. The other had two sales, and the last is so strange it warrants a column of its own. Given all the hype in the press about housing prices, would it surprise you to know that a full 10 out of the 34 are predicted (by the website Realtor) to have appreciated 20% or less in the last 5 years? If you remove the cost of the commission at sale using a discounted broker (call it 4.5%) the number bumps up to 13.

What about the upside?

The best projected return on a property was, at first glance, a whopping 60%, or about 12% a year, which is along the lines of what optimists say. Once you take out the commission, it drops to 53%. However, the property was purchased at a low price because of the abysmal condition. Even if they had only spent $200 a square foot for full renovations, which is optimistic, to say the least, it brings their basis from 1.6 million to just about 2.05. Now the projected return on the money is a hair under 20% in 5 years, which is a somewhat less glorious take home rate. The lowest projected return was 7% after commission over 5 years.

The second best rate of return was for a similarly unrenovated Eichler, purchased for $908 a square foot and a total price of 1.625. After a commission, the expected return is 46%, which isn’t all that bad if you like it a little retro. Otherwise, you have to start hoping a buyer rewards you above market for your improvements.

One comp sold on April 28 of this year for $2.55. It previously sold for 13% over ask, or 1.8, on April 19, 2016. Assuming no other costs (HA!), this is a return of about 635K, or 35% over 5 years. However, if it had sold for the Redfin estimated value of $2,242,713, that would be down to 19%. Throw in there the fact you were most likely paying more for your home per month than you would have in rent, the notion that this is your most valuable asset you can't go wrong owning becomes even murkier.