Friday, November 03, 2006

Downtown Condo at Portico #318

Here's another Portico unit that's been listed on day one at a loss.

Since this unit doesn't have a patio and is very small in an building that was designed as rentals and then converted into condos the real value of this unit is probably no more than $1,200 a month. When you run the numbers including taxes and HOA the value of this unit is around $175,000. I'm not sure they will go that low but that's all it's really worth if you think in terms of monthly payment.

The sales history shows the first sale which was likely from the developer to the first owner in the low $200,000s so this unit appears to be in pretty big trouble.

Portico is in downtown's Little Italy neighborhood.

Type: Listed on MLS(#066091539)

Resale Price: $304,000
(Range priced $299,000 to $309,000)
Cost: $320,000

Loss@6% Sales Expenses: $34,240
Loss%: 10.70%

Purchase Date: 06/22/2005
Holding Period: 17 months and counting...

Bedrooms: 1
Bathrooms: 1
Square Feet: 553

Purchase Details: view

7 comments:

Anonymous said...

Your math is problematic at best. While positive cash flow from day 1 is what everyone dreams of, of course, it's rarely a given, even in the cheapest of markets. That's why investors hold their positions, rather than trade buildings every year ... in 20 years, the rent-vs-own math works much in their favor. But you can't apply that on the first day, which means that you can't apply today's rental value to today's purchase prices (and this is ignoring down payments).

The relationship between renting and owning is very complex. Such a simplification (today's rent should = today's purchase price in monthly payments) makes for a splashy big percentage number, but really means very little. Worst, it doesn't reflect well at all on your understanding of RE.

Mr. Brightside said...

For a very small low quality unit I think it's only worth $1,200 per month to get involved. If you want to make a investment with a lower potential return that is the nature of a free market.

Since the unit was worth only $236,000 on 2/16/2005 and since the market has gone down a generic 10% since then a value of $212,000 isn't all that far from my $175,000 perceived value using the rent vs. mortgage payment model.

What is the unit worth to you? Do you think that a price of $320,000 was a good investment back in June 2005?

Again I'm very interested in hear your numbers of this unit. What is it worth based on your approach? Care to post the specifics include the formula?

MLS Listing Value: $304,000
6/22/2005 Value: $320,000
2/16/2005 Value: $236,000
Brightside's Value: $175,000
Anon's Value: ???

Anonymous said...

It would appear that the Economist would agree with Brightside on this one.

http://www.economist.com/finance/displayStory.cfm?story_id=4079027

"The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents. The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier."

Anonymous said...

I am not involved enough in downtown RE to speculate (hah!) as to the value of the unit, so I won't.

All I'm saying is that I'm so very tired of hearing simplistic "explanations" and math for bubble theory. Anyone who knows anything, knows it ain't that simple. I appreciate what you're doing with this blog; I don't want to see you lumped in with the hysterical shriekers. Stick with the hard data (purchase price, closing price) and steer clear of the judgemental projections (those always include implicit assumptions). Please.

As to the anon above: the Economist used general terms ("reflect the future benefits of owning") exactly for that reason. If they meant the purchase price should (always and every day?!) be equal to rent, they are capable of writing those words. They didn't. Think about it.

Mr. Brightside said...

At some point you have to put a valuation on any asset, including real estate, outside of an actual transaction. If you want to offer a criticism of my approach I think you have offer your approach. Frankly I wouldn't be able to use this approach for say a ocean view home in La Jolla or a penthouse condo at Pinnacle. I do think that in a market that is moving down with a lot of inventory using comparable sales starts to lose value as well.

BTW I think it would be interesting to build a model that included a rental cash flow equivalent as well as other methods. It's not uncommon to value a business using different methods. I do find this an interesting topic as I do think the market will revert to a fundamental valuation as it digests the emotional market from the last few years. You have to remember that it wasn't too long ago people queued up for hours to get a shot at buying a condo downtown. That's not the type of environment where any sensible math is taking place.

I fully expect to blog about good deals in the market someday, as the blog says it's a market monitor, I'm not anti-real estate.

It's also quite possible that marginal properties like this small unit actually trade at a discount to rental value someday. If that occurs it would be a great time to buy well-selected investment property.

Sven said...

@anon 12:46

I'm a little curious too how you would evaluate a piece of real estate. There are a number of rent vs own calculators out there that you can use to simulate evey aspect of home ownership vs renting. They count tax savings for ownership, years you plan to live a this location, expected house appreciation, rent, mortgage type, the difference between rent and mortgage invested at a reasonable rate, etc...

And right now, unless you run the simulation for over 40 years, it's a better deal to rent and invest. Obviously you could use unreasonable figures to make real estate look like a good investment again (high appreciation, a bad investment fund, high rent, etc...), but you have to be honest with yourself when you make big financial decisions like this.

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