3035 Scott Street
Assuming our plugged-in tipster is correct (it’s currently “pending” on the MLS), 3035 Scott Street has closed escrow with a contract price of $2,820,000 (5.8% under asking).
Purchased for $2,625,000 in October of 2005, a sale at $2,820,000 represents average annualized appreciation of 2.8% over the past thirty months for this remodeled single-family Cow Hollow home. Any guesses as to how that might compare to the change in neighborhood “median sales price” over that same stretch of time?

65 thoughts on “The Apple Of The Day: Single-Family In Cow Hollow (3035 Scott)”
  1. If it’s “remodeled”, doesn’t that not really make it an apples-to-apples comparison? Or is the implication just that it was at some point during its lifetime remodeled (not necessarily post-10/2005)?

  2. I also posted in another thread about 2820 Divisadero that sold in 05 for 5.25 million and then again a couple of weeks ago for 7.5 without a major update in the interim. Anyone else have info on this sale?

  3. Of course Spencer.
    And Fluj, it’s not a “loss”. It’s a Loss, with a capital “L”. But yes you are correct, it is their neighbor’s gain… unless it isn’t.
    But with regards to this house:
    Assuming 10% down, and a generous ARM rate of 5%, we can roughly assume that they lost $384,570.40 over the course of 31 months.
    Compared with renting a very nice home at roughly $10k a month, they have only lost $120,539.76.
    Calculations used to derive these numbers here:
    http://spreadsheets.google.com/pub?key=pM4Gw0s2zSeA8g4MYUHtsXA

  4. Well it seems as if they only borrowed $1.1M and put 1.525M down in the first place. So now how much did they “lose” ?

  5. Regarding 2828 Divisadero, MLS shows as a sale on 5/13/08 with a asterisk price of $7.5M* – so, despite the 4 DOM, my guess is that it sold for under the asking price of $7.5M. Property Shark shows the $5.25M sale on 7/15/05. MLS shows last sale in 1998 at $2.852M – but not the 2005 sale. Property Shark lists square feet at 3,820 – that would make this recent sale nearly $2,000 psf (unless it sold for way under list price).
    Of note, per the MLS, this $7.5M sale of 2828 Divisadero would be the most expensive sale ever in the MLS for District 7D (Cow Hollow) with the exception of 2820 Scott (sale in Dec 05 for $8.5M – also asterisked).
    So far in 2008, there have been 12 sales of SFH’s in 7D with a median price of $2.8 – 3.0M (depending on how you treat the two asterisk sales) with a mean price per sf of $966 (but 5 of 12 sales lack sf data).
    In 2005, there were 27 sales of SFH’s in 7D with a median price of $2.2M but with a mean price per sf of $1,018 (with 12 of the 27 sales lacking sf data and 4 asterisked).

  6. Since they bought in 2005 they likely got a good rate (maybe even sub 5?). The loan was for $1.1M so I think it’s safe to say the mortgage was less than 6K a month. And since it was a $1.1M and mortgage deductions are capped at $1M, nearly all the interest was deductible.
    This seller, in plain point of fact, did not take a loss. Quite the opposite is true. It was a trust sale so they may have even been retirees not subject to AMT, and able to deduct property tax.
    The notion that EVERYONE jumps into buying an expensive property without understanding how to manipulate mortgage tax deductions to his/her advantage is a fallacy. More, it is a fallacy many of you have taken as gospel. Every time something like this appears how many churn out the same ole numbers? Well, sorry. Because a lot of times people making expensive purchases are pretty sophisticated financially. For many, keeping a mortgage makes a whole lot of financial sense.

  7. Hey Fluj,
    Thanks for the info, I have updated the spreadsheet accordingly.
    I suppose (but do not assume) that you will be surprised that having a larger amount of money tied up in the house has actually widened their loss, and they are now down $130,121.97 vs. renting, and again that’s assigning a very generous rental value of $10k a month to the property.
    The actual loss on ownership appears to have narrowed to $224,495.13, but that’s an illusion of the spreadsheet because I don’t factor in the opportunity cost of having the down payment tied up in the house until I get to the rental side.
    So, for example, if we assume a 5% return on their investments (and they could easily have done much better then that simply by having the money in an S&P index fund like IVV over the past 31 months which saw an annualized return of roughly 8.2% over the same period) they missed out on $204,851.67 in capital appreciation with their $1.525 down payment.
    Just calling it as it appears to, be based on the information at hand. I welcome any new information that may add to this picture.

  8. missionite, this is the first time I’ve gone through your spreadsheet – solid piece of work. But the rent number seems to be input as $3K not $10K if I’m looking at it correctly.

  9. “The loan was for $1.1M so I think it’s safe to say the mortgage was less than 6K a month.”
    Yes, I have the estimated mortgage at 5% at $5,905. I have no idea if it was possible to get below 5% at that time, but I assume that even if it was, it would not be significantly lower. Correct me if I’m wrong.
    “And since it was a $1.1M and mortgage deductions are capped at $1M, nearly all the interest was deductible.”
    It doesn’t matter if they borrowed 1.1M or 3.5M, they can only deduct the first 1M in interest, so irrespective of mortgage size they can only deduct roughly $126k in interest over the 31 months of ownership, which my spreadsheet has factored in. In other words, this doesn’t change anything.
    “This seller, in plain point of fact, did not take a loss. Quite the opposite is true.”
    I’m not sure where you get your confidence. Perhaps you could share it with us? It appears to me that there are some pretty large numbers to overcome here. I’m not a professional financial adviser though, and I might be missing something.
    “It was a trust sale so they may have even been retirees not subject to AMT, and able to deduct property tax.”
    I thought you could deduct property tax regardless? Perhaps someone could clarify this for me?
    Not being subject to AMT is only going to have a marginal effect on the outcome, and for the purpose of this exercise, reducing their tax basis has the effect of increasing the loss (by virtue of decreasing the deductible).
    For example, let’s say they are dirt poor and have a tax rate of 15% (this is ridiculous of course, but I’m just trying to illustrate the point), that’s going to reduce their tax savings by $60k, and increase their loss accordingly to roughly $190k vs. renting a $10k/month apartment.
    Alternately, let’s say they are the richest people in the world, and have a tax rate of 60%. Their deduction savings went down (but also their taxes went up!), but we are only talking a difference of $20k or so.
    In other words, manipulating mortgage tax deductions either way isn’t going to materially change the basic facts. But again, if there’s something I’m missing, then please educate me.

  10. Dude, sorry about that. I sometimes forget to click the “automatically republish changes” box on Google docs. It should be corrected now if you click again.
    Fluj, I’m genuinely curious, and not at all argumentative: What metrics do you disagree with? I’ve had this spreadsheet evaluated by agents, mortgage brokers, mathmeticians, and bankers. I don’t claim that it is error free (hence the “beta” tag), but it has been a while since anybody has spotted an error. If you disagree with how the calculations are performed, or feel there is a basic error in the methodology, I would love to hear what your disagreement is, and I mean that sincerely.

  11. Missionite, again it’s always interesting to see your fine spreadsheet put in action. One very minor point about it — SFRs and condos (with a few exceptions) are exempt from rent control laws. so that cell might need adjustments when you’re running it for such properties.

  12. Maybe it’s because it’s Friday before a 3-day and I’m feeling magnanimous, but I just wanted to thank fluj (seriously, I’m not being sarcastic) for what he brings to these discussions.
    Although I tire of the empty-headed and often irrational “buy, buy, buy” mantra my friends (and sometimes complete strangers) used to scream at me (it’s been quieter lately), I don’t see that fluj belongs to that crowd. He seems more thoughtful and rational and credible than those other folks and I enjoy reading and thinking about his posts.
    No matter what your perspective on the housing market, or other topics in general, it is important to listen to (and not just outright dismiss) opposing perspectives.
    So, thanks fluj! Have a great weekend everyone!

  13. Hi Trip,
    Cell C71 allows you to control the rate of increase.
    Most tenants in SF are covered under rent control, but as you correctly point out, SFH and individually owned condos (as opposed to a building where the subdivider of the building still owns the condos) are exempt.
    There is no way to guess or predict what a particular landlord of a SFH will do. For example, I live in a beautiful (albeit creaky) victorian that has not had a single rent increase since I moved in 6 years ago. I have, of course, heard of the opposite.
    Rather then try and predict what a particular landlord will do, I have given the user the opportunity to enter their own values. Since most tenants in SF do live in rent controlled properties I have left the average allowed rental increase over the past five years (roughly 1.5%) as the default.
    I’m fully aware that market rate SFH’s may see more dramatic increases in rent, but when posting an analysis I try and compensate for this by overestimating the rental value to begin with. For example, 3035 Scott would be extremely unlikely to command $10k/month in 2008, let alone in 2005.
    Finally, even though the lack of rent control means the landlord can raise the rates at will, they are still fairly constrained by market forces, as the tenant can vote on the increase with their feet. Every month of vacancy represents a loss of 8.3% of annual income, so a 10% increase in rent with three months of vacancy (which is probably not unusal at the $10k/month level) is going to take three years of non stop rental to attain profitability, and of course every change in tenancy increases the risk that the next one will be the nightmare tenant. So in general I suspect raises that are excessively above the CPI are the exception not the rule, but I have no data to support that theory, and the last year or two may have turned that upside down.

  14. nice spreadsheet missionite and I agree this was not a very good investment in retrospect.
    2 questions – how is the “out of pocket expenses” line derived?
    second I’d question the 2% closing costs on buying – is that really typical? I’ve never come close to paying that much when buying a home. But I wore down the mortgage banker to essentially zero upfront costs.
    thanks.

  15. Fluj – It’s 31 months of ownership and the costs go way beyond the mortgage payments.
    The spreadsheet is great but another way of looking at it:
    $2,820,000 less 5% selling commission is $2,679,000 netted. That $141K of appreciation is 2.1% over 31 months and a return of 9% or about 3.5% annually on the downpayment BEFORE any financing costs, taxes, maintenance, etc. Now you can argue about the expenses but 3.5% annualized gross return ain’t good.

  16. Fluj,
    Perhaps you could tell me where the spreadsheet is wrong instead of just being categorically dismissive?
    Let’s break it down:
    2.6M purchase price
    31 months of ownership
    $76k in property tax (1.14% in California)
    $183k in mortgage payments
    $31k for homeowners insurance (.46% which I understand is a best case scenario)
    $67k in renovation and maintenance (it does advertise as being remodeled, so this is probably way under…but I’m sticking with my guideline of 1%)
    $52k in purchase costs
    $141k in selling comission
    Add it up, and that’s $550k.
    Oh, and there’s the opportunity cost of having your down payment of $1.5M tied up in the house, instead of an interest bearing account. A 5% CD (which was easy to find in 2005) would have returned an additional $204k over 31 months.
    So now we are at $754k in expenses, roughly.
    What’s the big “no” here? Can you tell me exactly where I’m going wrong?
    Now you do get $284k in benefits:
    $90k in tax savings from deductions
    $194k in appreciation from the sale.
    So that leaves a net cost of ownership of $490k.
    But you have to live somewhere, so let’s compare it to renting a nicer home for $10k a month. 31 months, with some room for annual increases is roughly $325k in expenses.
    Subtract that from $490k and we have the home costing roughly $165k more to own then renting a nicer place for $10k a month.
    In other words you are paying $15k/month (and carrying a fair amount of risk) for a place that would probably cost you $6-7k/month at most if you rented.
    Where is the faulty logic? If you can clue me in, I would appreciate it, and trust me I am not being argumentative, I am being 100% sincere. If there is something “financially sophisticated” people do that turns all these numbers inside out please educate me, because I would like to employ those financial maneuvers myself when I buy a house this year.

  17. resp.,
    Thank you. “out of pocket expenses” is simply the money you have to pay while owning the house. In other words, all costs excluding appreciation and transaction costs (comissions, transfer fees, etc)
    The exact formula is:
    HOA+Mortgage+Insurance+Maintenance+Property Tax-tax savings.
    It was just a way for me to get my head around how much I would need to budget on a annual basis to cover my costs.
    Oh and apologies to all for hijacking the thread. I only do it once in a while, I swear.

  18. Is that in an interest-only loan? If not, you have to consider that some of the loan was paid off.

  19. You have conflated before tax and after tax figures in a way that supports your argument. For example, because interest on a CD is taxed as ordinary income, opportunity cost is approximately half of what you have calculated. Appreciation from the sale is also lower, but since it is cap gains there is not nearly so big a tax bite.
    I suspect that with all amounts worked to their appropriate after tax equivalents renting vs buying is basically a wash.
    And if you remove the opportunity cost portion of your calculation entirely, buying beats renting. Opportunity cost is kind of a funny thing in these rent vs buy arguments because it is so totally hypothetical. I think the example of a CD is probably reasonable (although the average rate for a 3 year CD in 2005 was 4.5% not 5%). But I can’t help thinking that you also have the opportunity to loose the whole thing or at least some big chunk of it. Perhaps your financial advisor, at Bear Stearn let’s say, suggested you invest in their CDO’s instead of bank CD’s. Just as safe, but with a higher return… Don’t scoff. It happened to a lot of people.

  20. NoeValley Jim,
    I have actually treated the loan as a 30 year fixed on the spreadsheet, so the equity earned (while minimal at 31 months) is indeed accounted for.
    Salarywoman,
    If you read the footnote at the bottom you will notice that I have carefully explained my rationale for not calculating taxes on the earned interest. The primary reason is that there are a multitude of investments that don’t require you to pay capital gains (if at all) until you sell or settle the instrument (such as selling a stock, or withdrawing from a 401k or IRA). I came to the conclusion that it was unfair to the renter to force the sale of their instruments prematurely merely to create taxes for the purpose of comparison, when their options may be much more nuanced. I also felt that it would be a big job to evaluate a wide variety of investment strategies and their tax implications. That’s beyond the scope of what I’m trying to accomplish here, but I could be persuaded, for the sake of appearing as umbiased as possible, to tax the earned interest as income.
    I just used the CD as an example in this post. I agree it was a poor one.
    Likewise I have not taxed the appreciation on the house because there are options there as well, notably 1031 Like Kind Exchanges. I have, however, calculated to see if capital gains is triggered. In this cas it’s a moot point since whether it’s a married couple or not they resided in the property over two years and didn’t come close to exceeding $250k in gains after all expenses are deducted.
    And given that both the opportunity cost and the appreciation cost are nearly identical, it shouldn’t materially affect the difference beywern buying and renting.

  21. Why do people keep questioning opportunity costs? (although I think they should be tax-effected in these calculations)
    $1.525M is a lot of money and so is the $61K of annual risk-free taxable income (at 4%) you forego by having it locked up in your home instead of the bank.
    You always have to make some kind of assumptions when calculating the risk/return of investments. One can argue about how much opportunity cost to assume, but assuming some reasonable amount is always more accurate than zero. It’s better to be approximately right than exactly wrong.

  22. Oh and one more thing – It seems extremely likely that the owner had a interest-only loan. $1.1M note is too much of a coincidence – It’s $1.1M not $1.0M that’s the maximum tax deductible – an aggressive tax accountant would use the $1.1M threshold even though that’s supposed to include a first and second mortgage. So the owner purposely did not borrow any money that did not have tax-deductible interest.

  23. I do not subscribe to the opportunity cost philosophy. Someone who puts $1.525M down has an extensive portfolio and has weighed the repercussions beforehand. When title cuts the check at the end of the day, they don’t subtract opportunity costs. And as for a point by point analysis, I don’t feel like getting into it, Missionite. 67K for maintenance, I question. 2% at closing I also question. Treating out of escrow payments as expenses, I question.

  24. New Spreadsheet here:
    http://spreadsheets.google.com/pub?key=pM4Gw0s2zSeC66sZyO4SiPQ
    Resp,
    You are correct about it being the first 1.1M, I have made the proper adjustments.
    I also agree that it is too much of a coincidence their loan is for this amount, so with a bit of work, I have added the ability to calculate for interest only loans in the spreadsheet, and have used that to make the calculations for this property.
    Salarywoman,
    Just to be clear, I am not building the spreadsheet to “support my argument”. I am building the spreadsheet to be a fair and reasonably accurate tool.
    With that in mind, I have heard your and Resp’s critiques that I am not taxing capital gains on the investment income, and so I have reversed course, and am now taxing investment income at the highest possible rate: as ordinary income.
    I have a note now at the bottom explaining that there are a number of ways to be taxed at the lower capital gains rate of 15% (or lower), but I am going with the higher rate in order to give the benefit of the doubt to home ownership as much as possible.
    Given that I am now zeroing in on a more accurate picture, and am taking a more conservative outlook on investment income, I have also changed the equivalent rental rate to $7k a month, which based on my perusal of craigslist today, seems to be on the upper end of what this proeprty would command on the market. I think even this is being generous, as I doubt it would rent for that in 2005, but again, I am trying to be as fair as possible, and give the benefit of the doubt to ownership.
    Even with all of that, I show this property was more expensive to own then renting a similar property by $102k, and the loss on the property (before opportunity cost is factored in) was $220k.
    Thank you all for your feedback, which I continue to welcome and encourage. And apologies again to SS for hijacking the thread.

  25. missionite, I still don’t follow the math for “out of pocket expenses”. I get HOA $0 + mortgage $183K + insurance $31k + maint $68k + prop tax $77k – tax savings $90k = $269K, not the number you got. what am i missing?
    then when you add selling commission of $141K you have $410k + the upfront purchase costs you added. so, I come up with at least $410k in after-tax cost of ownership for 31 months which is over $13k per month. sounds like even a worse deal.

  26. I do not subscribe to the opportunity cost philosophy. Someone who puts $1.525M down has an extensive portfolio and has weighed the repercussions beforehand.

    Weighing the reprecussions is exactly what I am trying to do here, and that’s the whole point of calculating opportunity cost to begin with. I think you should consider abandoning your reticence to embrace opportunity cost:
    “Opportunity cost is a key concept in economics because it implies the choice between desirable, yet mutually exclusive results.” – James Buchannan Jr.
    http://en.wikipedia.org/wiki/James_M._Buchanan
    http://en.wikipedia.org/wiki/Opportunity_cost

    When title cuts the check at the end of the day, they don’t subtract opportunity costs.

    This is missing the point. If title cuts the check and you earned $100, when you could have put the money in a risk free bank account and earned $1M, you can’t brag about the $100 you made. The reality is you blew it and lost a lot of money.
    I’m certain that you use the concept of opportunity cost in your daily life whether you realize it or not (we all do). It’s simply presented in a more formal manner on the spreadsheet.
    “67K for maintenance, I question.”
    1% of home value is a guidline that is commonly used in these kinds of estimates.
    The listing mentions that it is “remodeled”. My understanding is that $67k would be a very cheap remodel in this city. I have a friend with a $700k home who just got bids on just a kitchen remodel. The bids started at $75k. Perhaps others with more experience could weigh in here?
    The backyard looks landscaped and professionally maintained, the home looks professionally cleaned, it may even be staged (I would be surprised if it wasn’t).
    And after 31 months in an old victorian I would be quite surprised if there wasn’t a reasonable amount of ongoing maintenance. I live in an old victorian, and there’s always something breaking.
    I don’t think $67k is out of line for two and a half years in a $2M property that has been remodeled. In fact I think the real number is probably much higher.

    Treating out of escrow payments as expenses, I question.

    You may have a point here, as this closing cost calculator estimates $33k in closing costs:
    http://partners.leadfusion.com/tools/kiplinger/home09/tool.fcs
    Do you have a sense of what a typical closing cost would be when described as a percentage of purchase price? I will correct the spreadsheet accordingly if I can get a sense of what to expect.
    However, in my defense, I see that we must add the transfer tax on the sale which I see I have not included on my spreadsheet (this will be corrected shortly). That will be $21k according to this site:
    http://www.bartlettre.com/sellers/transfer_tax.php
    So according to these calculators there will be $54k in costs, and my spreadsheet shows $52,500.
    So in the case of this property I think I am in the right neighborhood at the end of the day, but if I am missing something, or misunderstanding something please tell me where I went wrong.

    Treating out of escrow payments as expenses, I question.

    I’m a little confused by this. If you have to spend money, irrespective of escrow, it’s an expense related to owning a home, no?
    You wouldn’t have “out of escrow payments” if you were renting, right?
    But perhaps the problem is I don’t know what you mean by “out of escrow payments” to begin with.
    I’m just trying to understand what you are suggesting here.

  27. Resp,
    You might need to hit refresh on the spreadsheet, as you might have been watching while I was working on it.
    Mortgage (on interest only) is $142k, not $183 (note, I changed the spreadsheet to accomodate an interest only loan, you can change it back to a normal fixed rate by changing cell C19 to “No”).
    Tax savings is $97k, not $90k.
    So, out of pocket expenses will be $221k, not $269k.
    I wouldn’t focus on “out of pocket” expenses too much. That’s just a number I use to determine affordability. In other words, if I buy a given house, I need to have this much money on hand every month to keep the ball rolling.
    The number you want to pay attention to if you want to know the total cost of ownership is C65 Total Expenses.
    If you are looking for your net cost (after gains from sale), then you want C69 Gain/Loss on ownership.

  28. A 3.5% annual return does not seem too bad. Sure, the owner might have invested in a CD (he also might have lost his down payment in the stock market or at the Red Rock Casino) – but you cannot live inside a CD.

  29. sanfrantim- It’s not a 3.5% annual return. That’s the number before including any expenses like mortgage interest, maintenance, property taxes or anything else. All it includes is the price going in, the price going out and the realtor’s commission. I just used that as the hypothetical but impossible best-case scenario for those that want to argue that this home cost absolutely zero to finance or maintain over 31 months. The actual annual rate of return is surely negative including all those costs.

  30. San Fran Tim:
    You cannot live inside of a CD, but you can live inside of a rented home and put the money (that would have been used on a downpayment for purchase) in a CD, and that what is being addressed here.
    Missionite:
    You always use the after tax return of the opportunity costs, and most people would consider an opportunity that had a predictable rate of return, like a CD, which would be taxed at 50%.
    Fluj:
    Whether someone considers the opportunity cost or not, they still paid it. If your point is that they were too stupid or emotional to worry about it, fine (and I agree that this encompasses a LOT of buyers), but they still had to forego the interest by putting it into the house so it’s a valid point. However, I agree with 2% being too high, and was surprised to see the 2-7%. I use 1% because that is sort of a typical loan point payment. Missionite, care to explain the other 1%? That’s a lot of money, and I’m not seeing it any more than fluj.
    Resp and Missionite and fluj: you can deduct $100K above the $1M mortgage *only* if you use it for a home improvement. That means the homeowner deducts it, but the $67K in remodeling and maintenance gets bumped up to about $105K – about 5K for normal maintenance and 100K for improvements, which if they didn’t do, hits the 100K deduction, so it would be a safe assumption that they did them.
    When I did my quick back of the envelope (and not very accurate) calculation, they are probably right around beak even with renting. The main reason is that renting SFRs is very expensive in SF. Much more so than condos or flats. That, plus favorable timing (they bought at the start of a big runup) offset the transaction costs and relatively short holding period. Someone buying today won’t likely have that timing advantage.

  31. tipster – disagree on the criteria for deductability on schedule A for the last 100K of the $1.1M.
    i’m no tax expert but according to IRS pub 936:
    “Home Equity Debt
    If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt.”
    the IRS limits the deductibility of home equity debt to $100k.
    I have been advised by a tax expert personally in the past that one can deduct interest on schedule A for a first mortgage of up to $1.1M and the IRS won’t care that’s its technically $1M of a first + 100K of home equity.
    either way i think we’re splitting hairs. the owners of this home surely picked a mortgage of 1.1M on purpose for tax reasons. and that probably means they were trying to be thorough about making this work as an investment. and it didn’t.

  32. I read that link and you are absolutely right, resp. The limit is clearly 1.1M. I had been told years ago by a real estate sales person that the $100K had to go towards home improvements, but that is clearly not the case.
    Thanks for correcting that part of the above post. BTW, they probably just picked 1.1M because they had the money for the rest, and they weren’t getting the non-tax deductible interest rate they would have had to pay on the amount above 1.1M.
    BTW, missionite, the 2% I was questioning in my post above had to do with the 2% for home acquisition costs. I changed topics in the middle of that paragraph. The issue is that 2% would be about $50K, and I would expect the loan points to be 1% of 1.1M, or 11K. The % should be a % of the loan, not the purchase price, and maybe add something in for doc fees and other miscellaneous fees. The difference you have off the 11K, $39K, is an awful lot of money.

  33. I can see everyones point here about opportunity cost. However I think the point should be that opp cost is a comparison tool that is imperative when comparing renting versus owning. Thats its basic use. Otherwise as Fluj or others say.. its part of someones portfolio.
    For instance if I buy a house for 1M CASH, sell it in a year for 1.1M then I made approx 100k-expenses. The fact that the 1M was not in a CD is irrelevant to the absolute profit. However, when you are doing a comparison of RENTING versus OWNING,as missionite is doing, then the opportunity cost is very relevant because you are putting yourself in the place of the buyer AND the renter in a direct comparison. If you are the same person with the spare 1M in cash, and you rented the same house rather than bought it then you had other opportunities for that 1M. And that other 1M made you money in that elapsed time period.

  34. “Whether someone considers the opportunity cost or not, they still paid it.” “too stupid or too emotional …”
    I object to this characterization. The very loan was structured for maximum mortgage benefit, and that is readily apparent. That was a divisive characterization, Tipster. So here’s one for you.
    Opportunity costs exist in spreadsheets, not title companies or banks. “Opportunity cost” is a self congratulatory fence sitter buzzword.
    One funny thing about opportunity cost — and apologies if this point was made elsewhere — is that it assumes prescience. You cannot know what your money would have done elsewhere until it is reviewed in hindsight. You cannot look at a scenario such as this one, one in which the very loan was structured for maximum mortgage benefit, and talk “opportunity cost.” It’s a complete crock.
    Look at it. Does it make sense. Can you afford it? Will it be profitable?
    Also, a trust sold this property in the end. Someone likely died. Trying to cram your spreadsheet buzzword into a scenario in which people who likely planned to live in the property for much longer than they did is beyond disingenuous.
    What is the opportunity cost of dying? Enormous, right?
    Bullshit.

  35. “”Opportunity cost” is a self congratulatory fence sitter buzzword.”
    what? did i really read that? from fluj? waaaat?

  36. Tripster,
    I think you are looking at the older version of the spreadsheet. Go here instead:
    http://spreadsheets.google.com/pub?key=pM4Gw0s2zSeC66sZyO4SiPQ
    I now do indeed tax investment gains as ordinary income at 44.3% (35% AMT + 9.3% State Tax). I am making the assumption that you are going to go with the lowest risk investment out there such as a CD. Of couse it’s a fairly simple matter to achieve the lower capital gains tax rate of 15% (just buy a stock and hold it for at least a year). As I mentioned above, a CD was a bad choice to make my point with. Instead of CD, let’s say an index fund like IVV, which would have returned 8% over the same period, and would have only been taxed at 15%. In that case, the numbers become quite dramatic. But I don’t want to be accused of manipulating the numbers in favor of renting, so I am going with the more conservative outlook.
    I agreed with Fluj (and agree with you as well) that the closing costs were high. I did some more research and located this calculator: http://partners.leadfusion.com/tools/kiplinger/home09/tool.fcs
    I plugged in all the numbers (Purchase price, loan price, etc., plus I used a 1% origination fee and 1 loan point – are these fair? I left everything else on defaults which are probably low for SF and left transfer tax, property tax and insurance on 0, since I am accounting for these elsewhere) and got $26k in closing costs as a result, which is pretty damn close to 1% of the purchase price. So I changed my spreadsheet to have closing costs be 1% for now, but I’m going to probably incorporate my own closing cost calculator at some point.
    So that brought the closing costs down by $26k.
    However, if you read the posts, you’ll see I also didn’t have the SF transfer tax (which the seller typically pays upon sale) factored in. I have factored this cost in, and that brought another $21k back in expenses.
    So my original numbers were off by a whopping $5k, and I think we can safely say they lost money on this house vs. renting, to the tune of roughly $100k.

    When I did my quick back of the envelope (and not very accurate) calculation, they are probably right around beak even with renting. The main reason is that renting SFRs is very expensive in SF. Much more so than condos or flats. That, plus favorable timing (they bought at the start of a big runup) offset the transaction costs and relatively short holding period. Someone buying today won’t likely have that timing advantage.

    I did a pretty expansive search on craigslist for a SFH rental that seemed to match this one in location, quality, and features. I didn’t find anything that was an exact match, but what I did find seemed to suggest a market rate of around $6-7K a month.
    My whole point of the spreadsheet is to not do back of the napkin estimates. Rather I want to get as close to accurate as I can possibly manage.
    I think I’m pretty damn close right now, and I’m pretty confident that these guys did not do well with their investment. Furthermore, as you correctly point out, they bought with favorable timing. If the new owner has similar intentions I think they are going to have a significantly worse outcome if they try to sell in 31 months.

  37. Fluj.. it doesnt need much prescience. You just need to know what you would have rather done with your money. Because an investment involves risk, anyones real opportunity cost is the risk-free return.
    Lets say again u buy a 1M property. If you pay cash your mortgage expense is 0. If you go 90% mortgage your mortgage expense is approx 60k/year. If you dont consider the opportunity cost of the 1M cash u put into the house then the the math will never work on the renting/buying comparison.
    Again.. for comparison of renting/buying only.

  38. YEah, but it isn’t valid. This couple probably wanted to live in the place for 15 years but somebody died. What would the return be 12 years from now? You cannot say. Extrapolating 7-D’s appreciation stemming from 12 years back to 12 years in the future? It’s silly.

  39. Fluj,
    My business partner bought his multi-million dollar property with a trust, and he is very much alive and well.
    Brad Pitt and Angelina Jolie bought their home in New Orleans with a trust and they are also quite healthy.
    Buyng a home with a trust is extremely common, particulary if the owners are not married, want to protect their assets, or are seeking privacy.
    I suspect these sellers are very much alive.
    “You cannot know what your money would have done elsewhere until it is reviewed in hindsight.”
    Not true. There are a number of investments that deliver returns with an extremely high degree of certainty: Bank accounts, CD’s, Treasury Bills, etc. and it is quite possible to know in advance exactly what your return will be.
    I might be aiming a little high at 5%, but I think most people would agree that reasonably cautious investors can achieve returns of 5% without too much effort or incurring too much risk. Yes there is an element of risk in any investment, but that’s true with home ownership as well (hello Marina homeowners, meet the San Andreas fault). As long as we stick to what is reasonable and cautious, we can have a fair amount of confidence in our predictions.
    It is against these fairly predicatable and low risk returns that I am measuring this transaction.

    Opportunity costs exist in spreadsheets, not title companies or banks. “Opportunity cost” is a self congratulatory fence sitter buzzword.

    I wholeheartedly disagree. As I mentioned before, opportunity cost is a key economic concept that you will find any economics 101 class. Every business and every individual calculates it at some point or another: do I take this job, or that job? Do I buy this house, or that house?.
    A bank, no matter how large, does not have unlimited resources, so they are going to be asking themselves do I lend to this person or that person?
    They are going to make decisions about where to best employ their resources based on what will deliver the best returns at the lowest risk. That is why they will not lend $500k at 15% to a millionaire with a credit score of 500 but will lend $500k at 6% to a school teacher with a credit score of 800. In their estimation, the amount of risk they incur lending to the millionaire deprives them of the opportunity to lend the money at a lower rate, but with a higher degree of security to the school teacher.
    That’s opportunity cost.
    In other words, opportunity cost is just a way of measuring how you allocate your resources and distribute your risk among mutually exclusive investments. If I know I can get 5% risk free, then I have to have a fairly high degree of confidence that if I choose to do something else with my money that I can do better then 5%, or get some other measurable benefit that makes it worthwile, otherwise I am depriving myself of the opportunity to make 5% risk free.
    I don’t know how to make it any clearer then this. If you still think it’s BS, then I honestly don’t know what else I could say.

  40. The owner bought at the height of the market (late 05) and just sold for about 9% over the 05 price. Certainly not an ideal holding period for investment purposes, but still the owner made out reasonably well.
    Setting aside speculation about the owner’s relative costs of owing vs. renting and about other investment scenarios he otherwise might have pursued (we can argue about these al day), this purchase and sale decision was hardly catastrophic.
    No evidence here of the 20% declines I have been reading about from some on the site.

  41. You could say that opportunity cost for this investor in ’05 was 50% of a risk free CD yielding 4.5%, but you wouldn’t use that figure today. Opportunity cost is a forward-looking measure and hence hypothetical. In hindsight, you can look like a genius when you’re just lucky.
    In today’s uncertain environment, CD’s are averaging 2-3% yields if you choose a “safe” institution and don’t count special incentives. That doesn’t beat the real rate of inflation, and many investors are just not going to lock in that rate of return. To get a higher yield you need to assume more risk.
    Missionite’s spreadsheet is good because it attempts to quantify the real costs associated with being a homeowner. It’d be better to leave out opportunity cost as a fixed item and include it as a footnote. As they say, your mileage may vary.

  42. Fluj,
    More information on revocable trusts, which I think this likely is:
    http://www.bankrate.com/brm/itax/tax_adviser/20041203a1.asp
    In short, it’s unlikely that anybody died. They made an investment, and did a number of things to maximize and protect their investment, among them was purchasing it through a trust.
    It was not, as far as I can tell, a profitable investment. Nor was it likely a crippingly bad one. If you think I’m trying portray this as a sign of a larger collapse, or trying to buttress some sort of pre-existing viewpoint, you are wrong. I’m merely trying to develop a tool that will let me (and anyone else who wants to use it) perform something resembling an accurate analysis of the value of homes as an investment.
    In other words, my primary goal is accuracy, not fulfilling an agenda.
    Your snideness isn’t really called for, by the way. I’m not mean anon, and perfectly willing to have a pleasant conversation grounded in facts.

  43. missionite-
    i think you may have forgotten the effect of inflation upon that 5%cd yield.
    and the tax treatment is important for a coupla reasons:
    capital gain vs ordinary income PLUS the ability to carry your capital loss on the house forward to offset future capital gains.
    i believe someone with the ability to put this much down on their house is likely to be able to use the above mentioned
    loss carry provision.
    so while it may be true that you should not risk buying an apple (orh condo) when you can rent that same apple, as is now possible, i would venture to say that 3035 scott is not the same situation.
    the amusing thing about this thread is that it highlights how many monday morning quarterbacks post on ss.

  44. SanFranTim,
    It’s a matter of opinion, but I thought that the consensus is the peak of the market was 2007. Regardless, in some areas of SF prices are indeed 20% off peak. (for example 726 Edinburgh in the Excelsior which was purchased for $699k in 2007, and is currently listed at $569k – that’s 19% off, and there at least a dozen on the market right now within the neighborhood that are that much off or more off of peak as well.). You can argue that these are not prime areas, or they don’t represent the entire city, and you would be right of course. But this isn’t happening in a vacuum, and it’s hard to imagine these differentials continuing ad infinitum. At a certain point there will be people who aren’t going to pay $1.5M for a 2 bedroom SFH in bernal when they can buy a 4 bedroom SFH for half of that less then a thousand feet away. As a result, either prices will rise in the lower priced area, or drop in the higher priced areas. Place your bets where you will, I know what I’m thinking, and I’m getting ready to buy, so it’s not idle speculation on my part.
    Michiko,
    I don’t claim that the spreadhseet can tell the future. That’s ridiculous, and completely beside the point. No one knows what the future holds, and my spreadsheet is not intended as a tool for prognosticating.
    What it can do, I believe, is run a reasonably accurate analysis of how a selected property performed (emphasis on the past tense) as an investment as compared with renting a similar property, OR it can be used to model possible future scenarios, based on whatever you happen to believe might happen with the market, and with your investments.
    As such, comparing what investment gains you might have made (or think you might make) with the down payment should you choose to rent instead is an important part of the equation.
    If you would bother to look at the spreadsheet, you will see that the investment gains are calculated last, in a completely separate box, with all totals broken out both before and after, and a footnote below describing how investment gains are taxed (i.e as ordinary income for now, although I’m probably going to break out a separate one for long term capital gains).
    Also, and this point seems to have been completely lost in this discussion, you are able to plug in your own values if you disagree with mine. So if you feel 5% is unattainable, you can plug in 3%. (I would like to add, however, that Capital One, a 4 star CAEL certified bank, is currently offering a rate of 5% on jumbo CD rates (deposit of $100k required) with a term of 60 months.).
    For instance, if Fluj believes that the seller would have simply kept the down payment money in cash under the bed instead of in a bank, then he can plug in a number of 0% for apprecation, and Ta-Dah! opportunity cost is now removed as a factor. That’s ridiculous of course, but my point is that the spreadsheet is just a tool, and how intellignetly it is used depends on the user.

  45. Paco,
    Wouldn’t a rising tide lift (or sink) all boats?
    In other words, wouldn’t inflation have the same impact on any profit realized from home appreciation as it would on any investment gains, thus cancelling it out as a factor in comparitive analsysis? Or am I missing something?
    I think understand your point about capital gain, but I’m not advocating a CD should be your investment. You could invest your hypothetical down payment in an index fund, and as long as you hold it for over a year you will be taxed at the lower capital gains rate of 15%. There are a lot of options out there for investment, and they don’t all lead to being taxed at ordinary income rates.
    The only reason I’m taxing the investment gains as ordinary income is because if I don’t then a whole chorus of people will (and have) accuse me of tilting the facts towards renting. So, fine, I’m going to tilt it towards owning.
    Can you explain a litte more what you mean by carrying the loss? I think I understand what you are saying, but this house is showing a nominal gain, so how would carring a loss apply in this situation?
    Yes, this is completely Monday morning quarterbacking, I totally agree, but I’m also learning a lot from the process (and clearly others are as well…). So it’s no different then studying game films after the game, no? I want to be as informed as possible when I buy a home this year, and publicly analyzing and discussing what other folks have done is one way of shaking information from the trees.

  46. the real point i’m making about the 20/20 hindsight is that it is very difficult to predict the future and the recent past does not really help. so where do you put the money?
    risk free cd’s do not beat inflation. 60 month cds mean 5 years locked into crappy rates. index funds gyrate and i believe the s&p 500 is down between 5-10% over the last 12months. in other words putting your money into your dream house might be less profitable but certainly easier to stomach.

  47. maybe someone who disagrees with the concept of using a rigorous spreadsheet with some reasonable estimates can explain to us how they would make a forward-looking buy/rent decision in today’s SF real estate market.
    and for those that don’t believe in opportunity cost – OK let’s forget it exists, but can you tell us that you’d be happy buying a house today if you knew it would get a 1 or 2 % annual return over the course of your ownership?
    thanks in advance for the insight.

  48. missionite,
    Now you’re being defensive. I have “bothered” to look at your spreadsheet, though I don’t follow every iteration.
    I’ll repeat my opinion that I think you’re doing a service by attempting to accurately calculate the costs of home ownership.
    My point is that term “opportunity cost” is by definition forward-looking. Not only could an alternate investment go to 0, it could result in a negative value. In other words, you can also lose money. That’s why that value is a hypothetical and should so noted in an footnote or asterisk.
    I don’t really care if you think something is ridiculous or not, but since you’re the one asking for feedback on your proprietary application, I’m surprised you couldn’t debate the point on its merits.

  49. resp,
    The known risks of purchasing right now are so high that you should buy only if you can afford to lose money. Very unscientific, I realize.
    Accurately forecasting costs is really important, but for me, understanding your risk profile is critical.

  50. resp,
    Yes, exactly. I built a pretty decent business out of rigorous spreadsheets full of reasonable estimates. I don’t understand the controversy.
    michiciko,
    No not defensive. I’m totally willing to debate anything on the merits. That’s exactly what I’m asking for.
    The spreadsheet is not a proprietary application by the way. I’m not selling it, or asking for money. It’s really an open source project which has been built and modified with a great deal of assistance and advice from many people, including some of the people on this thread.
    You mentioned I should have investment gains as a separate item, which I do, and that I should have a footnote for them explaining further, which I do. That’s why I thought you hadn’t seen it. I wasn’t trying to diss you. I welcome your input.
    My “ridiculous” comment wasn’t directed at you specifically, but I do disagree with your statement that opportunity costs are, by definition, forward looking. If I bet on the horses and break even, and after the fact discover I could have invested the money risk free and made 2%, then I can say *after the fact* that my opportunity cost of gambling *was* 2%.
    Yes an alternate investment could go to 0, and so could your house (via earthquake, fire, terrorist act, or foreclosure). There’s inherent risk in any investment. I’m not pondering the worst case scenarios, just the likely ones.

  51. If you’re evaluating a future real estate investment, then opportunity costs are forward looking and, yes, your estimate of them could be very inaccurate. But your assumptions about future home price appreciation, maintenance, etc. in the same equation is probably even more inaccurate.
    If you’re evaluating the success of a past real estate investment (like the one that started this thread) then opportunity costs are backward-looking and very accurate.
    In either type of evaluation they may or may not need to be included in a buy/rent decision. If you really think you can make 10 or 20 or 30% on a real estate investment, or if it’s clear your going to lose the same amount, then opportunity costs won’t change your decision so they don’t really matter. However if you’re coming up with a projected return of 1% or 2% or 5%, you really gotta ask yourself it it’s worth the risk vs. putting the money in the bank, getting risk-free interest and renting.
    IMHO, too many people are still assuming a rate of appreciation in SF that’s way too high and not bothering to do a rigorous analysis in advance with some “what if” scenarios.

  52. missionite,
    Point taken – opportunity costs are not always forward looking.
    I meant to emphasize the uncertainty of that calculation and a necessity for understanding your own risk profile. Paco said it better.

  53. Opportunity cost may have been somewhat of a misnomer: this was just the cost of tying up the funds. It was a real cost that was easy to calculate and was certainly paid.
    The real estate agents salivate over the chance, and try desperately, to take it out of the equation altogether: it so lowers the total cost of ownership to remove it from the rent/buy equation when more than half of the purchase price, and 100% of the non-tax-deductible portion, was paid this way. They try every argument they can think of to remove it.
    But those of us who understand that it is a real cost aren’t having their arguments. And even with cheap money (after taxes, the opportunity cost applied to more than half of the purchase price was under 3% — far less than any mortgage), in what once was a rapidly rising market, it isn’t enough to save the rent vs. buy.
    What is the opportunity cost of death, fluj? It’s the opportunity to do well with your money, to donate it to a wonderful cause.
    Here that opportunity was squandered, handing large portions of it to real estate agents, former owners, and mortgage brokers, when they could have rented a nicer house around the corner with a view on a better block for less money and then donated all that money they squandered on the Scott Street home to far better causes. And the one who died wouldn’t have left their spouse to have to go through the ordeal of selling the home.
    2825 Green street was on the market and didn’t sell. Around the same period as this Scott Street property was being sold, the owners of this house on the last block of Green Street, one of the nicest streets in SF, ended up renting it out for $6000. It’s the salmon colored house on the left with a fantastic panoramic bay view from the master bedroom, which takes up almost the entire back half of the top floor.
    So the purchasers of the Scoot Street home could have rented a nicer home on one of the best, flat blocks in the city. And maybe then one of the owners wouldn’t have had that heart attack from huffing and puffing up that steep hill they bought on.
    http://www.mapjack.com/?caCnWeevbFQG

  54. Missionite – All the charts show that the run-up in prices which began in 2002 hit an apex in late 2005. Since then, median prices have wobbled seasonally but basically been flat. The key thing is someone was willing to pay 8% more for this property than was paid in October 2005. I think your instinct to be looking to buy about now is a good one.
    Don’t get me wrong; I like your spreadsheet, it is a powerful tool, so long as the user understands the assumptions built into it (e.g., the 5 % opportunity cost used to weight the instrument against a purchasing decision).
    I personally think 5% is way off. To guarantee that sort of return, a prospective buyer must tie up her downpayment stash for at least 6 months, probably longer. That simply is not realistic for someone genuinely looking to buy. A more realistic figure would be 1-2%, the savings account or money market rate.

  55. Was I really all that snide? Was I more grating than your “loss” with a capital L bolded 10% down shpiel? I know what trusts are, and why and how they work. A lot of times “family trust” is a vehicle used if a death occurs. But we really don’t know here. (I had not noticed that was how they purchased the property, but rather how they sold it.)

  56. Count me out of the kind of moralizing that tipster posted.
    From the comment about the heart attack and the hill, I’m assuming that the poster has medical training and knows for certain when and how someone in this family died. It’s also really presumptious to tell other people how to spend their money and what charitable causes deserve their contributions. That is really insensitive at the very least, and has nothing to do with whether the numbers work or not.

  57. At a certain point there will be people who aren’t going to pay $1.5M for a 2 bedroom SFH in bernal
    No one is paying $1.5M for a 2 Bedroom in Bernal. I guess you are exaggerating to make a point, but you don’t really need to do that.

  58. NVJ,
    My point was that if significant increases continue to happen in nicer neighborhoods, and significant declines continue to happen in so-so neighborhoods that are adjacent, then sooner or later a breaking point is reached and one or the other changes direction pricewise to meet the other. Given prevailing trends nationally and regionally, I probably wouldn’t bet on the Excelsior rising to meet Bernal, so what do you think is a likely outcome for Bernal then over the next five years? Past performance would indicate an outcome similar to the scenario I described (1.5m 2br etc), but common sense would suggest that’s not likely.

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