1135 Francisco Street #5 closed escrow on 10/17/08 with a reported contract price of $862,500 ($2,500 under asking). Once again, two bedrooms/one bath, one car parking, District 8 (Russian Hill), and purchased in October of 2005 for $880,000.
∙ Despite The Palm Tree, It’s Francisco Court (And #5 Is On The Market) [SocketSite]
Wow, so only $2,500 under asking for a 1050 square foot 2bed/1bath TIC?! I know they paid 880k in 2005, but to get $862,500 (or $820 psf) in this market these folks are really lucky (and it’s a 17 unit TIC that will never convert!)
Oops, disregard the TIC point above, apparently this is a condo. (Still a good price though if you ask me). Yet, I thought this was originally marketed as TIC’s? Does anyone confirm and relay how they were able to condo convert if so? Thanks.
[Editor’s Note: You might want to read the referenced post above. This is NOT The Francisco Palms.]
Wow, Russian Hill for UNDER 2005 pricing. Who would have thought? And I’ll bet they threw in the obligatory 3 years of HOA, which you didn’t get in 2005.
The buyer walks away without too much of a loss. He got a 3/1 interest only for sure (which is why it was sold nearly exactly 3 years after he bought it, and couldn’t qualify for anything now). He paid about $1,000 per month more than renting and he had to cough up maybe another $2000 per month in realtors costs, closing fees, HOA fees he probably paid the buyer, etc. All in all, a $100,000 loss after three years, over what he could have gotten renting.
If he’s 30 years old, he might have conservatively earned 5% over 35 years on that $100K. So he ends up with $550K less for his retirement. Oh well, it’s only money…
Tipster-
I’ll preface with – I’m a complete bear.
I find your analysis to be intellectually dishonest though. The person gets a tax write-off on the interest (which works out perfectly for your interest only load).
Furthermore, 5% conservatively for retirement?!?!? It’s in negative territory right now. I think this selling price is still high, but let’s do a fair analysis.
Treeman – I’d love to see an analysis too. Are any of the units in this complex rented? Then we’d have the rent part of the equation, or a good estimate.
btw I imagine tipster’s going to say that the tax deductibility of the interest only gives you back as much as your marginal tax rate, so it’s still costing you 2/3 of the interest bill or so. Also maybe the 5% is a in a conservative investment, as opposed to begin a conservative estimate? I think you could get a 5% return in a CD somewhere, if you go long enough.
Anyone want to do the math?
Note to sellers: See Above Posting for Pricing Guidelines. Going to be seeing more and more of these. There will be the occasional overbid but apples/apples will look a lot like this story.
After tax cost of the money, assuming 33% tax bracket, $2400. HOA and insurance and maintenance, a little under a grand. Property taxes, a little over $500 per month after taxes. Note that the deductions would have amounted to about $50K, which assuming he had a $100K salary, would have knocked him way down to a lower bracket, so 33% is probably a good estimate.
So he’s paid $3,800 per month for a small 2 bedroom condo in a good location. A comparable rental (though rent controlled) would have run $2700-2900 in 2005. So he paid a premium of about a grand. Could be more, could be less.
5% return on your retirement over a very long period is not very aggressive.
This is not really the “real sf” 🙂
Kidding aside, I find this result remarkable… only a 2% decline over 3 years… to say nothing about the mayhem all around. It says something about either the skills of the agents involved or the oceans of money sloshing in sf or the pride of ownership in “real sf”. If this is as bad as it gets, all the doomsayers would have been wrong imho.
Here’s another interesting thing I noticed. This 2/1 (1053 sq ft) sold for $820 psf now in October. 1135 Francisco, #2, in the same building, is a 2/2 and 1207 sq ft. Sold in May, 2008 for $869k which is $720 psf. Anyone know the story? Why would 2/2 sell for $720 psf and 2/1 for $820 psf?
chuckie, my guess is that most people probably don’t look at price per square foot too closely: they just see that a somewhat similar 2/2 unit sold in the building recently and take that as a comp for the complex.
Too hard to compare $psf without knowing how the two condos compare with respect to renovations, view, layout, parking, etc.
Smaller units of similar quality are usually more expensive on a $psf basis as well.
“5% return on your retirement over a very long period is not very aggressive. ”
Agreed, but you’ve called out a very specific time period, and it’s not a very long one. Fact is, in the defined time-period (past 3 years), there is no positive return in the S&P 500. So you can’t use that as a measuring stick.
One could make the argument that a 5% growth/yr on the property isn’t very aggressive either (historically speaking). You’ve just chosen to look at the RE over 3 years vs. general investing over a very long time-frame. It’s intellectually dishonest.
Keep both to the last 3 years.
Treeman, I said in my original post that:
“he might have conservatively earned 5% over 35 years”
Not 3, 35.
And, no it’s not intellectually dishonest to use his retirement timeframe. And a good chunk of what he lost just occurred, after the market meltdown.
And I didn’t use real estate over three years. What I did was used this guy’s situation: he blew $100K early on in his life. He cannot invest it. It’s gone.
It is true that, had he put his closing costs and the extra $1000 per month into the market at the same time it was paid out, and the realtor fee he just paid, he’d be down right now, maybe by 20% overall, but that money has now evaporated. He cannot use the 80% he would have had left to start over in the market until he retires. He has 0% of it left. Nothing. Nada. He starts way behind and stays there. With 0%, you miss the 15%-20% gains in some years that end up averaging out the down years.
That’s leverage. You can lose it all. More, even. Not smart to buy at bubble prices, even if you, as this guy did, buy reasonably early in the bubble.
I think Tipster’s analysis was unfairly one-sided, but I wouldn’t necessarily call it intellectually dishonest. I agree with Treeman that alot of people lost more in the equity market than this guy did on his home over the past few years. In looking at my 401K and brokerage statements, I think I might be one of them.
Either way – this is probably the worst housing downturn of our lifetime, so this loss is pretty mild honestly. It seems that prices have a long way to fall before they get anywhere near the 40% numbers that many have thrown out on this board.
FYI guys, 2005 was a red hot year. Prices were up 15-20% from Jan 1, 2005 to 4Q05. In other words, this place would have been sold for $700-750,000 if purchased at the beginning of 2005.
Here’s a trick to avoid that tripster:
Avoid leverage. Then you can’t lose everything. Not even at bubble prices.
So help me out here. I must be doing something wrong.
1) 880K interest only mortgage at 5% (could have even been lower, say 4.5%, so let’s assume 5% including closing costs) = 3,667/mo in interest.
2) 8,800/yr property taxes = 733/mo.
3) assume avg HOA dues = 600/mo.
4) assume ins. = 100/mo.
5) total monthly payment = 4,400
6) 33% fed tax bracket + 9.3% cal tax bracket = (3,667 + 733) X .423 = 1,861/mo tax savings
7) monthly payment after tax savings = 4,400 – 1,861 = 2,539.
8) If a comparable rental would have run 2,700 to 2,900 a month (per tipster, above) that’s a 161 to 361 monthly savings over renting. Over 3 years, that’s 5,796 to 12,996 – in savings.
The problem comes in paying the brokers commission and the loss on the 862,500 sale. The loss is 17,500 and the commission (assuming 4%) is 34,500 = 52,000. Minus the savings over renting, that’s still a 39,004 to 46,204 loss.
But it’s quite a bit less than 100,000. And that’s with superbly bad timing.
@ Jessup:
that would be great, except that most people (even high earners) don’t have extra $$$million+ cash to buy their homes outright – – esp. in the BA.
[Salarywoman], you’re greatly exaggerating the tax savings. You can’t just multiply the interest by (33% + 9.3%). You have to actually run the entire tax scenario to see the savings. Also, you used only a 1% property tax rate — too low, but you also neglected to deduct property taxes from income taxes. You also failed to include maintenance costs (paid by an owner, but not a renter). You also likely understated sales commission — could be as low as 4% but 5% is more likely. I did not check your math and assume you did that all correctly.
You are right that this seller did not come out catastrophically, just badly. Would be much worse for those who purchased in 2006 or 2007 and had to sell now or in the next 2-3 years. He was very lucky and/or smart to sell now and cut his losses.
All very interesting posting.
As a solid RE bull, I have to say the seller is doing OK. He lost some money, but not that bad especially after you look at your own 401 and brokerage statements lately.
All being said, if the seller did not have to sell now, and hold for a few more years, he would be better off than now.
Ester…you’re sentiment and the sentiments of the many homeowners that have taken their properties off the market when they “couldn’t get their price” so they could “have their renters build their equity until the market comes back” crack me up. (but, I’m laughing in a sad way)
I hate to tell you folks, but 2 or 3 years from now, RE prices in SF will be significantly lower than they are today. Yes, someday they will be higher, but not in the next few years. Wait until all these sellers who have delayed their sales panic and sell their places into a declining market. The market will feed on itself in a downward spiral (kinda like the stock market now).
Stay away folks. If you think 10% down is bad, you ain’t seen nothin yet.
G-man,
That is only your prediction. And only time will tell who is more correct….
I can point to a number of data points out there and say that some areas (the hardest hit ones) are already seeing the bottom. It is in the media everyday now.
And of course, you can point to another set of data and say it is another 40% from here.
Only time can tell.
“He lost some money, but not that bad especially after you look at your own 401 and brokerage statements lately.”
Depends on what he invested in. Bulls never seem to acknowledge that someone could be short this market and making a *killing*.
Foolio,
are you one of those lucky ones yourself??
How much did you make lately??
Trip,
Don’t know the specifics of SF prop taxes but Prop 13 says 1%. Local bond issues can bump it up but not usually above 1.3%. Don’t think it’s going to affect the outcome.
Major maintenance costs are covered in the HOA dues. The owner may have done some painting & remodeling but that’s not maintenance. A tenant wouldn’t have bothered. The rest, say getting the dishwasher fixed, is peanuts.
Prop taxes are included in my tax savings calculation.
The usual way tax savings are calculated is on the marginal rate, which is the highest bracket you fall into. True, a more careful analysis for a specific person may yield a different result but we know nothing about the owner so this is all pretty hypothetical.
All I’m saying is that this person’s decision to buy instead of rent was not totally foolish. And if they could have held onto the property for a few more years at the same monthly cost it would probably have turned out to be smart.
This surprises me because I had totally bought into the renting-is-better mentality. It goes to show that it’s always better to do the math than to just go with a convenient assumption.
Salarywoman,
I have a feeling that most people on SS that have a renting-is-better mentality are people that do not own. And because they do not own, they look at things from a different angle than people who do. Yes, a unit that rents $3000 costs $4000 to own TODAY. But in another 10-15 years, that unit is only to rent $5000, for example.
I hear a lot of opionions here talking about TODAY’s cost between rent vs own. No long range comparison.
When we decided to buy in 2004, my next door neight was renting her studio for $900. TOdya,it is $1600.
Just like RE prices are following a long term trend of buy vs. rent, rents are directly connected to income vs. supply. If more techs are laying off, that will cool that side of the equation. And the slow realization that there are too many new condos being built will is already upsetting the other side.
Declining rent would be an extra nail in the coffin of the un-affordability of RE in SF.
The feedback loop from the original RE crisis is starting to hit the overall economy just as Liar Loans (Alt-A) are being reset. SF is in for more pain.
@ester: I’m doing OK, but that’s not really the point. The point is that there are ways to make money in rising, falling and even flat stock markets. But SFRE bulls consistently seem to ignore those last two possibilties.
Foolio,
The SFRE bull consitently ignore the last two, because I never seem to be able to beat the general market. The best i have done is roughly match it.
I am sure that are super smart out there, that is making money in all enviroment. Just not me. Maybe you are one of them.
SO, I am going to make money the dumb way – investing in RE and hold.
“there are ways to make money in rising, falling and even flat stock markets.”
Foolio – you are correct. My husband shorted the market, and we actually made quite a bit every time the DOW plunged. Of course, we then lost some of the gain when the Market went back up, but we are still ahead.
Put another way, there are ways to lose money in rising, falling and flat markets.
I suppose it’s all just gambling, but it seems to me that shorting is more like gambling than investing in a well run company that makes a good product and is not afraid to innovate -or investing in a good piece of RE that you can rent out. I’ve never been much of a gambler. But I have known people who made a reasonable living at blackjack and poker.
I guess I’ll come around when Warren Buffet starts shorting.
Salarywoman,
I agree.
When I was younger, I used to think that I was smarter than the market, and I was really into put/call (but not short). Couple of times, I won quite big (by my standards, not some VC , or trading company standard), $60K in less than a week. Over a longer period (18 month), it became apparent to me that I was NOT smarter than anybody else, and I went back to my dummy’s way of buying RE and hold.
@Salarywoman
I agree with you that shorting the market is a form of gambling, but really, it doen’t take a genius to figure out the market will more likely go down than up esp. with all major economies on the brink of recession.
The RE “investors” or flippers who bought during the bubble were also gambling.
Shorting is no more “gambling” than buying stocks long (or buying RE as an “investment”). Each is an investment decision made with imperfect information. As long as you stick to core investing principles (risk, return, valuation) and don’t get caught up in a mania, you’ll be fine. Diversification cures many ills.
Salarywoman, property tax rate in SF for 2008-09 is 1.163%.
You wrote: “The usual way tax savings are calculated is on the marginal rate, which is the highest bracket you fall into.” That’s the error that realtors always make when they are trying to sell you on the tax savings of buying. It is not correct. Just run the numbers yourself under any scenario and income level with turbotax. Moreover, AMT also factors into things.
But the key point is even accepting your assumptions, with nothing down (which one can no longer do) and a ridiculously low interest rate (that is no longer available), and inflated tax savings, this guy still lost about $40,000 compared to renting an identical place in just three years. The only way buying has made any sense in SF for several years is if one projects a high rate of future appreciation. Did not happen here, and won’t happen again for many years — continued depreciation is all but certain. It makes even less sense (far less) to buy today than it did when this guy bought in 2005.
Waiting2nest,
I hate to say this, but shorting is NOT about telling the general market direction, it is all about timing.
That is why shorting is a whole different story than RE investing, whereas I can be wrong for the next 5 yrs, but still have a chance to come out ahead in 10,15,20 years.
Maybe your husband can help you to understan this more. Not to be irrespectful, but this is really investing 101.
ester,
you are confused. I never said that shorting (the act of shorting itself) was indicative of market direction. Rather, we shorted the market because THE MARKET was most likely heading south. To Foolio’s point, you can still make money even when the stock market is falling – – by shorting the market. Considering the fact that all major economies around the world are bracing for a recession, it’s not difficult to predict that stock markets would fall. Hence it was a “good bet” to short the market.
Flippers and RE “investors” who bought houses during the boom also gambled – – their “bet” was that RE values would always go up. Even if you intend to hold on to your RE asset long term (and not flip them for short term gains), it’s not financially savvy to invest in inflated assets.
Aren’t you the one losing $1500 per month on your five rental properties?
Yes, I am the one that is losing $1500 a month.
I am not here to debate whether our approach (including losing 1500 a month) is right or wrong. it is like a vegetarian trying to debate with a meat lover – both approaches have pro and cons, depending on how you look at it and what is your taste.
Plus if we go into another detailed calculation, i would bore a lot of people here to death.
Anyway, back to your point on short. If you are talking about take a negative outlook on the market, yes it is easy. If you are taking about actually taking a short position on any stock or index etc, it is extremely difficult and risky.
I remember having a couple of friends doing day trading back in 99/00. Made a lot of money at first, so much money that they quitted their job. Both ended up with bad results: jobless now, divorced, and then disconnected with all of us.
ester,
I’m with you there… let’s just agree to disagree and move on. I’m all for a spirited discussion, but somehow we seem to keep gravitating to the same boring topic of stock vs. RE and it’s getting really tiresome.
I know the owners and they are much better off. They moved to a house in a quieter part of the Bay Area. The building was self managed causing great consernation amongst the homeowners. The building is old and beautiful thus requiring a lot of work. You all failed to include the assessments. If you look at the building it was recently painted. It cost each homeowner thousands of dollars. There are undoubtedly more assessments coming in the future. Yes, they made a smart, move cut their losses and got out at a good time. Not all decisions in life should come down to money. In the end you will wind up extremely unhappy.
As Tim Robbbins said in the Shawshank redemption, “Get busy living or get busy dying.” We’ve lost it all, but we’re choosing to get on with living.