Noe Valley Apples to Apples With A View: 695 Grand View Ave #101

Why does the tour have asking at $579k? Was the purchase price reduced?

OKay, I should refresh the page before posting a belated comment. I look like I’m paraphrasing Foolio…

Prop shark gives the square footage as 585. A veritable palace.
Even now, with the craziest lowest rates perhaps in history, let’s run the numbers. Puy $100K down (20%), and take out a conforming mortgage @ 5% for $390K. HOA dues are $330/mo, and taxes are $475/mo. Total monthly nut: $3350. LOL. $100K at risk, and $3350/mo to live in a closet. And $30K to sell if you want to leave.
This is the sort of place that should cost more to rent than to own. Any owner should receive some risk premium for the very real chance that this falls to its intrinsic value, which is probably around $250K, give or take 10%. Assuming the economy doesn’t get even worse, of course.

Much of that $3350/mo is tax deductible, so the cost difference relative to renting isn’t as high as Satchel writes. I’m not saying this is a good deal at this price, but if the intrinsic value is relative to the cost to rent a Noe Valley view 1 bedroom, in good condition, with parking, then the intrinsic value certainly isn’t 1/2 the current price, as Satchel asserts– unless we are about to be return to being hunter-gatherers, which may be Satchel’s assumption.

Has anyone pushed play on the audioplayer on the virtual tour site? You have *got* to do that.

OK, let’s look at an apples to apples comparison on rent vs. buy then, shall we?
Over here we have an apartment very close to this one:
http://sfbay.craigslist.org/sfc/apa/980570016.html
(24th & Grandview, 1BR with 750 sq. feet for $1750 if the link goes dead).
Not quite as nice on the build out, but it’s one block away and offering two hundred square feet more, so I think it’s a reasonable apple for comparison purposes.
Here’s what those numbers look like (assuming 10% down with a primary and secondary, and all of the usual assumptions):
http://spreadsheets.google.com/ccc?key=pM4Gw0s2zSeCws5OkEqkXWQ
Basically assuming you live here for five years (which is about the longest I could imagine someone living in someplace that is so small…) and the value stays flat over same, it’s still cheaper to rent to the tune of $760/month. But there are a lot of factors that can change this either way, and the biggest factor is what is the value of housing going to do over the next five years?
If you can get the value to climb back up by 2% annually and get close to that previous sale price of $550k (which I think frankly is a best case scenario over the next five years), it actually works out to be *slightly* cheaper to own. You’ll save about $2k, or $38 a month by owning.
But on the flip side if we see even a modest decline of 2% annually and the next sale is $442,000 (and to be fair, I have to say that Noe has held up quite nicely in the current downturn – but then on the other hand this particular property hasn’t held up so well, has it? So it’s really a crapshoot all around….) then the results get rather catastrophic as the poor owner winds up losing $90,000, or nearly all of their down payment, which works out to an additional expense of $1500 a month for the pleasure of paying rent to the bank versus a landlord.
So while the immediate picture doesn’t seem to be quite as dire as LRiM suggests, I believe he is correct in analyzing the risk/reward ratio here. If we take a generous view and propose that there is an equal 33% chance for all possible outcomes (market up, flat or down), then the prospective buyer is looking at rather dismal odds: a 1 in 3 chance at breaking even, versus a 2 in 3 chance at losing a lot of money, with the potential of losing all your principal equal to the chance of breaking even.
I understand the satisfaction of owning a home, but for such a small place, you better be getting a lot of satisfaction for that kind of risk.
Given our current economic climate this place is overpriced in my book. In a perfect world the right price to buy such a small place is one where after owning for five years if the market is flat you break even, if it goes up, you win, and if it goes down you lose. In order for that to happen this property would need to be priced at around $350k.

missionite, who in their right mind is going to pay 6% on a mortgage now?

So while the immediate picture doesn’t seem to be quite as dire as LRiM suggests
Most people way overestimate the “tax savings” when purchasing. Even a great spreadsheet like missonite’s can’t really do it with any accuracy. The only way to get a sensible estimate is for individuals to run two scenarios (one with mortage deduction, one without) and compare.
We’ve been over this a number of times on SS, but it’s always worth restating: one CANNOT deflate the interest component (and property taxes) on a primary residence by one’s combined marginal tax rate in order to get an accurate estimate of effective tax savings. Please do not listen to anyone that tells you otherwise. It’s amazing how simple concepts are “lost” on people who have an interest in selling you a piece of property 🙂
For instance, married couples with relatively low income (in view of the cost of this 585 square foot palace) – say $100-125K – will see comparatively little in the way of tax savings, while a single filer making $200K would see about a 30-35% benefit.
Conceptually, in California it’s almost certainly not possible to realize the “full” marginal benefit because increased deductions at the state level (avoiding the 9.3% level) reduce available deductions at the Federal level. So, it is not conceptually correct to add the two rates. Never, whenever one is in a state that has an income tax – and we’ve got the highest!
Also, just FYI missionite, the prop 13 taxes are now 1.163%, and there are typically a few hundred extra of additional taxes in there for various proposition set asides or “apartment license” fees, etc. For instance, there are fixed additional taxes on this Grand View condo of $253.18, and yes of course taxes are delinquent.
“Intrinsic” or “fair value” for a place like this is NOT its rental equivalent cost. It is a rough estimate designed to take account of the risk/reward of purchasing an asset, and of course it tries to take account of where we are in the cycle as well as the type of property. Risk in an asset like this is high because it is not a desirable asset (who wants to live in 585 sq ft for 10 years – maybe a few people, but not many), as the current owner – who has imploded any downpayment made (that’s what “short sale” typically means) and is likely to suffer a credit ding as well – has discovered. I hope he did this 100% no money down! (always a sensible approach when buying bubble inflated assets)
OT – missionite – there are 3 or 4 3/2s and 3/3s (one 4/2) in Tiburon now that could be rented for less than $3K per month, and perhaps less than $2500 (one is asking $2885 and another $2750, and they’re sitting). I know you were thinking about moving 🙂

I’ve found EXACTLY what LRMiM describes when I run turbo tax with and without the mortgage and property tax payments.
The problem is that these numbers can move you into a lower tax bracket, or for incomes over $128K, a lot of the mortgage and property tax payments are phased out by IRS rules.
In my case, I am in the 50% tax bracket, but I found that I could only reduce my taxes by about 30% of the total payments.
The only way to know for sure is to run the numbers in your last year’s taxes.
Note also that the joys of home ownership can turn into golden handcuffs if your down payment gets wiped out. You might think that you are better off if your property value decreases because the next property will be that much lower, but if your down payment gets wiped out, you have nothing (or less than you had) to make the next down payment. So not only did you just lose a lot of money, you are stuck.

LMRiM,
Thank you, as always, for sharing your knowledge and advice.
I didn’t realize the property tax rate had changed. Doh! Updated my spreadsheets accordingly. A couple tenths of a point has a marginal effect on the net result obviously, but I would prefer to have the most current number regardless. Thanks for that.
Along those lines, I understand there will be various costs and minor taxes that this sheet will never capture, but I think there’s enough wiggle room in some of the other costs (such as maintenance and renovation) such that it washes out in the end. The goal here is to get close enough to the ballpark that someone could make a reasonably well informed decision.
I have an as yet unpublished iteration of my spreadsheet which, among other things, calculates the mortgage deduction quite strictly according to IRS guidelines. But knowing the exact deduction is not the same as knowing what the final savings will be for the owner. That of course is dependednt on their income, marital status, and tax bracket.
I have been operating under the assumption that (taxable income – deductions)*tax rate= taxes due. But if I’m understanding you correctly it sounds like I am way off base here.
I’m going to play this out as you suggest, and perhaps you could point out where I’m going wrong…
I’ll start with assuming that a married couple filing jointly with $140k in taxable income, would ordinarily pay 28% in taxes, or $39,200.
The first year of owning this humble abode should result in $23,341.32 in interest payments, and $5,687 in property taxes for a total of $29k in deductions.
If we subtract $29k from 140k we arrive at $111k. That knocks them down to a lower tax bracket, so we find their new net taxes to be 25% of $111k, or $27,750.
That’s a savings of $11,450, or 29%.
Now let’s take that single filer now with $200k in income:
Tax rate is 33%, so they owe $66,000.
Deductions don’t change: $29k.
So new taxable income is $171,000.
They are still at 33% tax bracket, so new tax owed is $56,430.
That’s a savings of $9,570, or 16%.
This is almost the opposite of what you are suggesting would be the outcome, so I’m wondering what I’m not getting. Help me understand!
I do get your drift regarding adding in state taxes. Clearly I need to do more research here.
Finally, OT, I showed that house you listed previously to my wife, and we did talk about it. We are monitoring a number of moving variables (SF school lottery, our own finances, the housing market, the economy, etc.) and holding off making any sudden moves until some of the results start coming in March. Tiburon is defintiely in the mix however. I’ll keep you in the loop.

Just discovered this. I feel like an idiot:
“A “progressive” tax is one where the tax rate increases as income increases. A progressive tax structure consists of brackets. You pay a certain tax rate on income up to the next bracket. After that bracket is reached, a higher tax rate applies to income that is earned that is above that amount. Let’s say that you pay 5% on income below $10,000 and 7% on income above $10,000. So if you make exactly $10,000 of income the tax is $500. At $10,100 the tax is still that $500 on the amount below $10,000 and $7 on the additional $100, for a total of $507. The key point is that only the amount in the new bracket is taxed at the higher rate.
Many people believe that once you reach a higher bracket you pay the higher tax rate on all the income that falls below that bracket amount as well. I have actually talked to people who think they need to “get their income into a lower bracket” to avoid paying a higher tax rate, because they think that a higher tax rate would apply to all of the income they earned.”

Not only is there tremendous misinformation regarding tax brackets but also as to the concept of deductions. I’ve reported here before that one realtor we interviewed when we bought our place insisted that the mortgage interest deduction resulted in a dollar less in taxes for every dollar in interest paid. He also gave us flat-out misinformation on depreciation on the second unit in the building we were interested in. We didn’t use him . . .

PHR,
I’m not an expert on prop 13, but I think that SF assesses 1.163% on the tax value of a place. I’m guessing that the 0.163% additional is for SF specific stuff, but I think that even for a $2M place, one would be assessed 1.163% * [$2M – $7K homeowner’s exemption], so pretty close to 1.163%. The additional miscellaneous fees ($200-300) are parcel assessments and independent of value.
For instance, print the tax bill for 3271 Baker in the other thread today:
https://services.sfgov.org/ptx/intro.asp
(Click on begin, input the address, and note the tax assessed value of ([$1.7M purchase price + 2% prop 13 increase for one year since purchase] – $7K homepwner exemption) * 1.163%, and then the fees, penalties, etc. added on)

Missionite posted at 1:13 AM
LMRiM responded at 6:34 AM
who needs Bangalore for overnight production?
we a have 24hr. feed right here!

Well since this thread has jumped the tax shark…

I just did a run through on my Federal taxes for 2008 and the estimate I got for comparing my taxes with and without the real estate items is that each dollar of deductions I reduce my Federal Taxes by 23.3 cents. I am in the 25% tax bracket and file as Single for the Feds. I haven’t done my estimate for the State yet but it is likely to be about 7% (some will come from the 9.3% bracket and the rest from the 8% bracket). So while my marginal combined rate before deductions is 34.3%, I estimate I save about 30 cents for each dollar I get to deduct.

I don’t get as much bang for my buck on the deductions with the State since both my partner and I lose our standard deductions at the state level while he can still claim a standard deduction on his Federal return since according to the Feds he is just some stranger that lives at the same address (even though they would get about $1,000 more a year in taxes out of us if they recognized our marriage).

When we were shopping no one told us we would get a dollar for dollar reduction but then whenever they started to mention tax savings I would jump in and let them know I was aware of how the tax deductions worked. I have a low threshold for people telling me things I already know.

Missionite, you still have it wrong. Here is the corrected numbers for the $140k couple:
*
Married couple filing jointly with $140k in taxable income so their state taxes would be $13,020 ($140k * 9.3%).
This tax is deductible, so their new taxable income is $126,980.
According to this schedule (http://www.irs.gov/formspubs/article/0,,id=164272,00.html) their taxes owed will be $24,592.50.
So total taxes will be $37612.50.
*
If they used the standard deduction at the state level this couple would only have a tax liability of $7,526 to the State (after the $198 exemption credit). The standard deduction is 7,724 for a couple, so you subtract that then consult the tax table at: http://www.ftb.ca.gov/forms/2008_california_tax_rates_and_exemptions.shtml
At the Federal level their standard deduction is $10,900 which is greater then the state tax liability so assuming no other deductions they would again take the standard deduction. After the exemption they would have a taxable income of 122,100 and owe $23,213 in Federal taxes (from the 2008 tax schedule found in the instructions to Form 1040). So that is the base line for the couple. Total taxes of $30,739 if they use the standard deductions at the Federal and State levels.
*
The first year of owning this humble abode should result in $23,341.32 in interest payments, and $5,687 in property taxes for a total of $29k in deductions.
*
Okay at the state level then their taxable income would be $111,000 resulting in a state tax of $5,516 (after the exemption credit). At the Federal level their taxable income would be $105,484 after the deducting the state income taxes and the housing expenses. This would result in a tax of $17,294 after their personal exemptions (this is from the 2008 tax table). So their combined taxes would be $22,810 with the purchase of this abode. Saving them $7,929 (or ~27% per dollar spent on deductible housing expenses).
Their actual savings would probably be a bit higher since they would also be able to deduct some expenses that they would bother with otherwise (like the Vehicle License Fee).

@ missionite & others –
You guys are all trying to solve a tax problem algebraically, when you really need to simulate it 🙂 Turbo tax is your friend! Later today I’ll run the numbers for 2008 tax year (I’m working on my final tax things anyway) and post the numbers. About my comment that it is less meaningful as you go down the income scale, what I meant was that the percentage reduction in out of pocket monthly costs as a result of tax savings goes down as you go down the income scale (and add dependents, BTW, and add other available deductions such as 401(k)s) because of the progressivity of the brackets, phase out of itemized deductions, etc.
@ Rubicon –
I think it’s much nicer up here in Tiburon than in Lamorinda (personal preference I know). Here are some of the places I was talking about, with notes:
23 Mercury Avenue – need to drive by and see the sign; not in any listings these days. Renovated 4/2, nice area, very family friendly, house is adequate. We looked at it in July 2008 when it was asking $3900, last I saw it was asking $3200 and it’s been empty all the time.
[Address unknown, but indicated in cl as being right near that 23 Mercury place], $2885, 3/2 w/garage:
http://sfbay.craigslist.org/nby/apa/986641852.html
307 San Rafael Avenue – smallish, but EXCELLENT neighborhood. No views from that side of the street, but walk to Reed school and downtown Tiburon. Asking $3500, which is high IMO, but the property was just purchased for $1.075M by an “investor” (good luck with that cash flow):
http://www.realtor.com/realestate/1105610882/
http://sfbay.craigslist.org/nby/apa/981618646.html
Here is another one in the Belveron neighborhood (near to that Mercury Avenue address) w/pool that looks serviceable. It has been empty for months, and is asking $3750:
http://sfbay.craigslist.org/nby/apa/986502065.html
Please never dream of paying craigslist prices for any of these places! Very little seems to be renting, even large places at seemingly good prices.
There is another house in the $3500 asking range on Mara Vista, whose cl ad has falen off but which has been empty for 4-5 months as well (initially asking $4200). When that reappears, I’ll post it.
If you are willing to pay $3500, I’d look at the $5000 asking rent listings. There are lots of anecdotal stories of distress up here (my wife is heavily involved in school volunteering and hears all the stories) and a number of properties should be coming up soon for rent.
I hope that helps!

I agree with Dude — thanks all for the efforts. Note also that these tax numbers are for the first year of ownership, but the tax savings diminish over time as principal is paid down, meaning less interest is paid in subsequent years. If you’re making projections over the first five years or so based on a 30-year mortgage, this won’t be material. But if you’re projecting past that time frame this does come into play.
It is a good thing, of course, when more of a payment is going to principal and less to interest, but this does change the analysis nevertheless.

Dan,
They edited their listing. That information wasn’t posted when I linked to it originally. They also lowered their price, so maybe their circumstances changed.
Regardless, I just did a search and counted twelve 1BR apartments that were posted within the past 3-4 days, and show a location in Noe Valley (two were in twin peaks), and the averaged price for all 12 was $1646. Given the size of this unit I think assigning a comparable rent of $1750 is a perfectly reasonable assumption.

List price now $399K and active contingent.