We were discussing where the bottom might be, and I suggested it could be at the point around 20% above the break-even cash flow. To get to the +20%, I’m figuring 10% for tax advantages, and 10% for market-timing inefficiencies, causing buyers to jump in early. Here are some examples of where prices could wind up, based on a 30-year fixed rate of 6.5%:
222 Mescalita, OSD
4 br/3 ba, 2,225 sf
YB: 1998
Tax rate = 1.06%
HOA = $20/mo.
For towns like Oceanside and Vista, you can figure approximately $1.00/sf for rents. If we call the potential rent of this house $2,225/month, here are the different choices with a 20% down payment, and the last year prices were at that level, in paretheses:
Break-even: $350,000 (2002)
Break-even + 10% = $385,000 (2003)
Break-even + 20% = $420,000 (2004)
Oceanside has been so hard hit by foreclosures that the buyers are nervous, and it’s likely that you could see a house like this one selling under $400,000 in the next year or two. These had sold as high as $545,000, and this one is currently for sale, asking $465,000 – and sitting vacant, with 60 days on the market. This is the original owner, and they’ll probably consider renting it out again before long.
***********************************************************
3492 Corte Curva, CBD
4 br/3 ba, 3,097 sf
YB: 1999
Tax rate = 1.13%
HOA = $75
A typical house in Carlsbad will rent for roughly $1.25 per sf, and this one just leased for $3,700 per month. Santa Fe Trails is a newer Centex tract in the heart of South Carlsbad, and makes for a good example. Considering a 20% down payment:
Break-even: $600,000 (2001)
Break-even +10% = $660,000 (2002)
Break-even + 20% = $720,000 (2002-03)
This area has highly-ranked schools, low fees, and in a good location, so I think it could stand a good chance of bottoming at the BE +20%. The owner paid $495,000 for it in 2000, and that’s after the previous owner had paid $500,500 when it was new in 1999 – so that must have been an insider deal there.
************************************************************
12650 Carmel Country, CV
3 br/2.5 ba, 1,608 sf
YB:1999
Tax rate = 1.17%
HOA = $125
There have been three of these 1,608 sf models rent this year, so we’ll use the middle rent of $2,800 per month – which is about right for Carmel Valley, where you can see rents fluctuate between $1.50 and $2.00 per square foot:
Break-even: $430,000 (2001)
Break-even + 10% = $473,000 (2002)
Break-even + 20% = 516,000 (2003)
Two of these same models closed in December for $600,000 and $610,000 – the high sale in 2005 was $740,000. Given the track record of Carmel Valley, I could see a floor building around the 2003 prices – or maybe higher, if rents keep going up.
***********************************************************
17265 Cm de Montecillo, Fairbanks Rch
6 br/6.5 ba, 6,981 sf
YB: 1991
Tax rate = 1.08%
HOA = $473
Remember this one, the auction that failed? They rented it for $10,500 per month instead. I don’t think anyone is buying investment properties in 92067 based on break-even cash flow, but if they did, this is how it would look:
Break-even: $1,600,000
Break-even + 10% = $1,760,000
Break-even + 20% = $1,920,000
The only bid at the auction was $1,600,000, after the opening bid (wishing price) was $2,795,000 - maybe sanity is returning to the Ranch? The owner paid $1,432,000 in 1992, and had been trying to sell it last year for $3,000,000 to $4,200,000.
***************************************************************
To sum it up, you can work with the general theory that properties will be at a break-even-cash-flow around 2001 pricing, break-even +10% at 2002 pricing, and break-even +20% in the late-2002/2003 pricing.
***************************************************************
If you found a property you liked that was priced higher than that, it should probably have some nice extras.
Here are the two qualifying charts to use when justifying paying a little more. The real struggle is to buy a property with all the extras, without paying for them.
ADD-ONS
Ocean view – peek
Bathroom window - add $500
Seen with mirror - add $1,000
From top of roof - add $2,500
Overlooking neighbor’s junk - add $7,500
More trees than view - add $10-25,000
Ocean view – real
Partially blocked, but decent - add $25,000-$50,000
More water view than obstructions - add $50,000 to $75,000
180-degree unobstructed - add $100,000 to $200,000
Yard size
1/4 to 1/2 acre - add 10%
Over 1/2 acre - add 5%
One-story – add 10%
Turnkey ready - add 5-10%
3-car garage - add $20,000
Good schools - add 10%
Built in last ten years – add 5%
Fancy newer resort-style pool/spa – add 50 cents on the dollar invested
SUBTRACT-OFFS
Ocean view
Owner swears he’s seen it before – deduct $10,000
Hurt yourself trying to see it – deduct $5,000
May and June – not much value due to May gray & June gloom
Road noise – deduct 5%
Freeway noise – deduct 10-15%
Old house, original condition – deduct 20-30%
Old house, w/home depot remod – deduct 10-15%
Newer house, no upgrades – deduct 5-10%
So-so schools – deduct 10-20%
Older pool – deduct $10,000 to $50,000
Bad pet smell – deduct 5% (at least)
If you are selling, you don’t get to go through the add-ons and double your list price – if you have one or two main benefits the buyers might be willing to pay more, but they’re not going to give you more than about 10-15% more than any recent sale, and most will still want to pay less than the comps, even if yours is the best on the street.
Does anyone have any others to include on the lists?
Print
