Cecil Gale Delusion *Update 2*

I last featured 2619 Washington back in October when it was for rent and for sale.

Previous Purchase: 12/20/96 - $715,000

Listing History: 11/3/08 - $2,284,800

Re-Listed: 10/13/09 - $1,995,000

When I last featured this property, I said the following: First they were asking $7,500/month and they are now asking $6,000/month. Both of those rental asking prices are wildly delusional and they have no shot at getting those prices.

Well, according to the MLS, this property has been rented out and it appears that the "sale price" for the rental is $6,000/month on 11/13/09 which I previously called delusional. I don't know if there are some other aspects to the deal (extra incentives, etc), but I still think $6k/month is too much...I'll argue that I am right much more often than I am wrong on this blog, but here it looks like I was wrong since this got rented out at a "delusional" price.

Another Late 2003 Price -- Near Rental Parity?

Address: 1225 Washington #2 - 90403

Details: 1 bed/1 bath 595 sq ft condo, 1959 building, "updated kitchen", $174/month HOA

Description: SHORT PAY.Wonderful location, just a few blocks south of Montana. Quaint 1 bedroom with laminate floors, updated kitchen countertops, added cabinets inside the unit for further storage. Front facing living room, with separate dining room. Washing and Dryer inside the unit. Car port parking on the side of the building. This is a front south facing unit, so it will be light and bright most of the day. No showings currently available.

Previous Purchase: 1/27/05 - $419,000

Listing History: 6/15/09 - $299,000

SOLD: 11/13/09 - $355,000

This short sale came on the market and was only active for 21 days before going into escrow and it subsequently closed for almost 20% MORE than list price. Clearly the idea was to list this as a short sale and also list at a very low price to gain more interest. Looks like it worked as they got into escrow quickly and sold it for well above list.

I have been skeptical of the rally in this segment of the market because of the massive FHA activity, the ultra-low rates, and the new buyer tax credit. I still have questions about the sustainability of these incentives and questions about what will happen longer term, but for now let's just try and look at valuation based on two measures.

First, let's look at it on a rollback basis. I'm estimating this to be about a late 2003 rollback. So that is pretty decent, considering that we have seen stuff selling at 2005 levels recently (I believe 2005 levels are way too high). Luckily, we also have a record of this unit selling on 3/15/02 for $239,000. While you may be able to argue that an early 2002 price isn't exactly free of any bubble influence, I'm going to use it as a somewhat fair baseline for illustration purposes. As I did in my last post, let's use 3% inflation and let's use 8 years of compound growth for an early 2010 purchase date. That gets us to about $303,000. But the buyer just paid $355,000...so on this basis it looks like you can argue they jumped the gun and overpaid. But maybe we should adjust a bit for some minor kitchen upgrades and also adjust for a potential $8,000 tax credit.

A second way to try and look at valuation would be to think about this on a rental equivalent basis. Here, to be consistent, we assume no down payment and no principal payments (i.e. interest only). $355,000 @ 5% comes to $1,480/month. Add in another $320/month of taxes and you are at $1,800/month. Call it $2,000/month with HOA. But then you've presumably got some tax benefits which drop you down by a decent chunk. Depending on your assumptions, I think you can argue that this purchase price and these low rates get you back to roughly rental parity seeing as how a unit like this could probably command somewhere in the $1,400/month range.

So on a pure rollback basis, this doesn't look like a steal; although it does look like a good rollback relative to some of the irrational buying out there right now. But on a rental parity basis, I think this doesn't look like a terrible buy. You can blame low rates all you want -- and you can worry about what an eventual rise in the rates will do to values in the intermediate/longer term, but there is no denying the strong power that they have in getting numbers to line up. Yes, rental rates still seem to be under some pressure, but I don't see rental rates crashing in the future.

Finally, we can also use this sale to show that prices in this building have come down since I featured #3 in this building back in May 2008 when it was an REO asking $415,000. I did an update when it sold in June 2008 for $399,000. So the buyer of unit #2 here saved $45,000 and potentially picked up a tax credit and got a lower rate all by waiting almost a year and a half to buy...patience pays off.

So in conclusion, I think examples like this show that there some decent deals to be had out there. I don't see any reason to get overly excited though and I don't think there is much of a sense of urgency to buy...I think in rationally priced examples like this, the bulk of the decline is over and we are now in for a long, boring stretch of slowly declining or flat at best pricing. "buy in 2010-2012"

If I am totally nuts and am missing something, I want to hear it.

Late 2003 Rollback

Address: 428 21st Place - 90402

Details: 5 bed/4.5 bath 4,878 sq ft house, 9,000 sq ft lot, 1988 construction

Description: Sensational Traditional with lovely private gardens and pool. Gorgeous wood and stone floors, ideal center hall floor plan. All rooms in the right places. Large living and dining rooms. Great open kitchen / family room with lovely breakfast area. Separate office / library. Sumptuously romantic master with large sitting area. 3 guest rooms + maids with private entrance. Fabulous back yard for entertaining with BBQ, pool & spa. This is a great offering for Santa Monica.

Previous Purchase: 7/30/04 - $3,550,000

Listing History: 8/11/09 - $3,449,000

SOLD: 11/11/09 - $3,250,000

This location is solid. The lot is large. The house looks pretty nice. I don't see many (any?) flaws here and yet, just like the real estate agents and the bulls said could not possibly happen, we've got a healthy rollback into 2003 territory.

I have consistently said that I think 2010-2012 will likely be a good time to make a purchase -- with the big caveat being that you don't lose your mind and overpay for something. With sales like this one, I think it should be clear that there are a few motivated and realistic sellers out there with quality merchandise to sell. As the froth continues to get squeezed out of the system, it becomes safer to buy.

Finally, the sale before the one in 2004 shows how much more downside may exist if you are really bearish. This house sold on 3/2/01 for $2,350,000. When the most bearish were posting on this site that we would go into a depression I argued against them. I will take this opportunity to once again argue against the biggest of the bears and say that I don't think we will see a nominal early 2001 price on this type of house. However, things get kind of interesting if you assume the 2001 price was close to fair value and then you do an inflation adjusted valuation.

Take 3% inflation and assume a March 2010 purchase date for an even 9 years of time from the 2001 sale. That brings you to a fair value of $3,066,000. So maybe this buyer jumped the gun a bit and could have bought this place a bit cheaper down the line...but I don't think you can call this purchase all that bad.

What Is This Thing? *Update 4*

I last featured 2009 Montana on Halloween when I found out that it had finally sold.

(lot) Purchase: 10/6/06 - $969,500

Listing History: 3/4/09 - $2,798,000
Reduced: 04/01/09 - to $2,598,000
Reduced: 05/02/09 - to $2,498,000
Reduced: 07/30/09 - to $2,198,000
Reduced: 08/11/09 - to $2,098,000
Reduced: ???????? - to $1,988,000

SOLD: 10/28/09 - $2,010,000


It looks like this thing will not die. It is yet again back on the MLS, but this time it is being advertised as a rental ---- for $9,995/month.

I think they are asking way too much money for this as a rental seeing as how it sold for $2mm. You can rent a real house on a quiet street north or just south of Montana for much less than $10k/month.

Also, why did someone buy this and immediately put it up for rent? Did they really think this was a great bargain at $2mm?