Originally posted October 28, 2006
Address: 17 Georgetown #24, Irvine, CA 92612 (University Town Center)
Plan: 1100 sq ft – 2/2
MLS: S446969 DOM: 124
Sale History: 5/23/2005: $550,000
Current Price: $549,000 (Accepting Backup Offers)
University Town Center is a ‘village’ in Irvine that includes all the condos near the University of California: Irvine (UCI). There are many apartments in this area as well (owned by the Irvine Company of course). The proximity to UCI ensures that there is a large student population here.
I’m sure there are quite a few investors who purchased condos here to be used as rental properties. Those who bought years ago are probably doing real well if they have kept their properties – huge appreciation and positive cash flow make a nice cash cow! 🙂
But since prices for 2 bedroom units like this one are now in the mid 500s, it’s hard to make the numbers work as a rental even though rents are strong. This Plan 1 condo in Cambridge Court was purchased in May 2005 with 20% down for $550k. They put it back on the market a year later. The status in MLS is ‘Backup’ meaning that a sale is pending but the sellers are accepting backup offers. They originally had listed it at $599k and have reduced it $49k since then. If it sells for $549k, they will have lost about $34,000 (after 6% in selling costs).
UPDATE: I just found this blog post by the OC Realty Group that shows how to make the numbers work in University Town Center: http://www.ocrealestateblog.com/blog/_archives/2006/1/30/1718817.html
UPDATE #2 – May 18, 2007
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17 Georgetown sold on 11/21/2006 for $535,000. Assuming 6% in selling costs, the sellers lost about $47,100 or about 42% of their down payment!
The new buyers purchased the place using 100% financing. Who knows.. Maybe this unit will come back on the market.
the units in this neighborhood actually have decent floor plans with high ceilings. the 2 story plans are nice. however, i’m not too excited about living next to noisy college neighbors. unless they’re cute sorority girls…..
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I just checked out the link of this ocrealestateblog.com and I’m amazed how many facts/numbers he omits just to make his math work.
here is my version of the math:
20% downpayment for a $400,000 is $80,000. If you put $80,000 into an ING account at 5% you could be earning $4,000 a year in interest(or $334/month). You have to add that amount into the equation since a renter is not puting anything down to rent.
Let’s say we buy the condo and it appreciates to $450,000 after 4 years. Now we want to sell and incure selling expenses of 6% realtors fees. 6% of $450,000 is $27,000. (I’m actually omitting closing costs etc). Since we bought for $400,000 total potential gain is $23,000. We said above that we would earn $4,000/year in interest for the $80,000 down payment. $4,000/year for 4 years is $16,000. $23,000 profit minus $16,000 opportunity cost leaves us with a potential profit of $7,000 for 4 years or $146/months for 4 years.
Keep in mind that the beauty of home ownership comes with certain privileges such as having to pay for your own maintence. $100 -$200/month is probably a fair estimate for such expenses.
Also, keep in mind that homeowners association fees are not tax deductible and that legally you need to pay income taxes on the $750 rental income. Overall this deal as described in the blog wouldn’t be worth it especially since it assumes a 3% per year appreciation. The way socal real estate is moving over the next 3-5 years you are very likely to loose money on this deal.
What if the unit doesn’t appreciate and is worth exactly the same 4 years from now and you have or want to sell. 6% commission on $400k is $24,000. your opportunity cost for the $80k downpayment forgone interest is $16,000. I this scenario you are actually loosing $40k during 4 years in addition of having made mortgage payments for 4 full years.
Renting you own 1 bedroom apratment (no shared bathroom as the ocrealtorblog suggest) is $1,000/months or $48,000 for 4 years.
All over sudden that doesn’t sound like that bad of a deal anymore. Only potential downside is missing out on potential future appreciation (we all know where real estate is headed for the next 5 years.)
Advantages to renting as a student:
-total privacy (no roomate)
-no maintenance expense
-flexibility: you can move anytime you want (maybe after 1 semster you decide that UCLA is a much cooler school to go to)
If your parents have $80K to give to you put it in the bank. The $334 interest earned per month will reduce you actual monthly rent expense down to $667/month.
The tax benefit has an opportunity cost: The inability to take the standard deduction. The true tax benefit of owning is the difference between the standard deduction and the deduction that one gets from itemizing.
This is “new math” at its finest. Comments are open on that blog… Maybe we should speak up?
I totally agree, “new math” at its finest. Let’s rip the analysis to shreds when we have a little more time.
Here is a huge mistake in the tax bracket. There is no way you can getaway with using the highest tax bracket. More likely, the propsective GF will be in the Federal 25 or 28% tax bracket and 9.3% California. And while most of the payment is interest in the early years, there is still principal component which is not tax deductible.
Is the interest even tax deductible if its a rental property? Has anyone run the numbers as a true investment property vs. their new math approach of mixing and matching the best from the various tax code (i.e. the mention of using the 1031 option which, from what i understood, is only open to investment properties).
Even ignoring the new math, the realtor forgets that the 1k month on campus housing (at least on the east coast) runs only for 9 months. It would be hard to charge the same annual cost for a lessor location for 12 months (not impossible – some students live on campus year round).
Finally, how many parents want their freshman child to live off campus , and how many frosh want to live 15 minutes away…
Trump will be in Anaheim this next weekend. Will they be able to dig up 50,000 more wanabee millionaires to pay his $1.5 million speaking fee. I’m tempted to visit just to count the house, just to see what the bottom of the barrell looks like. Spin on, Mr. Trump
Do downpayment requirements unfairly undermine the mission of providing affordable housing?
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Down payment was half purchase price
ASSOCIATED PRESS
October 29, 2006
TUSTIN – Winners of an affordable-housing lottery found out they couldn’t qualify for homes being built at the former Marine Corps Air Station because down payments were nearly 50 percent of the purchase price.
The homes – priced between $55,100 and $311,400, well below Orange County’s $626,000 median house cost – were advertised by Lennar Corp. and William Lyon Homes with the words “3 percent down payment required.”
http://www.signonsandiego.com/uniontrib/20061029/news_1h29lottery.html
Zovall,
Could you check into this sale. I think it looks fishy. 51 New Dawn, Irvine, 92620. The realtor’s description said something like “more motivated than a wildebeast at a cheetah convention or a beaver during a dam burst”. The property was in pre-foreclosure and on the market for months.
I then saw it sold. Just out of curiosity, I was checking zillow. According to Zillow, it was purchased on 10/15/01 for $1,060,000. It sold for $1,885,000 on 6/7/06 and then again on 6/8/06 for $1,800,000. What is with the two sales in two days? The second sale was for $85K less?
I think the end of the preforeclosure period would have been just days after it sold.
Thanks for any insight!
Anonymous,
I’ll look into it and see what I can dig up!
Thanks!
It appears that the buyers/sellers recorded two grant deeds: 1 on 6/7/06 and 1 on 6/8/06. The one recorded on 6/7/06 shows a documentary transfer tax of $2073.50. Documentary transfer tax in Orange County is $0.55 per $500. Working backwards, you get the price to be $1,885,000.
The grant deed recorded on 6/8/06 says ‘Re-recording grant deed to reflect the correct documentary transfer tax’ and the amount is $1,980 – reflecting a price of $1,800,000.
This explains why Zillow shows two sales. I’m not sure how the preforeclosure fits into all of this. I looked up the old MLS listing and it was originally listed at $1,999,000 and MLS reports it as being sold at $1,885,000. I suppose a call to the agent would be a way to get the actual sales price. Let me know if you already have that info.
I think the OC Register had the sales price listed at $1,800,000. So, it seems the first one was just a mistake that was corrected the next day. Thanks for looking into it.
Have you heard anything about that possible fraud case you found? I wonder how much of that was going on?
More on “new math”
If this is indeed bought as an investment home for a dependent attending UCI, wouldn’t this be a riskier and more costly non owner occupied loan? This loan probably costs at least 0.5 points and the interest rate is at least 50 basis points higher than the assumed 6.0% rate.
The off campus guide at UCI estimates that the average rent for a 2BR/1BA apartment near school costs $1350 per month, so the most you can get is $675 assuming a full 12 month lease with no turnover. Banks routinely discount the rent by 25% to account for tenant issues, so you will only be able to qualify for the loan with only $506 in rental income. This is well off the $750 assumed rent by the OC Realty Group.
Of the 170 2BR+/1BA+ homes for sales in the University Town Center area now, only 8 are listed for less than $500K and the cheapest one is $439K. So the purchase price is at least $39K too low.
Should we even bother to run the numbers with depreciation, maintenance, Schedule E rental income, mortgage interest vs. principal repayment, and capital gains sales tax (not likely)? It seems that the investment is probably a loser with more realistic assumptions about true market conditions.