Monday, July 5, 2010

$50,000 Off in Just Four Weeks...How Low Will it Go?

I sent my buddy W the link to this apartment a while back and when I saw him at the BBC a few nights ago he mentioned it had already been on his radar. We tried to determine how overpriced it is (there was no debate about whether it actually is overpriced) while agreeing it is big, very nice inside, and in a prime location.

3819 East LIVINGSTON Dr #4, Long Beach, CA 90803
Wishing Price: $329,000
Beds: 1
Baths: 1
Sq. Ft.: 902
$/Sq. Ft.: $365
View: Peek-A-Boo
Year Built: 1959
MLS#: S619384
On Redfin: 31 days
HOA: $300
Down Payment: $13,000 (FHA)/$65,800 (20% down)
Income Requirement: $94,000 (income = home price/3.5)/$75,000 (income = mortgage/3.5)
Monthly Nut: $ 2,400 (FHA)/$2,000 (20% down)
Description: * * * Complete Remodle * * * Reduced price for quick sale. .. This beautiful one bedroom condominium is turn key and ready to move-in. New gourmet kitchen with top of the line stainless steel appliances, custom cabinets, granite counter top and custom lighting. The dinning room features custom cabinets finished with granite counters. The newly remodeled bathroom features a beautiful shower with travertine and marble design enclosed with custom glass door, the new bath tub is surrounded with custom tile and marble, the vanity has a marble counter top and glass bowl sink. This home has new lighting, new paint, new base boards, new windows, new carpet, new tile floors and much much more.



Although the realtor they chose is obviously an illiterate dummy, the sellers at least seem to possess some common sense. I say that because they have demonstrated a willingness to meaningfully slash the price in a short amount of time:

Jun 27, 2010 - Price Changed $329,000
Jun 18, 2010 - Price Changed $349,000
Jun 01, 2010 - Listed $379,000


Besides hinting at a determination to get it sold, all that $50,000 in price reductions (in four weeks!) really tells us is that this joint was $50,000 overpriced. You have to be aggressive when you start out with a WTF $379,000 asking price.


You must be pals with this moron.

So, given how effortless it was for this seller to lop off so much "value," how do we know this place isn't still 50k overpriced? Fundamentals, my friends, fundamentals.

The income requirement of $94,000 seems high, even for this area, but if you calculate the less conservative 3.5 times mortgage (and not 3.5 times price), $75,000 per year seems totally feasible. And Southern California buyers are clearly not conservative when it comes to homeownership, so I'd say that fundamental has been met.

Interestingly, there are no sold comps for reference. Not a single 1 bed/1 bath has sold in this area during the last six months. So we have to fall back on Rent vs. Buy. With 20% down, your monthly nut will be $2,000. I seriously doubt this place, as nice as it is, could get more than $1,400 in rent. Not without a direct ocean view.

Which means if the going got rough and you had to relocate for work but couldn't sell (thanks to hefty sales commissions and the likelihood that appreciation is dead for the next few years), you would eat, at a minimum, $600 a month just to keep this "investment" and maintain your FICO score.

Yikes. I hope that new job pays a lot more than your last gig.

Worse, if a buyer goes FHA (which, let's be honest, is exactly what's going to happen) then the monthly outflow jumps to nearly $2,400!


So, clearly that fundamental has not been met because (debt)ownership entails a $1,000 monthly premium over renting. Yes, yes, the mortgage interest deduction will somewhat narrow that margin (you'd still paying about $400 per month more to own even after the tax write-off), but as an owner you need to factor in the likelihood of future tax increases and HOA assessments on a 50-year-old building, and as a landlord you need to factor in vacancy rates and repairs. That's why I think the only reason to buy a one-bedroom is when it's cheaper to own than rent. Period.

Because one-bedrooms are shitty investments to begin with. Compared to a two-bedroom, the rental options are incredibly limited. Either you rent to a retiree or a single professional. That's about it. Students are out because very few can afford to live without roommates. Families are out because one-bedrooms are too small for couples with a kid.

But one-bedrooms are even worse investments when they are upgraded units like this. That's because you need to charge more rent to cover your inflated monthly nut. Which puts you further into the shallow end of the renter pool.

Making matters worse, even if you find a wealthy retiree or cash-flush single (or childless couple without personal-space needs), you're going to have a difficult time keeping them. The retiree is either going to kick the bucket or get sent to a nursing home eventually, and a young single professional is likely to meet someone and get nagged out of the "bachelor pad" and into a house.

High turnover rate is death by a thousand cuts for landlords.

And as spacious and gorgeous as this place is, there's no way you -- or anyone -- will live here for the next 30 years. Which leaves you with two options: Sell for a higher price in 3-5 years, or rent it out for more than the monthly nut.

At this price it would obviously be insanely cashflow negative, leaving only the option to use it as a starter platform and try to sell in a few years for a profit, allowing you to move up into a larger property. Since you'll be paying up to $2,400 each month to live here, you certainly won't be able to save much -- meaning you are betting the farm that rampant appreciation will save you.

And what do you think the odds are that a ONE-BEDROOM APARTMENT will appreciate enough during the next five years to cover your 6% sales commissions and provide enough profit to leverage up into another place?

Infinitesimally small, Chachi.

You see, the disadvantages landlords face in renting out one-bedrooms are the same issues owners face when looking to sell and move up. Who are you going to sell to? That same narrow field of buyers: Well-heeled singles and retirees. Which is why one-bedrooms typically don't appreciate in price as quickly.

Most people don't think about this stuff, but they should.

It's worth noting that the taxable value is $121,947, indicating this is a long-term owner with tons of equity. Which explains the aggressive pricing. And the seller's equity rich status could provide an opportunity for a good negotiator to get a decent price ($280,000 sounds about right for this location). It's not like you'd have to put any money into the thing -- it's fully upgraded and pristine.

Oh, but what's this? No mention of a washer and dryer?

Uh oh. I smell a deal killer.

After poring over the listing details and photos, any mention of in-unit laundry is conspicuously missing.

So let me get this straight: I'm going to pay $2,400 per month for a FOR A ONE-BEDROOM APARTMENT, including a whopping $300 per month in HOA fees, and I have to deal with the colossal pain in the ass known as community laundry?

I rescind my $280,000 target price. The inconvenience of coin-operated community laundry is a huge penalty. And I realize my life is privileged when my biggest concern is avoiding the indignity of having my Brooks Brothers dress shirts dumped on the counter because I left them in the community dryer four minutes too long, but we're talking about shelling out TWO THOUSAND FOUR HUNDRED DOLLARS PER MONTH and having to deal with that bullshit.

For that kind of money, FOR A ONE-BEDROOM APARTMENT, I expect to have a plethora of amenities, the least of which is my own goddamn washer and dryer.

And what was this seller thinking dumping $40,000 to $50,000 into creating a "luxury" unit if the building itself doesn't have any comparable "luxury" features (no pool, no gym -- I wonder if it even has elevators)?

That's like hiring Rolls Royce to install a hand-stitched Corinthian leather interior complete with champagne cooler and suede a rusted-out Edsel with manual windows and no engine.

What's the point?


  1. I was listening to Ryan Seacreast radio on the way to Safeway. His sister just got a new place- granite, pool, good location- so Ryan asked what she liked best about it:
    The answer" It has a washer and dryer- no one throwing my wet clothes on the floor so that they can use the washer!!"

  2. No in-unit laundry is an absolute deal killer at any price. I lived in one apartment that didn't have in-unit laundry ten years ago, it was my last.

    That bathroom is giant for a 900 sq. ft. apartment, why didn't they add a stackable when they remodeled it? A place that small does not need a separate shower and tub.

    And what is with all that granite in the kitchen? Personally I cannot stand when people run granite up the walls, let alone trimming the window with it.

    My rent isn't much more than $2,400, and I get a hell of a lot more house (with equivalent finishes) than that place offers, and in 90803!

  3. Dave in Alamitos BeachTuesday, July 06, 2010

    Am I the only one who can't stand those "vessel sinks" and glass enclosed showers? They're just a pain in the ass to keep clean. BUT I'm assuming that someone who wants this place has maid service, AND that maid is probably in charge of the laundry.

    But when you think of that, why would anyone with that kind of money ever opt for a place like this? The building looks fine for people who want to live in a decent neighborhood at the cheapest price possible. This unit doesn't provide that.

    I don't ever think it's smart to have the nicest, i.e. most expensive, place in the neighborhood/building.

  4. Somebody will lose money on this crappy 1 bedroom! The mushroom cloud-type fallout from the biggest housing bubble ever will continue for a long time to come...

  5. Nice post El Bee! Those are some really good points. Keep them coming.

    If you are going to buy this place to live in $280k is definitely a good price. If you are going to be buying as an investment remember buying real estate as an investment is a risky business and you should only buy if you can expect a premium for taking that risk. There are lots of people purchasing properties with no monthly cash flow or negative cash flow. I can tell you from experience that is not a good strategy. Specially if the market goes down.

    The investor should only purchase at a price that he/she is getting a risk premium on the investment. Hypothetically lets say that 10 year treasuries are yielding ~3%, the long term maintenance of the property is 2%, the property manages to rent for $1,400 (no washer/dryer???) and let's assume we are in a regular market in which rents are keeping up with a typical 3% inflation. That is a lot of assumptions. If the purchase price is $280k the rate of return is a enough to match a treasury and cover the long term maintenance expenses of the properly. You might have a little additional money. The purchase price needs to be somewhere between $235k and $260k or lower. Otherwise you are better of buying the US treasury and not taking on the additional risk or doing the extra work of managing a property.

    Then again with this deficit and money printing you might not be better of in a 10 year US treasuries. But only time will tell... Back to real estate. Nice post El bee!

  6. I don't know what's better, El Bee's blogs, or the comments!


    Thanks to all of you, for continuing to school me.