In early March 2012, a Palo Alto tear-down that listed for $1.195 million garnered 38 offers and sold for $1.65 million! Thats a ridiculous $455,000 over asking for a place that looks like it would be worth maybe $950,000, 5 years ago. According to Zillow.com, a great site to check out sales prices and find estimated home values, the house is roughly 1,732 square feet on a 8,000 square foot lot. Yep, that’s it folks!
Now you know why a couple needs to earn at least $350,000 a year just to afford property in the nicer parts of the Bay Area. If you “only” make $350,000, even if you have 20% down ($330,000) on the $1.65 million home, very few banks will allow you to borrow $1,320,000 given that’s almost 4X your combined income! This is a very sad state indeed, and another reason why there shouldn’t be blanket Federal tax rate assumptions and views about what people make. I really hope you folks elsewhere can understand.
There is no doubt Bay Area real estate, specifically real estate on the Peninsula and in San Francisco is heating up. With the recent IPOs of Zynga, Pandora, LinkedIn and Yelp, along with the impending monster IPO of Facebook on May 18, 2012, the frenzy has returned! There’s also been a huge push by Mayor Ed Lee to provide tax incentives for high tech companies to set up offices in San Francisco. Mark Pincus, Founder of Zynga was going to move his 2,000+ employees out of SF in 2011. However, he not only decided to stay, he also plans to take up more office space to make room for over 3,500 employees now!
IT’S SO HARD TO DO THE OPPOSITE
We all know that people like to run in herds. It’s very hard to sell while the market is rising due to greed. It’s also very hard to buy while the market is collapsing due to fear. Sell too soon, and you feel like an idiot because everybody else is getting rich and rubbing it in your face. Buy too soon, and you feel like an even bigger idiot because you’re losing money, at least on paper.
From my 2012 predictions, you will recall that I believe US property is one of the most attractive asset classes to own in the world. When you can borrow at 3% and rent at a 7% yield, you should be buying given the spread is huge! We’ve already had a correction (although some in places like SF don’t think so), rents are skyrocketing (I know first hand as a landlord in SF), and a wall of money is flooding into the system due to these IPO lock-ups. As a result, one should be buying, not selling at the first signs of rabid interes.
I actually feel more stupid selling too soon, especially when I don’t need to sell. But ironically, one should never sell when they need to sell. It’s better to sell when you don’t need to sell because your head is on straight. You can be bold and dictate terms and not leave money on the table.
THE TEMPTATION OF MONEY
Despite what the media likes to report, many of you still have plenty of home equity. My primary residence currently has a loan-to-value ratio of about 60% based on an appraisal done on March 8, 2012 for my never ending mortgage refinance that just got done on April 27, 2012. It’s part of the reason why the bank keeps calling me to refinance, because they know they have solid collateral. I’ve also been with them for 15 years now.
I’ve got a house that actually fits a young 28 year old Facebook couple quite nicely. A couple thousand square feet, and enough extra bedrooms for little Johnny and Eva. The location is in a good area in San Francisco, very close to one of the many Google, Facebook, Apple, Yahoo, and Ebay notorious bus lines. If you want to learn how to hook a Facebook millionaire, you should click the link!
Given I’m refinancing my mortgage down to 2.625% from 3.125% with all fees included, my gross payments drop by another 10%. My gross monthly payment is now about 37% lower than my peak monthly payment when interest rates were higher. If we talk about just the interest portion of my PMI loan, it’s 50% lower given the highest interest rate I ever paid was around 5.5%.
BenGenie has tremendously increased the cash flow of homeowners everywhere and all real asset owners are very thankful. At some point, the party will end, but not until the end of 2013 given what he promised to the markets. Savers are screwed, and I’m an aggressive saver, but at least the economy is taking off again!
GAINS & LOSSES IN REAL ESTATE
I’ve only made about 10% on my house after the evil brokerage fees. 5% is ridiculous, and needs to get crushed to a flat fee just like income taxes. It makes no sense that it costs $100,000 to sell a $2 million home and only $10,000 to sell a $200,000 home. The 10% increase is still better than a kick in the face given the housing downturn, but in the grand scheme of things, it really isn’t that much. Sorry, it’s a 50% cash on cash return on my 20% downpayment years ago.
My thought process is that if I can sell my house at a price where I think it may go to in the next 12-24 months, I should sell. I’m trying to lead a more minimalist lifestyle with less property weighing me down. I’ve got multiple properties, and my primary residence is my largest and most expensive property.
PROS OF SELLING PROPERTY NOW
* Major increase in liquidity. By selling my largest asset, I increase my liquidity by over 50%. I don’t know what to do with this much cash, but that’s a good problem.
* No more maintenance. Homeownership requires a lot of maintenance. From leaky roofs, to dry rot on the deck, to cracked windows, to blow furnaces, everything adds up. No ownership, no more maintenance.
* Increase in freedom. I can go wherever I want now, but I’ve still got to come back. With no more home and a mortgage tied to it, I can truly go anywhere in the world forever. I imagine living on a cruise ship for 2 months in the Mediterranean. I’ll then spend a month in Casablanca exploring all of North Africa. Perhaps I’ll go back to Hawaii for a couple months to rest and eat my favorite laulau dish, and then go to Tahoe for the winter to snowboard for several months.
* Lower monthly nut. I’d have to downgrade to a 2 bedroom apartment, but the montly nut will probably go down by about $1,000-$1,500 given I no longer have to pay property taxes. I hate taxes, especially property taxes which go towards so many things I don’t use eg the $1 billion dollar phantom high speed rail from SF to LA. Renters need to pay a Renters Tax since they are the majority in the Bay Area and use public transportation too!
* Never have to work again. In “How To Retire Early“, I reveal my 14-18 years worth of living expenses saved over the past 13 years. If I sell my house and increase my liquidity by 50%, the math dictates I will at the very least have 21 years worth of living expenses saved up, excluding all passive income, online income, and rental property income. In other words, I don’t think I’ll ever have to work again if I cash in on my house. I could even quit my job and not die alone because I hear ladies can smell cash from a centimeter away! Maybe this mega freedom alone is worth selling. Although, couldn’t I just experience the freedom and not sell and work online instead?
CONS OF SELLING PROPERTY NOW
* Nostalgia. I really enjoy my home. The memories here are priceless. From house parties to potlucks to friends and family members staying over, it’s hard to let go. 90% of all my blog posts were written in this house as well! Nostalgia makes me so happy. I never bought the house to try and make a profit. Purchasing the house was because I loved it, and thought it would provide a wonderful lifestyle in San Francisco. I’m glad to say that so many years later, it has indeed been a wonderful experience.
* Rents are ridiculous. Rents have probably gone up another 5-7% since I told you about my crazy landlord open house experience in the Fall of 2011. I felt too guilty raising my rent by more than 10% then and I’m therefore probably around 6% below market. That said, I do have the option of raising rent this November when the one year lease is up. If I sell my house, I’ve got to jump in the rental fray, and it doesn’t look pretty. In fact, it looks downright depressing what $3,500/month gets here in San Francisco!
* Moving is a pain. Moving really sucks. For the past 12 months, I’ve been consciously trying to get rid of clutter with the anticipation that I might move this year for whatever reason. As a result, I’ve gone to Goodwill about 14 times, and brought more than 30 bags of stuff to donate. What’s left are the big furniture items (beds, sofas, dining table) and TVs. I don’t want to move this year, only to move again in a couple years when I really aim to make a drastic life change.
* Lower quality digs. My most important concern is lifestyle and the rental stock is inferior to the purchase stock here in San Francisco at least. The rental units in the South of Market area are all new and pretty good, but the area is not my favorite. Even if I don’t sell my primary residence, I still have almost a couple decades worth of living expenses saved up if I don’t work. So why should I downgrade my quality of living if I don’t have to? The temptation and desire to lead a minimalist lifestyle is perplexing.
* Property taxes reset. Thanks to Proposition 13, California property taxes are calculated based on the base year purchase price of your house and rises by only an inflation index of around 1-3% a year, depending on what California decides. A $20 million mansion purchased 30 years ago for $200,000 still has a property tax based on a valued under $400,000! If I sell and decide to buy a again, my property taxes would reset to a higher level if I buy a similar property.
* Realtor fees. Realtor fees alone make me not want to sell! As I said before, a 5% commission is ridiculous for the amount of work Realtors do now that everybody has the internet and can find their properties on Trulia, Zillow, Redfin, and the MLS themselves! Everybody knows how to dial a phone, go to open houses, read what’s happening with the markets. Just on principle, I don’t want to sell my house given the oligopoly commission structure that is ripping off buyers and sellers. If the commission structure was a flat fee, I bet the housing market would instantly recover given there would be much quicker market clearing.
* What if the property market goes ballistic? There is a real good chance that the property market in San Francisco goes bonkers as the fever moves north from Palo Alto. These tech/internet companies have some serious profits and some mega balance sheets unlike the dot com companies in 2000. Property could easily rise by 5% a year for the next three years, which is equal to around 12% a year in easy gains given my LTV of 60%. Making a 40% cash on cash return on my equity in my house over 3 years would be phenomenal, especially since all I had to do was enjoy my life in my home!
I’ve got several Realtor friends who are all chomping at the bit to list my house. Inventory is down about 50% Year over Year for some reason, while demand is heating up. Realtors make money through transactions. As a result, I’m going to sit down with a realtor and come up with a game plan.
I’ll discuss a floor price I’m willing to accept, and an aspirational price. There will be minimal-to-no upfront costs on my part, and my Realtor will bear the risk (his time, marketing materials, staging, etc) if he agrees he can get my floor price. Only if my house sells will he get paid.
As a personal finance blogger and investor, I am extremely curious if all this media real estate hype about how hot the market is bullshit, or reality. The only way to find out is to test the market! The only downside is that my ego gets hurt. Even then, I don’t care because I’m about to close on my refinance for just 2.625%.
* Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I keep track of all my properties with their easy to update net worth dashboard.
* Get the best home insurance possible. In order for your property to grow in value you must protect your property from damage. Fires, floods, leaks, theft, and other accidents happen all the time. If you have cut-rate insurance, you could very well pay way more than you should. I highly recommend checking with USInsurance.com online to find the best home insurance rates. They have a huge network of providers that will compete against each other to provide the most tailored home insurance coverage possible that is affordable. Mobile home insurance, renters insurance, condo insurance, and homeowners insurance are just a few of the options based on the type of home in which you reside. Leverage the internet to save money and protect your largest asset.
Photo: Beautiful Victorian In San Francisco. Probably worth around $4-6 million. SD.