Remember the $1.69 million three bedroom, two bathroom condo I used as an example in “How To Correctly Value And Analyze Property“? I forecast it would go for $1.85 million. 2553 Greenwich has a fantastic view of the Bay, but it doesn’t have a dedicated entrance, and it’s on three floors after walking up a flight of stairs.
I figured the property could easily reach $1,000/sqft in several years, or $2 million due to the view and upward trajectory of the SF real estate market. It turns out my estimate of $1.85 million was just wishful thinking of what I’d like to pay. A friend’s friend bid $2 million for the place cash and LOST! Just think about that for a minute. Someone was willing to pony up $300,000 above asking and still got a big fat rejection!
The only people who have $2 million cash liquid are those with net worths of at least $5 million if not much, much more. Of course someone with “only” a $2-3 million net worth fully invested in the stock market could just liquidate instead, but that’s highly unlikely. The multi-millionaires I know coincidentally follow two main Financial Samurai rules: 1) They don’t spend more than 1/10th of their gross income on cars, and 2) No one asset class makes up more than 50% of their net worth. They are highly diversified.
It turns out that 2533 Greenwich Street received 8 offers with the winner paying $2.2 million cash! That’s $501,000 over asking, or roughly 28%! How does one even come up with a $2.2 million valuation anyway? It’s like shooting into the dark as you don’t know what other people are doing. This is a classic case where underpricing brings maximum value.
$2.2 million is mind blowing due to the hodgepodge nature of the property. It could be completely done up, but without a dedicated entrance and no connection from the garage into the condo for security purposes, it just feels a little off. And with all those stairs starting from the street level, it really should have an elevator. Regardless of my opinion, more than five people thought the property was worth more than $2 million bucks so that’s all that matters.
PROPERTY MARKET TAKEAWAYS
* Cash buyers are everywhere. The amount of all cash offers in the market is increasing. Some peg the amount at 30%. Cash will always trump another buyer who has to take out a loan.
* International buyers are here. One of the reasons why you want to invest in a major city is because of the international demand curve that city faces. The buyers of the next decade are from Mainland China just like how the Japanese were the buyers of US assets in the 80’s and 90’s. They are buying properties in cash for themselves and for their children. Part of the reason is because they want to diversify their riches away from China. Another reason is the steady appreciation of the Ren Min Bi which is making foreign assets more attractive.
* Focus on prime property. Lower tier property may have risen more in percentage terms, but they also fell way more as well. Think of prime property at the top of a triangle that keeps on growing in height and width. The growth is in demand of limited prime property, resulting in continued price growth. What seems ridiculously expensive now will seems even more ridiculously expensive 20 years from now.
* It feels crazier now than during the peak. I distinctly remember getting outbid on several properties between 2004-2007. It now seems worse because there’s 40% less inventory at any given day plus 5 years of pent up demand. Some properties have breached peak prices, but still many have not, especially in outer areas and vacation spots. There is still lots of opportunity if the entire tide is going to lift all properties to new highs. You’ve just got to spend the time to look if you can’t afford prime areas or if you’re looking for that second home.
TIME FOR A PROPERTY MARKET COOL DOWN
It’s a little absurd why there are so many buyers now compared to just a couple years ago or even just in 2012 when prices and rates were lower. I don’t think we are in a property market bubble for the nation as we are coming off a low base. Pent up demand is real and only growing with such limited supply.
We’ll see what the future holds. My bet is that nationwide prices start flat-lining and falling until 2020. We’ve just finished 7 years of a nice bull run since the financial crisis. The easy money has been made. Save your money aggressively and manage your finances like a hawk!
Wealth Building Recommendations
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win.
Updated for 2019 and beyond.