January 3, 2007
View From Florida (Part III, RE Guts Game)
(c)
copyright, View From Silicon Valley, 2006. All rights reserved.
We spent the week before Christmas
in Florida. The small suburb where we were visiting is midway between Altamonte Springs, which used to be the north
fringe of metro-Orlando, and Daytona Beach. As of this writing, the are 944 homes listed for sale in this small city.
Different from our last study where the median family income was $66K, the median family income for this suburb is only $36K
with 13%+ of families living below the poverty line.
With a couple hours to kill one afternoon, we drove around a couple
neighborhoods to check out prospects. We went through a nearby gated community and then a subdivision literally across
the street.
There are bunches of ways to slice the data but we finally settled on the details below for the non-gated
subdivision. (We'll review the gated stuff in "Part IV.") As a measure of the density of options, it will take
me longer to write this missive than it did to drive around and collect the data.
Let's start with a sort by size:
Size Built Features Price $/SqFt
1,958
1999 4/2/pool $354,000& $181
1,985* 1981 4/2/none
$375,000&@ $189
2,234 1989 4/2/none $364,900 $163
2,400
1999 4/2/pool $449,900& $187
2,446 1995 4/4/none
$398,000& $163
2,446 1995 4/4/pool $469,000 $192
2,600
1999 4/2.5/pool $359,000 $138
3,005 1975 5/3.5/pool $569,900
$190
3,621 2005 4/3.5/none $699,000# $193
3,686 2004 6/3.5/pool
$695,000& $189
*= total 3,128 but only 1,985 "Total A/C SqFt"
#- "Range Priced $699 -$725,000"
&-
Assist2Sell, "We sell list and sell homes for as little as $2,495!"
@- "as is, with right to inspect"
First of all,
let's discuss "Assist2Sell." (www.Sellfor2495.com) What does it tell you about market conditions when 50% of the listings
choose to use a discount agent? Are conditions so awful that 6% commission is a big hardship?
OK, back to the
point at hand. How does a prospective buyer chose among these listings? Not to mention the other 10 -15+ we saw
for which no flier was available. (At least no in the front yard. Puh-leeeeze, you don't expect us to actually
go to the trouble of making a phone call to learn the price?)
Personally, I would go straight to the listing at $138/square
foot. (Duh!) When seven of the other nine (or 19 or 90) are $180+ per square foot (+23% /square foot), this stands out.
As special bonuses, this house is empty, the sign in the front yard says "Available for immediate possession" and the flier
includes "Seller motivated..."
How will any of these other listings move before this one closes? How will any
of them move at $180+, or even $163, per square foot once there is a "comp" at $138 (or less, given the "motivated seller.")
Before
we got too excited, however, there is an additional tool available to buyers looking to squeeze out the best possible deal.
We submit the absolute optimum way to conduct a buy decision in this environment is to understand the seller's cost.
Zillow.com
is, of course, readily available with some of this data but our initial study finds it was missing a few sales records.
In a delicious irony, we could use a scam many sellers and seller's agents are using against them.
It is dishonest
but it is apparently not actually illegal, nor even against real estate agents' ethics, to list a property tax which bears
no relation to what a buyer would have to pay if they pony up at or near the listed price.
Seven of our ten listings
include 2005 taxes. Zillow.com gave us the details on two of the other three. Reconfiguring our previous list,
the following should become the standard for how buyers evaluate purchase options going forward:
Last Implied
Size Built Price $/SqFt '05Taxes Sale Cost Margin$ Margin%
1,958
1999 $354 $181 $2,292 2005 $337 $17K
5%
1,985* 1981 $375 $189 $3,570* 1994 $175 $200K
53%
2,234 1989 $365 $163 $2,476 1999 $170
$195K 53%
2,400 1999 $450 $187 $3,556 2003 $151
$299K 66%
2,446 1995 $398 $163 $2,719 2000 $185
$213K 54%
2,446 1995 $469 $192 $2,910 2005
$395 $74K 16%
2,600 1999 $359 $138 $2,733*
1999 $153 $206K 57%
3,005 1975 $569 $190 $4,057
2004 $255 $319K 56%
3,621 2005 $699 $193
>>new construction
3,686 2004 $695 $189 $6,474 2004 $409
$286K 41%
*- per zillow.com, assumes 1.9% RE tax rate
I remember playing "guts" games
as a kid. Who has the most "guts"? To climb highest in the tree? Or jump a fence and retrieve a ball when
there's a ("probably" sleeping) dog? Or slap the car as it drives by interrupting our street football or baseball games?
Real
estate in this area is clearly a massive "guts game." Which sellers can hold out longer than which buyers? Which
sellers can hold out the longest for the highest price?
As a convenient side effect, Zillow shows only a handful of
sales have closed during 2006 in these neighborhoods. Given the lack of buyers, an additional facet of this guts game
figures to become which seller will flinch and get out at a lower price before the seller next door?
Beyond that, what
does this new info really tell us?
First, you clearly see a seller in some potential trouble (or potential opportunity)
at the top of the list. After that, you see a lot of sellers sitting on fat margins waiting for somebody to flinch.
Even
the $138/square foot seller still grosses ~$206K in profits. Do you really want to enrich somebody by $200K just because
they were willing to settle for $200K instead of the $300K+ implied by staying with the pack at $180/square foot?
Conclusion:
It's
a classic guts game. Who will flinch first? We're not so naïve as to believe sellers will cave down towards their
cost today, tomorrow or the day after. On the other hand, it only takes one desperate seller to get us in at a price
which bears some resemblance to its rental value.
It seems inevitable sellers will soon stop being "insulted" by "low-ball"
offers. "Low-ball" offers will come to be seen as a distinct improvement upon "no" offers.
A few knife catchers
may buy based on a price decline of 5% or 10%. Even so, with 50%+ margins, and a huge(!) glut of inventory, prices have
MUCH further to fall than just 5% or 10%.
If you don't "have to" buy, why bother? (And when do really "have to"?)
There are 100's and 100's of listings going nowhere at current prices.
* * * * * *
The above is not intended
as advice to buy, sell or hold any stock, bond, real estate nor any other financial product or service. Buy and sell at your
own risk (just like we do.)
