Whose Gain?

Posted by Dave Fratello on Wednesday, October 28th, 2009 at 3:36am.

Late in the year here, you're going to see a larger share of new listings with distress factors. Often that translates to better prices with greater seller motivation.


A new candidate as a deal for the Fall is 421 Marine, a duplex that's new among the SFR listings.

One question here is, who's the sort of buyer who jumps at it?

The listing probably has this right: the home(s) could be a good opportunity for an owner/user. You get one 3br/3ba, 1300 sq. ft. house for yourself, and another for a renter in back. At $1.350m, the cost of entry isn't too high for MB, and you get perhaps $3,750/mo. (the current rent) from the tenant to help pay the mortgage.

There is also this shocker: the same property was purchased just over 3 years ago for $1.850m. That puts the current list price down $500k (-27%) since Summer 2006.

Were 421 Marine to go that low, it would wind up somewhat worse off than almost all 2006 SFR acquisitions resold so far in 2009, which have mostly gone from the mid-teens to low-20s, percentage-wise, below their last purchase prices. (Click to see MBC's spreadsheet on 2003-2006 acquisitions/resales; or at any time access that data from the pulldown menu labeled "MB Market Updates.")

Maybe it won't go so low – the home seems to have been "underpriced" with an eye toward drawing immediate interest. It might get bid up as a result. (The listings nearly screams: "HUGE opportunity awaits and priced to sell now!!")

And there is some urgency... an NOD filed in early October. The listing is not indicated as a short sale.

Wondering about the value of this property, including as an investment, we asked for and got a helpful analysis from Ideal Home Brokers, a new brokerage affiliated with the Irvine Housing Blog. (Click here to download the 8-page analysis [PDF]; it's nice.)

The comps in this analysis are not duplexes – no duplexes have sold in the Sand recently – but full-lot SFRs. (421 Marine is zoned R-2, per the listing.) That's a wrinkle. Also, none has quite the location challenge of this listing (nor the ocean views), but the comps generally suggest that, at $1.350m, this one is actually below market value. So now, let's see what the market says.

Is 421 Marine a good buy for a cashflow investor? This analysis assumes a 25% down payment plus cash for closing, meaning $370k down, with a cap rate of 4.5% and a cash-on-cash return of 7.4%.

Those numbers won't sing to your typical investor, and they'd be somewhat less good if you took out a couple of writeoff factors in this analysis. Some investors may see the longer-term potential for redevelopment of 2 new THs, also alluded to in the listing.

But an owner-user would get greater tax benefits, and would find the whole package a better deal. Given the interest we see all over town by people just wanting to get into the 90266 – think Tree Section cottages – it would not be surprising to see investors outnumbered if a line forms at the door.

Getting out of 421 Marine, the current owner will take a loss. The question is: whose gain?

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UPDATE: There's another question now: How much will this one sell for? Is it "underpriced?" Please vote in MBC's pricing poll. We'll close the vote Sunday night at 8pm, and tally the results thereafter.
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