Market discipline - so painfully slow - how to lose $180,000 in three years.
As an observer of the typical real estate related mistakes that people (me too!) make there has just been such constant fodder recently. The slow motion debacle of these misguided valuation ideas is so cringeworthy to me that I cant help myself but feature it on this page. Today has an interesting case study, one I have watched unfold over three years, and now there is a new chapter in this sordid affair (property is now on the market, finally).
The property in question sold exactly three years ago, for $850k. I was shocked at the price at the time, and angry that it sold at that inflated value. I was interested in buying it at perhaps $100k but preferably $150k less. That would have been something I could work with. But at $850 it was just such a terrible deal, there was no way based on my math (recall that math is hard, but this math wasn’t that hard at all), that this business prospect could ever pencil out as anything but a disaster.
To make the scenario even worse the buyer then later approaches my realtor and informed him of his grand ambitions. My realtor then gave an educated market value estimate based on real data, like any good realtor should do (and while he’s a polite dude, the message was not good at all). Of course, the realtor who was actually the one taking the commission on the land deal was nowhere to be found. He’d taken the cash and was of no further use, likely didn’t know the first thing about infill development. This is one of the many dangers of using terrible realtors when making critical purchasing decisions. The client will get terrible advice and act on it, and the realtor walks away with no liability to the disaster left in his wake.
But this post wasn’t intended to be a diatribe against my favourite topic, bad realtor behaviour in land deals. It is supposed to highlight the danger of infill development. Nobody discusses the failures, but you will see plenty of success stories featured prominently. Well here is a huge loser to report on! And the story isn’t over so we cannot tally the losses definitively (but we sure can make a detailed estimate).
Here is some dates provided by Honest Door.com, an interesting and free resource for real estate investors. It shows the last sale, data from the land titles office, and the current assessed value and the ‘honest door algorithm’ price. They have it curiously down at 738400. This could be accurate. The other interesting feature of this property is the old house was demolished. So many buyers can no longer buy this lot and it cannot be financed easily by conventional means. This could drive the price down even more - do you have $734k in the bank ready to go and want to put that full sum into this property? I sure dont…
here is the title from the old sale. Ouch. At 850 they have now paid property taxes for 3 years, that is about $15k. Then they lost the time value of the money, at 5% per annum, that is $42.5k/year x 3, that is $127.5k, plus the cost of the demolition, so lets call that another $10k. Losses are now already at $152.5k and counting…plus realtor fees to sell it, current list price is 795k, if it sell at that price less commission, that is another $28k in commissions. Total loss is now at $180k on this purchase. That really hurts
Another unknown here is this land investment may even have been financed, if so, the losses are further magnified by interest charges. the loss of investment opportunity to the owner are harder to quantify. If this lot was bought in cash, the return that could have been otherwise earned on the stock market or another investment is tremendous and impossible to measure. The losses could easily be more than the $180k that I’ve estimated here, a lot more. Many buyers don’t consider the time value of the funds misallocated to real estate as a loss. They’ve been lucky to buy into up markets where the money factor involved is negated by increases in values. This hasn’t happened in years in Calgary. Buyer beware!