We’ve been shopping for a bigger house and we have a well-defined list of characteristics. Bizarrely, and fortunately, R. and I are very close in agreement on virtually the entire list, and the things we disagree about only one person cares about strongly so it’s been dead easy to negotiate. Yay. As a result, I’ve registered at an online service from a brokerage that does MLS listings with a saved search and they e-mail me with updates, which is moderately entertaining (about as good as playing nethack, but not as much of a time sink).
Today was the first such update. House #1 was not interesting. House #2 is interesting, although the lot is a little small (.48 acres with private sewage is, imo, pushing it). Everything else about it (that can be detected online with photos) is about right. The location seemed borderline for access to the Acton station, until I realized access to the West Concord station (which is better anyway) is fucking awesome. Wow. After looking around at the crime rate, neighborhood schools, etc., all of which I more or less knew was good anyway, I googled the address (because sometimes you discover interesting other efforts to market a house this way, and occasionally you detect information about foreclosures, etc.), I found an SEC filing for GE Capital Mortgage Services back in March of 1998 that mentions this particular mortgage. Hey! That means I now know what it was considered worth ten years ago ($372K, based on mortgage value and loan to value, both of which were in the 8-K) and what they are asking now ($719K), which means I can figure out the implied inflation rate with a compound interest rate calculator (because you know how I love me some compound interest rate calculators yum).
I have no idea if the place sold between then and now, if the owners refi’d, etc. But in 1998 they had a fixed 30 yr at 7.375 (no PMI because their LTV was 74%). So now I’m scratching my head trying to figure out if they are out of their money or not. Certainly, they were paying a higher rate of interest on the loan amount than they were getting back, but (assuming they sell at their asking, which at this point is a huge assumption), they were appreciating at a lower rate on a larger value.
I never even used to ask these questions.
372000 compounding at 6.8% (compounded annually; 6.6 if monthly) gets you to 719000
275000 compounding at 7.375% (compounded monthly) gets you to 573932.05
LTV of .74 implies a house valued at 776000
By a simple comparison, they are out of their money. However, who lost? Was it the lender or the lendee. There is leverage involved here.
Their downpayment was $97000.
As of this month, they’d owe $237000 (loan done 2/1/2028 per SEC filing).
They’ll get (at their asking price, ignoring commission): 482000.
Less commission: 460000.
Ignoring their monthly payments, that’s just under 17% growth. Sounds good. Let’s not ignore those monthly payments.
$1900/month for 122 months = 232000
719000 (list price) – 237000 (remaining principal) – 22000 (3% commission) – 232000 (payments to date) = 228000
Just under 9% interest.
The reality, of course, lies somewhere between the 9% (which ignores the value of being able to live in your investment, which would of course also have to factor in property taxes, fuel, etc. and compare to local rental options blah blah blah) and the 17%, which treats the house as if it were a stock, bond, CD, etc.
Not to be evil or anything, but as a buyer, our question has to be: how much of that $228000 can we take away from them? If we knocked them down to, say $670,000, their implied annual gain would have been 6% instead of 9%, still a respectable gain, considering their housing costs are considered to be limited to property taxes, fuel, etc. (mortgage payments treated as investment costs only), and it is psychologically under the 10% barrier.
Let’s try to take all of their money, except for the real dollar value of their downpayment, away from them. There are a variety of ways to calculate real dollars.http://www.measuringworth.com/calculators/uscompare/result.php
This suggests their $97000 in 2007 (the latest this site goes) is between $123000 and $154000. We’ll go with the higher number. (Implies 4.75% annual inflation over the last 10 years).
228000 – 154000 = 74000
719000 – 74000 = 645000
That’s just over the 10% barrier.
In the ordinary course of negotiating for a house, I don’t think the buyer would know the terms of the previous owner’s loan (to be fair, I know a possible set of terms, but they could have refi’d and might have even sold to a different buyer in the interim). However, a buyer would know (because it’ll be a matter of public record, accessible through the Town and a realtor should be able to lay hands on it easily) what the house previously sold for and when. One strategy from that point would be to figure out what the price then was in real dollars now, and offer that (assuming that was less). This works better for sales well in advance of the current boom.
The usual comps strategy is pretty bad right now, because we’re clearly just over a crest right now. Waiting would improve that.
Another approach would be to look at houses in lower strata (starter homes) and look at what kind of discount they are selling at to comps some number of months ago, and apply that discount to the higher priced homes, on the theory that luxury homes lag.
R.’s strategy seems to be to knock $100,000 off, and see how they react. I think right now, that might tend to cause realtors to take one less seriously, but it would be interesting to float that idea past someone and see what kind of reaction one got.
My strategy would be more along the lines of knocking 10% off the asking price and see what kind of reaction I got. In part, this is based on seeing starter homes selling at 10% or slightly more below asking price in recent months.
In practice, while this particular house has a lot going for it, R. has already driven by a couple of other prospects and concluded that each had enough issues to be not worth pursuing immediately (one had an amazingly switchbacked driveway, which is scary in Land of White Stuff, and backed onto an old orchard, which is kinda cool except they used to use some scary pesticides back in the day so the soil would require testing; the other was a subdivision that backed onto a power line corridor, which yay, would never be developed, but oooh, power lines. Hmmm). This house, as noted, has a half acre lot with private sewer and is low enough and close enough to water to give us pause. R. may or may not do a drive by, but we're unlikely to act.