Opinions requested regarding SoWal real estate pricing...

[TooFarTampa]

Beach Dad, Full time is right about buying, because the consensus says rent. There are raw land deals out there. Builders need work now and are dismounting their Clydesdales. Make your homestead Florida and build a stout home exactly as you wish. The west end of 30A north of the road and Point Washington will provide you with a quiet location, without the hassles of short-term renters generally speaking. And, of course, mortgage rates are very low. If only we could have a permanent El Nino. Buy this spring after a full scouting foray, or wait and treat this whole process like a stock trade.

I would say renting is a good idea just because it is smart for any relocating family to rent for a while to figure out what neighborhood is best for them (that said, we have never done that, and never regretted not doing it). Bob is right about the raw land deals. And remember, while you are holding onto the raw land, you do not have to insure it. Maybe consider buying a lot in a great location, and renting for two years or so while you refine building plans and search for a contractor. Hopefully in the meantime, the state will be able to deal with some of these insurance issues.

Good luck with the move!

 

[fisher]

Alas, but once again this is based on an assumption to support your point of view and you aren't "thinking outside the box" . Your are assuming that the buyer would be taking out a 30 year mortgage. If, after researching and doing one's homework, the buyer feels confidant that the property will stagnate for a few years (and remember, not one person here knows what is going to happen), there are options to accomodate for that out there (differnet types of financing, more cash invested (again, I'm not judging to say this is good or bad - if the buyer thinks it is a good idea, it's a good idea), etc.).

That is what is frustrating, a lot of pessimists here have no peripheral perspective. No one sitaution is the same - there are ALWAYS ways to make things work in every market, up and down and why some win and some lose in this game.

Again, just my opinion.

Realism is much different than pessimism.

My assumption was based on paying cash not taking out a mortgage. However, the analysis would be roughly the same whether you pay cash or take out a mortgage. I understand the tax code and I understand finance extremely well. The analysis is sound based on the assumptions. If you assume an increasing market, it looks like a good deal. A stagnant market for a few years or falling prices and its a bad deal based on the math and no intangibles involved in the decision making process.

 

[fisher]

It isn't? Tell that to the sellers who profitted around $1 million dollars on a $4.1M investment, of which I am sure wasn't paid for with 100% cash, on the sale of the property at 260 Blue Mtn Rd. It was purchased in April 05 while the market was still high in price. It recently sold in Aug 06, in this "down market" to which you guys keep referring. Let's say for our example that they put 10% down on $4 Million ($400,000). They paid interest on the balance of $3.6 million for 1.5 years at 6% per year, equalling $324,000. Add that to their costs of downpayment and you have a total cash out of pocket of $724,000. Oops, better throw in taxes and insurance. Assessed value being at $1.56 million would bring the taxes to around $15,000. Insurance? I have not idea the costs. Lets say its a crazy number of $50,000. So when we add those numbers to that total cash out of pocket in the investment, we get a total of $789,000. To receive the $1,000,000 return on the investment of $789,000, you get a before tax return on investment of 126%. Divide that by 1.5 years and you receive an avg annualized rate of return of 84%. Show me that CD that pays that.

...and this sale is in a "down market" for a property which was originally purchased in the peak.

There are plenty of example on both sides. My point is that if you shop, you can find a property which may work for you today.

You are referring to the sale of land to the very desperate owners of Redfish Village that had to get a plot of land in order to get a beach access for all the condos they sold (see separate thread). I can quote 15 recent severe losses on sale to every gain on a recent purchase that you can quote. You should know better as a realtor that the market IS falling and falling hard. For you as a realtor to state anything to the contrary is a shame. Are you actually claiming that we are not in a down market??

Your math is bad too. In order to calculate return on investment, you need to compare the original cash outlay to the final cash inflow (you also need to consider the time value effect of cash outlays in between as for property taxes, but that calculation is too complex for this board).

So, here is the proper analysis. If they sold at $5.045 million, they netted $4.742 after a normal 6% commission. Then, they will pay from $110k to $150k in capital gains taxes on the sale. Subtract from that the after tax interest expense they paid of about $210k, the property taxes of $15k, closing costs of say 1.5% on the original purchase or about $60k, minor closing costs on the sale of say $15k. This will net the seller a profit of about $200k at closing (again ignoring the time value of money on the cash outflows between the purchase and sale dates). The annualized return on investment is around 30% (actually less if you do the real math including the time value of money on all of the other cash outflows between the purchase and sale date). Certainly a great return, but nowhere near where your interesting calculations went. Plus, lets call a spade a spade, these people got extremely lucky. A desperate buyer paid a lot of money to get a beachfront lot that they needed to try to placate a large number of potentially angry condo purchasers.

This situation is an anamoly and you know it as a real estate agent. You mention that there are lots of similar examples of great returns on property bought a the peak and sold during the bad downturn (which you imply doesn't really exist). There are 20, 30, 40 or more losses to go with every (this might be the only one as far as I can tell) gain that occurred on property bought at the peak in 2005 and sold mid to late 2006. I have seen losses of up to 45% on some transactions (and that return doesn't include carrying costs, closing costs, property taxes, etc).

 

[fisher]

?????????

You are able to deduct up to $25k of rental losses against normal taxable income with a Schedule E. Your are not limited to deducting $25k of expenses against your total rental revenue. Please see your CPA to verify.

Rental Agencies - Personal experience. I have used 3 different rental agencies. Marketing, renting, and maintaining multiple rental properties on your own is much easier and lot less expensive. Please talk to other rental home owners about there experiences.

RBP--if you are deducting rental expenses that exceed your rental income on your tax return, I suggest you see a good lawyer.

Rental income and expenses on a personal tax return are called passive activitie. If you expenses from a passive activity exceed your income from a passive activity, the resulting passive loss cannot be deducted against anything but other passive losses. You cannot deduct passive losses against regular income (ie:salaries and wages, regular business income, etc). My example was correct in that you cannot deduct the rental expenses if they exceed rental income.

 

[Indigo Jill]

Realism is much different than pessimism.

Touche, fisher... realism is much different than pessimism.

I guess I'm just trying to convey that the definition of "realism" is what separates on this thread. My perceived reality of the current market situation is different than your perceived reality in that I do think a savvy investor, especially those with a long term strategy, can buy now and do well in their investment. There are a milllion variables involved between one transaction and another, and every person's situation is the NOT the same. That is why sweeping generalizations (like saying that the market sucks or that it is great) are not accurate. Everyone has a story - as SJ's real life example shows and conversely, as the one's who have an opposite experience show.

 

[Rather B Paddlin]

Fisher,

Thanks for your two bit advice; but I have great lawyer, a great CPA, and awesome broker. Maybe you do not know as much as you claim to. My only advice on this board is to get advice from a professional.


FYI, see below.


If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income.

The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. See Phaseout rule, later.

Example — Deducting Passive Income and Losses
Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and less than $100,000 of modified adjusted gross income. She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages).

 

[Rather B Paddlin]

Beach Dad,

Sorry this thread has taken on a life of its own. The best 2 pieces of advice I ever received in life.

1. Surround yourself with good people.

2. Buy when no one else wants to buy , sell when no on else wants to sell.


I am sure you will make the best decision for you and your family, see you at the beach.

 

[Rather B Paddlin]

My perceived reality of the current market situation is different than your perceived reality in that I do think a savvy investor, especially those with a long term strategy, can buy now and do well in their investment.



Indigo Jill - well said.

"In the middle of difficulty lies opportunity". A.E.

 

[Indigo Jill]

Beach Dad,

Sorry this thread has taken on a life of its own. The best 2 pieces of advice I ever received in life.

1. Surround yourself with good people.

2. Buy when no one else wants to buy , sell when no on else wants to sell.


I am sure you will make the best decision for you and your family, see you at the beach.

I ditto RBP here, Beach Dad. And what we have all failed to acknowledge, myself included, in this thread is what "value" can you place on the quality of life here? That, IMO, is priceless.

Yes, analyzing the data and statistics about how the market is performing shows a correction taking place. NO one here, I think, is debating that at all! It is and it's ugly for many people. There are a lot of sad stories because the masses converged on the area over the last few years and many are losing their shirts right now. I liken it to what I call the "Money Magazine" phenomenon. By the time the "hot stock tip" hits the fine print, it ceases to be a hot tip and people make bad decisions and suffer negative consequences because of it. IMO, it's the SAME phenomenon here, except the investment vehicle is real estate, not stocks. That intuitively tells me that a lovely buying opportunity exists for the seasoned and/or educated investor right now.

Good luck to you Beach Dad! This is an amazing place to raise kids and I don't think you'll be disappointed whatever you decide to do.

 

[Smiling JOe]

You are referring to the sale of land to the very desperate owners of Redfish Village that had to get a plot of land in order to get a beach access for all the condos they sold (see separate thread). I can quote 15 recent severe losses on sale to every gain on a recent purchase that you can quote. You should know better as a realtor that the market IS falling and falling hard. For you as a realtor to state anything to the contrary is a shame. Are you actually claiming that we are not in a down market??

Your math is bad too. In order to calculate return on investment, you need to compare the original cash outlay to the final cash inflow (you also need to consider the time value effect of cash outlays in between as for property taxes, but that calculation is too complex for this board).

So, here is the proper analysis. If they sold at $5.045 million, they netted $4.742 after a normal 6% commission. Then, they will pay from $110k to $150k in capital gains taxes on the sale. Subtract from that the after tax interest expense they paid of about $210k, the property taxes of $15k, closing costs of say 1.5% on the original purchase or about $60k, minor closing costs on the sale of say $15k. This will net the seller a profit of about $200k at closing (again ignoring the time value of money on the cash outflows between the purchase and sale dates). The annualized return on investment is around 30% (actually less if you do the real math including the time value of money on all of the other cash outflows between the purchase and sale date). Certainly a great return, but nowhere near where your interesting calculations went. Plus, lets call a spade a spade, these people got extremely lucky. A desperate buyer paid a lot of money to get a beachfront lot that they needed to try to placate a large number of potentially angry condo purchasers.

This situation is an anamoly and you know it as a real estate agent. You mention that there are lots of similar examples of great returns on property bought a the peak and sold during the bad downturn (which you imply doesn't really exist). There are 20, 30, 40 or more losses to go with every (this might be the only one as far as I can tell) gain that occurred on property bought at the peak in 2005 and sold mid to late 2006. I have seen losses of up to 45% on some transactions (and that return doesn't include carrying costs, closing costs, property taxes, etc).

Okay, you are right I forgot to include the extra four months in the taxes and interest, but I did include added a couple of extra months when calculating the percentage of return. I did fairly mention that it was "BEFORE TAXES," as does your example of a CD or savings account returning around 5%. You pay taxes when you profit -- just a way of life. So comparing apples to apples, even using your after tax percentage for return of 30%, it still beats the heck out of 3% on that savings account for this scenerio. What is the inflation rate these days. :scratch:

Maybe you didn't read the last part of my post which clearly states that I can find particular examples of both sides of this coin. Sure Redfish Village was in a pinch, but so are some of the sellers who sold at losses. ;-) Don't read too much into it. Good deals do exist, but they are not the majority of the listings. I put "down market" in quotes because you and others say use the term so often, but that doesn't mean that good values don't exist. Like couple of other people said, in markets you make your money doing the opposite of the masses. If I correctly recall, the original poster, asking the question, is looking to purchase or rent a home, not seeking a rate of return on investment.