Valuation to the End of Life of a Leased Condo
While cruising MLS the other day, I came across V891550, a 35-year-old leasehold 3-bed condo in False Creek, asking price: $519K for 1248 sq.ft.
At first, I thought it sounded quite reasonable– $416/sq.ft. So my first thought was that it must be a leaker. It is, but the seller is paying the assessment. So far so good. But there must be a catch, right? Right. The (prepaid) lease expires in 2036, so the condo’s value drops to $0 then– all you have in 2036 is a share in a building which no longer has any right to the land. And a building that can’t be moved, with no land underneath it, is worthless.
Which makes this condo an interesting study– if somebody takes out a mortgage to buy it, they can’t amortize longer than 25 years. They can’t rely on appreciation in the long run, because it’s a foregone conclusion that the condo value disappears in 2036. Or you can keep the building then, but you have to lease the land all over again.
Let’s run some numbers…
Assume 100% LTV. A $519K mortgage. Assume interest rates will average 4% over the life of the mortgage. (I think this is low, but who knows what’ll actually happen).
$2,739 … Mortgage payment
..$318 … Maintenance Fee
..$176 … Property Taxes
…$ 75 … Paint & Appliances & Repairs fund.
—————
$3,308/month.
That’s the cost of “ownership” over the next 25 years. With the value dropping to zero at the end, and no potential for land appreciation upside. And I’m assuming there won’t be any special assessments in the future, which isn’t a guarantee in this part of the country.
Looking at the listing, it was built in 1976, and the interior doesn’t look like it’s seen a whole lot in terms of modernization– carpets, paint, countertops, but that looks about it. And the countertops are looking dated again. There are no photos of the bathrooms, so who knows what’s in there. At any rate, if I were to buy a place like this, I’d probably look to renovate it with newer finishings.
Is it just me, or does this seem crazy? $3,300 per month for a 3-bed 1976 condo for the next 25 years? And you get to live through a leaky condo repair, and it needs renovations on top of that price? And there’s no potential upside in land values? And interest rates could rise? Jeebus.
The realtor’s property details can be found here: http://joanmontgomery.com/mylistings.html/details-19315068
Here’s a relatively-similar renovated rental for $2460: http://www.rentpicnic.com/property/?pid=237
Or get yourself into the Athlete’s Village co-op building for $2100/month. http://vancouver.en.craigslist.ca/van/apa/2431069880.html
Just my opinions in here. What are yours?
This post was submitted by M-.
Click here to view all comments chronologically
June 18th, 2011 at 3:03 pm
Looks like the city is starting to work on valuing leased land units at the end of the lease term….but it will take years to figure out.
http://www.geoffmeggs.ca/2011/06/09/city-starts-c…
The previous link had a reference to the arbitration which estimated residual value of property at end of lease at 10% of replacement cost.
So how do you explain all this to your mortgage lender when trying to get a loan? Tough one….
June 18th, 2011 at 1:38 pm
Re: the land lease, the city tried to increase land leases in 2006 and it was just finalized through arbitration.
http://www.geoffmeggs.ca/2011/03/31/arbitration-h…
I suspect we'll see a similar bump in land lease rents when the lease expires. It will be very difficult for the city to evict people. Much easier to move to high lease rates.
Thus the value of the property in 2030s will not be zero. It will be low, but not zero.
June 15th, 2011 at 6:40 am
It's actually a really nice looking place, where are you going to find such a nice looking place for $416sq/ft? Unfortunately looks can deceive because you don't own anything at the end. Unless you know you were going to die alone in 2036 then it's a steal!
June 15th, 2011 at 4:00 am
@Canadian_in_Cabo: That shows some pretty restrained spending, congrats. The challenge I see though is that based on your figures, and assuming 3% annual pay increase, 25% tax rate, 50% after tax saving rate and a healthy 5.5% return on savings, you would have been earning $57K/year each for a household income of $114K when you were both 28 which is a lot higher than the average Canadian.
Looking at your after tax incomes that didn't go into saving (spent on mortgage and living costs), your total over this ten year period would only be $487,854. Assuming your properties doubled in value and that you bought them both for 300K, 220K (80k still left in debt) at 4.5% over ten years is $342K which leaves you $145K for ten years or an average of $14.5K per year or $1208 per month. I just don't see how a family of two can eat, pay for a car with insurance and gas, property taxes, maintenance and other costs of living on $1200/month. I personally would rather live a little whie young and retire later
June 14th, 2011 at 10:17 am
Stumbled across this in the back alleys of Dunbar (where I was fighting binners for recyclables to pay off my 10X income Vancouver mortgage:
http://buildsmall.blogspot.com/
They're basicall building a teeny, tiny house in their parents backyard. It's a cute place, and they're definitely staying true to their "buildsmall" dictum.
They're holding an open house this weekend if anyone wants to see how we'll all be living in ten years (HAM aside).
June 14th, 2011 at 10:03 am
New Listings 259
Price Changes 104
Sold Listings 205
June 14th, 2011 at 9:49 am
seattlebubble: Reader Story: The Demand is There, But the Supply Isn’t
Even in a market that is, apparently, 30% down from peak, good quality listings are flying off the shelves with multiple offers. Look for the same in Vancouver if/when prices falter. There will always be pockets of bidding wars in any market, with the lower quality stuff sitting and sitting and sitting. Think used car lot.
June 14th, 2011 at 9:32 am
@Patiently Waiting: Oh, no doubt! We have modest income, kids, a bit left in student loans, and we have to fight them raising our limits. At one point, we were offered enough credit to equal double our yearly income … while we were trying to open an investment account, had not asked for credit, and weren't swanning around with big savings.
I requested lower limits on my credit cards last time they doubled them. Our balances are on or about zero, so we don't NEED more credit … and I need $20K of fraudulent transactions like I need another hole in my head. I was warned that asking them to set it so they couldn't raise our limit without our permission would make us look like we'd had some sort of failure-to-pay issue.
Which I got a bit angry about. Because here they are trying to sell me insurance against credit card fraud, but they won't hold my limit at something manageable if, for example, Sony gets hacked? C'mon. Anyway, they lowered the limits begrudgingly.
No mortgage, no car loan – the banks would love to get interest payments from us somewhere.
June 14th, 2011 at 9:18 am
@Canadian_in_Cabo: Hi,
Do you have any more advice to share? Me and my wife are about 10 years younger, but would like to end up where you are now. How much of your wealth has been accumulated in investments vs. through your earnings? Do you invest conservatively or fairly aggressively?
I'm currently sitting at about 25% of your net worth.
Thanks,
June 14th, 2011 at 7:41 am
Regarding the 1.3 number, only 300k is our home (small place = small mortgage)… another 300k in a recreational property (paid for). The rest is all liquid assets. And a nice DB pension.
We have been saving 50-60% of our income for about 10 years now. It can add up quite quickly if you can keep you living expenses in check.
June 14th, 2011 at 7:10 am
@Patiently Waiting:
Only if they try to buy a house. Housing is not unaffordable to the average worker in either city, only property is.
For those who bought years ago, who are still racking up debt, that is a factor of rapidly increasing equity, ease of borrowing against it, and expectation of further equity increases to eventually repay the debt. This is a trap easy to avoid by budgeting and living within your means.
Post secondary education is also in a bubble, although not as bad as it is in the US. If there is anything easier than getting a mortgage, it is getting a student loan. Subsidies, loan guarantees and other "affordability" programs have contributed to escalating education costs. It is possible to obtain a degree without going into 10s of thousands into student loan debt, even people without wealthy parents manage to do it.
June 14th, 2011 at 7:04 am
@Canadian_in_Cabo:
That's great, but I have to ask, of the $1.3M net worth, how much of that is tied up in your home? I'm about the same age and a saver but after selling my place 3 years ago my net worth is only about half of yours however I have no debt and my investments are all very liquid (stocks & bonds). With a net worth of $650K at my age, I consider myself to have been quite succesful compared to my friends however they all spend more and live the high life as while they have no RSP's or savings, they are worth more on paper than me and see themselves as more succesful. Personally, I "only" made about $200K in real estate and the other $450 was through saving and investing.
I am assume that your net worth is primarily due to the increase in value of your home. I say this as assuming you both started saving when you were 18 years old and never bought a house but invested your savings in a secure 5% return investment, you would need to put away $20,000 a year each every year from age 18 to 38 to have a combined 1,300,000 and no debt…I don't know many 18 year olds with modest incomes that could put that kind of dough away.
Next question: If you were not so fortunate and your home had not increased so significantly, would you be that much better off than other Canadian's and ready to retire at 40?
Last Question: If a significant portion of your net worth is in your home, how are you going to get this equity out for retirement? Are you going to sell and move somewhere more reasonably priced like anywhere but Vancouver?
June 14th, 2011 at 5:45 am
"there is just not much credit available to them"
I'm a renter with modest savings, modest income, and education expenses. This last week, I've had two offers from each of the banks I deal with for low-rate balance transfers (3% and 4%). I've also had requests to increase my credit limits. I have no debt, but I could change that in a heart beat. If I pushed it, I wonder how much cheap credit I could get my hands on.
June 14th, 2011 at 5:31 am
@Patiently Waiting:
Credit is not cheap if you are a young worker with big debts. The lenders are concerned about getting their money back.
I don't think people who don't have a home ATM are running up debts just for day to day expenses, because there is just not much credit available to them. I think just about all the runup in debt we've seen over the last decade has been has been from home buying or refinancing (inc. HELOC).
June 14th, 2011 at 5:13 am
@Devore: Really? In Vancouver and Toronto? To get an average income, a young adult without rich parents starts out heavily in debt from Post-Secondary education. They live in a major city where cost of living has been increasing more than incomes for quite some time now (even for renters). The only reason young workers like this stay in their city jobs is because easy access to credit bridges the divide in their budgets.
In effect, underpaid, over-educated workers are provided to big city employers as a subsidy thanks to cheap credit. What happens when that credit is unobtainable or just cut-off? I hope these young workers tell the whole system to go to hell and find some place affordable to subsist, or maybe trash the downtown business district.
June 14th, 2011 at 5:11 am
@Anonymouse:
Really, how so? You don't think average money allows you to live comfortably in Canada?
June 14th, 2011 at 4:48 am
@Devore:
"The average Canadian household makes more than enough money to live comfortably "
I'd say they make average money, which to me doesn't imply comfort.
June 14th, 2011 at 4:24 am
@Patiently Waiting:
The average Canadian household makes more than enough money to live comfortably and put money away, even with the recent price inflation. Maybe they're paying too much mortgage?
June 14th, 2011 at 4:15 am
@Patiently Waiting:
Should we be like Saudi Arabia, whose citizens are fat and happy as long as the money keeps flowing, until the money runs out or they want something more?
June 14th, 2011 at 3:17 am
@patriotz: Yes, but when the low rates cause some people to buy too many assets and that effects all of us. Even those of us who choose not to buy are paying the price.
June 14th, 2011 at 3:12 am
@Patiently Waiting:
Well I would say that increasing asset prices are a rationalization for living beyond one's means. They're not a "price" or "cost" in themselves because nobody has to buy.
And the price for living beyond one's means is debt.
June 14th, 2011 at 2:49 am
I guess increasing asset prices is the price Canada is paying to keep the wolf from the door for a large part of our population.
June 14th, 2011 at 2:48 am
I stumbled upon that article earlier this morning… scary stuff.
My wife and I don't have especially big salaries but we have managed to accumulate a net worth of 1.3 million with only 80k left on our mortgage… no other debts to speak of. We are 38. Plan to retire sometime in our 40's.
We manage to save quite a bit of money every month, yet still don't find ourselves sacrificing much in terms of lifestyle, unless you consider driving a 10 year old vehicle a big deal.
A message to Canadians: live within (or below) your means.
June 14th, 2011 at 2:41 am
@LordHuggington: This isn't just about out-of-control consumer spending and crazed home buyers. Credit has been used to cope with stagnant wages and increasing prices. Many folks are going into debt just trying to survive:
"- Fifty-seven per cent of indebted respondents said daily living expenses are the main cause for their increasing debt;
- More than half — 58 per cent — said their household income had remained unchanged or decreased over the past three years, while 86 per cent of those whose income did increase said it did so only modestly;"
When the crunch comes, lots of people are going to be out of food and out of shelter. Is the Conservative government and Canadian employers going to come to the terms with the choice of increasing incomes or civil unrest? Unlike a lot of countries we have a lot of wealth in our natural resources, and we could make things little easier on the struggling masses if the TPTB wanted too.
June 14th, 2011 at 1:56 am
@LordHuggington:
A few more interesting articles in the globe and mail:
Canada’s growth losing steam: OECD
OECD urges Bank of Canada to raise rates
OECD warns Canada on rise in long-term unemployment
June 14th, 2011 at 1:44 am
Looks like Canadians have hit $1.5 trillion in household debt.
http://www.theglobeandmail.com/globe-investor/per…
What could possibly go wrong? :p
June 14th, 2011 at 1:15 am
@logic: …Some people just can’t see the positive side, can they? Born whiners. ….
I can see the positive side: Boston is awesome!
June 14th, 2011 at 12:34 am
No..only winner is Aquiloonies…
Get Game 7 revenue….not give shit for Cup…
This way can get rid of dead wood…like Coach.
Aquiloonie take $$$ and build more condos
I go sleep for 20 yeas…then wake up for next Canucklehead ride.
Canucks 2031 Probably have 5-0 lead in 3rd period of game 7 of Final with 2 minutes left…and still lose.
Maybe by the Van 150th best place on earth….
bwhahahahahahaha
June 13th, 2011 at 11:48 pm
Before we discard jesse's observations as chance:
'Stanley Cup Finals and Vancouver Housing Prices'
http://wp.me/pcq1o-2w2
June 13th, 2011 at 9:45 pm
Ha, well called Pat.
That theory makes as much sense as any other for Van's bubble.
June 13th, 2011 at 8:46 pm
@logic:
June 1994 was at the top of the late 80's/early 90's bubble, followed by years of price declines (as Jesse noted).
June 1982 was in the middle of the fastest and biggest RE bust Vancouver has seen since the 1930's.
Yes maybe there is a positive side.
June 13th, 2011 at 7:49 pm
OT, i know but…
The Canucks are in the Stanley Cup final for the first time in 17 years, 3rd time ever.
This is a very good season (historically) no matter what the result of game 7 might be.
Some people just can't see the positive side, can they? Born whiners.
June 13th, 2011 at 3:46 pm
Creative investors are reinventing the LOC…
If you paid down 1 year rent, you'll get one month rent free! It's equivalent to $1900/mth!!!
http://vancouver.en.craigslist.ca/van/apa/2439194…
June 13th, 2011 at 2:00 pm
An interesting forum:
http://www.city-data.com/forum/vancouver/
This site is international and has similar forums about cities all over the world. Diverse opinions but it can be a bit humbling for the "Best Place On Earth" crowd.
June 13th, 2011 at 1:36 pm
@Phil: Inventory build-up has been happening for the better part of a month. We have the odd high sales day, but the trend is clear and its unusual for this time of year.
June 13th, 2011 at 1:05 pm
Just an observation, every Monday there is a positive (from our perspective) sales/listing ratio, and everyone gets all excited. By the end of the week the ratio is much less positive, and everyone ignores it. There is NO current correction. Wake up.