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?

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604 Receding Gains
Member
604 Receding Gains

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….

604 Receding Gains
Member
604 Receding Gains

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.

weberractive
Guest
weberractive

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!

YLTN @ Work
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YLTN @ Work
@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.… Read more »
Bubble Lad
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Bubble Lad

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).

paulb.
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paulb.

New Listings 259

Price Changes 104

Sold Listings 205

jesse
Member
seattlebubble: Reader Story: The Demand is There, But the Supply Isn’t I’ve been looking for an investment property for a while, finding nothing but garbage and stagnant short sales on the Eastside in the $275 -$295 range. I got a tip that a house will be coming to market in my target area… The morning it comes on the market I meet the agent and we sign a purchase agreement. By 2 o’clock that afternoon he has 8 offers including a couple with escalating clauses. Because I was first and had a strong offer and the listing agent on my side I got it! Wow, the demand is there the supply is not! 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… Read more »
Absinthe
Member
Absinthe
@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.… Read more »
1.9milCrackHouse
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1.9milCrackHouse

@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,

Canadian_in_Cabo
Guest
Canadian_in_Cabo

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.

Devore
Member
Devore
@Patiently Waiting: Really? In Vancouver and Toronto? 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… Read more »
YLTN @ Work
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YLTN @ Work
@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… Read more »
Patiently Waiting
Member
Patiently Waiting

"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.

patriotz
Member

@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).

Patiently Waiting
Member
Patiently Waiting

@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.

Devore
Member
Devore

@Anonymouse:

I’d say they make average

money

, which to me doesn’t imply comfort.

Really, how so? You don't think average money allows you to live comfortably in Canada?

Anonymouse
Guest
Anonymouse

@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.

Devore
Member
Devore

@Patiently Waiting:

“- Fifty-seven per cent of indebted respondents said daily living expenses are the main cause for their increasing debt;

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?

Devore
Member
Devore

@Patiently Waiting:

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.

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?

Patiently Waiting
Member
Patiently Waiting

@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.

patriotz
Member

@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.

Patiently Waiting
Member
Patiently Waiting

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. 🙁

Canadian_in_Cabo
Guest
Canadian_in_Cabo

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.

Patiently Waiting
Member
Patiently Waiting
@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… Read more »
Anonymous
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Anonymous

@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