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Tuesday, January 20, 2009
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27 comments:
A Historical Day in Washignton DC today!
Has anybody every encountered anything like this:
"OWNER LOOKING FOR AN INVESTOR/1031 TAX EXCH"
Last sale was 1981, so it doesn't seem as if this is a FB.
http://franklymls.com/FX6956523
Amazing number of people in DC this weekend. Huge boost for local businesses, and hopefully some left with a good impression of this area as a great place to live.
I don't know if the inauguration will help the local real estate market, but it certainly did not hurt.
Actually, the new buyer can use the property as their personal residence. The 1031 rule is that the seller may sell investment property, but he must find and purchase a new investment property within a small period of time to qualify for the tax deferral.
It seems with this particular listing, the owner/seller is looking to sell/trade to another investor so that he won't have to find and buy an investment property within the short timeframe of 180 days.
NoVAwatcher:
The owner currently holds the property for investment (i.e., he rents it out).
The owner now wants to do a § 1031 like kind exchange so that he can sell this property and acquire a new investment property and defer the capital gains taxes that he would otherwise have to pay now.
In order to qualify for like kind exchange treatment (i.e, the tax deferral), he needs to find someone to purchase his property who will hold it as investment property (not as a personal residence).
That way, he can then use to proceeds to acquire a new investment property somewhere else and not pay capital gains taxes now.
"The foundation of 1031 exchange rule is that the properties involved in the transaction (the property you sell and the property you buy) must both be held for productive purpose in trade or business or as an investment and they must be like kind"
http://www.1031assistance.com/exchangerules.htm
The asking price for that investment property is far too high if the house is being rented out at $2800 / mo. The price should drop at least 25%.
MJC
You may be right about the purchaser not having to hold the property as an investment; however, I don't think the 180 day rule can be waived -- even if the purchaser is an investor.
Blacksilver is right: there is no way that place will cash-flow. Based on rents in that area, they might be able to get a little more than $2800 (e.g. $3k), but I kinda doubt it, and with the way the market is flooding with rentals, I'd bet against it.
So, based on rent, that place should be selling for $450k or less, or 56% of the listing price.
So, based on rent, that place should be selling for $450k or less, or 56% of the listing price.
That statement could apply to most houses for sale in the DC area -- if prices were determined in relation to their their fair rental value.
Zerodown,
You are correct - there is no waiving of the 180 day rule. I was trying to point out that this particular seller is appealing to investor purchasers with investment property so that the seller and purchaser can essentially trade properties that are similar in fair market value. That way, the seller would avoid having to find and purchase an investment property using the 180 time frame since he would be selling and buying like kind property on the same day, thus acting within the 180 day timeframe.
But, I think what is interesting here is that this place is being explicitly sold as a rental, when it's obvious that anyone buying this place (assuming an 80% LTV mortgage) will be losing money hand-over-foot each month.
I guess someone could argue that if you bought it outright, rent would be returning 4% a year, which is better than other say a money-market, bonds, etc. But that would be foolish, as comps have sold for $100k less in that neighborhood, it's a near certainty that prices will drop in the next few years, and the place will require constant maintenance. Of course to get 4% would require 100% occupancy rate.
I would be curious to know if they get an offer, accompanied by a market analysis, saying that the place will only cash-flow at $450k.
I don't think this Seller cares about the rent to own analysis. He is looking for a buyer/investor who has property that is worth the same amount so they can trade properties defer any realization of gain.
If this property is overvalued, then I think the strategy by this seller is that he is inflating the price with the intention of finding an uninformed investor/buyer with property that has a similar fair market value so the trade will be approximately equal with no realization of gain. If Seller lists a property at $800K while such property is only worth, for example, $700K, and Buyer/Investor has property worth $800K, I think Seller is trying to appeal to those investors with comparably priced homes. Of course, the appraisals should devalue any price inflation.
I live in that neighborhood! That home is most certainly overvalued. It's a good location and a nice area, but geez. There's another listing further up the road that has been listed at $875k for over a year (including being taken off the MLS for a month). Most not be highly motivated to actually sell.
Doug: Are you talking about the one on Melanie? If so, there neighbor sold an identical model this past summer for the low $700s (at photos make it look identical). The only bad thing about the comp was that the basement was unfinished, but they both back up to parkland.
I've been watching that area for a long time, and 2 big trends (but not the only trends) I see are unupdated houses priced high, and otherwise equivalent updated houses priced lower.
Of course, the cheaper updated houses sell in a few months (usually are 90-95% of asking), whereas the unupdated higher-priced houses sit forever. Because the cheaper (yet nicer) houses sell out a discount, it makes the overpriced houses look even more ridiculous.
Oh, and who knows, I might end up being your neighbor some day!
It sure was an interesting weekend in/around D.C. Personally I wasn't all that impressed with the organization of everything, it seemed like the powers that be were closing roads around the mall willy-nilly.
It was definitely an economic boom for the area though. All of the outdoor stores in Arlington were swamped all weekend with people buying warm weather gear and the restaurant I went to on saturday afternoon had a 30 minute wait at 2:30pm. I was certainly glad that I rent 2 blocks away from a metro station.
I took my wife and daughter to the Inauguration yesterday. We called a cab at 1020; it arrived at our house in N. Arlington at 1030. We arrived at the Lincoln Memorial at 1038!
Afterward, we walked across Memorial Bridge, boarded Metro at Arlington Cemetery (more seats than riders!), changed to the Orange Line at Rosslyn (ditto!), got off at Ballston and had lunch at a Chinese restaurant, then walked home.
Our experience demonstrates one of the reasons why property values in N. Arlington remain high: proximity -- to Metrorail, DC, everything. Can't beat it!
Tom,
What bridge did the cab take?
Interesting strategy, going for calling it as close as possible and calling a cab. Appears it paid off for you. Kudos. Walking over the bridge first before getting on the metro, also seems like a wise move.
NoVA watcher; yes -- that's the house. And it depends on one's taste, of course, but the house that's still on the market is not quite as nicely situated on its lot as the house that sold earlier this year. Agree with your assessment re: the pricing. It's a nice area and we've seen homes go very quickly when priced "right" -- had someone stop me while walking the dog the other afternoon and tell me they were looking at homes and asked me generic questions about kids in the neighborhood, is it as peaceful as it seems, etc ... but there are some homes that seem to be priced well above comps and they have been on the market forever. A tale as old as time :)
Tom: There are lots of reasons to live in Arlington (and I used to), but you can get easy access to DC from lots of places.
I didn't go to the Inauguration, but I did go to the We Are One concert. My experience:
1. Drove 20 minutes to the Vienna metro station. Lots of free garage parking this day, as always on the weekend. No traffic, train starts empty.
2. Metro to Foggy Bottom
3. Walked to Lincoln Memorial.
4. After concert walked to Dupont Circle & a restaurant.
5. Metro back at 8pm on a nearly empty train. No traffic.
Living in Arlington would have saved me perhaps an hour of time. With the Silver line coming, it will be even easier to get into DC. Now if you work in DC or Arlington, there are very good reasons to live in N. Arlington. Most people I know in Arlington live there because they love the immediate area and/or work there or in DC. Given the legions of people who want a shorter commute to DC, I do think N. Arlington RE prices are stable for some time to come.
Blacksilver: agree with your comment about Arlington RE prices.
Cara: the taxi drove over Roosevelt Bridge. There was exactly one other car on the bridge at the time!
Tom,
I am not impressed. All you did was attend a function and have a Chinese lunch, one day in a year.
I can accept it if you say proximity to work in DC saves you time and leads to better quality of life (assuming your DC job is so intellectually stimulating and enhances your quality of life in the first place), but it is funny to say that ARL real estate is desirable because you were able to attend a function held once every 4years.
I live in Arlington now and think it's desirable. I just don't think it's any more desirable now than it was 6 years ago when prices were half as much.
Ted K: Huh?
Tom: You pay a $200k premium a year so that you can easily attend an event that occurs every 4-8 years? That's dumber than hell.
"Daddy, why can't I go to summer camp again this year?"
"Shaddup, son. We took a cab to the Obama inauguration when you were two."
Novawatcher,
$200k per year? I think you meant just a $200k premium. The point still stands, although I'm not sure what instigated the vehemence of the personal attack.
(although I do understand it, as it is personally infuriating that the places that I like and have grown attached to have 10-12 months of inventory and deeply falling prices, i.e. Rockville, while the place he likes he can still claim isn't going to fall as far simply because it hasn't yet. It defies reason.)
Ted K and NOVAWatcher:
Now I think I understand what you were trying to say. My easy-in, easy-out Inaugural experience isn't the reason I own in N. Arlington -- it was an example of our neighborhood's proximity to DC and Metrorail. I should think that should have been obvious.
Tom and Cara: I think Tom's original statement came across poorly, hence the response.
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