If I Can’t Sell It, I’ll Lease It!!

Here’s something from the files of, “What the hell?”

I’ve noticed an increasing trend in the new listings which come on MLS each day, and that is the ratio properties for lease vs. sale.

Some owners refuse to sell unless they get “their price,” and thus they put the property up for lease.

Here’s a prime example…

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I’ve mentioned in the past couple of weeks how many people I run into that either refuse to accept that they can’t get the price they “want” or “need” to get out of their property, or that they subscribe to hindsight as a religion and won’t sell for less than they could have received in September of 2007.

I’m convinced that this is at least part of the reason for the huge influx of leases we see offered on MLS every day, as many financially-well-off owners have decided to wait out the storm by leasing their properties today in order to sell them tomorrow.

But a trend I’ve noticed among builders is one that I just don’t understand.

Take this house in North Leaside, for example:

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This is just your standard “Million Dollar Home” in today’s market; four bedrooms, five bathrooms, and 2900 square feet of living space including another 1300 in the basement.

It’s gorgeous right?

Or has this just become par for the course?  Are gleaming hardwood floors, ten-foot ceilings with crown mouldings, large principal rooms, and custom kitchens just expected in new houses these days?

That’s a topic for another day.

This property was home to a bungalow in September of 2007 until a builder purchased the property for $755,000.  It was nice sized lot at 45 x 125 feet, and it was just screaming “BUILD ON ME!”

In October of 2008, only eleven months after the original bungalow was purchased, the new house was first offered for sale at $1,469,000.

Oh…..but…wait.  What happened again in July & August of 2008, before this house was listed?  You know, that pesky global economic crisis thingee?  Oh yeah!

It sure seemed like a great idea in September of 2007, but a year later the equity markets had collapsed and it sent a ripple effect through the real estate market.  Things had only levelled off a few percentage points by October of 2008, but that was enough to force this builder to list his newest project for “only” $1,469,000.

Then came November, which saw a new listing for the property at $1,429,000.

Then another new listing and $1,399,000 in December.

Then $1,399,000 in January.

Then $1,349,000 later that January.

Now $1,299,000 in February.

So here’s the kicker: as the builder throws up his hands and rhetorically asks, “Now what?” the answer comes in the form of a stop-gap solution…..leasing.

The house is being offered for lease at $5,000 per month, and I’m trying to figure out why.

At $200 per square foot, this house cost just under $600,000 to build.  Had the builder been able to sell at his initial $1,469,000 price, there might have been $70,000 – $80,000 of profit in the project for him; a far cry from what he might have expected had the global economic crisis not struck only two months before the house was completed.

But now at $1,299,000, the builder is going to take a bath on the house, and I don’t mean the kind filled with bubbles in the upstairs jacuzzi.

Assuming the builder is not financing the project in CASH, and that he’s borrowed half of the project cost ($1.3-$1.4M) from a bank, he’s probably incurring a minimum of $3,000 per month in interest alone!

And what if the builder borrowed more than half?  How about 60-70%?  His interest costs could be upwards of $4,500 per month!

So what good is leasing the house for $5,000 per month when it’s already been sitting vacant for five months?

Factor in property taxes, and the builder will lose money every month that he continues to own this property.

So what is the long term plan?

That’s exactly what I’m trying to figure out.

If he can lease this house for one, two, maybe three years, will he be able to get that original list price of $1,469,000?  Yeah, probably in three years.

But is it worth it?

Is becoming a landlord really a responsibility he’d like to add to his day job of building houses?

Time will tell how this pans out.

For what it’s worth, I’m shocked that this house is available at a “paltry” $1,299,000.

But I’m not so shocked that nobody is banging down the door to rent it for $5,000 a month…

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