How Much Does it Really Cost to Buy a Luxury Condo in San Francisco, Not Live in it for 10 Years, Then Sell at a Loss?

Pocket

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

A lot, as the co-founder of YouTube is finding out.

At a certain level of wealth, these things aren’t the end of the world. But they do add up.

Back in September 2007 – so 10.5 years ago – at absolute peak frenzy of the Housing Bubble in San Francisco, the co-founder of YouTube, Steve Chen, purchased a two-level 3,030 square foot condo, #2402, at the high-rise Ritz-Carlton Residences on 690 Market Street for $4.85 million. At the time, it was an unfinished empty shell.

He then built it out as “überswank bachelor pad,” as SocketSite called it, including a double-height and double-wide living area, with a build-out budget “estimated to have been nearly as much as the shell.”

So in terms of the build-out costs, let’s round that down to the nearest million: $4 million. OK, bear with me; if we’re off by a few hundred thousand bucks, no big deal because these are adding up to be really big numbers.

At this point, not counting Home Owner Association (HOA) fees, property taxes, insurance, mortgage interest, and other expenses, he has plowed $8.85 million in it.

But then, without ever having lived in his trophy condo, he got married, had kids, and moved down the Peninsula. “And according to a plugged-in source, Chen is finally giving up the penthouse,” SocketSite reported in October 2012, when the pristine, unlived-in unit came on the market for the first time. His asking price, to get out from under it: $8 million. But it didn’t sell, and he pulled it off the market.

A few days ago, according to Reator.com and Zillow, the still unlived-in condo came back on the market but at a big discount from what the aspirational price had been in 2012. Now the asking price has been cut to $5.95 million.

So let’s do the math of how much money Chen might have by now plowed into this condo over those 10.5 years without ever having lived in it.

Property taxes: According to Realtor.com, the property taxes were:

  • 2015: $80,728
  • 2016: $81,456
  • 2017: $81,310.

Property taxes in California can only increase by a maximum of 2% per year while under the same ownership, thanks to Proposition 13. When the property is sold, the next owner gets to pay property taxes based on the new assessed value, and that often means a large increase for the buyer.

Chen bought at the peak of the last Housing Bubble. Prices in San Francisco declined from late 2007 through 2011, bottomed out in January 2012 and then began to surge again.

So let’s assume Chen’s property tax bill started at $70,000 in 2007 and rose to $81,300 by 2017 in equal increments. This would amount to an average of $75,600 a year or $794,000 for the 10.5-year period.

Home Owner Association fees. Zillow lists monthly HOA fees of $3,640. Let’s assume that they started out lower, say at $3,200 a month and increased in equal increments, for an average of $3,420 a month. That’s $35,910 per year, and about $377,000 for the 10.5-year period.

Brokerage commission. The condo is listed by Sotheby’s. If the unit sells at asking price, and if the brokerage commission is 6%, it would amount to $357,000.

So the estimate costs, not counting insurance and mortgage interest:

  • Acquisition: $4,950,000
  • Build-out: $4,000,000
  • Property taxes, 10.5 years: $794,000
  • HOA fees, 10.5 years: $377,000
  • Sales commissions: $357,000

Subtotal: $10.48 million.

So after a sale at asking price of $5.95 million, minus the $10.48 million in costs over the 10.5-year period, Chen would have lost $4.53 million on his bachelor-condo adventure, without ever having lived in it. This loss would be almost equal the original purchase price of $4.85 million. Let that sink in for a moment: to lose $4.53 million on real estate that had original been acquired for $4.85 million!

This assumes that he didn’t insure it and that he didn’t finance any part of it, and that he can sell it at the current asking price. In the unlikely scenario that he financed $8 million in purchase price and build out costs, it would add about $2.5 million to his total costs before taxes.

Perhaps he can sell the unit at the current asking price. But that’s not a certainty. After a historic construction boom, San Francisco is awash in high-end units. For example, there are five other units listed for sale on Zillow in the same building on 690 Market Street – and OK, I get it, they’re not “überswank bachelor pads,” but still, they’re on the market competing with each other in the same building:

  • #202: 1 BR, 1.5 bath, $1.15 million, 29 days the market.
  • #504: 2 BR, 2.5 bath, $1.75 million, 29 days on the market.
  • #701: 1 BR, 1.5 bath, $1.395 million, 29 days on the market
  • #505: 2 BR, 2.5 bath, $1.795 million, 29 days on the market
  • And interestingly, #1702: 2 BR, 2.5 bath to be sold in a pre-foreclosure auction, at a foreclosure estimate of $1.2 million.

This is in addition to the inventory on the market from brand-new condo towers in the area.

Now if Chen has to cut the price by another $1 million to unload the unit, and sell it for $4.95 million, and this takes another year of running expenses, his loss (including lower broker commission) will jump to around $6.1 million, not including interest and insurance, for a unit he’d originally acquired for $4.85 million.

So I wish Chen the best of luck in getting out from under his bachelor-condo adventure in a pain-minimizing manner.

A whole industry has sprung up on both sides of the Pacific to dodge the rules on both sides of the Pacific. Read… Why are Investors in China so Eager to Buy US Homes?

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