Sand Happ'nin's

There's action in a few parts of the Sand Section. Not sales – no new ones since April 15 – but action worth a look.

First, as we go to press (?), SFR inventory in the Sand Section is at 40, the highest we've seen in a year-plus of public market tracking. That's already +5 over the figure at mid-month. (See this story for a graph.)

There's one less listing in that mix, though. The toe-dipping, market-testing, ultra-modern walkstreet home at 528 6th (pictured) has now called it quits. The listing was withdrawn and the signs are down.

This home hit the market in mid-November 2007 at $3.449m, fully $450k higher (+15%) than its Feb. 2006 purchase price ($2.995m). That was ambitious.

Though we know some people liked it, the market snubbed 528 6th. Its stark, angular modern design just isn't what the typical family is looking for. (The apparently bogus square footage reported in the listing also drew MBC's ire in "Buyer, You'd Better Verify.")

More importantly, the sellers' attempt to play to scarcity in the market simply didn't work. True, when the listing emerged there were few South End walkstreet options, and there's always talk about how "pent-up" demand is for such homes. But 528 6th is just one door in off of Valley, not a classic walkstreet feel, and, well, maybe demand is not so pent-up after all. (See "Options Grow on South End Walkstreets.") The sellers never cut their price in an effort to move it, and appear to have decided to keep it.

Much further north – up at the Gateway to Manhattan Beach – there's a long-running case of involuntary keeping of a property: 4419 Highland (click for details via Redfin). You all know the story here, so we won't rehash it.

It was most recently offered for rent, but the news is that you can now buy 4419 Highland on a lease-option basis.

A lease-option. When another El Porto (El Norte!) listing sang this siren song last Summer, we presented the sellers' pitch and described the pitfalls. (See "The Lease-Option Gambit.") The home did sell pretty quickly, though, so we gave credit for creativity to the sellers then.

To compress the essence of our story from last year, the catch to a lease-option can be that you put up a high security deposit thinking it'll be part of your down payment. Then, 12-24 months after agreeing to purchase the home at today's price, you either do so, or you walk and the landlord/seller keeps your cash. The worst part, in a declining market, is being frozen into an agreement to pay today's price ($1.299m for 4419 Highland).

There are a hundred ways to offer a lease-option, however, and we won't assume this is a bad deal on the Gateway till we get more detail.

Finally, back down South, we have a case of a neighbor perhaps undercutting another. 401 3rd St. (click for pics & details via Redfin) just hit the market at $2.685m – a decent price for a sizable (4br/4ba, 3450 sq. ft.), newer home (an older home radically remodeled in 2006).

Across the street, 400 3rd (click for details) is a lovely corner-lot Nantucket (Cape Cod?) with 4br/4ba and 4050 sq. ft., priced at $3.499m. That's a difference of $814k for two comparable homes with almost the same location.

Because 401 has a narrow street frontage and 400 has that coveted corner, location advantage definitely goes to 400. And 400 offers 600 extra square feet. But is it an $800k advantage?

By PPSF, 401 is undercutting 400 by 10% ($778/PSF vs. $864/PSF). If it sold tomorrow morning at full price, 401 3rd might ultimately cost the sellers of 400 3rd $200k or more. Both sellers would walk away happy, but there could be grounds for a grudge.

Lease-Option House in Escrow

Did MBC credit the sellers of 217 Sea View with being "creative and aggressive in their marketing"? Yes, we did.

Are they in escrow now, less than 3 weeks after hitting the MLS? Yes, they are.

Are we surprised? Yes.

Are we happy for the flippers who rebuilt this house, though they made some questionable decisions? Yes.

How many SFRs sold in the Sand Section in August? Three (3).

And in September, so far? Zero.

Do we concur with this comment on the previous story, in light of the reported new escrow?

Lease-options like this one could well become more common, particularly if they are internally financed..

Yes, even though we don't know yet whether this sale was on the tricky terms offered by the sellers or through more conventional financing.

Will MBC use the self-Q-&-A format in a lot of future stories?

No.

The Lease-Option Gambit

People lacking the cash for large down payment (increasingly necessary these days) may be tempted by offers of a “lease-option” purchase or “seller financing.”

MBC recently mentioned a Sand Section property, 217 Sea View in El Porto, that is being marketed with both sweeteners. Here’s the pitch, courtesy of an email from the seller several days ago (note: the current price is $1.52m):

1. Monthly lease for 12-18 months (extension to 18 months contingent on no late lease payments).
2. Monthly lease to be $5,300.
3. $530 (10%) of the monthly lease is credited towards the downpayment.
4. Deposit of $17,000, all of which gets credited towards your downpayment in case you exercise the option to purchase.
5. Purchase price to be $1.53 million – appraised 5 weeks ago at $1.58 million (there are currently only 4 properties on the market for less in the "sand section" of Manhattan Beach and one is a tear down.

Advantages to you, the buyer of acquiring a home in this way:

1. Low downpayment – no need to come up with 10-20% downpayment.
2. Monthly lease is almost half of what the monthly mortgage payment would be.
3. No Real Estate taxes.
4. You may sell or sublease the property.
5. Several other advantages depending on agreement.

Let’s boil this down. You agree to a price of $1.5m or so. You pay $17k up front, and another $6k-$9k is credited toward your “down payment” over the next year to 18 months. When it’s time to exercise the option, you’ve got about $25k in the game – 1.5% of the purchase price.

Then what? You need to find a way to pay for the other 98.5%, or you’ll be forced to walk away from your $25k. (The seller doesn’t say so above, but that’s typical.)

MBC is skeptical that you, the hypothetical buyer, will be able to put together all the finances in such a short time. That 12-18 month window is a very quick trigger. If you aren’t able to buy it outright today, why do you think it will be easier next year?

Then there’s the declining-market problem. This relates to price as well as financing.

Whatever price is agreed to now, there’s a good chance that the home will be worth less next year. When you go shopping for loans, the lenders care about a current appraisal, not the contract price you agreed to before. If the value has gone down, you can get a loan, but you’ll need more cash to bridge the difference between your contract price and the appraisal.

But the seller will finance! Even with just 5% down! Yes, and that could be big, but it’s unclear for how long they’d loan you money. No doubt these sellers are sophisticated and can help make a deal work. But don’t kid yourself, they’re not going to play bank for 30 years.

If you must have this home, and you know you’ll be coming into some big money within the next year, going with the lease-option might make sense. It’s a great way to test-drive the home.

What about the home itself? Is it a must-have?

217 Sea View was purchased in Nov. 2004 for $945k, then massively remodeled – converted from a duplex to a 3br/2ba, 1440-sq.-ft. SFR. Everything, top to bottom, inside and out, was redone.

Many of the details are nice – both bathrooms are slick showpieces, and the master bedroom upstairs has a large walk-in closet – not a typical feature in a smaller home.

Alas, the two downstairs bedrooms – just off the entry – are impossibly small. And the small kitchen area was under-done, with mid-range materials and appliances. (What’s with the angled stove?)

There’s little common space and, of course, no yard on this half-lot. Views? You get a peek at the ocean down the alley. Otherwise, in a sadly typical El Porto fashion, most of the windows look out on the walls of neighboring houses.

Evidently there was already one taker, but the buyer didn’t “qualify.” Credit the sellers for being creative and aggressive in their marketing; they're trolling all the waters.