July 20, 2010

House in Palo Alto for just $645,000! Sort of!

$645,000

269 ADDISON Ave Palo Alto, CA 94301

image

Beds: 2
Baths: 2.5
Sq. Ft.: 1,239
$/Sq. Ft.: $521
Lot Size: 6,300 Sq. Ft.
Property Type: Detached Single Family
Style: Cottage/Bungalow
Stories: 2
View: Neighborhood
Year Built: 1896
Community: Downtown
County: Santa Clara
MLS#: 81033538
Source: MLSListings
Status: Active This listing is for sale and the sellers are accepting offers.
On Redfin: 4 days
Nice home on large, landscaped lot minutes from downtown Palo Alto. 2-story house has 2 master suites, hdwd flrs & wood beamed ceilings. French doors in LR open to spacious backyard w/ lush lawn, fruit trees & gardening beds. Buy a single fam house in downtown at a DISCOUNT! This is leased land. Buyer pays $1391/mon rent to landowner & keeps low prop tax base (only $293/mon). Go to 271 Addison.

Here’s what Burbed reader Herve had to say:

$645K for that seemed really cheap… Then I read the last part: "Buyer pays $1391/mon rent to landowner & keeps low prop tax base (only $293/mon)."

Indeed! What’s going on?

Well, it turns out that this house has been on Burbed before. Let’s take a look:

$588,000 for a house with land for 56 years

Just when I thought I had seen everything – I found this:

269 ADDISON AV, Palo Alto Property Details – Palo Alto Real Estate – Palo Alto Homes for Sale – Movoto
269 ADDISON AV, Palo Alto 94301

269addison.jpg

Wow. Don’t you wish you had bought this house in 2006? You could’ve flipped it and made a $57k profit. And now, there’s only 52 years remaining on this lease.

You snooze you lose. Better buy this house soon because every year the lease gets shorter, the price goes higher apparently!

Comments (37) -- Posted by: burbed @ 5:17 am

37 Responses to “House in Palo Alto for just $645,000! Sort of!”

  1. nomadic Says:

    Almost $1400/mo in rent and you still have to pay property tax too! What a racket.

    Land leases are less uncommon in some countries. The seller just needs to find a foreigner with a suitcase full of cash willing to take this deal. And if he wants to die in his house like a good Palo Altan, he shouldn’t be too young.

  2. nomadic Says:

    Good news!

    Unemployment rate falls in 39 states in June *

    *The unemployment rate fell in most states in June, mainly because more people gave up searching for work and were no longer counted.

  3. SEA Says:

    You only have to pay $645k for the opportunity to rent this place for 50+ years.

    nomadic- In regards to the taxes, this is all messed up:

    “Buyer pays $1391/mon rent to landowner & keeps low prop tax base (only $293/mon).”

    Let’s start with there is no “buyer.” The “buyer” is really a lessee, and the “seller” is the lessor, remains the owner, even if it is a long-term lease. If this were a sale, then that low “prop tax base” would not be preserved.

    This is presented as if it is a sale, but it’s really a long-term lease. We know the lessor would be the one paying those low taxes, but what we don’t know is the proposed terms of the lease–is the lessor supposed to pay more or less rent based on property taxes? If so, if the taxes suddenly equalize, based on a legislative change, does the rent suddenly go up? I’m guessing that the lessee is supposed to be responsible for maintenance, based on this bargain rent deal.

    Basically let’s lease it so that the difference between what the taxes would be if it were a sale and what the taxes are under a lease can be realized by the owner, but let’s sell it as a purchase, so the owner doesn’t have any responsibility. Basically the owner seeks risk-free income, which seemingly has way too many problems. And the lessee is supposed to think who cares because of the long duration, I guess. And the current owner will probably be dead in 50 years.

    The question is how much would you be willing to pay to get a bargain lease deal for 50 years?

    My approach would be NPV on the cash flows. Start with a normal rent situation, then compare with this situation. That $645k is going to be very difficult to overcome, unless renting something equivalent rents for a high enough price.

    Some simple observations:

    Straight Line (linear) consumption:

    $650k/50 years = $13k per year ($13k = 2% of $650k)

    $650k at 5% opportunity cost = $32.5k/year

    Assuming no risk, as if you could immediately sell this whole deal to a new lessee, you give up $45.5k in capital per year, plus the rent payments to the owner. It’s not clear if it’s ($1,400 plus $300) per month, or just the $1,400 per month, but we’re talking about another $20k per year in rent paid to the owner.

    Using these numbers, the annual cost of renting this place: $52.5k, and we still have not figured out maintenance, improvements, light bulbs and Drano.

  4. SEA Says:

    “…mainly because more people gave up searching for work and were no longer counted.”

    I suspect that this impacts all ages. I’ve not personally combed the data over, but from what I am seeing the teen market is one area where many gave up looking for summer employment.

  5. Pralay Says:

    Good news!

    Unemployment rate falls in 39 states in June *

    *The unemployment rate fell in most states in June, mainly because more people gave up searching for work and were no longer counted.
    ——

    That’s not the correct way to do “exercept”. You must do Real Estater way.

    The unemployment rate fell in most states in June, mainly because more people gave up searching for work and were no longer counted.

    Fewer states saw job increases, the latest evidence that the of economic recovery is slowing.

    The jobless rate declined in 39 states and Washington, D.C. last month, the Labor Department said Tuesday. That’s a slight a great improvement from May, when 37 states saw their rates decline.

    The report also indicated that businesses are n’t hiring many new workers. Nationwide, private employers added a net gain of only 83,000 83000000 jobs last month. The national unemployment rate dropped to 9.5 0.00005 percent in June from 9.7 percent the previous month, as about 650,000 people stopped looking for work.

  6. nomadic Says:

    One thing burbed left out: this house was on the market in 2006, but NEVER sold. The owner (who is an individual, not Stanford University as guessed in the 2006 burbed post) is checking to see if people got smarter in real estate since then, or much, much dumber (if they “buy” the house). On second thought, could Stanford be the leaseholder? Does their reach extend across Alma?

    You know, I’ve heard of people selling the houses on their property so that someone else can move it to another location. But that’s usually for a $1 selling price.

  7. SEA Says:

    “You know, I’ve heard of people selling the houses on their property so that someone else can move it to another location. But that’s usually for a $1 selling price.”

    And that $1 is only to satisfy the consideration part of a contract. Furthermore, the homes that are moved usually have some sort of historic value–wood that cannot be purchased today, for example.

  8. madhaus Says:

    It’s pending! That’s what you get being on the right side of Middlefield. Think about it, this is merely the upscale version of our friend Owner in Casa del Lago. The only difference is the “Seller” on Addison wants to keep the land, the tax base, and enjoy a payment stream from it, rather than the downscale model where a mobile home park snarfs up all the land gains.

    Owner’s place has been listed for 88 days and no price reduction yet. Anyone surprised?

    Property Shark has very little on sale history for 269 Addison. It appears to be owned by either a family trust, refinanced by Los Gatos owners in 2007, or another person with a different family name who also owns property in Sunnyvale and Los Altos.

  9. SEA Says:

    “Owner’s place has been listed for 88 days and no price reduction yet. Anyone surprised?”

    I just checked that today. I was going to report in 2 days when it hit day number 90.

    I have no idea what’s going on in his head. Please allow me to fantasize.

    My guess is that “the friend” is who really wants the place sold. Owner doesn’t have any interest in moving–it’s suited his needs well, and would continue to do so, if it weren’t for his friend with a female type name. Why reduce the price when you don’t really want to sell? Who knows, I’m probably wrong.

    As far as that Addison property, if the tax base is being preserved, how are sales tracked?

  10. madhaus Says:

    As far as that Addison property, if the tax base is being preserved, how are sales tracked?

    How, indeed? There are all sorts of rules about lot subdivision, minimum size, etc. Do you see either the city or the county allowing property owners to lease the land and sell the structure? That’s a recipe for transients to move in.

  11. Sio2 Says:

    Most buildings in China have 70 year leases. So these people spending $150k or more for a condo essentially own part of the lease. I’ve asked people what happens 70 years from now, and nobody really knows.
    What happens in the US if a condo needs to be torn down, or burns down? Is the land sold and then the proceeds distributed to the owners?

  12. nomadic Says:

    Perhaps it’s pending “with release” to see if there’s still a bank out there who would loan money under those terms.

  13. madhaus Says:

    #11, I’ve owned a condo. Most of them give you a proportional interest in the property so you are not leasing the land, you are a part owner but can only sell your share with the unit itself.

    I don’t know what happens in China when the leases run out, or the leased land for homes on the Stanford campus. The latter have restrictions that they can only be sold to Stanford employees.

  14. Real Estater Says:

    >>I’ve asked people what happens 70 years from now, and nobody really knows.

    Why do you ask that question? Are you going to be around in 70 years?

  15. Real Estater Says:

    Guys,

    Are we running out of topics? Why are we still talking about Palo Alto?

  16. Petsmart groomer Says:

    > Why do you ask that question? Are you going to be around in 70 years?

    Remember, a house is forever. That’s your maximum inheritance, with Prop 13 benefits.

  17. Petsmart groomer Says:

    > Are we running out of topics? Why are we still talking about Palo Alto?

    Because it keeps you here and prevents you from procreating?

  18. nomadic Says:

    Here’s a nice overview of leased land deals:

    http://www.investopedia.com/articles/mortgages-real-estate/08/leased-land.asp

    RE, are you really willing to run fast & loose with your kids’ inheritance? If they become like you, they’re going to need all of the help they can get.

  19. Real Estater Says:

    >>Remember, a house is forever. That’s your maximum inheritance, with Prop 13 benefits.

    But we’re not talking about a house. You never had land in the first place.

  20. Petsmart groomer Says:

    > But we’re not talking about a house. You never had land in the first place.

    Your inability to extrapolate is quite impressive.

  21. nomadic Says:

    RE is as concrete as a sidewalk.

  22. Pralay Says:

    Because it keeps you here and prevents you from procreating?
    —-

    LOL!

  23. Pralay Says:

    If they become like you, they’re going to need all of the help they can get.
    —-

    Well, he is taking multiple steps so that his kids don’t become like him.
    - He is going to put his kids in a high-school where they will learn how to run company.
    - He bought a house in a place where Stanford gives preference (with one minor problem though – “all things being equal” which might not be true for Real Estater’s kids).

  24. madhaus Says:

    Ceteris Paribus, those kids are going to Foothill.

    Look it up yourself. I’m not your Google ho.

  25. madhaus Says:

    Are we running out of topics? Why are we still talking about Palo Alto?

    I’m not talking about Palo Alto. I’m talking about Middlefield.

  26. SEA Says:

    Real Estater- “Why are we still talking about Palo Alto?”

    Are we talking about Palo Alto? I thought mentioning Palo Alto was forbidden. But your question does have “Palo Alto” in it. What are all of us who are trying to avoid talking about Palo Alto to do?

  27. Sio2 Says:

    RE #14,
    I ask, because I am curious.

    Also, here one buys a house in part to sell at retirement or death. Potentially that’s true in China as well. But imagine someone who is 30 buys an apartment, then dies at 80. This apartment now has 20 years left on the lease. So the value will be less unless this question is resolved.

    Buying a house is not really practical in the cities of China, so many people face this question. Anyhow even SFHs are built on leased land so a house would have the same concern.

    There’s another question, which is, what will these buildings look like in 70 years? Perhaps not good. It’s common to tear down and rebuild a 70 year old house here, but I don’t know how this will work for condos.

  28. SEA Says:

    Sio2- RE#27; RE#14

    Real Estater doesn’t seem to realize that some of those 70 year leases written 70 years ago are about to expire.

    Personally, I’d value the lease similar to a bond. The lease would command a discount or premium, depending on the lease terms versus current market conditions. The duration needs to be considered, just like with a bond. The big difference is the return of capital in the end. With a bond, the holder of the bond gets paid, but in this long-term lease situation, the payment is reversed–the owner gets the property back, so the occupant must give the property back.

    If we knew the market value of the property at the end, this would be an easy computation: Discount the rent payments and add the discounted market value of the property. I doubt Real Estater understands any of this.

    I wish I had a good example right now, but there are some 100 year bonds that have come due. Back 100 years ago I am certain they were considered forever by those alive when they were issued. The conversation probably included, “It’s not our problem when these mature…”

  29. Real Estater Says:

    SEA says:
    >> Real Estater doesn’t seem to realize that some of those 70 year leases written 70 years ago are about to expire.

    As a Southeast Asian, you don’t realize that were are no leases written 70 years ago?

  30. nomadic Says:

    Prove it.

  31. Real Estater Says:

    >>Prove it.

    In Beijing, on October 1, 1949, Mao Zedong proclaimed the founding of the People’s Republic of China (P.R.C.).

    How long has the country been in existence? Can you do the math?

    Proof complete.

  32. nomadic Says:

    In the overall scheme of things, a lease expiring within 10 years would be “about to expire” to me. That’s assuming we’re only talking about China and not one of the many other countries which have long-term leases (like the UK or Canada).

  33. Pralay Says:

    How long has the country been in existence? Can you do the math?

    Proof complete.
    —-

    And you get a big F in your proof.

  34. SEA Says:

    When dealing with Real Estater, we must remember that the trees block the view of forest.

  35. Real Estater Says:

    Proof completed, dic.

  36. Pralay Says:

    China is not the only “Southeast Asia” country, Fake Estater.
    I thought you are an international traveler. It does not look like you know anything outside your prestigious zipcode.

  37. nomadic Says:

    SOLD! Full asking price on 8/27/10. Incredible.


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