Another Sterling Foreclosure: Good Price or Not?
A “penthouse” in The Sterling at 345 N. LaSalle has come on the market after foreclosure. It didn’t sell at auction and is now bank-owned.
Unit 4701: 3 bedroom, 3 bath, 1900 square feet
- An ad on Craigslist says it sold in September 2005 for $895,000
- It also sold in February 2005 for $719,500
- Currently listed for $725,900
- Assessment of $816 a month
Here’s the Craigslist ad:
This is a great chance to own a Penthouse condo at a remarkable price. (SOLD FOR $895,000 IN 2005.) Great views. High quality interior finish. Bank-owned, so make an offer!!!
Is this a good deal?
Or not?
I’m not up on rental values–what would a place like that rent for? As an investemnt property, you’d need to get around $6k/month, and I certainly wouldn’t pay that for 1900 sq ft in an okay building–especially w/o parking.
If you do an MLS search for 3 bedroom units with approximately 1900 to 2100 square feet, this is the cheapest listing– most are well over $800K. So it may be a good deal. I would want to see the inside. By the way, parking is leased in this building.
Does anyone else but me think it’s kind of odd that it sold for $719,500 in February 2005 and then miraculously sold for $895,000 only 7 months later?
And the “experts” said that Chicago didn’t have a “Bubble” like the coasts.
Rental prices are much lower. I had to look it up to confirm but you can get a 1800 square foot 3 bedroom, 2 bath in Lakeshore East for $3200 a month. You can rent a 2600 sq. ft. duplex in 33 W. Ontario for $6,000 a month (not really comparable in size or upgrades.)
You can also rent at 340 on the Park a 1900 sq. ft. 2 bedroom, 2 bath with den for $4850 a month (faces north.)
Basically- it’s difficult to find a rental that is this square footage that is anywhere close to $6k a month. They are all lower.
Sabrina, your theory that renting is better than buying works only for a short period period of time, 5 years or less. 6K for mortgage, or 4K for rent, the only thing you have to be sure of is that you property won’t decrease in value more than 2,000*12,000*5= $120,000 in 5 years. + tax benefit for the property.
If you do your research, and buy real estate at a good price, it is ALWAYS a better investment than stock market, if you hold it for at least 5 years. Providing that you are not trying to flip it in 2 years + if you live in it as in primary residence, it always makes sense as oppose to buy in a long term.
Alekso: Actually, in this type of market with rents way below what it costs to buy- my theory that renting is better actually works for far longer than five years.
I really recommend to people trying to decide whether or not to buy to check out the New York Times excellent graph/calculator that lays out the difference between the two depending on what information you plug in.
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
I put in that the monthly rent would be $3200 (since I found an equivalent condo in Lakeshore East with the same square footage renting for that amount). Home price is $725,000. I put 10% down. I did a monthly mortgage rate of 7.00% (because it’s a jumbo loan which currently would be a rate of 7.25%- but I lowered it slightly in the example. Of course- you may be able to figure out other loan scenarios to lower the rate.)
Property taxes of 1.50%. And I allowed for a growth rate in housing prices of 3% (which is in the historic average for Chicago.)
According to the chart- I would have to live in this Sterling condo for 14 years before it was “better” for me to buy the condo than to just rent it.
According to the chart- as a renter I would have “saved” $171,000 over the first five years of living in the condo (versus buying it.)
Right now, renting is a far better option than buying unless you truly intend to live in the property for decades.
Actually, if you change the advanced features in the NYT chart above and add in the $816 a month condo fee with only 3% average annual growth, the chart tells you that over 30 years buying will NEVER be as good as renting.
Wow.
Add in another $250 a month for parking (since The Sterling doesn’t have deeded parking and has the attached parking garage instead) and you would need 5% appreciation every year in order to make buying a better financial deal than renting.
In addition, most of the river view you see in the last pic will soon be obscured by the 300 N LaSalle office building. Actually, the cranes would already be visible in a current picture.
not.
Happy New Year!
John
John: Happy New Year to you as well.
I’ll have to watch this unit to see how long it stays at this price. Remember the “deal of the century” unit at River City is still on the market months later.
Hi all,
I used that great calculator for the 2/2 short sale unit at 299,000 (now under contract). You can rent a comparable unit for 2400/month. After 2 years in the Sterling, it would be better to buy than rent.
299K for a 2/2 is the way to go.
And that $299k 2/2 is probably pretty close to the right number per square foot for the entire building. Add/subtract adjustments for # of bed/bath and floor/view/other and you’d be right there. So, 1160 sq ft for $299k= $258/sq foot. 1900 sq feet * ($258 + 10% for higher floor = $285) = $541,500 + $50k for the extra b/b is about $600k. Run the numbers with $600k, and it’s probably pretty decent as a primary residence. Over $700k is nuts.
Streeterville Realtor: I did the calculator on the 2/2 at $299k as well. Did you put in the HOA? If you include that, it’s better to rent unless you’re going to live there longer than 4 years.
But at least that is realistic.
If the penthouse unit was $600,000 and the interest rate at 6.25% for the loan (which is generous in this credit market), it would still take you 14 years before owning is better.
It would have to be priced around $400,000 for buying to be better than renting in even just 3 years time period. (with 10% down, a 6.25% 30 year loan and 3% annual increases in prices.)
No, I forgot HOA. Thanks!
No problem. You can add it in the “advanced” settings. It makes a pretty big difference in the calculation actually.
Before the bubble, my understanding of the conventional wisdom on the buy/rent decision involved a holding period of 5-7 years for a primary residence. If the calculations show owning is cash positive in less than 5 years, that would be a good “value” in a principal residence. And, in doing these analyses, it’s easy to forget that there is some value (perhaps small) in owning v. renting for most people.
That NYT calculator is seriously flawed. If you buy, you are losing investment income on you down payment FOREVER. You are also losing the investment income on the difference between your monthly payment (renting vs. buying) FOREVER.
It does not appear to me that this is taken into account anywhere which is ridiculous but par for the course as fas as these calculators go.
Also, price appreciation always has been and always will be the same as rent increases in the very long term. Since the last 7 years have shown price appreciation move >2 standard deviations over the cost of renting, anyone who assumes a faster rent appreciation rate than price appreciation rate needs too check themselves. Anyone who disagrees needs to supply a reason why this chart will conitinue going up forever…
http://bp1.blogger.com/_pMscxxELHEg/R2K5CI81IGI/AAAAAAAABVs/bIxMpB_QD28/s1600-h/PricetoRentRatio.jpg
John
“anyone who assumes a faster rent appreciation rate than price appreciation rate needs too check themselves.”
Over the long term, sure, but do you really think that, on a 3-5 year timeline starting today, that sale prices are going to go up more than rent? I think that 1/1/2010 sale prices will be flat with current prices. Do I need to “check myself” if I also believe that rent rates might increase 1%+/annum?
John: The NYT calculator actually calculates the “opportunity costs” – i.e. if you would have invested the downpayment when renting instead of buying.
You can adjust those calculations if you wish in the “advanced” settings on the site.
Also, check out the “methodology” link. The calculator is pretty comprehensive but nothing is perfect.
These calculators can be a useful tool, but what I believe is most important to investing either realestate or stocks is how long you want to hold the investment and where in the market cycle we are.
Realestate is cyclial like stocks, and there is no doubt we are in market downturn which may take 5-10 years to recover to nomalized appreciation levels. I would definately rent rather than buy.
Good point, Valasko. The current market downturn is not stopping soon. Just plug in 3-5% (downtown condos probably more like 5-10%)price drops for the next few years and see what that calculator does.
Only a ‘greater fool’ would buy now. Rent, bank the savings, and then buy what you are looking at for less in the future. And always remember, the drop will overcorrect (due to fear) just like the rise did (due to easy money.)
Sorry for the hasty typo-ridden post. The rent/buy gap will close in the short-medium term. You must assume either higher rent increases or lower purchase prices in the short term. Whichever you choose will have a significant impact on the buy vs. rent calculation. But the gap will close and then you should assume equal growth rates for both. The “check yourself” is for those who think the rent/buy gap will not close, sorry for making no sense in the post above.
You can assume 1% rent increases, so long as you put in negative numbers for price appreciation for a given amount of time until the gap closes. Then adjust price appreciation to be the same a rent increase. I’m not sure if you can do this with the advanced features.
I’m curious what percent of home shoppers find their way to the “advanced” features, I would guess it’s pretty low. Giving people a tool like this does more harm then good, that’s all I’m trying to say. Anyone bright enough to know they need the advanced features doesn’t need the calculator in the first place.
IMO, there are virtually no non-distress properties on the market today that pass an honest rent vs. buy test at asking prices. Those that appear close are usually due to; too-high (unrealistic) rent comparisons, too high appreciation assumptions, too low tax/assesment assumptions; exagerrated tax benefits; ignoring opportunity cost of down payment and/or monthly cash flow difference, or some combination thereof.
If you expect massive inflation or another housing bubble then go and buy, you’ll be fine. Otherwise, rent.
John
How timely…
http://calculatedrisk.blogspot.com/2008/01/research-house-prices-to-fall-15-or.html
Fed economists model 4% annual rent increase vs. 3% annual price declines through mid 2012. That sounds possible to me. I think flat rent vs. 5-8% price declines for 3 years or so is more likely though before the rent/purchase ratio flattens out.
John
John: I too think we’ll see price declines and flat rents before it all evens out. But do you think even 8% declines – even if over 3 years- is enough to even it out?
If you do the NYT calculator, it seems more like a 40% decline has to occur in some prices. Or else rents have to go up.
I think the smaller inexpensive units in good locations will hold there own. The big question is how will the larger more expensive units, or the TRUMP building with its $1000 per square foot prices fare. And I dont know how anybody with any sense would pay more than $1400 per square foot at the spire. How many people in Chicago can afford to rent multi-million dollar units.
But do you think even 8% declines – even if over 3 years- is enough to even it out?
If you do the NYT calculator, it seems more like a 40% decline has to occur in some prices. Or else rents have to go up.
40% in some cases, in others you wouldn’t need as much. You can’t even use those calculators for the upper bracket because there aren’t enough rentals to get a clear grasp on what the correct comparable rental rate should be. And that is where you will see the steepest declines IMO.
Also, IMO, there will be government intervention (I mean REAL intervention, not baby-steps in Fed Funds) once the reality of lower prices sinks in. I expect interest rates back to 1%, no limits on GSE purchases, Fed purchasing MBS directly even. I don’t think reality is anywhere near sinking in yet, these yahoos are still talking about a second half rebound in 2008.
Who knows, but there is a chance the goverment is able to manufacture enough inflation to keep real estate prices from cratering as much as you might think they should. Of couse there is also the chance the credit cruch collapses the entire economy and we have a 15+ year asset deflation like Japan just went through. I would not be surprised by either one although I must admit that I see the latter as more likely.
John
I’ve seen a lot of predictions for rent increases, but my personal experience is telling me that this may be a bit optimistic, at least in the short term. I’ve lived in my high-rise rental building since it opened and my third lease will be up soon.
Last year rent increased around 5%. I didn’t like it, but after doing some serious searching I decided to renew. I know for a fact that my building was over 90% rented at that time. More rent increases are in store for my next lease… But right now I know of two empty units just on my floor and for the first time ever I have seen “For Rent” signs on the sidewalk out front. After living for 3 years downtown I am prepared to pay whatever it takes to continue living a few blocks from work, but hasn’t anyone noticed how many rental high-rises have been built downtown? A quick search on Craigslist shows a very large increase in suitable condos being rented by owners.
I personally think that rental increases are not going to track the official predictions, making the rent vs. buy calculation skew towards renting for at least another 3 to 4 years. However, I will continue to shop every time my lease is due for a renewal – there really is no substitution for going out and getting hard numbers on places you are actually willing to rent and/or buy.
Tipster
AS for rentals in Chicago it is very seasonal. The months between Nov-March are very slow and you will get the best deals and prices. 10-20% cheaper. The time period from May-Sept, I would say a majority of the leases in Chicago start/end between these months. This is when the landlords have an upperhand and can charge a premium as many more renters are looking at this time. For example in the same building in the South Loop, I rented a two bedroom in August for $1800 and I just rented a 2 bedroom that is larger and is on a much higher floor for $1600 last week. There just aren’t any renters looking during the winter months. This cyclical nature is most likely from the large number of schools/universities/hospitals.. in the Chicago area that start in the Summer/Fall.
Sabrina, how do we send you tips? Interesting article on professional falling-knife-catchers: http://www.slate.com/id/2181184/
Kenworthey: You can send me tips at:
cribchatter@yahoo.com
Kenworthey: I’ve added a “contact me” page with the e-mail in the right column as well.
Feel free to e-mail me with any tips or news!
Thanks,
Sabrina