Purchased for $435,000 in July of 2005, the listing for 2225 23rd Street #310 has been advertising “Bank APPROVED SHORT SALE! JUST WRITE OFFER & CLOSE WITHIN 30 DAYS!! IMMEDIATE 10% BUILT-IN EQUITY!” for the past thirty days. Yesterday the list price was reduced from $363,000 to $333,000. Another 8.3% of “built-in” equity?
And then there’s 2225 23rd Street #218 in the same Potrero Court complex. Purchased in 1999 for $183,000, but refinanced in 2001, it’s simply a “Pre-foreclosre Opportunty!” [sic and sic] with a list price that has been reduced from $333,000 to $299,000.
A few other relatively recent sales of same sized condos (602 square feet) in the Potrero Court development: 2250 23rd Street #122, $385,000 on 4/11/08 (had previously sold for $457,000 in June of 2005); 2250 23rd Street #334, $400,000 on 5/22/08 (purchased for $180,000 in March of 1999); and 2225 23rd Street #318, $400,000 on 5/30/08 (purchased for $300,000 in July of 2002).
∙ Listing: 2225 23rd Street #310 (1/1) – $333,000 [MLS]
∙ Listing: 2225 23rd Street #218 (1/1) – $299,000 [MLS]

23 thoughts on “Another $1,000 A Day In “Built-In” Equity On Potrero Hill?”
  1. built in equity or not, bS or not, i was just talking about these places with my business partner the other day. at these prices, they are actually starting to make sense. from what i understand, you can rent a 1bed/1bath in potrero court for at least $1500/mo (maybe even a couple hundred higher), if you can purchase one of these units for lets say, $330Kish it just about works out!

  2. These sorts of tiny, generic apartments in a so-so part of town (even sketchy, especially at night) are the sorts of “investments” that are almost guaranteed to fall 50% from peak.
    I wouldn’t look at stuff like this until it gets to below 1999 prices. Even if the units can “on paper” cash flow in the high 200Ks, remember the famous currency trading maxim, “the road to hell is paved with positive carry”.
    Fundamentally, these 600 square foot boxes should go for about $150K. And that’s only if you have a positive view of SF and CA generally over the next decade or so.

  3. I looked at a couple of these places. They seem very small for the size and the ceilings are quite low, plus there isn’t garaged parking, just some assigned spaces of which maybe half are covered.

  4. Garrett, yes and no.
    The price of real estate has basically been the rental value, plus some premium for expected appreciation.
    If you are expecting DEpreciation, then the price should be lower than the current rental value. As it should be as a matter of survival: if someone next year buys a similar place for 20% less, they will have the ability to RENT it for 20% less than you will and still break even, so you can see where rental prices of these places will be heading.
    Fannie Mae just threw in the towel on stated income, you now have to document EVERYTHING no matter what your credit score (translation: Alt-A is soon to be dead and gone), and Google’s lazy indicator is down, and now heading towards a 52 week low. I’d expect more of a slump in prices.

  5. I think what she’s trying to say if you put down the requisite 20% to get a loan these days, you’ll have 10% equity (for a few more months anyway).

  6. Garrett
    At $1,500 a month rent, the rental parity for an investment property would have to be around $225,000 so I think this has a ways to go to reach that level
    Also, you have to believe that rents will remain stable. I know there is a short supply of rentals in SF but just wait untial condo after condo is released and the speculators try to rent those out. And of course, if the economy falters….
    But I forget. SF is special (just like Marin, OC, San Diego and the list of special places just goes on).
    Declines are just starting in SF. IMHO we are about 2 years behind SD and we are not different just behind SD.

  7. Cal Housing Bear,
    Just some commen sense, not just for RE, it is also true for stocks etc. What goes down first always goes down the deepest, what goes down last tend to come out with much less damage.
    On the flip side, the former will see better recovery than the latter.
    So, SF is not going to be the same as SD in terms of the level of declines.

  8. Also, from what I understand, SF also stopped going up the first. (spring of 05?)
    A kind of first out, last in???
    Or, was it first in – if you consider the flatness since early 05 the equivalent of declines elsewhere?

  9. I agree with Satchel. 100 times monthly rent max for this kind of place/location. This is not prime RE and these units would be better used as rentals than as owner-occupied. Carport, low ceiling, generic boxes.
    The high prices in the 200s and – gasp – 300s have no connection to reality. No real pride-of-ownership effect that would justify the premium, just the “hope” that prices have to appreciate as it is close to entry price in SF.
    But lessons have to be learned and money has to be burned in our current Bonfire of Equities.

  10. 1. These places were originally built as rentals back in 1989 and then converted and sold as condos in early 90’s. They feel like it too.
    2. Location is ok. I live close by. Not terribly dangerous, but car break-ins, etc. Secure parking and complexis secure. But not easy to walk anywhere though.
    3. I bought and flipped a studio unit there about 18 months ago and made some money. There is a restriction on renting these units for at least 18 months or 24 months from date of purchase. And they do enforce it. So end discussion on rental, grm, etc.
    4. Building is flimsy cheap construction and crappy noise insulation. It is newer, so presumably relatively safe in terms of earthquake safety, electrical, gas, and major systems. They had a huge lawsuit with the developer that has been settled and significant assessments were paid by unit owners.
    5. Half of the building has lots of freeway noise in addition to noise from other units per item 4 above.
    6. Even with all of this, they are at a good price point for first time buyers or people needing affordable homes in a reasonably decent, sunny, and convenient location. Basically their studios are about the cheapest going, 1br for studio prices in most areas of town, 2br for 1 br price, 3 br units for house prices in Bayview or low priced 2br in other parts of town.
    7. You get what you pay for, but not everyone can afford $600,000 – to well beyond.
    8. Prices will probably go down in the immediate term, but will rebound because it is “affordable” housing that is not compromised by city bmr rules.

  11. 330k for 1500/mo rental doesn’t sound that good to me. If you go outside of San Francisco, not very far, say parts of Marin, you can buy places for 150-180k that will rent for around 1500. You’ll have positive cash flow right from the start, without paying a premium for SF. For 330k, I’d rather buy two of those and have 3k month income, and still have good upside potential.

  12. Wow. Get a tiny noisy studio for the price of a typical house in Noe in the mid-90s. This market needs to correct and then some to get back to sanity.

  13. Satchel says:
    Fundamentally, these 600 square foot boxes should go for about $150K. And that’s only if you have a positive view of SF and CA generally over the next decade or so.
    My thinking is that the correction means a return to the last long bottoming out period which was in the late nineties. Back then a place like this would have been close to if not above $200k, so at over $300k the price is coming close to late 1990s plus inflation.
    These are livable units in SF, and Potrero Hill is not that far from everything else and quite sunny. The City is going to bottom hard, but it will probably never be a better deal than flyover country on a per unit basis. The last two bottoms
    were close to each other, so expecting this crash to land much farther down seems an exceptional position to take.

  14. Mole Man – I agree with your analysis and my gut also says that $150K in 2010 dollars is too low.
    The big wildcard however is availability of credit. In the mid-1990s credit was still easy to come by. Who knows what the government and banks will do over the next few years. If the credit drought worsens and persists and causes units like this to go to $150K then there will be some really big problems beyond RE to deal with.

  15. people that think SF prices will roll back to pre 1999 levels are engaging in wishful thinking. next year will probably be the bottom in SF (ususal disclaimer: sans significant nationwide recession or a big earthquake.) the demand is still there, and as long as the bay area keeps creating high paying tech/bio/alt energy jobs, the best and brightest will want to live in “the city.” it’s been like that for 20+ years. why would this desireability suddenly change?

  16. 150K might seem low, but just apply a few rules of thumb: current rent/buy ration is around 200. Any landlord will tell you that, excluding appreciation potential, you cannot break even until you go under 150 and buying to rent really makes sense under 100.
    I am in rental investments and whatever way I run the numbers, this what I have seen in the past 14 years.
    Markets tend to correct, and when they do, they overshoot. Rental investors had very good mid-late 90s and I believe we are coming back to those days in the next decade.
    Yes, there are good paying jobs but unemployment is going up. Yes, rents are still high. But I see many rental signs across the city. Is this a sign of easing rents? If rents go down, the incentive to buy will mechanically decrease, imho.
    Things haven’t settled yet and everyone is making projections for the next 1-2 years. Real Estate is a 10-year game.

  17. “Rental investors had very good mid-late 90s”
    Sob.
    My landlady bought her castro victorian for 280K in 1995 and is probably pulling in 7K in rent from the three units. A rent/buy of 40.

  18. My landlady bought her castro victorian for 280K in 1995
    Yeah, I know of a few people in upper Noe who bought around that time at these price points. The pressure is enormous for them to sell today at 1.3M+.

  19. fronzi- i guess that means that you do not own (or plan to purchase) SF rentals, since 100 or 150 multipliers are non existent here.
    i’ve got a major renovation on a triplex going on, where i hope to get a 150 mutliplier. and the only way i can get that is because rents went up 20% in the last 2 yrs in this hood. it will be a barely break even proposition (assuming 100% financing), which i am OK with. they’ll be high end units, rented to quality tenants seeking nicer units. and the units are condo quality, so i can always sell of as tic’s in the future.
    bottom line: i am planning on making it on the future appreciation. and yes, i agree with you that in the final analysis, RE is a 10 yr game. 5 yrs if you’re lucky!

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