July 26, 2010
Rent Versus Buy (Or Sell) A Landmark Mansion
Listed for $7,900,000 last September, the asking price for the fully restored Landmark Burr Mansion at 1772 Vallejo was reduced to $6,995,000 last October and then withdrawn from the MLS (but not the market) this past May.
And while $26,950 a month might seem like an eye-popping number, keep in mind that on a purchase price of $6,995,000, and assuming absolutely no vacancy nor maintenance or upkeep, it would translate to a CAP rate of under 4 percent.
∙ Listings: 1772 Vallejo (5/4.5) - $6,995,000 | $26,950/month
∙ Another Ex-Mayor’s Landmark Mansion Coming Soon (1772 Vallejo) [SocketSite]
∙ Party Of
Five Eight Move To San Francisco’s Billionaires Row [SocketSite]
First Published: July 26, 2010 9:00 AM
Comments from "Plugged In" Readers
That's surprising. 2 mansions going from MLS to rental? What is going on?
Option 1 - They need the cash flow that bad?
Option 2 - Most probably they do not see the market coming back as fast as many thought.
In either case, they'll probably take the rent, only to mitigate the long painful red ink of keeping up these mansions.
Posted by: lol at July 26, 2010 8:42 AM
That's surprising. 2 mansions going from MLS to rental?
Happens all the time, there are lots of reasons why, and "mitigate ... red ink" it's not when the owner(s) have had the property for a while. See "bought in 1995 for 1.3M" + for rent at ~27K.
Posted by: geoff the realtor at July 26, 2010 8:48 AM
Having bought in 1995 for 1.3M doesn't means there's no red ink. Property taxes and mortgage payments (if any) are probably pretty low but these houses still cost money to keep in the best of shape, especially if you want to sell or rent at a good price. No rent means also an opportunity cost as well. That's a "7M property" that you do not enjoy and do not collect rent on.
Posted by: lol at July 26, 2010 9:01 AM
Obviously just guessing, but the people that own this place probably have more money than they can knowledgeably allocate (translation: they have money comin' out their ass) to productive investments so they probably don't care about the cap rate all that much. Any return at all beats losing your money in the stock market.
All you entrepreneural landlords reading socketsite: what's considered a "good" cap rate for a mansion, anyway? Or does the type of property not matter?
Posted by: Brahma (incensed renter) at July 26, 2010 9:25 AM
We've seen this story too many times. Overpriced property bounces between the rental market and the sale market on its way down to price discovery.
The owner desperately wants $6M or its equivalent but neither market is prepared to supply it. So the owner gets $0 until they accept reality.
Posted by: tipster at July 26, 2010 9:33 AM
"Having bought in 1995 for 1.3M doesn't means there's no red ink."
Especially if there was any "equity extraction" between then and now.
I was having lunch at the Bellagio buffet in Vegas back in 2005 while on vacation with the relatives and saw a bunch of people from a mortgage broker's office having lunch. They were all wearing identical T-shirts that had written on the back, "Unlock your equity - ask me how!". Quite surreal given what I knew was coming. I wish I'd a taken a picture.
Posted by: diemos at July 26, 2010 10:11 AM
The Baxters are a nice couple who can afford to wait. The speculation about their wealth is unseemly, and adds nothing to the value of socketsite.
Posted by: Conifer at July 26, 2010 10:18 AM
what's considered a "good" cap rate for a mansion, anyway?
I wish I had the problem.
Posted by: lol at July 26, 2010 10:18 AM
I don't believe anyone insinuated that the Baxters weren't nice. And their financial situation is quite seemly as it directly influences their decision to sell, the list price, the final offer they're willing to accept, their decision to rent, etc, etc.
Posted by: jason at July 26, 2010 10:42 AM
Ralph Baxter likely takes in $8-10M a year, and has for some time. $6M isn't nothing, but I don't think he's sweating it.
Posted by: Shza at July 26, 2010 10:49 AM
No question they can wait.
What's interesting though is the 2 different strategies for this kind of mansion.
Someone who buys this place will make a mostly emotional decision. "Got the money and love the location and the place". Hence the seemingly lofty asking price.
Someone renting will be looking at cash flow, etc... This adds a more rational element into the mix, hence a more rational price. Plus, we have to consider that people in this rental segment might be spending OP'sM (Other People's Money) like a company exec looking for a corporate rental, and be accountable to their company. After all it's a more viable solution than having your CEO buy a place with an insurance that the company will cover any resale loss when this CEO ends his contract.
Posted by: lol at July 26, 2010 11:08 AM
I don't know. The financial situation of the owners doesn't concern me, but I'm always puzzled by the decision to rent out these properties. The rental income is still taxable, and I'm not sure a deposit is going to totally cover all the wear and tear caused by (potentially) multiple families moving in and out (and in and out). Plus, you're still paying utilities, property taxes, insurance, and general upkeep, i.e landscaping. If this market does recover, you may have to make significant repairs to the place to make it market ready again. It just seems like a lot of hassle for very little return.
Anyway, a house near me went rental on craigslist for around 14k, and it rented very quickly (at what final rate, I don't know).
Posted by: Denis at July 26, 2010 11:28 AM
From what I can tell, permitted work over the past 15 years totals less than $250k. The owner has done several refies with CitiBank/Mortgage over the years, but I have no idea if equity extraction was involved. More likely, I imagine a healthy ROI if this goes rental... but that's just my gut instinct.
Posted by: EBGuy at July 26, 2010 12:00 PM
I think most people in any financial situation want to mitigate any ongoing drains on their resources. The other factor to consider is that even with the wear and tear that renters cause, there may be maintenance and security reasons to prefer having the house occupied instead of shuttered.
Posted by: kthnxybe at July 26, 2010 12:07 PM
$8M-$10M/yr? I don't think so. Not even close.
CAP rate of under 4 percent => not worth $7M. At least not now. You can easily get > 11% writing 1st mortgages right now. I don't think they will get that rent either.
Posted by: Jeff at July 26, 2010 5:44 PM
The comment about the owner making $8M-$10M/yr I believe referred to his job as Chairman and Chief Executive Officer of Orrick, Herrington & Sutcliffe LLP, a law firm with 1,100 lawyers in 22 offices.
In 2009, Orrick reported gross revenue of $847.5 million and profits per partner of $1.3 million.
As to Mr Baxter's share, that is anyone's guess.
Posted by: fred at July 27, 2010 7:17 AM
"The rental income is still taxable, and I'm not sure a deposit is going to totally cover all the wear and tear caused by (potentially) multiple families moving in and out (and in and out). Plus, you're still paying utilities, property taxes, insurance, and general upkeep, i.e landscaping. If this market does recover, you may have to make significant repairs to the place to make it market ready again. It just seems like a lot of hassle for very little return"
if its a rental you can expense all that stuff plus use depreciation to offset whatever is left of income. imo, this might be a way for the owner to hold onto this place but offset the financial drain a bit by classifying this as an investment property.
Posted by: anonee at July 27, 2010 9:20 AM
A little pricey for this hood. It sits in the middle of a block of mostly one-bedroom apartments occupied by middle-aged renters who have been enjoying rent control for 20 years and pay about half market price for their units. I live across the street.
Posted by: Joe Blfstyk at July 28, 2010 11:08 AM