Profile picture for SteadyState

Are agents not supposed to use rental prices for determining home prices?

I am having a rough time understanding the prices of homes in Cupertino, CA.
Over the last six months I have monitored both listing prices and rental prices. Here is the current snapshot:
Rental Price/Month (2000 - 2500 sq. ft single family home): $4000 - $4300.
Listing Prices: $1,350,000 - $1,500,000.
Just the property taxes on the home would be $15K - $20K per year.

Please explain why it makes sense to buy a home in this market. I am particularly interested in an agent who specializes in this area to opine on this topic. (The Rent vs Buy calculators  indicate it is always good to rent - even after 30 years with a 4.5% interest rate and 2*appreciation over rental price increase.
  • January 09 2011 - Cupertino
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Answers (12)

Real estate agents and the appraisers will be using sold home prices for comparative properties.  You really need to look at the sold prices.

With historically low interest rates it is a fabulous time to purchase a home.  You will own the home and are building equity in something, not paying off someone's property.

Good Luck

  • January 09 2011
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Oh boy.  SteadyState, no blood please.  Try to be gentle :O
  • January 09 2011
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Profile picture for the_country_hick
Christine, Looking at the numbers provided your statement makes no sense. Assume $4,000 a month rent and $20,000 a year for taxes (the high tax and low rent) it takes 5 months of paying rental costs just to pay the taxes on a house. Can 7 months of payments ($4,000 a month) for a rental ($28,000) cover the rest of the purchase price, house insurance costs plus maintenance? $28,000/12= $2,333.34 a month total payment. If not buying makes no economic sense at all does it? Realtors can feel free to look at recently sold houses to form their opinion of what a house should sell for. Buyers should compare the costs of renting to buying when making the decision of where to live under whose roof.
  • January 09 2011
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Profile picture for SteadyState
Christine -

Can you read? Did you graduate from high school? Read what I wrote:
1. I used an ultra attractive "low rate" of 4.5%
2. I assumed that the home would appreciate at 3% per year when rents only increase by 1.5%
3. The buy vs. rent calculator says I will NOT break even - not after 30 years even!

Now shop vomiting the NAR marketing points. Get educated. Learn reading comprehension. Learn some math and logic.
If you believe I am harsh (sorry Joan), please take my post and your response to your buyers and let them decide if you qualify to represent them in what will most likely be the most expensive transaction in their lives.

  • January 09 2011
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Profile picture for Lady Chattel
That's a no brainer situation........rent, rent, rent.......
  • January 09 2011
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With those numbers you should rent. There are some good web sites that have a lot of information regarding rental parity and the bubble that some markets still have; www.irvinehousingblog.com and www.patrick.net 
  • January 10 2011
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Profile picture for dacolan
A good agent will be quite familiar with the concept of rental parity, be intimately familiar with the local rental market and use this knowledge to help advise you. Other agents may simply refer to historically low rates and use a misinformed cliche like, "you're throwing money away renting, paying someone elses mortgage."
  • January 10 2011
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The rental price has nothing to do with determining a purchase price. If your local market is really this weak, I would rent or look elsewhere. I wish you the best of luck!
  • January 10 2011
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Profile picture for sunnyview
The rental price should be considered when buying property since having PITI close to rent gives the owner additional flexibility. Most agents do not consider it when recommending property, but I think that it should be a piece of the discussion.

An owner occupied purchase may not pencil out as strongly from an ROI perspective as a straight rental property, but they should be as close as possible so that if the worst happens the property will not choke the owner financially if they have to relocate unexpectedly and they will not be forced to sell in a down market.
  • January 10 2011
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Profile picture for numberonereo
Hi,
I don't think anyone has really answered you question so I will try.

Short answer is No.
I am A Cupertino Agent, My office is Located there as well.
In the higher end market and more desirable areas to live the purhcase price and Rental prices are mostly independent from each other.

The smart way, which it looks like you are considering is by looking at the numbers. I tell all of my clients before they make a purchase two things.
1) Does the numbers make sense? Is this home worth paying XXX a month to you?
2)How much would it cost you to rent a comparable home.
( many time it may cost a little more to own but for the added benefits that I will list below they are more than willing to bit the bullet.


For the last10 years it never worked out better to own number wise on a year to year basis in Cupertino.

The schools there really kept the prices up, so once homes start to appreciate more in the south bay, Cupertino prices will go up even higher maybe 5%, so you would be definitely banking on the appreciation more.

The only reasons why you would want to own in Cupertino would just be the basic reasons why anyone would want to buy over rent.


1) After 30 years you no longer have to pay any mortgage.( not to mention if you pay bi weekely it will be paid off in 23)
2) You will know that you can stay there as long as you want, with rentals you never know when the owner wants to kick you out/ move back in to the home/ sell the house.
3) A place to call your own, do what you want to the home. Color it how you want, Upgrade it how you want, etc


hope it helps.
  • January 10 2011
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Profile picture for sunnyview
"The smart way, which it looks like you are considering is by looking at the numbers. I tell all of my clients before they make a purchase two things.1) Does the numbers make sense? "

I see a contradiction. You say the numbers need to make sense and then you talk about painting the home any color you want. I can tell you that from a numbers perspective if appreciation in an area is flat or dropping, that you are better off painting your rental house whatever color you want when you move in and investing the difference between PITI and rent every month. When you move, you can paint it back before you hand your keys back to the landlord who has supported the difference in cost between renting and owning, paid all property taxes, taken all capital risk and paid for maintenance to boot.

Numbers may not be the whole story about whether or not to buy, but they should not be left out of the conversation if you see your primary residence as one part of a long term investment strategy. There are reasons to buy, but I believe that the decision to buy should be based on a sound financial foundation instead of an emotional lifestyle choice alone.

  • January 10 2011
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Profile picture for dacolan
The mortgage holder is spending $33K more annually than a renter in your market based on the numbers provided by SteadyState. While your mortgage holder would become a homeowner after 30 years, the typical renter would have saved the $990K difference (not including any interest or investment returns, not to mention the interest/returns made on the $270K down payment the renter never spent - of course, this also doesn't take expenses like maintenance, repairs (30 years is a long time), etc. into consideration that renters aren't responsible for).

At some point an informed buyer needs to ask themselves; How much is the ability to paint walls and change the landscaping worth to you?
  • January 10 2011
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