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How to Determine If a Real Estate Purchase is a Best Buy

The reader will learn how to determine what is considered a good buy in todays real estate market.

How to Determine If a Real Estate Purchase is a “Best Buy”

There are number of ways to determine if a property is a best buy but for the purpose of this article we will focus on the following: 1.) Investment or rental property with minimal down payment that yields a positive cash flow after expenses. 2.) Property where the asking price is substantially below like kind homes that have sold within the last six months. 3.) Property where the quality or condition is above average, in a highly sought after area, in a neighborhood where the inventory for sale is relatively nonexistent and are selling at or below market value.

(1) The following is an example of the positive cash flow approach. In Waikiki, Oahu there is a unique category of property called condo-hotels. These are hotels where a majority of the rooms are privately owned and leased back to the hotel or to a management company. However, some find it profitable to manage the units themselves. Some of the more affordable and attractive buys are studio or one bed room units that have full kitchens.

In today’s market condo-hotels have unique financing issues. Due to various stigmas associated with transients and other uncertainties banks are reluctant to provide mortgages. As a result the prices for these types of purchases have dropped considerably. So in order to get into this lucrative market cash offers and seller financing is the order of the day. For those individuals who are able to maneuver in these waters it can be very rewarding.

(2) Further properties of this type where the asking price is substantially below like homes that have sold within the last six months should also be applied before making a commitment to buy. According to the Honolulu Board of Realtors the average price of a single family home on Oahu has dropped 16.2%. While the average price for a condo on Oahu has dropped 11.1%. This means that condos that are in better than average condition and selling below 11.1% of like kind properties sold in the past six months may satisfy the best buy criteria. For example, take a condo, one bedroom, Villa on Eaton Square, 582 square feet. It sold for $330,000 in March of 2008, compare that with Villa on Eaton Square, 681 square feet selling on the same floor today for $310,000. At first glance this only appears to be about a 6.5% drop in value, making it a so-so best buy. However upon closer examination when the difference in square footage is taken into account the picture improves dramatically. For example, the cost per square foot of the unit sold in 2008 is $567.01. While the cost per square foot of the unit currently for sale is $455.21. This reflects a 24.6% drop in price over the one year period which now solidly meets the best buy criteria.

(3) Here the focus is on single family homes above average quality in highly sought after neighborhoods where the inventory for sale is relatively nonexistent and are selling below market value; or condos meeting the same standards where the inventory for sale is relatively nonexistent and are selling below market value. For example 3 bedroom condos are relatively in short supply in both the Waikiki and the Kakaako area. For our best buy in this area my favorite building would be Koolani. Generally 3 bedrooms in this building sell for over a million dollars. Currently there are three 3 bedroom units on the market. They all come with two parking stalls. One boasts 1,392 square feet of living space and list at $949,000. The other boasts 1,374 square feet and list for $980,000. The third unit boast is 1,561 square feet and list at $1,195,000. There have been two sales in this building in 2009. One at 1,393 square feet and sold in March of 2009 for $1,040,000 and another at 1,561 square feet and sold in January of 2009 for $1,250,000. From this information the unit boasting 1,392 square feet listed at $949,000. would be the best buy of the three.

Example number (3) Single Family Homes in an area that is very sought after where the inventory is in short supply is Aina Haina Beach. There are currently three properties on the market. Since January of 2009 there has only been one sale. Although properties generally sell for well over $2,000,000 in this area there is currently a 3 bedroom, 1,128 square foot unit is average condition selling for $859,000. The other two homes on the market are a 3 bedroom at 2,152 square feet, average condition and a 5 bedroom, 3,731 square feet; they both list for $3,475,000. The one sale in this neighborhood was September 1st 2009. It was 5-bedroom, home at 6,930 square feet which, sold for $5,500,000. The 3 bedroom at $859,000 would appear to be a great buy in this case.

Recently stumbled upon a “Best Buy”, in the high end condo market listed at $2.9 million. The monthly taxes and fees total $5,675. It is a best buy for the following reasons:

  1. It has 4,286 sq. ft of living space and is in excellent condition.
  2. It is one of two true penthouses in the building with its own private elevator.
  3. The other true penthouse at 4,607 sq. ft. which is comparable is listed at $4.98 million
  4. The two true penthouses are on the top, the 38th floor. There is a double unit Penthouse on the 35th floor which has 5,359 square feet of living space. It is listed for $4.6 million.
  5. Then there are two other units on the 35th floor one at 3,111 square feet, the other at 3,225 square feet listing at $2.55 million and $2.695 million respectively.

There is a caveat however. Buyers should never solely base a best buy on list price. The sold price is the determining factor.

However, to find comparables that have sold in the pass year is very difficult. The only properties that come close were sold in late 2008 and early 2009. They were penthouses or luxury condos that sold on high floors in the same building. There were a total of four in all:

  1. 1,981 square feet for $3.3 million
  2. 1,981 square feet for $3.67 million
  3. 2,222 square feet for $3.8 million
  4. 2,574 square feet for 4.9 million

Maintenance fees notwithstanding, with these comparative results one can see why the $2.9 million example is considered a “Best Buy”.

The following are true three bedrooms in Waikiki. All are fee simple. The first is listed for $522.900. It is on a high floor on Ala Wai Blvd. and over looks the canal. It has 1130 square feet of living space and an open lanai of 100 square feet. There were two units sold in this building in August of 2009, one having 1084 square feet of living space and 150 square foot lanai. It was listed at $535,000 and sold at $495,000. Then there was another. It has 1348 square feet of living space and 147 square foot lanai. It was listed at $548,000 and sold at $505,000.

The next example of a 3 bedrooms comparable with that mentioned at Ala Wai Blvd. is on Ala Moana Blvd. It list for $300,000 on a low floor. The square foot living space is 912 and 182 square feet for the lanai. The other Ala Moana Blvd. unit is on a higher floor and list at $485,000 and has 912 square feet of living space and 182 square feet for the lanai. You have to go back as far as November 2007 to find a 3 bedroom that sold at Ala Moana address. It was listed for $458,000 and sold for $430,000. The high floor generally command more money because the view is better and the street noise is buffeted but if the goal is to rent out the unit then at $300,000 this is a good investment.

Finally worth mentioning, there is a 3 bed room on Ainakea Way with 1,165 square feet of living space and 194 square foot lanai. It list at $499.000. It should be noted that there have been no 3 bedrooms sales in this building as far back as January of 2007. It may not satisfy our first or second criteria but if the intention is to live there is may satisfy category number (3).

In the above cases we have discussed the three different ways to identify  “Best Buys”.

  1. Investors who purchase a property with minimal or 30 to 40% down and the monthly rent minus all expenses yield a positive cash flow. The larger the positive cash flow the better.
  2. Then there are those properties of equal value and quality where the list price is significantly below the sales price for the most recently sold like kind.
  3. We also discussed those properties in highly sought after areas where inventory is scares or availability is rare; and when a property becomes available it is price aggressively to sell.

Now lets propose another condition for “Best Buy”, this has to do with the skill of the real estate agent. There are cases where the experience and knowledge of the real estate agent can turn what is not an obvious best buy into a great buy. It is the ability of the agent to negotiate and filter accurate information to resolve complicated issues that can prove invaluable to the client turning what would be an unattractive buy because of problems at first glance seeming very difficult to solve into winner. The cases that come to mind are: 1.) Zoning Issues; 2.) Foreclosures; 3.) Short Sales; and 4.) Fixer Uppers

These are not as obvious as are the first three examples but as a buyer when you come across these types of situations or if they are a part of your purchasing strategy make sure the agent you are working with has a good deal of knowledge in traversing these waters. A good agent in this case can mean the difference of hundreds of thousands of dollars in savings. As opposed to going it alone, you could be purchasing a money pit.

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