John Coons
Realtor®
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By John Coons
Part 3
Imperfect Markets
The housing market in many areas are impacted by government regulations. One example is rent control. In Berkeley, San Francisco, New York and many
other areas rent control has impacted the value of some properties. The value
of a single family home may not be impacted, because when sold the buyer
most likely will move in and live there, but the value of multi-unit buildings
are sold based on the rental income.
Rent Control Example:
This example is based on an actual case.
Let's say you purchased a three unit building with very low rents for
$1,200,000. The rent on each unit is $1000/mo., but the current market rent
is $2000/mo. You can not raise the rent on the existing tenants, unless they
leave. You can not ask them to leave, unless you move in and stay for two
years. In this case the buyer purchased a non owner occupied building,
and then moved in to one of the units. He found out that one of the tenants
had moved out and was secretly sub-leasing to other people.
This allowed the new owner to raise the rent on that unit to $2000/mo.
After two years he moved into the remaining low rent unit. Now he had
two units up to market rent. After fixing up all the units and being there
four years he sold the building based on current market rents for
$2,500,000.
Affordable Housing Example:
In Santa Barbara home prices are too high for police, firemen, and nurses to
live in town. In an attempt to make housing affordable to middle income
people they have properties designated as "Affordable Housing." These homes
are sold for fixed prices, not market value for a number of years (say 30 years).
These homes can sell for $350,000 right next to an identical home selling for
$1,000,000+.
There are other examples where the value of two almost identical properties
sell for vastly different prices due to zoning, regulations, or controls of some
kind. This method of investing attempts to remove these controls to in order
to sell the property for its true market value.
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