Model Homes

It isn’t unusual for developers to sell their model homes and lease them back.  GMAC had a whole division devoted to this – it  per month.  frees up a lot of capital for the developer.  Some model homes are sold to individual investors.  This is primarily an appreciation play, and we know how THAT turned out during the bubble.  A model home listing hit the market today at Les Maisons at Montreux

20540 Latour may be the oddest listing I’ve ever seen.  The model home is a 3660 SF 4/4.5, fully furnished, and listed for $1,295,000.  (20600 Latour seems to be the same plan, and is currently offered by the developer for $1,475,000, just reduced $200,000, and has an early 2008 MLS number)  Some listing terms:

–  Buyer to lease-back home to the developer for 2 years for $5000 per month.

–  Developer has the option to extend the lease-back period for an additional 2 years.

–  Developer has the right to repurchase the home at 110% of the sales price.

Is this the absolute worst opportunity ever offered on the MLS?  Assuming 100% financing at 6%, the monthly mortgage is about $7800 (I’m using 100% instead of 80% to account for lost opportunity cost on the down payment, but it doesn’t really matter).  Property taxes are $11,117 per year, or about $925 per month.  Homeowners insurance would run about $650 per month, based on .5% of purchase price annually.  You might have to increase liability insurance due to the model home usage.  HOA dues are estimated to be $550 per month, including yard maintenance.  Throw in garbage service and a few light bulb replacements, and the buyer’s monthly cost is $10,000 to recover $5000 in rent.  Over a 4 year lease-back period, the buyer would be negative close to a quarter million dollars!  And then be stuck with dumpster charges to get rid of all that heinous staging furniture.

I miss Diane’s monthly reports for their terse appraisal of the market.  But even when she "retired", market supply in the over $1M market vs. demand was approaching infinity (and beyond!).  It isn’t a market segment anyone expects to heal soon.  But even if it did, the developer has a "call" in place at far less than you have lost on carrying this house.  Who would be fool enough to take this deal?  Is there a plutonium level tax bracket I am unaware of that makes this deal pencil out?

No axes to grind here, just thought you readers might like a little levity and the chance to tee off on Montreux as a whole again.  It’s been a while.

 

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About Mike McGonagle

An architect, business owner, and compulsive public records hacker, Mike reads the tea leaves of the local real estate market from a unique perspective.. A former Chicagoan, Mike earned his MArch from Harvard University. Mike can be reached at mike@macassociates.com or 775-345-7435. His continued musings can be found on the REreno.com blog.
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21 Responses to Model Homes

  1. Avatar dirty deeds says:

    Is $70/sqft a good deal for an almost new house with an added $25k in upgrades?

  2. Avatar Gary says:

    $650/month for homeowners insurance? Wow that is unreal!

  3. Nice post Mike, I will bookmark your Blog!

  4. Avatar SkrapGuy says:

    Levity indeed, Mike. Hard to figure any scenario in which this deal makes any sense.

  5. Avatar bob_c says:

    can i rent a room in this casa for $500/month?

  6. Avatar billddrummer says:

    Reminds me of an investor who wanted me to sign a lease/option on a 3/2/2 house in Sparks Suburban, constructed in 1994. Nothing special, original appliances, no amenities, your standard starter home for young married couples.

    The lease/option agreement was 23 pages long!

    I beat feet out of there with no remorse.

    I wonder if the guy ever got a tenant?

    Talk about things that make you go “Hmmmm.”

  7. Avatar Mike McGonagle says:

    20600 Latour received a NOD today from WFB. $804,217 plus $21,490 fees owing on the 1/25/08 $1,125,000 construction loan base on a 8/5/09 default. I think WFB may also hold a $120,000 prorated loan on the land (it’s complicated chain of ownership, but the loan would be for about 50% of what the developer paid for the lot). Listed at $1,475,000

    WFB issued construction loans on 3 other Les Maisons properties on the same day, but no NODs yet. My guess they are in the same default condition. 20520 Latour, $1,125,000, listed for $1,335,000; 20540 Latour (the model)listed for $1,295,000, $990,000; and 20620 Latour, $990,000 not listed. Expect NODs shortly.

    20560 Latour is listed at $1,788,000 and 20580 is listed at $1,649,000. These may have been self financed.

    I think you could pick up 20600 for the $825K or so owed to the bank and maybe closer to $600K if no one at WFB is minding the gate. If not today, in a couple of months as the foreclosure proceeds.

  8. Avatar OhPlease says:

    but, but, but I thought the bottom is in.
    I should think that buyers would be “snapping up” these properties now that we know prices have stopped falling.

  9. Avatar skeptical says:

    I do believe Montreux is doomed. What demographic would pay $1000/month for property tax, $500/month for HOA, and $500/month for property insurance all in addition to their $5k+/month mortgage?

    Banksters with that kinda money ain’t looking for a place in Reno. IV, maybe. Reno? No way.

    Much like Somersett, Montreux is a big bubble baby. Built during the bubble, with a bubble mentality, based upon bubblenomics — (i.e. free money).

    People can debate the status of the larger Reno real estate market. However, I don’t see how anyone can argue that Montreux is close to bottom. There will be a lot more price destruction there before the bottom feeders are even tempted, considering the massive built-in costs of owning there.

  10. Avatar billddrummer says:

    To Mike,

    The NOD on 20520 Latour showed up today.

    And WFB filed an NOS on 4165 Drop Tine Ct. on 5/6/10. The NOS references a construction deed of trust recorded 8/2007–current balance $1,189,752.98. There’s a lot loan for $358,000 subordinated to the WFB deed of trust, granted by the land owner–one of the out-of-towners that developed the upper reaches of ArrowCreek.

    All the other lots in the cul de sac are vacant. This is a nice McMansion–4,730 s.f., 4 BR/3.5 BA, 1474 s.f. attached garage, and another 830 s.f. detached garage (mancave?).

    Why this is relevant to Les Maisons?

    The principal behind the construction company on the Drop Tine house is the same as the one on all the Latour homes. I wouldn’t be surprised if the construction company built the Montreux houses.

    Listed for $999,999, but you could probably swing it for $825,000.

  11. Avatar smarten says:

    Just out of curiosity Billdd [and I haven’t done any title research], but is the construction company that developed Latour the same one that our buddy Michelle Plevel is related to [Bay Area]? Asked a bit differently, is the listing agent on the Latour property the one and the same Michelle Plevel?

    Sounds to me like the construction loan DIDN’T include a land advance [because the seller carried most/all of the purchase price back], which would mean someone had documented a wholesale cost to build in the slightly over $200/sq ft range.

    At the $825K number you speculate, we’re talking about $150/sq. ft for the improvements and the land for free! Depending upon the quality of improvements, on paper, this might represent good value [if this is the kind of house you’re interested in (Tom?)].

  12. Avatar billddrummer says:

    To smarten,

    It doesn’t appear that Michelle Plevel has an interest in this listing. The listing is through Dickson Realty, co-listed by J.P. Menante and Dolores Zunino. Oddly enough, the agents are both multi-generation Renoites, I think.

    The construction company is run by a local person as well, although the developer for this section of ArrowCreek is out of Dallas.

    I believe your cost to construct is spot on. Carrying expenses (HOA dues) at ArrowCreek are lower than Montreux, and the slide show makes the house look attractive (although I would junk all the furniture at closing).

    The $825M number makes sense to me because WFB doesn’t want a multi-million dollar REO, even though it’s a really big bank. They’d have to sit on it for years (the listing originated in 2008), and it’s just not worth the trouble.

    As far a build quality, it might be very good. The builder did a lot of homes in Montreux at similar costs/s.f.

    Trouble is, it doesn’t appear that any of the ones he started in 2007 have sold.

  13. Avatar billddrummer says:

    To Mike,

    On 5/13/10 Wells Fargo filed an NOD on the remaining 16 lots in the Les Maisons subdivision. The NOD references an outstanding balance of $1.5 million, and the loan has matured.

    Lots appear to be in the 0.4-0.6 acre range.

    So, $94,000/lot for a custom subdivision in Montreux.

    Sounds like a great deal.

  14. Avatar billddrummer says:

    Further on Les Maisons-

    20540 Latour received an NOD on 5/12/10. The NOD refers to a deed of trust that matured 2/5/10, and is now showing an outstanding balance of $971,715.72.

    Could the sale/leaseback listing be a bluff?

    By my count, the borrower has until June 7th to cure the default.

  15. There is some misinformation here, in regards to the Les Maisons homes/models. Here are the TRUE details:

    20540 Latour (one of two Les Maisons models) sold on 7/6/10 for $1,150,000. There was no lease back involved in this sale, nor was it ever marketed with a lease back. It was a “short sale”. The bank cooperated fully with the seller to quickly make the sale happen.

    20520 Latour (the other Les Maisons model) is currently for sale for $1,595,000, including all furniture. No lease back is offered. The lease back concept was taken off the table on 5/22/10. When this home was marketed with a lease back, the listing price was $1,275,000.

    Myself, and my parnters Rob Wonhof, Jan Houston, and Monica Gore are the listing agents.

  16. For clarification, the HOA dues for Montreux are $250/Mo.

  17. Avatar Mike McGonagle says:

    Brooke et al, all of the information and links on the original were taken directly from the then current MLS listings for the said addresses. The estimated HOA (including property maintenance) dues quoted was taken directly form the listing at the time. If the addresses were mixed up, it was because the listing agent at the time messed them up.

    Congratulations on your sale of 20540. The “choose your own finishes” properties will be interesting to follow.

    Hey, and questioning comments or not, I will totally defend what I put up at RRB in the first place.

    But I have to ask, why was importance to you to respond to a dead thread? Does RRB actually have some clout here?

  18. Avatar Reno Ignoramus says:

    Mike I suggest that the blog has had a significant following in the Reno RE industry since the Diane days. Not many realtors have ventured onto the blog over the years because of the blog’s finely tuned realtor bullsh!t detector. Remember when Chase Nation first came along?
    So thanks to Brooke from Dickson Realty for making a comment. Maybe she would be willing to offer her assessment of the over $1 million segment of the local market, in light of the fact that sales over $ 1 million now comprise about 0.2% (yes that’s two tenths of one percent) of all closed deals in Reno-Sparks.

  19. Avatar Martin says:

    Actually, RI, according to Guy’s Chase charts, there were 2,685 closed sales of SFRs in Reno-Sparks from 1/1/10 to 6/30/10. 15 were for $1 million or more. Thus, the percentage is not 0.2%. It is 0.55%. About one half of one percent.

    I realize this is like counting molecules. The point is that the $1 million market in Reno essentially does not exist. There are some microscopic traces of it, but not much more.

  20. Avatar GrandWazoo says:

    I won’t really be happy until all the 2005-2007 mortgage brokers come back and tell us what they are doing now. Remember the guy who boasted the negative amortization mortgages he sold all over Reno really _were_ in the best interest of his customers? Remember the loan queen?

    I don’t know where they all are these days, but I think something like the leper colony in “Ben Hur” would be a good start.

  21. Avatar Reno Ignoramus says:

    Hey Wazoo,

    Angela was her name. I believe that her comment that buyers ought to beware of paying too little for a house still ranks as the Number 1 dumbest comment ever made on the RRB. The loan guy that you refer to was up there on the list as well. This was the guy who said that nothing down neg-am loans were the finest consumer-oriented product ever devised because they “helped otherwise neglible” people buy a house and pursue the American Dream.
    The bubble brought many memorable moments to the RRB.

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