So I've been looking at some of the listings and am curious what the rule of thumb is for factoring in condo fees when trying to value condos. Condo A - 450k. fee of $200 per month. Condo B - 150k. fee of $800 per month. Assume same sf and that fees cover the same services. Everything else about the units are the same - taxes, capitalization rate, same neighborhood, etc. Catch is that Condo B is... [more]
So I've been looking at some of the listings and am curious what the rule of thumb is for factoring in condo fees when trying to value condos.
Condo A - 450k. fee of $200 per month.
Condo B - 150k. fee of $800 per month.
Assume same sf and that fees cover the same services. Everything else about the units are the same - taxes, capitalization rate, same neighborhood, etc.
Catch is that Condo B is very likely to raise rates in the near future. How much would Condo B need to raise its rates for Condo A to become a better purchase?
My thinking is that it would depend on how long one expects to hold the property. Holding the property for 10 years, if there is no change in the condo fees, Condo B is a better buy by 228k ($600 per month difference * 12 months * 10 years = 72 k). If Condo B raises its fees by more than $2500 over A, it wipes out the savings in purchase price over a 10 year period ($2600 * 12 * 10).
This is just my quick Excel calculations. Curious how others would approach it. This is such a critical issue in valuation I am sure there is alot of thinking on it.
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Response by JButton
over 13 years ago
Posts: 447
Member since: Sep 2011
this has been covered in the past so you can search but in my view you have to look at what the difference in maintenance would translate in mortgage amount. so delta between these is $7200/year. divide that by mortgage rate you can get, say 4%, and you get $180k.
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Response by JButton
over 13 years ago
Posts: 447
Member since: Sep 2011
i mean mortgage amount you can finance w/ the difference.
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Response by ethana
over 13 years ago
Posts: 27
Member since: Mar 2012
thanks, that's very helpful. Had searched for previous threads on the topic but not found anything immediately. Will try again.
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Response by Ottawanyc
over 13 years ago
Posts: 842
Member since: Aug 2011
Well I think more fundamentally I would be quite worried why, if you're getting the same service, the prices are so vastly different. Is one grossly mismanaged? You sure that some of your home owner costs aren't covered in one and not the other? This is not a fee issue, it is a cost issue. Clearly there are more factors at play.
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Response by dc10023
over 13 years ago
Posts: 85
Member since: Jun 2008
I would calculate based on indefinite basis (as even if you sell if, the price you sell it for will be adjusted for the higher carry cost).
If you assume the cost of capital is 6%, then that is $20,000 price difference for every $100.
e.g. (800-200) x 12 / .06 = $120,000
If you know a bit of finance/cashflowing the formula of 1 period cashflow / discount rate = present value of all future cashflows is familiar. If not, trust me that this is the correct formula (or you can look it up)
I would say the discount rate should be higher than 4% as it should represent long term opportunity loss and liquidity/flexibility.
Also you can refine further by pre-adjusting the monthlies for tax savings...
If this is a specific question on these two properties (of approximately same location/quality/etc)... the 150k 800/mo is much better option. (Breakeven would need to be a discount rate of 2.4%. Though the discount rate can be discussed/argued... not even US government has a 30 yr discount rate of 2.4%)
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Response by dc10023
over 13 years ago
Posts: 85
Member since: Jun 2008
Btw, no tax adjustment for condo fees... Tax deduction adj could be made for coops' maintenance fees.
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Response by ethana
over 13 years ago
Posts: 27
Member since: Mar 2012
DC, appreciate the comment. Incidentally, the listing that prompted this "hypothetical" was a houseboat in 10024. Yes, I know that it is an inapt comparison with a condo. But I am interested in learning about valuation.
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Response by ethana
over 13 years ago
Posts: 27
Member since: Mar 2012
Sorry, I meant 20024.
I have uncovered a few interesting threads that touch on this issue but none that address it directly.
To clarify, you're comparing Condo A (price $450k, $200/month common) vs. Condo B (price $150k, $ common)?
Sounds like B is in Battery Park City...
You're financing 3x as much for Condo A so the interest expense could very well negate whatever advantage the $200 has over $800.
I could Excel the hell out of it, but I'm too lazy.
Factors to consider:
1) mortgage rate
2) interest deduction (your tax rate)
3) probability of A and B's condo expenses increasing
4) price increase percentage of A vs. B.
5) Time horizon of comparison. The longer you evaluate, the more advantageous is Condo A.
I chose A over B in my own decision. As much as I loved Battery Park City, the common charges were way too much and I elected to pay more for a house with much lower common charges.
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Response by JWL2672
over 13 years ago
Posts: 138
Member since: Mar 2012
Don't forget also that the Condo A's $450k price increases quicker than Condo B's $150k. (e.g. if prices double, A = 900k, B is worth 300k.)
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this has been covered in the past so you can search but in my view you have to look at what the difference in maintenance would translate in mortgage amount. so delta between these is $7200/year. divide that by mortgage rate you can get, say 4%, and you get $180k.
i mean mortgage amount you can finance w/ the difference.
thanks, that's very helpful. Had searched for previous threads on the topic but not found anything immediately. Will try again.
Well I think more fundamentally I would be quite worried why, if you're getting the same service, the prices are so vastly different. Is one grossly mismanaged? You sure that some of your home owner costs aren't covered in one and not the other? This is not a fee issue, it is a cost issue. Clearly there are more factors at play.
I would calculate based on indefinite basis (as even if you sell if, the price you sell it for will be adjusted for the higher carry cost).
If you assume the cost of capital is 6%, then that is $20,000 price difference for every $100.
e.g. (800-200) x 12 / .06 = $120,000
If you know a bit of finance/cashflowing the formula of 1 period cashflow / discount rate = present value of all future cashflows is familiar. If not, trust me that this is the correct formula (or you can look it up)
I would say the discount rate should be higher than 4% as it should represent long term opportunity loss and liquidity/flexibility.
Also you can refine further by pre-adjusting the monthlies for tax savings...
If this is a specific question on these two properties (of approximately same location/quality/etc)... the 150k 800/mo is much better option. (Breakeven would need to be a discount rate of 2.4%. Though the discount rate can be discussed/argued... not even US government has a 30 yr discount rate of 2.4%)
Btw, no tax adjustment for condo fees... Tax deduction adj could be made for coops' maintenance fees.
DC, appreciate the comment. Incidentally, the listing that prompted this "hypothetical" was a houseboat in 10024. Yes, I know that it is an inapt comparison with a condo. But I am interested in learning about valuation.
Sorry, I meant 20024.
I have uncovered a few interesting threads that touch on this issue but none that address it directly.
http://streeteasy.com/nyc/talk/discussion/3820-how-do-you-know-if-property-is-overpriced - wide ranging, and interesting
http://streeteasy.com/nyc/talk/discussion/11266-how-much-should-a-rental-cost-the-carrying-cost - just about the rent vs. buy, which is a popular topic
To clarify, you're comparing Condo A (price $450k, $200/month common) vs. Condo B (price $150k, $ common)?
Sounds like B is in Battery Park City...
You're financing 3x as much for Condo A so the interest expense could very well negate whatever advantage the $200 has over $800.
I could Excel the hell out of it, but I'm too lazy.
Factors to consider:
1) mortgage rate
2) interest deduction (your tax rate)
3) probability of A and B's condo expenses increasing
4) price increase percentage of A vs. B.
5) Time horizon of comparison. The longer you evaluate, the more advantageous is Condo A.
I chose A over B in my own decision. As much as I loved Battery Park City, the common charges were way too much and I elected to pay more for a house with much lower common charges.
Don't forget also that the Condo A's $450k price increases quicker than Condo B's $150k. (e.g. if prices double, A = 900k, B is worth 300k.)