Building Houses or Condo’s for Sale? Bad Dog Ginger!

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The wisdom of Gary Larson’s Far Side
This afternoon I got another phone call from someone convinced that they should develop condominiums and sell them. I am really struggling to find a better way to communicate on this really basic point. I feel like the guy in the Far Side cartoon above.
 
If you have the know how required to produce buildings that people live and/or work in, using that very valuable resource to produce houses or condos that you sell to people has a huge opportunity cost.  Opportunity cost is a big deal, as in lost opportunity and wasted opportunity.  What else could you have been doing instead of building and selling?
I cannot emphasize this enough. If you have the wherewithal to build something, Don’t sell it.  Hold onto it and rent out space in your building. The market for new or renovated rental buildings is hugely under-supplied in most markets, particularly in anything even remotely resembling walkable urbanism.  There are lots of places where a couple of decent buildings will have a wonderful effect upon the neighborhood.  The people who fill in the missing teeth in the neighborhood will do well, while doing good.
 
Our culture has created completely unrealistic expectations for what is supposed to happen when you buy a home. Avoid putting yourself in a place where you have to deliver on all the delusional nonsense that fills the heads of people who watch too much HGTV. Build to hold and rent. Build in places where the amenities are exotic stuff like proximity to transit, day care, $2 coffee and a genuine local bar.
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5 thoughts on “Building Houses or Condo’s for Sale? Bad Dog Ginger!

  1. basenjibrian April 19, 2016 / 2:49 pm

    Isn’t one response, though, that injecting multiple new property owners into the neighborhood will have significant benefits?

    • rjohnanderson April 19, 2016 / 9:40 pm

      Sure, that is one response. But seriously, the opportunity cost is very high if you want to be the person facilitating getting a bunch of new homeowners into the area where you are working? How much nonsense do you want to deal with in order to do that? The expectations of home buyers are much harder to meet than the expectations of most rental tenants. Also each sale is completely dependent upon how rigorous the appraiser is. The appraiser who you will probably never meet. Consider the potential return on brain damage you are likely to see with a for sale offering. Think about the warranty and liability tail. Handicap the likelihood of encountering the homebuyer from Hell.

  2. basenjibrian April 29, 2016 / 3:34 pm

    Ah!

    Good points, all!

    You are of course coming from the perspective of the builder/developer. My question was mostly from a class biased perception of the Great Virtuous Homeowner as the savior for a neighborhood.

    LOL.

    In a gig economy with few “permanent” jobs, does ownership even make sense from the perspective of the resident anymore?

    • rjohnanderson April 29, 2016 / 5:42 pm

      For people navigating short term engagements in the Gig economy, I think owning a building makes sense if you own a building that generates cash flow. Owning a duplex, triplex, or four-plex could provide an opportunity to live rent free while having depreciation expense to deduct from your other income. If you do project-based work, cash flow can be erratic, so having your tenants pay for the building you live in can be a real advantage if you don’t know if you will be able to pay your mortgage on time every month.

      If you can also fold a small office or workshop into your building, even better. Owning a building that has cash flow is a great hedge against month to month swings in income. That is very different from owning a house, particularly if you need two regular paychecks to cover the mortgage. If you read Arthur Nelson’s research you will see that we are headed into a period where single family detached houses are oversupplied, which will not help them appreciate in value. Own something in a walkable neighborhood close to services , preferably something that generates cash flow.

  3. Danny Cerezo June 9, 2016 / 9:40 am

    Hi Richard, I see your points and they are all very valid and I agree with them in fact. However, I just wanted to say that I build single family detached homes for sale, BUT, they’re in very urban, and very dense L.A. under the Small Lot Subdivision Ordinance passed in 2006. That allows us to take one 6,000 SF lot and put 4 houses on it. We are creating home ownership opportunities in very dense urban cores where people do live close to transit, a local bar, dry cleaners,etc. If you’d like to find out more, check out the City of LAs Small Lot Ordinance here: http://urbandesignla.com/resources/SmallLotDesignGuidelines.php

    I get the “build and hold” argument and some developers like that. I just think that there are others that don’t. That doesn’t mean they’re wrong, and the build and hold guys are right. It just means, they’re different.

    Oh by the way, when we have our open houses for these homes, the lines are out the door and they sell in a flash!

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