DealWatch: Pearl Condos Trading Below Market Value

Posted on 07/15/08 7:00 AM

Market inefficiencies occur when an asset is trading below or above fair market value. If you subscribe to the Efficient Market Theory you will likely state that it is impossible to “beat the market” because prices ALWAYS incorporate and reflect ALL relevant information. Proponents of the Efficient Market Theory believe that there is perfect information in the market i.e. whatever information is available about an asset to one investor is available to all investors. The bottom line is that an investor should not be able to beat the market since there is no way for him/her to know something about an asset that isn’t already reflected in the asset’s price. If you feel this also applies to real estate, don’t read on. My experience, however, is that all home buyers are not created equal. There are ample examples of buyers who over-paid, and a closer look at some of the current listings would suggest there are also a number of condos out there that are trading below value.

Current PEARL DISTRICT Opportunities

Henry Condo, roughly 1000 sq. ft. unit, priced in the $475k-$525k range. Let’s call this one condo A. Condo B is the same unit three floors down, currently on the market for $25k MORE than condo A. Hello, condo B is three floors down from condo A, not up! Typically the higher you go the more you pay – usually between $7k-$10k per floor. Basically condo A should be trading at a premium to condo B, unless the latter’s finishings/features warrant a higher price. However, both have pretty much the same views and finishes. As far as I can tell (yes I have actually seen both) there is little to explain this rather interesting pricing strategy, other than the fact that condo B is probably dressed up a little more for the occasion. Condo A is also trading at a discount to a similar unit a couple of floors down that sold back in 2007. It has a slightly different floor plan, but roughly the same square footage and the same views. At just over $500 per sq. ft condo A is trading at somewhat of a historic low as far as list price/sq.ft is concerned at the Henry!

Streetcar Lofts, unit in the 1300-1500 sq. ft. range, listed in the upper $500k. Virtually the same unit, three floors below, sold nine months ago for the same price as the current listing. Both have comparable finishes, the unit that sold nine months ago has a small deck, the current was “only” a balcony. Bear in mind the current listing is three floors up and don’t forget we’re comparing sold price to list price. It is unlikely the current unit will sell for the list price, especially since it is a short sale/distressed property. The fact that it went pending not too long ago and now is back on the market also doesn’t exactly support a strong position for the seller. Thus, a strong buyer could probably pick this one up at a nice discount to the already discounted list price.

Lexis Condo, smaller unit, listed considerably below $200k. The seller of condo B, its twin brother – one floor above condo A, is asking for a whopping $40 more. That’s a lot of money in this price category and one floor up doesn’t really support quite such a price hike. Now, you could still argue that just because condo B is priced out of line with its twin brother, that doesn’t mean that condo A is a good deal on a historic comparison. So let’s look at some of the recent sales. Hmm, looks like there’s another sibling who got “pawned” off not too long ago – this time one floor down from condo A. Condo C, equal in size and finishes to both of his brothers sold back in Nov. 07 for $30k more than the middle child. This could indeed be a case of middle child syndrome, but more likely the seller of condo C was just lucky and now the owner of condo B is trying the same trick.

If real estate markets are in fact efficient, as some suggest, why is there such pricing disparity for essentially identical condos? You tell me…

Source: RMLS as of 07/15/08

Click on Agent503’s Condo Map to locate the condos/lofts mentioned above.