Can This House Sell for $500 Million?

This Bloomberg piece profiles the rise of the spec housing market, where developers are building houses prior to having negotiated a contract with a buyer. The hope is that ultra high net worth individuals will be able to tour the property once it is completed, fall in love with it, and purchase the property.

Case in point: a 74,000 square-foot house being built in Bel Air, a neighborhood of Los Angeles. Here is what this house will look like, per an artist’s drawing:

house

Bloomberg:

Nile Niami, a film producer and speculative residential developer, is pouring concrete in L.A.’s Bel Air neighborhood for a compound with a 74,000-square-foot (6,900-square-meter) main residence and three smaller homes, according to city records. The project, which will take at least 20 more months to complete, will exceed 100,000 square feet, including a 5,000-square-foot master bedroom, a 30-car garage and a “Monaco-style casino,” Niami said.

So can the house sell for $500 million? It seems possible but unlikely. Consider that the priciest home ever sold in the world was a $221 million London penthouse purchased in 2011, according to Christie’s. The most expensive properties on the market today include a $425 million estate in France’s Cote d’Azur, a $400 million penthouse in Monaco, and a $365 million London manor.

Regardless of whether this house sells for $500 million, it appears the spec market is booming:

New luxury mansions are proliferating in Los Angeles, often without buyers in place, known as building on spec. Niami, whose production credits include “The Patriot,” a 1998 action movie starring Steven Seagal, last September sold a Los Angeles home to entertainer Sean “Diddy” Combs for $40 million.

That was followed by the December sale of a Beverly Hills spec home for $70 million to Markus Persson, who last year sold his video-game company to Microsoft Corp. for $2.5 billion. In January, hedge-fund manager Steven Cohen closed on a Beverly Hills spec home for more than $30 million.

Los Angeles luxury homes have ballooned in size in the past 30 years, said Peter McCoy, contractor for a 53,000-square-foot mansion under construction on a Bel Air hilltop visible from Niami’s project.

On How the Wealthy Hide Money in New York City Real Estate

An excellent piece in New York Magazine on the booming real estate market with ultra high net worth individuals. Buildings such as 432 Park Avenue and 111 W. 57th are not yet completed but are selling out quickly.

The piece does a great job explaining how difficult it is to police the flow of money into real estate

The first rule of selling property to the ultrarich is that you can’t try to sell them property—you offer them status, or a lifestyle, or a unique place in the sky. A marketing video for 432 Park Avenue, scored to “Dream a Little Dream,” features a private jet, Modigliani statuary, and Harry Macklowe himself costumed as King Kong. One recent morning, at the development’s sales office in the GM Building, Wallgren led me down a hallway lined with vintage New York photographs, through a ten-by-ten-foot frame meant to illustrate the building’s enormous window size, to a scale model of Manhattan.

Extreme wealth demands extremely elaborate wealth management, and anyone who has a few million in spare cash will probably already have an entrée to the cloistered world of private banking. An anonymous high-net-worth client of Credit Suisse, who spoke to U.S. Senate investigators after taking advantage of an amnesty for tax cheats, described the process by which he would manage his funds when visiting Zurich. A remote-controlled elevator would take him to a bare meeting room where he and his private banker would discuss his money; all printed account statements would be destroyed after the visit.

The ways these ultra-rich go to to conceal their holdings is extreme:

Behind a New York City deed, there may be a Delaware LLC, which may be managed by a shell company in the British Virgin Islands, which may be owned by a trust in the Isle of Man, which may have a bank account in Liechtenstein managed by the private banker in Geneva. The true owner behind the structure might be known only to the banker. “It will be in some file, but not necessarily a computer file,” says Markus Meinzer, a senior analyst at the nonprofit Tax Justice Network. “It could be a black book.” If an investor wants to sell the property, he doesn’t have to transfer the deed—an act that would create a public paper trail. He can just shift ownership of the holding company.

The theatrical secrecy is designed to build personal trust between such bankers and their clients, which is especially vital when the goal of the transactions is to conceal assets from the prying eyes of rivals, vengeful spouses, or tax collectors. Moving the money itself is a relatively simple matter: A wire or a suitcase can convey cash from China to Singapore, or from Russia to an EU member state like Latvia, and once the funds have made it to a “white list” country, they can usually move onward without triggering alarms. Concealing the true ownership of a property or a bank account is trickier. That’s where the private bankers, wealth advisers, and lawyers earn their exorbitant fees.

Worth the read.

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Bonus: see this Vanity Fair piece from May 2014 which highlights the major high rise condos being built in New York City.

How Much is the White House Worth?

Zillow has published one of its Zestimates, claiming that the White House, a 16-bedroom, 35-bathroom single-family home located at 1600 Pennsylvania Avenue would be worth about $319 million on the open market.

The White House isn’t for sale, but Matthew Yglesias did a bit of research and found the price at odds:

This turns out to be rather substantially at odds with the Washington, D.C., Office of Tax and Revenue’s take on the matter. Assessor Folu Addy’s take on the property is that it’s a commercial building worth almost $1 billion. The difference seems to largely come down a different assessment of the land involved. Washington views parcel 0187S 0800 as a quite expansive area whose land alone is worth $963,825,340. The physical structures are valued at a mere $31,174,660.

Hmm.

The Woes of Atlanta’s Housing Market

The New York Times has a story on Atlanta’s depressed housing market. It paints a dire picture of my hometown:

The reasons for Atlanta’s housing woes are both representative of the nation’s troubles and special to this former boomtown, where housing appreciated handsomely, though not to the lofty heights of Las Vegas, Miami and New York.

Where the region once attracted thousands of prospective home buyers drawn by plentiful jobs and more affordable living, that influx has dwindled. Local unemployment, at 9.2 percent, is slightly higher than the national rate, in part because one in every four jobs lost was connected to real estate, a much higher rate than in the rest of the country. Those jobs have yet to return, while even people with work are having trouble qualifying for loans.

The region, plagued by mortgage fraud and developers who dotted the exurban landscape with large luxury homes that never sold, is inundated with foreclosed properties. In fact, Atlanta has the most government-owned foreclosed properties for sale of any large city, according to the Federal Reserve.

Quite simply, it’s a buyer’s market right now:

Atlanta has suffered greatly from a contracting pool of home buyers. The number of people moving from within the United States to Atlanta peaked at 100,000 in 2006 and plunged to just 17,000 by 2009, the latest census figures available.

On Moral vs. Contractual Obligations

From a very good personal story in The New York Times, about a financial planner who ended up losing his house:

Borrowing that much had seemed to make sense when the value of the home was still rising substantially every year, taking our net worth higher with it. But at that point, there was no way we could sell the home for anywhere near what we owed. Some of my friends were already doing short sales, where the bank agrees to let you sell the house for less than your loan balance. I was also aware you had to be three months behind in your payments before the bank would talk to you about the possibility.

At first, I dismissed the idea of a short sale. Late that summer, I sat down with a really close friend in Las Vegas, someone I looked up to. He cut to the heart of the matter right away: Why, he wanted to know, were we still making the payments?

Because I have a moral obligation, I said. You pay your debts.

He proceeded to explain that I didn’t have a moral obligation to the bank. I had a moral obligation to my family. I had a contractual obligation to the bank, along with a clear moral obligation to be honest in my dealings. What he was asking was this: Which is more important? Your contractual obligation to the bank or your obligation to your family to preserve your ability to make a living?

I had never thought of it that way. But it made sense. I summed it up to myself like this: I have a contractual obligation to the bank (as well as a moral obligation not to skirt the consequences of breaking it: losing my house and wrecking my credit score). But my moral obligation to my family trumps the contractual obligation to the bank.

I found this paragraph particularly enlightening. Do not be quick to judge others’ financial habits:

For one thing, I am less quick to judge other people’s financial behavior. I’m also more inclined to take into account personal factors that determine how people behave around money.

I have a friend who is going through a tough time financially. He has a high income, but is burdened by debt from a few real estate deals that went south. He continues to take fairly expensive ski trips. That would seem irresponsible in his situation, and maybe they are.

But I now realize that it is not that simple. Maybe those trips are keeping the guy alive, or saving his marriage or keeping him sane enough to work.

The author of the piece, Carl Richards, is coming out with a book The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money early next year.