A lot, as the co-founder of YouTube is finding out.
At a certain level of wealth, these things aren’t the end of the world. But they do add up.
Back in September 2007 – so 10.5 years ago – at absolute peak frenzy of the Housing Bubble in San Francisco, the co-founder of YouTube, Steve Chen, purchased a two-level 3,030 square foot condo, #2402, at the high-rise Ritz-Carlton Residences on 690 Market Street for $4.85 million. At the time, it was an unfinished empty shell.
He then built it out as “überswank bachelor pad,” as SocketSite called it, including a double-height and double-wide living area, with a build-out budget “estimated to have been nearly as much as the shell.”
So in terms of the build-out costs, let’s round that down to the nearest million: $4 million. OK, bear with me; if we’re off by a few hundred thousand bucks, no big deal because these are adding up to be really big numbers.
At this point, not counting Home Owner Association (HOA) fees, property taxes, insurance, mortgage interest, and other expenses, he has plowed $8.85 million in it.
But then, without ever having lived in his trophy condo, he got married, had kids, and moved down the Peninsula. “And according to a plugged-in source, Chen is finally giving up the penthouse,” SocketSite reported in October 2012, when the pristine, unlived-in unit came on the market for the first time. His asking price, to get out from under it: $8 million. But it didn’t sell, and he pulled it off the market.
A few days ago, according to Reator.com and Zillow, the still unlived-in condo came back on the market but at a big discount from what the aspirational price had been in 2012. Now the asking price has been cut to $5.95 million.
So let’s do the math of how much money Chen might have by now plowed into this condo over those 10.5 years without ever having lived in it.
Property taxes: According to Realtor.com, the property taxes were:
- 2015: $80,728
- 2016: $81,456
- 2017: $81,310.
Property taxes in California can only increase by a maximum of 2% per year while under the same ownership, thanks to Proposition 13. When the property is sold, the next owner gets to pay property taxes based on the new assessed value, and that often means a large increase for the buyer.
Chen bought at the peak of the last Housing Bubble. Prices in San Francisco declined from late 2007 through 2011, bottomed out in January 2012 and then began to surge again.
So let’s assume Chen’s property tax bill started at $70,000 in 2007 and rose to $81,300 by 2017 in equal increments. This would amount to an average of $75,600 a year or $794,000 for the 10.5-year period.
Home Owner Association fees. Zillow lists monthly HOA fees of $3,640. Let’s assume that they started out lower, say at $3,200 a month and increased in equal increments, for an average of $3,420 a month. That’s $35,910 per year, and about $377,000 for the 10.5-year period.
Brokerage commission. The condo is listed by Sotheby’s. If the unit sells at asking price, and if the brokerage commission is 6%, it would amount to $357,000.
So the estimate costs, not counting insurance and mortgage interest:
- Acquisition: $4,950,000
- Build-out: $4,000,000
- Property taxes, 10.5 years: $794,000
- HOA fees, 10.5 years: $377,000
- Sales commissions: $357,000
Subtotal: $10.48 million.
So after a sale at asking price of $5.95 million, minus the $10.48 million in costs over the 10.5-year period, Chen would have lost $4.53 million on his bachelor-condo adventure, without ever having lived in it. This loss would be almost equal the original purchase price of $4.85 million. Let that sink in for a moment: to lose $4.53 million on real estate that had original been acquired for $4.85 million!
This assumes that he didn’t insure it and that he didn’t finance any part of it, and that he can sell it at the current asking price. In the unlikely scenario that he financed $8 million in purchase price and build out costs, it would add about $2.5 million to his total costs before taxes.
Perhaps he can sell the unit at the current asking price. But that’s not a certainty. After a historic construction boom, San Francisco is awash in high-end units. For example, there are five other units listed for sale on Zillow in the same building on 690 Market Street – and OK, I get it, they’re not “überswank bachelor pads,” but still, they’re on the market competing with each other in the same building:
- #202: 1 BR, 1.5 bath, $1.15 million, 29 days the market.
- #504: 2 BR, 2.5 bath, $1.75 million, 29 days on the market.
- #701: 1 BR, 1.5 bath, $1.395 million, 29 days on the market
- #505: 2 BR, 2.5 bath, $1.795 million, 29 days on the market
- And interestingly, #1702: 2 BR, 2.5 bath to be sold in a pre-foreclosure auction, at a foreclosure estimate of $1.2 million.
This is in addition to the inventory on the market from brand-new condo towers in the area.
Now if Chen has to cut the price by another $1 million to unload the unit, and sell it for $4.95 million, and this takes another year of running expenses, his loss (including lower broker commission) will jump to around $6.1 million, not including interest and insurance, for a unit he’d originally acquired for $4.85 million.
So I wish Chen the best of luck in getting out from under his bachelor-condo adventure in a pain-minimizing manner.
A whole industry has sprung up on both sides of the Pacific to dodge the rules on both sides of the Pacific. Read… Why are Investors in China so Eager to Buy US Homes?
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So Michael Goguen was right to have a boat instead of a condo.
You can’t really let, say a 76 foot Nordhavn, just sit for 10 years and, even with excellent maintenance, it is going to lose close to half its original value over that time period so, no a yacht is never a good investment. Its a very expensive toy with a 4-5,000 gallon fuel tank that you must refill every 3000 miles and that’s for a full displacement hull. You want do more than 10 mph and fuel costs go exponential!
Many people in SF have lower yearly costs for single family homes than his tax bill. Or lower costs than his HOA fees if they bought in at the right time.
I keep hoping for silicon valley bubble startups that have been losing money for years to go bankrupt so that some of the funny money will dry up, normal people can live their lives and the crowding and quality of life problems will get better.
When so many people come for the latest tech gold rush and do unproductive things paid for from free endless supplies of money, it makes the bay area a worse place to live and doesn’t contribute to make the world a better place in any meaningful way.
Can’t wait to see Facebook implode. Let’s see what happens then.
Are you saying my on-demand, self-eating, blockchain AI pizza app is unproductive? C’mon, I’m disrupting stuff and breaking things!
> paid for from free endless supplies of money
Until that goes away, the problem will definitely not get fixed.
Steve Chen has a net worth of $300 million, as they say; mo’ money, mo’ problems.
Consider how much he probably made in the stock market in the intervening period?….In that light, eating a $4 million loss is like finding pocket lint in the bottom of your pockets – no great loss.
I’d say, the buyer of the condo snagged a great deal.
The problem is not that Steve Chen lost millions. The problem is that complete immoral idiots like Steve Chen spent $9M on a condo and thereby contributed to a market price dislocation that priced much poorer and much more deserving homebuyers out of the market from 2007 to 2018 or longer.
Every time some uber-rich idiot overpays for a house, they contribute massively to the housing problems of the rest of the population. THAT is the problem.
How is Steve Chen an “immoral idiot” because he spent his money on a purpose-built condo (he didn’t kick anybody out of their house, or prevent anybody from getting an SF house)?
Who elected justme to run around handing out moral judgements?
I think it’s immoral to run around making such judgements with trivial knowledge of the target of the attack.
And I appointed myself to make the judgement about justme…just saying…
Sorry, but I don’t get the point.
If you’re uber rich and your wealth came suddenly from, basically, being in the right place at the right time after having a good idea. a few million $ is pocket change and worth less than you or me finding a dollar on the pavement. At worst, it’s an embarrassment to be kidded about by his other wealthy friends if they’re feeling really rowdy.
If you’re a Chinese man or woman who buys US or Canadian real estate to launder stolen Chinese money that was taken out of the country, any value is OK since the true cost basis is $0.00.
People like these don’t value money like you or I or most other people do.
I think the point is RE isn’t the win win that it’s made out to be. When one loses one can lose real big real fast.
Also, If one ends up underwater one can petition the state to change your taxes to the current home value. I did this when I was upside down for years in socal RE.
I bought in 1991 and i believe it was 2002-2003 when I got the “you’re back to zero” letter.
No, the point was some rich schmuck lost a bundle and smugness is required from us. Some ancillary message about high price real estate was also in there.
My point is …
1) The uber rich don’t value money like you or me so a big loss like this probably doesn’t register as much as you finding $1 on the pavement and feeling lucky.
2) Re your implications: I don’t live where real estate inflation is common so California pricing looks like a self inflicted mess to me. I don’t relate to it even a little.
Assuming the new owner doesn’t tear out all the upgrades it remains a legacy to the original owners vanity, so it lives on.
Wolf, did you include the effects of inflation? Especially asset price inflation not just CPI.. as that seems to be the predominant cost of living people must absorb in the Bay Area.
Willing to bet he’s lost another 30-40% on top of your calculations. Merely based on asset price equivalence.
That’s what we used to call “opportunity cost,” what you could have done with your money otherwise. For example, if he had, instead of buying the condo and building it out, invested the $8.85 million in AMZN…. well, you do the math.
On the other hand, he could have invested it in a startup that then fizzled and shut down, eating his investment alive. So it’s really hard to figure opportunity cost, but it is real.
If he’d just banked it in the 30 year, he’d be 50% ahead by now, around $4.5m to the good?
Does this article imply that housing prices are coming down on condos
over 1m? And are there negative implications for housing in Marin and Contra Costa counties?
This is not the implication of the article, but there is a glut of new luxury condos and luxury apartments in SF. Rents have already come down, and the high-end condo segment is seriously under pressure.
Wolf,
Regarding the rents coming down, I live near San Mateo where there has been a ton of construction. I expected rents to drop. Instead, there are two things happening both of which are leading to rents going up. The new construction is luxury apartments and condos. The condos for ownership — later to be rented out — don’t seem to be selling. The luxury apartments start out so high (they even talk about one month off) that the reduced rents are still in the stratosphere. Not to be outdone, Zillow promptly ups the expected rents for old condos to be rented out and this in turn pushes somebody in a desperate situation — schools for example — to bite. The luxury apartments are almost always in bad school districts so the only ones who’d move there would be unmarried or those without kids etc. The major source of influx into job market used to be after October when H1Bs would find out whether they were selected in the lottery. The other used to be fresh graduates but we need to see if there is enough hiring going on this summer.
Seems like funny money cannot go away fast enough.
This concludes the report :).
At least he’s trying to sell at the top this time around. Better to sell now than next year.
I think the top is already long gone for multi million dollar property. Haven’t houses in this range been on a decline. I mean this market is totally separate from the skyrocketing prices of homes under $2 mill.
When you get in to $5 million dollar plus residential properties which you are customizing for million of dollars it seems pretty clear you are in pure luxury territory. Where I assume all of these super wealthy people know they aren’t investing in anything but status and comfort.
The market is to narrow and fickle to consider any of these investments. And they are black holes for carrying cost.
He got $300 million when Google bought out YouTube, so I doubt the carrying cost bothered him at all. I’m guessing he held onto it just in case his marriage went belly-up and he needed a divorcee pad to land in.
depending on who one is married to $300,000,000 isn’t all that much money…….just sayin.
In CA does it depend on if he got the $300M before the marriage or after? If so, and if he were to divorce (I wish him the best, of course), that 300M might become 150M pretty quickly.
Still, that’s real money.
Having gone thru 2 CA divorces, the answer is kind-of sorta yes (depending on your pre-nup and some other technical details).
How about that 2 bed 2.5 bath coming to foreclosure with an estimate of 1.2 ?
How’d you like to be the 2 listed 2 beds at 1.7?
Apart from the obvious it seems that Chen overbuilt even at the time. It sounds like it was never an 8 mil location.
For those of us outside California, spending more that $120,000 on a nice 2 bed 2 bath seems somewhat ludicrous.
My 3×2, 2000 sq. ft. house in a great neighborhood in the best school district in my town cost less than my annual salary. The owner of the $1.7 mill 2×2 will lose more than my entire house cost.
I’ve been to San Fran. Nice town. Pretty. Understand lots of people write apps to call taxis and what not. But its not that nice.
Oh your information is so outdated, my friend. They now write apps to call apps to call taxis. These apps usually get woken by chanting a proper noun, say Alexa or Google. Lately, they’ve had issues where they would call the app to call the app to call a taxi by calling it from an ad in tv and this would lead to one of the apps in the chain of calls breaking out into a villainous laugh.
Last I heard, the s/w companies were writing apps to figure out which of their apps was breaking out into a laugh instead of calling other apps. They’re also keeping fingers crossed that one of these news apps doesn’t break out into a laugh or call apps to call apps to call pizza?
Why not just keep it as a pied a terre?
I think you mean “pommes de terre” (as in stored potatoes get you through famine?)
He can probably use the deduction of the loss.
Ah yes, bad business.
He had got it rented to someone else in these ten plus years the loss would be way less.
Anyone at all touching on the ins and outs of California real estate rentals, knows that sitting vacant without a nominal “renter” is bad. I am certain Chen has been told by every acquaintance, plus the guy standing next to him at the SF Opera, that he would lose less money with a “rental”. $4 million out of $300 million? He is probably shrugging his shoulders about 690 Market. The opportunity costs on the remaining $296 million no doubt absorb his interests.
///
For us mortals these figures are immense and unreal, devoid of logic and common sense.
///
For the wealthy, not so much. From his point of view, he didn’t lose 5 million. He gained a bragging right in the upper class that he can afford to lose 5 million without caring. And that is a statement of financial power.
///
….ahh….said the dapper detective! but who sold him the condo….why yes it was none other than………FELIX SATER! bwahahahaahha.aaaaa.
Seriously, you pay ~2mn for a regular condo in this building just for the privilege to pay a further ~5% of that every year in taxes and fees. Is it extra if you actually flush the toilets? look but don’t touch. imagine not tipping the doorman?……oohhh that warrants a special visit from SFO tenderloin enforcers? LOL.
I feel so bad for Mr Chen. Where does he live now? Hillsborough? Where his place is worth probably $10m or more? Let me find the world’s tiniest fiddle.
it’s a capital loss to offset capital gains on his stocks.
Unless Chen did something super slick, which I can’t even conceive of, I don’t see any of this ever qualifying as a capital loss.
The IRS won’t let you go 10 years with no activity and no revenue (not to be confused with income) from the asset and still call it a business.
I have limited MLS access in SF, this is unit #2402 and the improvements were done by Joel Sanderson Architects of NYC ( God forbid you use some hick firm from SF!).
Commissions on properties in this price range are usually 4% with a 50/50 split between buying and selling office, not 6%.
Still a nice paycheck…
And no wonder SF people think Sonoma County is a bargain…
Presumably Mr Chen has some Google stock after the YouTube purchase. You win some, you lose some.
“co-founder of YouTube”
At least we can’t say he didn’t put some of his money back into the local economy.
Why not just use any normal real estate purchase and run the figures? Other than the fact that there was nobody in the property a similar scenario may be worked out.
What would the decrease in value of a high end property be if lived in?
A simple example. Simple numbers and calculations used. A ten year period.
A house purchased for $200,000 with 10% down.
A fixed rate mortgage at 5%. Just assume the same interest paid over 10 years. Property taxes at 1% a year. Opportunity cost on the down payment is the same 5%. Insurance at $500 a year. Upkeep at $1000 a year. Closing costs of A$5000 (Too cheap).
So after ten year what is the cost of the house?
Interest: $9000 a year or $90,000
Property Taxes: $20,000
Opportunity Costs on down payment: $10,000
Insurance and upkeep: $15,000
Closing costs: $5000
Total direct measurable costs over 10 years: $140,000. This ignores the opportunity costs on the funds used during the ten year period other than for the down payment and unexpected repairs.
Deduct the equivalent for rent paid per month.
The classic rent versus buy question……………..
What it a good deal to buy the house? Depends on lots of factors. After factoring in all the costs did you/will you make any money on the house?
What about capital gain taxes on residential real estate in the USA? Do you pay tax on any NOMINAL profit?
yes, federal capital gains tax is 15%. some states will income tax will also get a piece.
This is the high dollar end of pumping housing out of reach of anyone unwilling to sign over their 1st born child and accept a life of perpetual slavery. The low dollar end is no down payment, lowering finance standards and ninja loans. It just depends on which market you are trying to buy into.
perhaps his improvements are unappreciated. maybe they’ll be back in style in a future nostalgic era.
the arrivista pad is kaput, as there are no new arrivisti.
note to self: dump it.
What would be really interesting to know if Chen’s predicament is being repeated among the wider uber wealthy, money laundering folk in the expat Chinese community. Hard stats are so sparse.