@okie,
This is really too funny. Here's what your source says:
Quote:Simply put, the allocation of purchase price between the Obamas’ lot and the lot next door, which were both owned by the same couple and had long been sold together, makes no sense unless the amount paid for the lot adjoining the Obamas’, by the wife of now convicted political fixer Tony Rezko, was specifically meant as a favor to the Obamas, so that they could afford their mansion.
How does the author of your source, Carolyn Kay,
know that? Well, this gets complicated, so follow along carefully.
Apparently, Kay has decided that the sellers of the property first priced both lots as a single lot. The asking price for that single lot was $2.575 million. How did she come up with that figure? That was the initial asking price for the two lots when they went up for sale individually -- Kay has no information regarding the asking price for the single lot, so she's just guessing here.
Next, she tries to figure out how much each lot was worth, based not on the asking prices for those lots, but on ... well, take a look:
Quote:It is common in the real estate industry to separate the house vs. land value from a total purchase price by assuming that 75% of the price is attributable to the house and 25% to the land. And 25% of the $1.65 million that the Obamas paid for their house and land is $412,500. By this test, the Rezko property should have been priced at less than that amount, as it had less square footage. Instead, Rita Rezko paid half again as much.
OK, so the lot without the house should have been worth less than the lot with the house, because it was smaller and ... well, it didn't have a house on it. Oh, if life were only so simple. No matter that the side lot was on the corner of a major street (Hyde Park Blvd) and that
it is zoned RM-5, which means that the owner can build a multi-unit building, up to four stories, on that lot (do your own search
here, it's fun and easy! -- the address of the side lot is 5050 S. Greenwood Ave). No, none of that matters. According to Kay, the only thing that determines the value of a piece of property is its size in relation to the piece of property next to it.
But that's not enough for Kay. She next tries to determine the value of the property based upon the price paid by Obama for the small strip of land that he purchased from Rezko.
Quote:Again from the 11/1/06 Tribune article (and also from the Recorder’s Office’s online records), we know that on January 11, 2006 the Obamas bought a strip of the Rezko lot that adjoined their property. As the Tribune describes the transaction,
Using a standard formula, Obama’s appraiser estimated the 1,500-square-foot portion at a market value of $40,500.
But Obama felt it would be fair to pay the Rezkos $104,500, or a sixth of their original $625,000 purchase price, because he was acquiring a sixth of their land
If an assessor valued 1/6 of the property at $40,500, wouldn’t that mean the market value assessment of the whole Rezko property at that time would be $40,500 x 6 = $243,000? Admittedly, the valuation of a strip of land may be lower because it is such a small portion of a property, but could that possibility account for the huge difference between the two values?
Now, one should realize that, in Cook County, the assessed value of a piece of property bears only a vague relationship to the property's actual value (a fact that even Kay acknowledges). Nevertheless, she takes the assessed value of the side lot and compares it to the price paid for one-sixth of that lot, and proclaims that the assessed value
must be right. Why is the assessed value a better gauge of the property's true worth? Because Kay says so, that's why.
So, what does this all mean? According to Kay, the side lot was worth a whole lot less than the $625k that Rezko paid for it. So, it logically follows, Rezko must have paid full price for it in order to help Obama buy the house lot. How do we know
that? Because Obama couldn't afford both lots, and the seller wouldn't sell the house lot without selling the side lot along with it.
Now here's where we get into a lot of trouble. First, Kay must assume that the sellers wouldn't sell one lot without the other. The problem here, though, is that the sellers
had already tried that and failed. They initially tried to sell both lots as a single lot and couldn't find anyone to buy it. Now, according to Kay, the best way out of this impasse for the sellers was to split up the properties but still sell them as a unit, which is a selling tactic that has one significant drawback:
it makes no sense whatsoever. Really, if you can't sell one big piece of property, why would you split them up if you still insist on selling them as a unit? For normal people, splitting the two lots means that the two lots are intended to be sold individually. For Kay, splitting the lots was just a better way of selling both of them together than selling them as a single lot. Yeah, that's the ticket!
Second, Kay has to assume that Obama needed Rezko's financial assistance in the first place. If Obama could have afforded both lots, then the notion that Rezko was doing Obama a favor by buying the side lot doesn't make much sense. Here's what she says:
Quote:At the time, the Obamas’ finances were good, but not good enough to buy a $2.5 million mansion. The 11/1/06 Tribune article reports that the Obamas obtained a $1.32 million mortgage on their property (the information is also available on the Recorder’s Office website). That means their down payment was $330,000 ($1.65 million - $1.32 million). A venerable institution like the Northern Trust, which lent the Obamas the money, would never have engaged in any of the risky practices that later caused the housing market crash. Therefore, they would have applied a formula to determine what the Obamas could afford to pay for their home, based primarily on the size of the down payment. Apparently, the magic number turned out to be $1.65 million.
But let's look at Obama's financial situation in 2005, when he made the purchase. He had just been elected to the US senate, a gig which pays $169,300, not counting meal and gas money. His wife was also pulling down six figures at the Univ. of Chicago Health Center (in 2006, she made $273,618, quite a bit more than her husband's government salary). Together, then, the Obamas were making over $400k just in wages -- and that doesn't count investment income or the royalties that Obama was getting for his best-selling first book or the $1.69 million deal he made for his second. In total, the
Obamas earned just a shade less than $1 million in 2006, which is probably close to what they earned in 2005. So, with that sort of income, would a bank have loaned the Obamas enough to buy a $2.575 million double-lot? Well, according to Kay, not some high-class outfit like the Northern Trust Bank, although the Obamas somehow managed to get the Northern Trust to issue them a mortgage for the purchase of a $1.65 million home. Those darned banks, they can be so picky.
So, what can we conclude from this? Well, first of all, it's clear that Kay doesn't know what the hell she's talking about. It's not just that she doesn't understand the fundamental basics of real estate, it's that her account leaves one with the inevitable sense that she has never actually seen a house. Furthermore, her quaint notions about what determines the value of a piece of property are positively physiocratic. She evidently has never heard of things like "market price" or "supply and demand." Truly, Adam Smith lived and died in vain.
It is small wonder that Kay would convince a simpleton like
okie. That's not setting the bar very high. After all, I wouldn't be surprised if
okie is, at this moment, trying desperately to free himself from some
Chinese finger cuffs. If Kay wants to sway less vacant and malleable minds, however, I'm afraid she'll have to do a much better job.
