The Art of War — Sabaton
Speculation is a battle. The forces of greed and fear drive the financial markets, and the speculator attempts to profit from these moves. Speculation is not investment, although most do not understand the distinction. Speculation is the battle of the individual against the herd. For those who understand it and have learned to move against the emotional forces of fear and greed, there is opportunity to profit. For those who follow the herd, there are brief moments when profits are available, but few have the discipline to take them. Most speculators are slain by the market.
Like many others, I have a disdain for pure speculative flips.
People who buy properties, make no improvements, and attempt to resell
it for a profit simply inflate market prices. There is no value added.
People who rehab old or run down properties do a community service, and
they earn the money they make. However, flippers are merely financial
parasites profiting by constricting supply at reasonable price points.
Of course, flipping is a dying art, and those who are attempting it now
are losing money which makes for great schadenfreude.
Flipping is much more difficult now, not just because prices are
dropping, but because the constriction of credit and the tightening of
financing terms makes it much more costly and difficult to do. The
Option ARM with 100% financing was the ideal tool for the flipper. It
allowed him to enter the market with none of his own money, it
greatly reduced the carrying cost of the property, and it gave him downside protection in the event prices fell. With these conditions in
place, it is no wonder speculative flipping became the pastime of every
would-be Donald Trump in California.
Another behavior enabled by loose credit during the bubble was
cash-out serial refinancing. With the ability to get access to cash
from the property without selling it, there was no need to sell the
property, and many speculators held their properties and withdrew their
cash as needed. Houses were treated like savings accounts earning a
very high return. Of course, they were not withdrawing free money, they
were adding huge amounts of debt, but since the debt service costs were
low, and since nobody thought they would ever have to pay this money
back out of their income, cash-out refinancing became the rule rather
than the exception.
Today’s featured property is an example of a speculative cash-out
serial refinancing flip-flop. The speculator bought the property with
100% financing using a 1-year ARM, took out some cash, refinanced with
an Option ARM, took out some more cash, and now they are walking away.
Asking Price: $599,000
Income Requirement: $149,750
Downpayment Needed: $119,800
Monthly Equity Burn: $4,991
Purchase Price: $740,000
Purchase Date: 7/9/2004
Address: 23 Muir, Irvine, CA 92620
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,109 |
| $/Sq. Ft.: | $284 |
| Lot Size: | 4,500
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Other |
| Year Built: | 1977 |
| Stories: | 2 Levels |
| Area: | Northwood |
| County: | Orange |
| MLS#: | S544309 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 11 days |
landscaping brings you into this 2 story 3 bedroom, 2.5 bath with
seperate family room, formal livingroom and dining room that can be
called a great room. Laminate flooring in the living areas and
staircase and ceramic tile in the kitchen/family room. There is track
lighting in the living areas and celing fans in bedrooms. The forth
bedroom is really a den and can be used as a bedroom. Guest bath has
granit countertops as does the kitchen. There is an in ground jaccuzi
in the patio/deck. Master bedroom is huge with marble floored master
suite and a great balcony and a walking closet. There are vertical
blinds in living areas and a cozy riverstone fireplace adorns the
living room.
fantistic, seperate, celing, granit?
If the “forth” bedroom is really a den, then it should be advertised as a 3/2.
This property is sporting a 20% discount off its 2004 purchase price and represents a significant discount from neighborhood comps.
- It was purchased on July 9, 2004 for $740,000. The owner used 100% financing — kind of. She obtained a $592,000 first mortgage, when she bought the property and put down $148,000.
- One month later on August 27, 2004, she obtained a second mortgage for $173,000 and cashed out $25,000 (I wonder how much she kicked back to the appraiser?)
- On 5/5/2005 she opened a $58,900 HELOC and got some more cash.
- On 9/27/2005 she refinanced with an Option ARM with a 1% teaser rate for $640,000. She opened another HELOC for $80,000 at the same time.
- On 11/10/2005 she opened a stand-alone second for $173,000.
- And finally on 10/27/2006 she opened another HELOC for $250,000.
- The total of the first and second mortgages is $813,000. If the HELOC was used to pay off the second mortgage, the total debt rises to $890,000. If the HELOC was an add on, the total debt on the property is $1,063,000. I doubt Washington Mutual gave the huge HELOC without paying off the second, but you never know.
- Total mortgage equity withdrawal was $250,000 not including the recapture of her downpayment.
When speculation pays that well, it isn’t a surprise many people were doing it. Of course, she has to deal with the consequences to her credit, but for $250,000 in free money…
.
If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.
I stand alone and gaze upon the battlefield
Wasteland is all that’s left after the fight
And now I’m searching a new way to defeat my enemy
Bloodshed I’ve seen enough of death and pain
I will run, they will hunt me in vain
I will hide, they’ll be searching
I’ll regroup, feign retreat they’ll pursue
Coup de grace I will win but never fight
That’s the Art of War
That’s the Art of War
Breaking the will to fight among the enemy
Force them to hunt me they will play my game
And play by my rules I will be close but still untouchable
No more will I see suffering an pain
They will find me no more Ill be gone
I will have them surrounded
They will yield without fight overrun
Coup de grace I will win but never fight
That’s the Art of War
That’s the Art of War
The Art of War — Sabaton
I did a flip once. I tried and tried to sell a house owned by HUD, but there were no takers, even though it was a great deal. So, once the owner occupant only buying period was over, I bought it myself. All it really needed was appliances an touchup paint, but I replaced those and still made a 15% profit after holding about 6 months. And this was in a normal market! (1997) I feel for the people who are trying to sell into this one.
I know that it was perfectly economically rational for people to engage in such financial shenanigans, but it still seems uncomfortably close to stealing to me.
I think if I had been signing all of those loan papers I couldn’t have helped feeling my dad’s hand slapping the back of my head and hearing his voice saying, “Come on son, grow up and behave like a man.”
“it still seems uncomfortably close to stealing to me.”
The system should keep an honest man honest. This system didn’t. Imagine if you went to a mall and there was an unmanned kiosk with thousands of dollars of cash sitting out in the open. If you take some of this money, it is theft because the money is not yours, but if someone makes it that easy, they are asking for people to steal it. The same is true of lending in the housing bubble. The lenders made it so easy for people to steal from them that it is difficult to hold many of the borrowers responsible and feel sorry for the banks.
Perhaps an attorney can opine on the matter, but it seems to me that if this situation were set up as a government sting operation that the defendants (borrowers) would have a credible entrapment defense…
I’d say the correct analogy would be going Macy’s- bringing a few hundred dollars worth of stuff to the counter and writing on a piece of paper – “I owe Macy’s $500” and the Macy’s clerk gladly accepts the note as payment. Not illegal at all. Nor were the loans that were made to this buyer. The system completely broke down due to the greed of the mortgage brokers and the bankers along the way getting money for themselves (legally) as they passed along the hot potato. It also broke down to the incompetence and stupidity of the Wall Street MBA’s who ultimately bought this crap.
So that would be you pick out $500 worth of stuff at Macy’s, and the cashier hands you a diamond ring and a mink coat and says, here, might as well owe us $10,000, except if you bring them back next month we’ll buy them back from you for $25,000. Oh, and do you want a Ferrari to go with that?
Yeah–and then Macy’s takes the note, records it as a $500 asset which is accuring interest, bundles it with a thousand other handwritten IOUs, and sells the bundles as IOU2s–at a premium because the collateral is just, you know, going up.
Then the buyer of the IOU2s bundles a bunch of THEM together with some actual tangible assets–just barely enough for a rating agency to hand out a AAA rating on the bond. Bingo, more free money!!All of this works fine until the laws of thermodynamics take charge, and a fund or two suffers from black swan flu. Then the few who knew they were trading junk IOUs head for the doors of the vessel, taking all of the life preservers with them.
And here we are, the collective victims of our own greed–every last one of us with a 401K that we don’t manage ourselves, or CD, or an interest-bearing checking account, or whatever probably had a hand in creating this mess. Who could blame us–the marks were practically BEGGING us to take the free money, as we chased the ever higher yields.
Problem is, we are our own marks. We are the poker player at the table left wondering who the sucker is.
Pathetic, really. I almost feel sorry for myself while I am feeling angry at myself (figuratively speaking, of course). So, yeah, nothing explicitely illegal in this. Why does it feel so much like something was?
What I think is missing from all of these is that Macy’s clerk collects a commission and bonus every time she “gives” more merchandise away. The more she gives away, the more she makes.
And so it goes…
Interesting.
looks like this happened on a much larger scale too…
http://www.nytimes.com/2008/08/27/business/27default.html?bl&ex=1219982400&en=149edf05b53c24f2&ei=5087
“The new owners told their lenders they would vastly increase the rental income, even though all of the 1,802 apartments were subject to New York’s strict rent-stabilization program. And the banks went along. By the end of 2006, the complex, now known as Savoy Park, was appraised for $420 million, according to documents filed with the Securities and Exchange Commission.
Savoy Park, which is bounded by 139th and 142nd Streets and Fifth Avenue and Malcolm X Boulevard, was refinanced a few months before the credit markets stalled last summer. Credit Suisse pooled the main or senior $210 million loan with other mortgages and sold it to Wall Street investors as a commercial mortgage-backed security. The owners secured four additional loans, bringing the total debt on the property to $367.5 million, with a loan-to-value ratio of 88 percent, according to Realpoint.
The lenders were begging people to pull this kind of crap. And don’t forget for every refi there were a slew of people getting their cut in fees and commissions. Everyone was on the take.
Hat off to the owner on the financial manipulation. She qualifies to manage a large US public corporation. Under her financial and accounting leadership, the company can report huge cash flow and profits on nothing.
Have you ever considered writing for The Onion?
Check out Worldcom before they went bankrupt. They reported billions in cash flows and profits on nothing.
I have never “flipped” real estate myself, but I have no disdain for flippers or speculators. I do not recognize any moral condemnation nor congratualtions for “adding value” to an asset before selling that asset. Flipping and speculation does not necesscitate nor imply fraud or acquiring a mortgage through fraudulent means. And it is important to not confuse speculating and flipping real estate with illegal or immoral activities. If a person has disdain for flippers, that is a personal feeling and has no basis in social morality.
Owning a home is not a life necessity and speculating on real estate is not morally different than speculating on stocks, commodities, or any other asset. Most speculators, no matter the asset, will lose.
Flipping is the same as scalping. It should be illegal.
And how would you enforce this law. Say one can not sell a property unless they have owned it for at least 2 years? Would this include commercial property too?
How would I enforce this law? I would introduce reeducation camps where house scalpers would be rehabilitated. I wouldn’t worry too much about determining who the scalpers are as education is a gift that everyone can benefit from.
I get the feeling all the flippers getting their head handed to them in the current market is the most effective form of reeducation.
Although your camps do sound fun.
Oh yes, they will be brutally fun!
I don’t think flipping, as such, should be illegal. However if someone committed fraud as part of flipping- for example stating the residence was their primary residence on their loan application – then that should be illegal and pursued. I also think (hope) that lenders (or, more likely, sharks that will buy the claims from the lenders) pursue these people very aggressively against their personal assets for any losses (since these will mostly be borne by taxpayers). I’ve a bit more sympathy for honest people who got stuck overpaying at the market but for bona fide owners not flippers
One thing is for sure. Even with legalized scalping of houses we would not have had a bubble of this giant proportion if fraud was prosecuted vigorously.
If a person has no problem with flippers, that is a personal feeling and has no basis in social morality.
😆 😆 😆 😆 😆 😆 😆 😆 😆 😆 😆 😆 😆 😆
Absolutely right. Pure speculation lubricates the wheels of capitalism. The problem was not flipping itself, the problem was the economic bubble that made it so effortlessly profitable.
Touché. Speculation provides liquidity which is a good thing. By “economic bubble” I think you mean how easy it was to buy crap on margin. This is the same problem in the commodities market and is why the cost of food, oil and metals has gone up. Take away the margin and it all comes crashing down. Before anyone goes on the “supply/demand” bandwagon in reply to me, let me mock you up front: Blah blah blah…
Speculation didn’t cause the commodities rally, which began in 2002 when it began to take off (I know, I was one of the few small investors who owned PCRAX at the time and saw it coming).
What caused it was ridiculously cheap money – the same thing that caused all manner of asset inflation in the past ten years.
The dollar was beaten on by anything and everything for the period of 2002-2007 – other currencies, commodities, art and collectibles, high p/e stocks, and, of course, housing. That’s what happens when you give dollars away by the truckload.
Uh… that cheap money was used to speculate. That’s the main factor that has driven up commodities prices.
How is buying an insurance policy against destroyed wealth “speculation”? Was Southwest Airlines “speculating” when they intelligently bought a fistful of crude calls? They probably saved hundreds of jobs by doing so.
We’re not talking about hedgers. Remember? We’re talking about speculators. A hedger has a direct interest in a commodity, because its movement can shut down their business. A speculator’s only interest is in movement period. They could care less what it is that is moving. Hence the switch from .com stocks, to houses, to various commodities.
It is impressive, but somehow your magical totem can see into the hearts and souls behind these movements of the tickers and gyrations posted every month at dqnews. Is this a special gift, or can the technique be taught?
Here’s a thought: all “investors” are just trying to beat inflation, and some just have a different way of going about it. Sometimes, capturing volatility is part of the game. Sometimes it isn’t. In any case, shouldn’t everyone want to have a long-term hedge against higher oil costs, seeing as how fossil fuel costs filter into every other cost we face? Or should we all just happily stick our savings in nice little CDs and blissfully ignore the fact that the money supply may charge ahead at a 20% expansion with or without us?
Here’s a thought: Mass speculation on the long end causes price inflation. Perhaps if we didn’t have so many speculators, we wouldn’t have so much inflation to beat. It’s okay though, because after speculative inflation comes deflation and most of the speculators get burned out. Too bad Joe American has to pay the price in both directions.
Bet she doesn’t have any of that money left. Bet
she spent it on glitz and toys.
I would fire this agent immediately! There are no less than eight spelling errors in that listing. What a moron.
Even worse, the associations of realtors and the programmers at the MLS sites have never been sufficiently embarassed that they include spellcheck software for ads.
This is one small way in which even good real estate agents who can spell allow their industry to look like it is populated by idiots. If I was a real estate agent, I would certainly be pushing for better software and processes.
Well, I think most of the people who really look at MLS listings are still realtors, who then compile a list of places to take clients to that weekend. So, if it doesn’t bother them….
Moreover, if I was the agent that could spell, I WOULDN’T want to let my idiot COMPETITORS off the hook. If the industry looks bad, then a competent agent looks like a god
Those are exactly the conditions which make for a new competing firm with a new business model to make huge inroads.
These stories are just so depressing.
When will it ever end?
There is no hope for our economy, it’s been ruined.
Watch out, September is traditionally the worst month for the market. People are already predicting big declines are comming.
This is an absolutely hideous house. I can’t believe that even in Irvine would it sell for more than $180 a sq foot- and seeing where prices are going in Irvine as well as where I live, that may be too much money.
Everything in this place is garbage, and the exterior looks neglected. It needs a new driveway and the lawn looks like a patch. It’s difficult to believe something like this ever sold for more than $400K.
And the loan history screams fraud. After talking to buddies around town in the mortgage business, I’m convinced that about a third of serial refinancers were practicing fraud, or at least acted in the knowledge that they could always just walk if things got too bad.
Check out some of the listings in a trash LA county city if you want to see insanity. I suggest Culver City or Gardena for some real gems.
She should be thrown in jail.
While I don’t necessarily disagree, I would say that she wouldn’t have gotten anywhere had the appraisers and the underwriting staffs were a little more conservative in their assessments. The real crime is that this was “tolerated” at the highest levels… the same people who were the masterminds behind the government bailout.
what is going to happen to the square miles of exurban mcmansions built for an era of cheap gas that will never return?
they rot and become safety nuisances costing towns money to police, even as the tax base dwindles.
are we going to see a glorious Day of the Bulldozers, as one strapped town after another decides the cheapest thing to do is to plow those misbegotten buildings under forever, thus reliving the sacking of Carthage?!
I’ve thought about this. I suspect that here in California, they’ll just stand and rot under the sun and eventually be allowed to burn in one of our yearly firestorms.
The future? Look to what’s happening to Detroit. Rotting homes that no one can give away and neighborhoods that resemble “Mad Max” on any given night.
Yes, something like that. Detroit bulldozes dozens of abandoned homes each year.
Maybe “bucks for bulldozers” can be part of the next housing rescue package. I’m sure there will be even more legislation in the next few months.
Some of these exurbs will be shoveled under and returned to farmland, and others will become the slums of the future.
Salvage will be big business over the next 30 years, as we dismantle auto-centric suburbia, and the population either moves to inner suburbs or small towns, or repopulates the small cities of the midwest.
Vast tracts of some of the richest farmland on planet Earth lie under the thousands of miles of crapbox subdivisions built in CA and the midwest. Time to return this land to its highest purpose, which is for growing food. We’ll be needing all the acreage for farmland we can get as fossil fuels deplete and agricultural methods than rely on plentiful supplies of them, become less productive.
And you all thought Back to the Future II was over the top when Lyon Estates became a really bad neighborhood in 2015.
That movie came out in what, 1987?
:vampire:
what a prospect! to think of the staggering amount of lumber, concrete, metals, and energy poured into houses that will soon become rubble.
Right. Modern society is just a year or two from returning to Little House on the Prarie. Orange County will be a total wasteland after everyone packs up and moves to South Dakota to take up subsistence farming in a former subdivision. Or we’ll move to “inner suburbs” which exist in maybe a dozen American cities, all of them east of the Mississippi, and none of which have capacity to house all of the “outer” suburbanites who would apparently be participating in this great migration.
You self-styled futurists need to get an economic clue. There’s no way that the farmland under any subdivision could feed even the people currently living on it, so no way it could be economically reconverted to farmland. Cheap oil has only made technology and transportation cheaper. As energy gets more expensive (gradually), technology and society will both adapt (gradually), led by price signals. Yes, at current oil prices, living 60 miles from work is unprofitable for almost everybody, so as the population continues to grow, new development will be more dense and property on the fringe will perhaps get relatively cheaper until the potential cost savings causes business investment out there once again. But scrapping and bulldozing of a built environment only happens where there is massive failure of government and society and a sudden out-migration to better places of anyone who can manage to leave. There can’t be an sudden out-migration from American suburbs, because there’s nowhere better to go with the capacity to take us, and scrapping our McMansions to build mid-rise mixed use developments in inner suburbs would take too much expensive energy to be a net gain.
“fantistic, seperate, celing, granit?”
You forgot to mention the “walking closet”. My daughter will be so scared if she saw the closet working in her bed room. :snake:
And “forth” bedroom. The agent is getting biblical. “And behold the bedroom came forth.”
LF_Worker, “You forgot to mention the “walking closet”. My daughter will be so scared if she saw the closet working in her bed room.”
rrrrring, Hello Pot! It’s me, Kettle.
Can we assume you meant “walking” instead of “working” and “bedroom” rather than “bed room”?
I guess I am not qualified to be a RE agent… :red:
Quite the contrary; it means you may in fact be qualified to write mls listings. I would happily pay top dollar for a “working” closet if it means I never have to fold or iron again.
I saw an mls listing the other day which warned of “Aggressive Tennants.” I thought that was awesome. “If you are a connoisseur of assault and battery, then we have just the place for you.” As someone suggested above, I don’t think the listings were intended for mass consumption. At least I hope not.
So that’s what happened to this house, where the fourth bedroom that is really the den — it must have had a walking closet!
It is only a bedroom if it has a closet.
Anyone know where to find historic home sales records online? I used to be able to use Redfin to export a csv with every past sale in an area for any time period plus all current listings but it looks like that isn’t available anymore. It was really useful!
At least now I can afford houses in Irvine that I don’t want. Maybe something can bring West LA down soon; it’s still about $2mil for something in a terrible neighborhood that would be best used as firewood.
There is no difference between “investment” and “speculation”.
There are, however, plenty of moralists with no understanding of the role risk plays in every aspect of life, and a near-total majority of people who can’t comprehend that merely holding on to a fiat-currency dollar for more than a moment is a form of speculation.
Every investment has an element of momentum, fundamentals, macro trends, etc, even a humble 4.5% CD at a large, stable bank… like Washington Mutual… or IndyMac… or National City…
There is no difference between “investment” and “speculation”.
Yes there is. It’s pretty much as IrvineRenter says. Investment is using capital to add value to something in order to gain more capital. Speculation is using capital to acquire something, sit on your ass, and try to sell it for a higher price.
As far as something abstract like stocks: Investors buy the stock because they believe management will offer more/better products and/or services. Speculators don’t give a crap, they just think the stock is going up or down based on trends. There is overlap between investment and speculation, as you point out, just like anything else in life. It’s like saying you’re conservative or liberal. Few people are at either extremes, and the ones that are at either extreme are called “losers”.
I’m afraid that the “value” you’re referring to is ephemeral at best. Why should ownership by one party as opposed to another inherently “add value”? Does the thousand shares of Exxon I might own somehow add more to the equation because I’m a more sincere guy? If I sit on it for a few years, does that make me more of an “investor” than someone who flips it after a week or two? At what point do I get to hop on the high horse and officially make the transformation from “speculator”?
And let’s say events cause the “investor” to need to unload their “investment” quickly, despite the best of intentions in terms of being a long-term holder – my cousin who was forced to sell a house after a few months due to a divorce comes to mind. Is this somehow different than a speculative flipper who does things like add new flooring or molding to a house while owning for a few weeks?
At the intersection of moralism and naïveté lies stupidity.
Whatever dude. My comment is very clear. Only a narcissistic person would try arguing it from that perverse angle. I’m very experienced at that tactic.
Arrest people for speculating? That’s pretty harsh. While I agree that lenders and brokers pretty much created this bubble by throwing their underwriting standards out the window, it would be insane to try and regulate speculation. Reasonable regulation of lending is something else.
Our entire economic system is built on the principles of risk vs. reward. We’d have a socialistic nanny state if we tried to kill off speculation or limit private economic risk.
Most people buy stocks to make $, not “because they believe management will offer better products”. Look at your 401k materials. They discuss the stock and mutual fund values over the last 5 or 10 years. They don’t tell much if anything about the individual companies products.
the company uses money from specultors stock purchases to make investments to improve products, market share, whatever. In theory, anyway.
I don’t think anyone here said that we should arrest speculators. I think we all agree that we simply need to reeducate them vigorously.
I’d rather focus educational efforts on those folks who somehow think that dollars are actual money which serve as a credible store of value.
I’d be happy to take all your worthless fiat dollars. Will that be check, cash or PayPal?
do you mean reeducation as practiced by the cambodians?
The Cambodians didn’t practice reeducation. They practiced sadism.