Flipper — Vars and Dunham

No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,

Do you remember the extreme arrogance and smugness of flippers and other kool-aid intoxicated people during the bubble? Isn’t everyone who buys in a bull market a genius? They were all so sure the market could only go up, and every property was a gold mine. They were all living in their private wonderland.

And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!

And of course, now they are under water, drowning in debt and sinking to the bottom. When it comes to flippers, my schadenfreude overfloweth…

Today’s featured property has been profiled before. It has been on and off the market for about a year and a half. This is the third listing we have documented here. It takes a great deal of courage to flip a $2,000,000 property. Either that or a great deal of ignorance and kool aid.

Asking Price: $1,880,000

Income Requirement: $470,000

Downpayment Needed: $376,000

Monthly Equity Burn: $16,666

Purchase Price: $2,050,000

Purchase Date: 5/23/2006

Address: 29 Mahogany, Irvine, CA 92620

Beds:	6
Baths:	7
Sq. Ft.:	4,200
$/Sq. Ft.:	$448
Lot Size:	0.27 Acres
Property Type:	Single Family Residence
Style:	Spanish
Year Built:	1996
Stories:	3+ Levels
Area:	Northwood
County:	Orange
MLS#:	S551434
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

These owners managed to perfectly time the top of the market. They paid $2,050,000 on 5/23/2006. They used a $1,500,000 first mortgage, a $400,000 second, and a $100,000 downpayment (don’t expect to see that kind of leverage on a $2,000,000 property again in your lifetime). Can you imagine this couple’s mortgage payment? Anyway, they first listed this property in early 2007 for $2,299,500. They wanted the $300,000 profit they were entitled to for owning less than a year. When it didn’t sell the first time, they relisted in September 2007 for the same amount. As I noted at the time, “The same house; the same price. Still no chance…” Well, here we are just over a year later, and the owners have begrudgingly admitted that they paid too much. They are now asking $1,880,000.

Wow! A whole 5% off the peak. I guess the high end hasn’t dropped much, right? What we are seeing here is classic denial pricing. This owner will likely chase the market all the way into foreclosure.

Their downpayment is gone, they are over the market, and they are putting wishing prices out in the market. Perhaps they will get lucky and some knife catcher will perceive this as a bargain. I doubt it.

{book}

They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!

They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!

Flipper — Vars and Dunham

Touch Too Much — AC/DC

Seems like a touch, touch too much
You know it’s much too much, much too much

I have written much on the Fundamental Valuation of Houses and the concept of rental parity. It has been my supposition from the beginning that prices were greatly detached from their fundamental valuations and were due for a crash. My prediction is for a 40% decline in Irvine’s median by 2012. Today’s featured property is a great case study in just how ridiculous the asking prices still are here in Irvine.

Asking Price: $1,199,000

Income Requirement: $299,750

Downpayment Needed: $239,800

Monthly Equity Burn: $9,991

Purchase Price: $550,000

Purchase Date: 6/3/1999

Address: 59 Trailwood, Irvine, CA 92620

upgarded? elementray?

“For
investors, this will rent for $4,200 per month easily!” I think he meant to say, “For kool-aid intoxicated speculators, the rent will cover half your cost of ownership.”

I was required to take courses in real estate economics in school, and in my professional career, I use this knowledge on a daily basis. It occurred to me that not everyone really understands this stuff, so many of the analysis posts I have written have sought to explain how real estate economics really works so people could better understand what they are getting in to when they buy a house. I wrote the post Speculation or Investment to try to show the key differences between those two styles of investment. I also wanted to make clear that people who bought houses in California at inflated prices are engaging in speculation and not investment. Many believe they are investing because they intend to hold the asset long-term; however since they are running a negative cashflow compared to renting, and since the only way they can profit is if prices become even more inflated, they are speculating, and since prices periodically crash to cashflow value, they are very likely to get burned.

Today’s featured property is being touted to investors as a good deal. It is not. Any real investor would analyze the cashflow and quickly realize this is a really dumb investment. If it generates $4,200 in rent, and it costs the owner $7,528 net each month. This property loses $3,328 per month. This is in addition to the $9,991 you will lose each month in declining equity. Of course, the only reason someone would buy this is because they don’t believe they will lose $9,991 each month in equity; in fact, they believe they will make back their $3,328 and more through appreciation. There is no other way to look at it. I suppose you could argue that if someone could afford it and if they really wanted it, they would not mind losing $13,319 per month in ownership costs and lost equity, but if you really believe that, you are pretty gullible. Remember, Timing Does Matter.

The fact that there are knife catchers out there buying these properties shows how little the market psychology has changed. We are entering what will probably be the deepest economic recession since the Great Depression, interest rates are rising, and our entire financial system sits on the brink of apocalypse, and yet, there are still people who fear being priced out and believe house prices will rapidly rise soon. Amazing.

Just for the record, using the assumptions above, this property is worth $660,000 at rental parity for a GRM of 157.

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

BTW, The Great Housing Bubble is now available on Amazon.com.

{book}

It was one of those nights
When you turned out the lights
And everything comes into view
She was taking her time
I was losing my mind
There was nothing that she wouldn’t do
It wasn’t the first
It wasn’t the last
She knew we was making love
I was so satisfied
Deep down inside
Like a hand in a velvet glove
CHORUS:
Seems like a touch, a touch too much
Seems like a touch, a touch too much
Too much for my body, too much for my brain
This damn woman’s gonna drive me insane
She’s got a touch, a touch too much
She had the face of an angel
Smiling with sin
The body of Venus with arms
Dealing with danger
Stroking my skin
Like a thunder and lightening storm

Touch Too Much — AC/DC

Groovy Little Hippie Pad — ZZ Top

I have profiled today’s featured property before, but the price is so outrageous, the decor so over-the-top, that it warrants another look.

Original Asking Price: $1,059,000

New Asking Price: $835,000

Income Requirement: $208,750

Downpayment Needed: $167,000

Monthly Equity Burn: $6,958

Purchase Price: $479,000

Purchase Date: 6/27/2003

Address: 337 Tall Oak, Irvine, CA 92603

“customized by a senior
exec. w/ the homebuilder.” You mean someone who should know better…

Feels like
a Manhattan or San Francisco abode — except that this is Irvine!

The place looks like a Bordello to me. Don’t the pictures above look like they need some hookers and a piano man?

The master bedroom has inviting double doors and plenty of vanity mirrors so you can watch yourself doing whatever…

If you prefer a red bedroom in the “red light district,” it has one of those too. Don’t you love the chairs? Is that Dogs Playing Poker in the background? Perhaps not…

First, let’s get to the price. There is no way this is worth $835,000, forget the $1,059,000 he was asking last November. There is an identical floorplan (not so gaudy I hope) at 143 Tall Oak asking $550,000. That comparable is going to make financing this Groovy Little Hippie Pad next to impossible. Basically, someone will need to come up with about $400,000 cash to close the deal. Can anyone possibly think this property warrants a $285,000 premium due to the dubious tastes of its owner? You could buy 143 Tall Oak and spend $285,000 making your own brothel if you wanted. You could pay for some big-time designers and top-of-the-line everything and still not spend the premium. The last time I profiled this property, I challenged everyone to come up with a rationale for the price. I still can’t come up with one.

At least this guy was a conservative borrower. He only owes between $400,000 and $450,000 depending on whether or not he tapped his HELOC. If this property sells for its ridiculous asking price, and if a 6% commission is paid, the owner stands to make $305,900. The $225,000 he backed off of his initial asking price must feel like a huge discount to him. The recession is hurting everyone, I guess.

.

I’m gonna find me a groovy little hippie pad.
I’m gonna find me a groovy little hippie pad.
I work a hundred grand scam from a border town.
Well, I’ll be feeling glad.

I’m gonna fix brown rice every day,
And drink down a bottle of midnight red.
I’m gonna fix brown rice every day,
And drink down a bottle of midnight red.
That’s all I need to get groovy,
That’s what all the little hippie said.

Groovy Little Hippie Pad — ZZ Top

Marble House — The Knife

Are the high-end homes in Irvine plated with marble? The asking prices would make you think so. Today’s featured property was purchased by a knife catcher at auction. No improvements have been done to the property — no marble — and now they want $260,000 for their efforts. Oh wait, they made no effort. They just want $260,000 just because. This is the kind of behavior that makes house prices unaffordable, and it is exactly the kind of behavior this market is going to crush out of existence.

Asking Price: $1,149,900

Income Requirement: $287,475

Downpayment Needed: $229,980 or $437,863

Monthly Equity Burn: $9,582

Purchase Price: $890,064

Purchase Date: 5/19/2008

Address: 15 Bayview, Irvine, CA 92614

Beds:	5
Baths:	3
Sq. Ft.:	2,967
$/Sq. Ft.:	$388
Lot Size:	5,166 Sq. Ft.
Property Type:	Single Family Residence
Style:	Mediterranean
Year Built:	1986
Stories:	2 Levels
Area:	Woodbridge
County:	Orange
MLS#:	S538594
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

There hasn’t been a home available in Bayside for over 2 years! Then why did it go so low at auction?

Does that description read like it was purchased by an out-of-towner? My sources tell me it is owned by First Pacific Properties, LLC, whoever that is. Perhaps it is a new vulture fund catching its first knife. They obviously have not been watching the prices of nearby comparable properties. Many people have commented on 4 Rainstar. It is arguably a superior property, and they are asking $999,000 after a long series of price drops:

On the other side of South Lake, there is 7 Bayporte. It is a very similar property, and it is listed at $1,025,000.

So the comps are around $1,000,000 and dropping fast, but somehow this property has gained $260,000 in value. WTF? I cannot get my mind around what these guys are thinking. Plus, since their own auction purchase is going to set the ceiling of financing value, lenders will likely only loan 80% of the
$890,046 purchase price. In other words, the purchaser of this property will need to ignore the neighborhood comps and put up $437,863 of their own money to close the deal. I don’t think that is going to happen.

If these guys recognize their error quickly, they might be able to sell this and still make a small profit. If they priced it at $950,000 today, some other knife catcher might pay it and bail them out of this deal. With the rate prices are dropping, they probably have a three to six month window before they go underwater, less if they are paying a full commission. I will watch this one. I suspect we can all get a major schadenfreude fix out of it.

BTW, there is an interesting subplot to this property. How did a property that was purchased for $720,000 go into foreclosure and get auctioned at $890,046? You guessed it, mortgage equity withdrawal. Over the course of 5 years or ownership, the previous owners took out $377,000. Option One Mortgage ate the loss.

.

And comb your hair
I carry you
Down the stairs

On the inside of this marble house
I grow
And the seeds I slow
Grow persistant too

Marble House — The Knife

Mack the Knife – Frank Sinatra

The people who bought properties as flips in 2007 had to put their own money into the transaction. All of these people made a small fortune by starting out with a larger one.

One of the myths of the real estate bulls is the rich-foreigners-will-save-us fallacy. This myth has a hint of racism to it: foreigners must be culturally superior to have the money to come to the rescue of us poor Americans. Whenever I see this argument raised, I always link to a post done by Rich Toscano at Piggington.com called The Dumb Money. As stated in the article, “Far from being a positive fundamental, a sudden excess of foreign
participation in an asset market is indicative of ill-informed
speculative money at work. When the foreigners really start piling on,
it’s always a good sign that the end of the bubble is nigh.” As you might have surmised, today’s featured property was a flip attempt by someone with a non-Westernized name (as was yesterday’s.) The stupidity of this particular flip is breathtaking to me. It was purchased as REO for well over what the lender paid, and now it is being offered for much less. The entire loss is going to be the flipper’s money.

If the property looks familiar, it is because we have featured it before: Brookside Comp Killer.

Asking Price: $660,000

Income Requirement: $165,000

Downpayment Needed: $132,000

Monthly Equity Burn: $5,500

Purchase Price: $740,000

Purchase Date: 12/19/2007

Address: 4342 Brookside Street, Irvine, CA 92604

That description is a lie (and annoying for several reasons.) This is not REO. Do you think the seller is so embarrassed that they are losing so much money on the deal so quickly that they are pretending it is still bank owned?

This property was REO when the bank purchased it on 12/17/2007 for $678,340. It was sold to a woman “as her sole and separate property” on 12/19/2007 for $740,000. Perhaps the husband knew it was a dumb idea? The lender had to be thankful someone was foolish enough to purchase a house for over $60,000 more than they paid at auction, particularly given the sorry state of the market last December. A lender was willing to loan 80% of the $740,000 purchase price, but the owner had to put $148,000 down. If this property sells for its asking price, the owner stands to lose $119,600 after a 6% commission. Basically, they lost $120K in 6 months. That knife was quite sharp.

I doubt a regular reader of the IHB would have made that deal. I must admit, I feel a bit of schadenfreude on that one 😉

Thus concludes another week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

.

Oh, the shark has pretty teeth, dear
And he shows ’em, pearly white
Just a jack knife has Macheath, dear
And he keeps it, keeps it way out of sight

Hey Sookie Taudry, Jenny Diver, Polly Peachum, Old Miss Lulu Brown
Oh the line forms, on the right dear
Now that Macheath, I mean that man Macheath
Yeah he’s bad, mercy mercy
Yeah he’s badder than old Leroy Brown
You better lock your door, and call the law
Because Macheath’s, that bum,
He’s back in town

Mack the Knife – Frank Sinatra