Category Archives: House Flips

Financing in a Declining Market

Check out Howlin’ Wolf’s description of the blues (it’s at the beginning.)

It cannot be denied (rationally) that we are currently in a declining market. In a declining market, banks look at appraisals and comps differently than they do in a rising market. When prices are rising the lender will look at the highest comparable sales to determine total value upon which they will base their loan. When prices are declining like they are now, the lender will look at the lowest comparable sales or asking prices to establish the value upon which they will base their loan. This is a major headache for sellers. Remember the post I did on the big drop in Turtle Rock recently How to Lose $500,000 in a Year? Once that seller put that house on the market asking $800,000, he ruined the comps for every similar home within a mile of his location. Let’s say you are the neighbor at 6022 Sierra Siena Road who is asking $950,000 for a similar property. If you find a buyer willing to pay $950,000 and put 20% down, the lender is going to look at the neighboring house asking $800,000 and say, “I can only loan your buyer 80% of $800,000.” For the buyer of the Seirra Siena Road property to make a sale, the buyer will need to put down $310,000 — almost 30% because of the low asking price on Silver Cres.

Also, in a declining market lenders will raise loan-to-value requirements. The lenders I have spoken to have told me that right now, there is no market outside of the conforming loans of the GSEs (Freddie Mac, Fannie Mae) or the FHA. The FHA will allow loans with 3% down, but the income requirements are so tight, that it is very difficult to qualify. The GSEs allow higher DTIs, but they are also requiring higher downpayments. Even now, very few loans are being approved without 20% down. Another interesting thing I was told is that nearly all of the buyers over the last several months were renting at the time of their purchase. It is a classic case of those renters who felt “priced out forever” jumping at the chance to own — more kool aid. There is almost no move-up market right now, probably due to the deep price drops at the low end of the market. People getting out of entry-level housing do not have any equity, and those who still have equity, are not able to sell their homes.

Today’s property is a classic flip. The owners bought it in March, and they are asking $119,000 more than they paid for it. In the bubble rally, they might have pulled it off because the bank would have ignored their low purchase price and financed anyone with 100% financing at almost any price they wanted to ask. However,in today’s market, they set their own comp, and the lender is not going to ignore it. For them to get their WTF asking price, someone is going to have to put down a large amount of cash. In short, it is not going to happen.

46 Marsala

Asking Price: $659,000

Income Requirement: $164,750

Downpayment Needed: $227,000 based on their purchase price as a comp

Monthly Equity Burn: $5,491

Purchase Price: $540,000

Purchase Date: 3/14/2008

Address: 46 Marsala, Irvine, CA 92606

WTF

Beds:	3
Baths:	1
Sq. Ft.:	1,100
$/Sq. Ft.:	$599
Lot Size:	–
Property Type:	Single-Family House
Year Built:	1994
Seller Type:	By Owner
County:	Orange
Listing #:	875385610
Source:	Oodle
Status:	Active
On Redfin:	5 days

This beautiful single-level home is located in the interior of the
tract – quiet and private location. Upgrades include remodeled kitchen
and bathrooms – stainless steel appliances, granite countertops,
tumbled limestone tiled backsplash, and new dark cabinets with brushed
nickle hardware. Marble floors located entry, kitchen, and bathrooms.
Custom earthtone paint throughout. Crown molding and 6″ baseboards
accent the custom paint beautifully. Floorplan is open and inviting.
Private yard includes a waterfall and tropical plants. 2 car garage,
attached and lots of parking directly in front of the home makes it
nice for guests to visit. 2 blocks from Plaza Vista Elementary – award
winning school! Low tax rate and only $50 per month for mello roos.
HOA’s are lowest in the area at $133 per month. Amenities include 2
olympic size association pools and tennis courts. Call today for a
private showing of this spectacular home!

I guess the new pergraniteel added $119,000 in value. Perhaps some pictures would help.

$599 per square foot?

WTF?

Bubble prices did not reach $600/SF. Maybe that is why they took it down to $599/SF? Since this is a FSBO, there is no commission involved, so if they get their asking price, they stand to make $119,000. Good luck with finding the buyer with $227,000 to put down that wants to grossly overpay for this place.

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 holiday weekend.

🙂

How many more years, have I got to let you dog me around
How many more years, have I got to let you dog me around
I’d soon rather be dead, sleeping six feet in the ground
I’m gonna fall on my knees, I’m gonna raise up my right hand
I’m gonna fall on my knees, I’m gonna raise up my right hand
Say I’d feel much better darling, if you’d just only understand
I’m going upstairs, I’m gonna bring back down my clothes
I’m going upstairs, I’m gonna bring back down my clothes, do them all
If anybody ask about me, just tell’em I walked out on

How Many More Years — Howlin’ Wolf

Well, now meet me in the bottom,
Bring me my runnin shoes.
Well, now meet me in the bottom,
Bring me my runnin shoes.
When I jump out the window,
I won’t have time to loose.

When you see me streakin by,
Please, don’t be late.
When you see me streakin by,
Please, don’t be late.
Well, when you see me movin,
You know my life is at stake.

Well, I hope you see me,
I come streakin by.
Well, I hope you’ll see me when,
I come streakin by.
She got a bad old man,
You know, I’m too young to die.
Boy, I got to leave here.
Fore I get caught in there.

Meet in the Bottom — Howlin’ Wolf

FSBO – For Sale By Optimist

Don't Dream It's Over — Crowded House

You don't need a realtor to sell a house. A title company can take care of most paperwork, and an attorney can draft the rest for a minimal fee. Realtors are supposed to be experts at sales and marketing, but if you possess these skills, there is no need to pay someone 6% to draft a poorly written property description and sit in your house on the weekends. You can do it yourself and save a great deal of money. There are advantages of to selling on your own. You don't have to base your asking price on comparable properties. You can make up a number and put the property for sale for whatever price you want. There is no neutral market observer to tell you your price might be too high. Who needs to pay attention to comps? Also, you don't have to worry about the time and money your realtor is going to spend marketing your home because you will pay all those expenses yourself.

Today's featured property has been featured on IHB before. The previous owner was unable to sell it using a realtor, and it went back to the bank in foreclosure. The current owners bought it from the bank. Surely, they will find the buyer who appreciates the unique qualities of this home and obtain their asking price. It is just a matter of good sales and marketing and a healthy dose of optimism (real estate optimism tastes best when mixed with kool aid.)

Asking Price: $749,500

Income Requirement: $187,375

Downpayment Needed: $149,900

Monthly Equity Burn: $6,245

Peak Purchase Price: $729,500

Peak Purchase Date: 11/21/2005

Flipper Purchase Price: $540,500

Flipper Purchase Date: 1/18/2008

Address: 14712 Sweetan St., Irvine, CA 92604

Beds:	3
Baths:	2
Sq. Ft.:	1,500
$/Sq. Ft.:	$500
Lot Size:	–
Property Type:	Single-Family House
Year Built:	1975
Seller Type:	By Owner
County:	Orange
Listing #:	768421118
Source:	Oodle
Status:	Active
On Redfin:	78 days

Swimming pool/Jacuzzi w. solar heating; 3 Bedrooms, 2 baths,Living Room, Den, office, kitchen;

Granite countertops; Bosch dishwasher; Smooth cooktop self cleaning oven; Microwave/convection;

Coffered ceiling light & Ceiling fan; Granite fireplace in den;

Ceiling fans in every room;

2 skylights;

New tumbled stone shower in master bath; Approx. 1500 sq.ft.;

Central AC; recently remodeled;

new landscaping; walk to schools;

FSBO Link

The seller's name and contact information on the link above does not match the property records. Whoever she is, please refrain from using her name in the comments. Thank you. If you want to call and make an offer, well… that is up to you.

The previous owner and the bank shared in the losses on this property. The owner put 20% down ($145,900), and the bank put up $583,600. At the foreclosure auction, the lender paid $607,901 which probably represents the original balance plus all the missed payments. When they sold the property for $540,500 to our flippers. The lender lost $67,401. The total loss on the property was $213,300. The lender's loss is our flipper's gain. If they manage to get their asking price, they stand to make $209,000.

WTF

WTF? Are you kidding me?

This property was for sale forever in the $600s before the credit crunch. I suppose if you completely ignore all the comparable inventory priced $200,000 less (and dropping daily) this price might be attainable. Oh wait, they must have spent $20,000 on pergraniteel and added $209,000 in value in the process. I guess that makes the asking price reasonable… Not. Don't let me spoil the bubble rally. Don't dream it's over.

Perhaps there are some drawbacks to selling without a realtor after all…

I hope you have enjoyed this week at the Irvine Housing Blog. We set a new record this week when we had over 10,000 unique visitors on Wednesday. I guess it really was The Ultimate Post. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

Crowded House There is freedom within, there is freedom without

Try to catch the deluge in a paper cup

There's a battle ahead, many battles are lost

But you'll never see the end of the road

While you're travelling with me

Hey now, hey now

Don't dream it's over

Hey now, hey now

When the world comes in

They come, they come

To build a wall between us

We know they won't win

Don't Dream It's Over — Crowded House

Nothing to Lose

In the era of 100% financing, speculation was widespread. Why not, speculators had nothing to lose other than their credit score, and if prices had gone up, they would have reaped a huge windfall. We have documented case after case of this behavior right here on this blog. Are we flagellating the equine after it has already perished? Perhaps, but until this behavior is seen for what it was, lenders will not learn their lessons, and they will do it all over again. Realistically, the only thing that could save housing prices would be a return of 100% financing and the elimination of lending standards like we saw during the bubble. There is only one problem with that: people cannot afford the payments — They have proven that much. The continued use of 100% financing through 2007 was the only thing delaying the crash. Now that the FED is lowering interest rates, they are hoping this will translate into lower borrowing costs and help knife-catchers finance the huge sums necessary to afford today’s pricing and slow the decent of prices. There is only one problem with that: as the FED lowers interest rates it increases inflation expectations, and mortgage interest rates go up. Hmmm… It is really quite a quandary.

The low interest rates we are experiencing now may prompt a few sales in 2008, but the FED will not be able to keep interest rates low for long or inflation will get out of control (anyone remember the 1970s?) If the FED starts raising interest rates later this year to curb inflation, mortgage interest rates will again rise — not because of inflation expectations but because base rates will have increased. Mortgage interest rates hit the floor in 2004. The Federal Funds rate was 1%, inflation was low, and risk premiums were artificially low because investors in mortgage backed securities did not recognize the risks. 5.8% is as low as interest rates on a 30-year fixed-rate mortgage can get. Higher inflation and more rational risk premiums will prevent interest rates from getting that low again. It seems very unlikely mortgage interest rates can get any lower than 5.8%. We will not see 4% mortgage rates to prop up prices.

Have you noticed when the real estate market bulls are proven wrong, there is always some unforeseen outside factor to blame? David Lereah had the nerve to claim nobody saw the subprime crisis coming despite the fact warnings about subprime lending were widely known and reported. Remember that you read this here: Mortgage interest rates are going to rise. You will probably not see mortgage interest rates on 30 year fixed rate mortgage below 6% again in your lifetime. Sometime in late 2008 or early 2009, the federal reserve will start raising interest rates, and mortgage rates will rise with them. This will be blamed for the big drop in prices and it will be held up as the reason for the faulty forecasts of bullish realtors. If it wasn’t for the FED, trees really would grow to the sky, right?

One of the primary functions of the FED is to provide a stable financial system. Once the Federal Reserve begins to see economic growth and liquidity in the debt markets, interest rates may rise as quickly as they fell in order to stop hyperinflation from occurring. The FED does not want to see its member banks receive worthless currency in return for the loans it made; although I suppose this is better than receiving even less currency in a default.

Mortgage Interest Rates 1972-2006

When a country knowingly devalues its currency, it causes a severe recession as the prices of imported goods and raw materials increases dramatically. Perhaps a severe recession and price inflation is preferable to an economic depression like the one of the 1930s in America, but it is certainly not desirable. There will be some benefits to a devalued currency. A less valuable currency is a boon to exporters. The United States has run a chronic trade deficit for many years, and much of the recent deficit has come from inexpensive goods imported from China. The trade imbalance may correct itself with currency devaluation. Of course, this rebalancing of trade will come at the cost of more expensive imported foreign goods and a commensurate decline in spending power from US consumers. Also, prior to currency devaluation, wages in the United States were so high that jobs were being outsourced to foreign countries where people can be paid much less. Wages could not rise significantly from where they were without devaluing the dollar to prevent wage arbitrage from moving jobs overseas. The devalued currency provided some room for wage increases, and these wage increases could theoretically provide additional support for housing prices. If the FED does chose hyperinflation, there needs to be wage inflation to go along with it or the economy will experience a very deep recession due to the steep drop in consumer spending (It may anyway.) If wages rise, houses become affordable again. I wouldn’t mind paying today’s prices if my salary doubles.

Put today’s problems in perspective: the Federal Reserve is being forced to chose between stagflation and depression, house prices are crashing, and homeowners are being foreclosed on in record numbers. This situation is the result of declining home prices; the declining home prices are a direct result of the unsustainable price levels created during the bubble rally; the unsustainable price levels were created by widespread use of 100% financing and the elimination of lending standards, so this is important stuff worthy of daily exposure on blogs like this one. In today’s 24 hour news cycle, it is easy to focus on the sensational and forget about the root causes of our problems. The roots are here in properties like this one and in borrowers like this one who used 100% financing to speculate in the real estate market at the expense of our banking system.

Asking Price: $590,000

Income Requirement: $147,500

Downpayment Needed: $118,000

Monthly Equity Burn: $4,916

Purchase Price: $762,000

Purchase Date: 4/12/2007

Address: 3691 Scottsdale, Irvine, CA 92606

Beds:	6
Baths:	3
Sq. Ft.:	2,451
$/Sq. Ft.:	$241
Lot Size:	5,375 Sq. Ft.
Type:	Single Family Residence
Style:	Traditional
Year Built:	1973
Stories:	Two Levels
View(s):	Park or Green Belt
Area:	Walnut
County:	Orange
MLS#:	S524214
Status:	Active
On Redfin:	12 days

6 bedrooms total – 4 bedrooms upstairs, 2 bedrooms, 2 dens downstairs, with 2.75 baths. Wood flooring downstairs. Remodeled kitchen with double ovens, flat top cooking surface, large pantry & newer cabinets. Leaded glass front doors, plantation shutters, newer central A/C, newer tile roof, 8 ceiling fans and recently painted in & out. Large backyard. Close to park and community pool.

$241 / SF is real progress.

The price will have to be reduced for the cost or repainting. The pink and green colors are truly ugly.

This property was purchased less than one year ago, and if the short sale is approved, and if the seller gets their asking price, the lender (NBGI Inc.) stands to lose $207,400 after a 6% commission. There have been some comments on my equity burn calculation where I take 10% of the purchase price and divide it by 12 to get a monthly equity loss on the property. How much was this lender’s equity burn? $17,283 per month. If this flipper had any of his money in the deal, that would have been his loss, but since it was the lender…

Anyone looking to buy in today’s market really should pay attention to the equity burn number. In today’s market, borrowers have to put money down. It is their money evaporating into the ethers. The phenomenon is real, and it will continue for the foreseeable future.

It is a good time to be a renter.

Tonights the night well make history, honey, you and i

And Ill take any risk to tie back the hands of time

And stay with you here tonight

I know you feel these are the worst of times

I do believe its true

When people lock their doors and hide inside

Rumor has it its the end of paradise

But I know, if the world just passed us by

Baby I know, you wouldnt have to cry

The best of times are when Im alone with you

Some rain some shine, well make this a world for two

Our memories of yesterday will last a lifetime

Well take the best, forget the rest

And someday well find these are the best of times

These are the best of times

The Best of Times — Styx

Take It

Oh We’re Not Gonna Take It

no, We Ain’t Gonna Take It

oh We’re Not Gonna Take It Anymore

we’ve Got The Right To Choose And

there Ain’t No Way We’ll Lose It

this Is Our Life, This Is Our Song

we’ll Fight The Powers That Be Just

don’t Pick Our Destiny ’cause

you Don’t Know Us, You Don’t Belong

oh We’re Not Gonna Take It

no, We Ain’t Gonna Take It

oh We’re Not Gonna Take It Anymore

oh You’re So Condescending

your Gall Is Never Ending

we Don’t Want Nothin’, Not A Thing From You

your Life Is Trite And Jaded

boring And Confiscated

if That’s Your Best, Your Best Won’t Do

we’re Right/yeah

we’re Free/yeah

we’ll Fight/yeah

you’ll See/yeah

oh We’re Not Gonna Take It

no, We Ain’t Gonna Take It

oh We’re Not Gonna Take It Anymore

We’re Not Gonna Take It — Twisted Sister

I think these clueless WTF sellers have finally pushed me over the edge. I want to shame them; shame them all. I’m mad as hell, and I am not going to take it anymore. How much longer are we going to watch these people put ridiculous prices on properties before we all decide “We’re Not Gonna Take It Anymore?” When do sellers start worrying about insulting the intelligence of buyers? How can you list a property for $240,000 more than an arguably superior property 4 doors down, particularly when the comparable property isn’t selling?

Please, somebody help me understand the thought process here.

OK, my neighbor, who has a similar house, has been trying to sell it for almost six months. My neighbor paid almost $400,000 more for their house, so it is probably a nicer property, but mine is better because it is mine. It isn’t a short sale, so there is nothing stopping my neighbor from selling (other than there are no buyers.) My neighbor has reduced his asking price $400,000 over the last 6 months trying to get out. I know this because I am a neighbor, and my realtor must know about this property and has also told me. I have been hearing stories about price declines, but my neighborhood is different, and my property is special, so I am going to ask…

$240,000 more than my neighbor and $235,000 more than I paid in March of 2006 (almost the peak.)

Yes, that makes sense. The market has bottomed, and the spring rush is coming. I am sure some buyer will see the unique qualities of my property and pay me the profit to which I am entitled.

Is there some other way to see this listing price? Please help me. I can see no other line of reasoning or pattern of thought that can produce this asking price. How out-of-touch with reality are sellers today?

You know, perhaps we should stop calling them sellers because there is no way the property is going to sell for this price. Perhaps we should call them “listers” or “askers” or “clueless-WTF-nutcases?” What do you think?

Asking Price: $1,599,000

Income Requirement: $399,750

Downpayment Needed: $319,800

Monthly Equity Burn: $13,325 at least

Purchase Price: $1,363,000

Purchase Date: 3/3/2006

Address: 25 Triple Leaf, Irvine, CA 92620

Beds:	4
Baths:	5
Sq. Ft.:	3,681
$/Sq. Ft.:	$434
Lot Size:	6,985 Sq. Ft.
Type:	Single Family Residence
Style:	Contemporary
Year Built:	2006
Stories:	Two Levels
View(s):	Park or Green Belt
Area:	Woodbury
County:	Orange
MLS#:	P625403
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Just move in. Highly desirable Juliet’s Balcony model with larger lot. Porte cochere and French doors leading to nice courtyard on side of home. Walk in and see living rm and library. Large gourmet kitchen with all the extras like Viking 6 burner with griddle, stained maple cabinets, stainless steel appliances, granite counters, pendant lights. Craftsroom downstairs with built-in cabniets and computer niche. Wine cellar. Built-ins for TV area in family room and master. 20′ diagonal tile flooring with granite inserts downstairs. 4 bedrooms upstairs each with own bathrooms. Master and one other bedroom have retreat areas. Master bath has spacious tub and glass enclosed shower. Balcony upstairs. Backyard has been professionally hardscaped with built-in BBQ, and plants will be completed. Enjoy all the amenities of a contemporary home. Location is great near 2 parks. Association offers a 9 acre recreation center and 3 pool areas.

pergraniteel — “stained maple cabinets, stainless steel appliances, granite counters,”

Does anyone remember the neighbor?

Update 4 — The saga continues… This house was relisted again for $1,359,000. The total loss stands at $473,540. After putting $525,400 down, I imagine this seller did not think they would be risking a short sale. Their equity is all but gone…

Old Asking Price: $1,700,000

New Asking Price: $1,359,000

Purchase Price: $1,751,000

Purchase Date: 12/30/2005

Address: 33 Triple Leaf, Irvine, CA 92620

1st Loan $1,225,600

Downpayment $525,400

Beds: 4

Baths: 4.5

Sq. Ft.: 3,750

$/Sq. Ft.: $453

Lot Size: 6,348 sq. ft.

Year Built: 2005

Stories: 2

Type: Single Family Residence

View: Park or Green Belt

County: Orange

Neighborhood: Woodbury

MLS#: S472319

Status: Active

On Redfin: 215 days

Unsold in 90+ days

From Redfin, “The Jewel of Woodbury! Ready to deal. Rich woods on floor, ceilings, p aneling etc. Gorgeous paint schemes, tile designs. All Viking Kitchen, open bright floor plan typical of Juliet’s Balcony homes. Surround sound, huge master bath, all bedrooms are suites. Designer window treatments. Across from a private park. Walk to parks and 6 pools, elementary school, shopping center. Woodbury’s amenities are incredible and the lifestyle resort like.”

IMO, the property being offered for $240,000 less is a superior property. I think the front landscaping is certainly more attractive. Anyway, as a public service, let’s help this hapless lister pick a better asking price.

That 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.

Hell in a Bucket

Well I was drinkin last night with a biker

And I showed him a picture of you

I said, pal get to know her, youll like her

Seemed like the least I could do.

Cause when hes chargin his chopper

Up and down your carpeted halls

You will think I am dressed up quite proper

Never mind how I stumble and fall.

You imagine me sipping champagne from your boot

For taste of your elegant pride

I may be going to hell in a bucket, babe

But at least Im enjoying the ride, at least Ill enjoy the ride.

Hell in a Bucket — Grateful Dead

I have to wonder if today’s flipper decided to buy after a night of drinking. He certainly had more kool aid than common sense. Today’s property was purchased for peak pricing a year after the peak in May 2007. This property was purchased despite the news of the subprime blow up 3 months earlier. Perhaps this flipper really believed the “subprime containment” meme? It is easy to ridicule a bad investment after the fact, but we at the IHB would have ridiculed it before the fact, and we would have been right. Enjoy the schadenfreude at this flipper’s expense, with the damage to his credit this fiasco will entail, he won’t be doing it again any time soon.

Asking Price: $849,995

Income Requirement: $212,498

Downpayment Needed: $169,999

Monthly Equity Burn: $7,083

Purchase Price: $1,050,000

Purchase Date: 5/9/2007

Address: 53 Legacy Way, Irvine, CA 92602

1st Loan $787,500

2nd Mtg. $262,500

Downpayment $0

Beds:	5
Baths:	4
Sq. Ft.:	3,683
$/Sq. Ft.:	$231
Lot Size:	7,426 Sq. Ft.
Type:	Single Family Residence
Style:	Contemporary
Year Built:	1998
Stories:	Two Levels
View(s):	Park or Green Belt
Area:	West Irvine
County:	Orange
MLS#:	S521032
Status:	Active
On Redfin:	2 days

Rarely on the market, Largest floorplan in The Legacy Tract. Spacious West Irvine Home features a Gourmet Cook’s Kitchen with Granite Counter tops. Large Family Room With Fireplace. Beautiful tile floors throughout family room. Extra large Loft. Guest Bedroom on First Floor with full Bath. Three car garage with large driveway. Top Award winning schools: MYFORD Elementary, PIONEER Jr High and BECKMAN HIGH. Wonderful neighborhood with no association dues. Views of the Park and trees.

This large, single-family detached property is selling in Irvine for $231 / SF. This is not a bad property in a bad neighborhood, it is a beautifully updated property with a large yard backing onto a park. It is selling at such a low price for a couple of reasons. First, the market is declining precipitously, and there are few buyers around. Second, this seller used 100% financing (I guess you could still get that in May 2007,) so he doesn’t have any reason to keep up payments. This was purchased as a speculative flip, and the lender was taking all the risk. It didn’t work out, so the flipper gets bad credit, and the lender gets a huge loss. If this property sells for asking price, the lender (JP Morgan) stands to lose $251,005 after a 6% commission. That is a sizable loss considering this loan was made about 9 months ago. I wonder if the flipper has even made any payments? This could be fraud, but the owner is a real person and not some fictitious business entity, so I think this was a real flip attempt — a very foolish one.

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

🙂