The price on this property is now under $6,000,000. The owner is asking $1,000,000 less than what was paid.

Real estate is notoriously illiquid. When you want to sell it, there is not always a buyer there to unchain it from your ankle.

Today’s featured property is looking at a potential million dollar loss.

Asking Price: $6,495,000

Address: 29 Blue Grass, Irvine, CA 92603

Ball and Chain — Social Distortion

Times are hard getting harder
I’m born to lose and destined to fail

Real estate is illiquid. Perhaps you have heard that term before. One of the main criticisms of owning real estate as an asset class is its lack of liquidity, but what does that really mean? Liquidity is the ability to sell an asset and convert it to cash. In case you haven’t noticed, right now, real estate is not very liquid.

Liquidity risk is one of those esoteric and academic concerns that does not apply to the real world–or so people thought during the bubble. When prices were rallying, real estate was very liquid. If you would have put a property for sale in 2004, you would have obtained multiple bids over the ask within days. Real estate was nearly as liquid as stocks during that time. Like every other condition during a financial mania, people assumed this would also go on forever.

{book4}

When stock prices crash, there is still liquidity. You may have to discount the price a few pennies to find a bidder, but there is always a bidder willing to pay something close to the most recent transaction price. In real estate, this is not the case. When a credit crunch causes a drastic reduction in potential buyer’s ability to make bids, offer prices can drop very quickly while the asking prices of sellers do not. This increasing bid/ask spread is one of the telltale signs of a real estate market price collapse.

We joke about the phenomena here. We remark on the denial and delusion of sellers and their WTF asking prices. We see the collapse of demand caused by restricting credit; sellers do not. For instance, look at these two Woodbridge properties: 79 Lakeview Irvine,
CA 92604, Price:
$590,000; and 24 Lakeview Irvine,
CA 92604, Price:
$699,000. The less expensive property is asking $289/SF while the more expensive one is dreaming $421/SF. The former owner accepts reality; the latter owner does not.

The illiquidity of real estate makes property a ball-and-chain. The owners are looking for relief, but they are not going to find any.

Take away, take away
Take away this ball and chain
Well I’m lonely and I’m tired
And I can’t take any more pain

Today’s featured property is a high-end ball-and-chain. It is only being discounted 7% off its peak purchase price. That doesn’t sound like much, but 7% of this purchase price is $500,000!

Asking Price: $6,495,000

Income Requirement: You’re not financing this one.

Downpayment Needed: You are probably paying cash.

Monthly Equity Burn: More than you can imagine.

Purchase Price: $7,000,000

Purchase Date: 8/2/2006

Address: 29 Blue Grass, Irvine, CA 92603

Either John McMonigle is a good writer, or he hires one. That description describes the property well, it uses a few well-placed modifiers, the grammar and spelling are correct, and most importantly, it did not pain me to read it. I guess when you list a $6.5 million property, you get quality description copy.

This property was purchased for $7,000,000 on 8/2/2006. The owner used a $5,600,000 first mortgage and a $1,400,000 downpayment. Can you imagine the payments on a $5,600,000 loan? Wow! Despite the huge financing amount, this owner must have some real money. He refinanced on 2/7/2007 for $4,900,000. To do that, he had to pay down the original note by $700,000. It is still a huge loan, but a distressed homeowner doesn’t have $700,000 sitting around to pay down mortgages. This guy does.

If this property sells for its purchase price, and if a 6% commission is paid (John McMonigle would make $389,700), the total loss on the property would be $894,700.

It is difficult to project what will happen to properties like this one. Properties over $2,000,000 historically have not been financed (although the bubble changed that somewhat). The cash market for these very high-end properties cannot be valued by a rental income based approach. People with that much money are not using financing, and rental parity is not a concern to them. If you are rich enough to pay cash for a property like this, you buy it because you want it.

The very rich that buy properties like this are still subject to changes in wealth and income like the rest of us. Many of these people are suffering from drops in the stock markets and other asset class valuations. This may or may not cause them to sell real estate. During our last real estate recession, high-end properties like these got hammered. They might get pummeled again.

{book3}

Well it’s been ten years and a thousand tears
And look at the mess I’m in
A broken nose and a broken heart,
An empty bottle of gin
Well I sit and I pray
In my broken down Chevrolet
While I’m singin’ to myself
There’s got to be another way

Well I’ll pass the bar on the way
To my dingy hotel room
I spent all my money
I’ve been drinkin’ since half past noon
Well I’ll wake there in the mornin’
Or maybe in the county jail
Times are hard getting harder
I’m born to lose and destined to fail

Ball and Chain — Social Distortion

Turtle Rock is the one neighborhood I least expect to see dramatic price declines; however, this does not mean it is not immune to the pressures of the market.

Asking Price: $949,000

Address: 2 Sarena, Irvine, CA 92612

{book6}

Secret O’ Life — James Taylor

I have been battling with recession stress lately. Unemployment in
the residential real estate industry is somewhere between 50% and 80%.
It is difficult to keep your spirits up when all you hear about are
layoffs. Sometimes it is good to relax and remember…

The secret of life is enjoying the passage of time
Any fool can do it
There aint nothing to it

It is not as easy as it should be in times like these.

Nobody knows how we got to
The top of the hill
But since were on our way down
We might as well enjoy the ride

Turtle Rock is one of the original Irvine Villages, and it has a large number of long-term homeowners. There should not be as much toxic financing here as in other villages, but as we have seen on previous posts, there is plenty of HELOC abuse causing problems. Prices here will fall, but it should not be as catastrophic in Turtle Rock as it will be in Turtle Ridge.

This is a pretty home. At least the knife catcher who buys here can enjoy their gilded cage.

Asking Price: $949,000

Income Requirement: $237,250

Downpayment Needed: $189,000

Monthly Equity Burn: $7,908

Purchase Price: $1,200,000

Purchase Date: 3/15/2006

Address: 2 Sarena, Irvine, CA 92612

Beds:	3
Baths:	3
Sq. Ft.:	2,328
$/Sq. Ft.:	$408
Lot Size:	–
Property Type:	Condominium
Style:	Contemporary
Year Built:	1987
Stories:	2
Floor:	1
View:	Estuary
County:	Orange
MLS#:	U9001823
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Short and sweet–perhaps a bit too short.

I wonder if this owner reads Shakespeare, “Beware the Ides of March”

This property was purchase on 3/15/2006. The owner used a $500,000 first mortgage, and a $700,000 downpayment. He may be pissed about this loss, but this is certainly not a distressed sale. Kudos to him for recognizing it is a good time to bail.

If this property sells for its asking price, and if a 6% commission is paid, the total loss to the homeowner will be $307,940.

I know it shouldn’t make a difference, but I do feel bad for the people that lose their own money. We can speculate that it was appreciation from a prior sale, and it might be, but it is still a lot of money to lose. Bummer.

{book5}

The secret of life is enjoying the passage of time
Any fool can do it
There aint nothing to it
Nobody knows how we got to
The top of the hill
But since were on our way down
We might as well enjoy the ride

Isnt it a lovely ride
Sliding down
Gliding down
Try not to try too hard
Its just a lovely ride

Secret O’ Life — James Taylor

The North Korean Towers are still dark at night. Prices are still falling and equity is still burning. Even with the huge price reductions, asking prices are still well above fundamental valuations. These units are perhaps the most toxic assets in Orange County.

Asking Price: $430,000

Address: 3131 Michelson #802, Irvine, CA 92612

Down In It — Nine Inch Nails

Kinda like a cloud I was up way up in the sky and I was feeling some feelings
…but I watched it way too long and that dot was pulling me Down.

I was up above it.
Now Im down in it

I last profiled a property in these towers back in May of 2008 with the post Equity Inferno. The post was very popular. At the time, a realtor who owned the unit was asking $1,080,000 for an eighth floor unit in building 3141. Today we have an eighth floor unit in 3131, the building next door, asking $430,000. That is some serious equity burn.

Just for amusement, I calculated the equity burn for our savvy realtor/investor in 3141 Michelson #808. He paid $1,035,000 three years ago in March of 2006. Over the last 36 months, this property has decline in value $605,000 based on the nearly identical unit being profiled today. That puts the monthly equity burn at $16,805 ($605,000 / 36 = $16,805).

However, you could look at it from his point of view. In May of 2008, this guy tried to sell the place for $1,080,000. Apparently, he must have felt the property was worth this much, if only in his own mind. Therefore, in his world (assuming he accepts the $430,000 comp as the true value), his property has lost $650,000 in value over the last 10 months. That translates to a $65,000 monthly equity burn.

Great investment.

Clearly this qualifies as one of the most toxic assets in Orange County.

Asking Price: $430,000

Income Requirement: $107,500

Downpayment Needed: $86,000

Monthly Equity Burn: $3,583

Purchase Price: $679,500

Purchase Date: 1/20/2006

Address: 3131 Michelson #802, Irvine, CA 92612

amennities? billard?

For whatever reason, the database on these properties is difficult to sort through. I cannot find the mortgage information. From what we do know, this property is being offered for 37% off its purchase price. If the property sells for asking, and if a 6% commission is paid, the total loss on the property will be $275,300.

I must confess, I get a special schadenfreude from this property. The hubris of buyers there was best epitomized by the exchanged I documented in the last post on these towers. I still think of those poor souls who drank the kool aid and purchased there… and I giggle.

{book2}

Kinda like a cloud I was up way up in the sky and I was feeling some feelings
You wouldnt believe sometimes I dont believe them myself and I decided I was
Never coming down. just then a tiny little dot caught my eye it was just about
Too small to see. but I watched it way too long and that dot was pulling me
Down.

I was up above it.
I was up above it.
Now Im down in it
I was up above it.
I was up above it.
Now Im down in it

Down In It — Nine Inch Nail