Brookside Comp Killer

Asking Price: $699,000IrvineRenter

Purchase Price: $830,000

Purchase Date: 11/17/2006

Address: 4342 Brookside St., Irvine, CA 92604-2237

Beds: 4

Baths: 2

Sq. Ft.: 2,200Knife Catcher Award

Lot Sq. Ft.: 5,623

Year Built: 1971

Stories: 2

Type: Single Family Residence

Neighborhood: West Irvine

$/Sq. Ft.: $318

MLS#: P575245

Status: Active on market

On Redfin: 5 days

From Redfin ” THIS IS A SHORT SALE. ALL TERMS, SALE PRICE, AND COMMISSION ARE SUBJECT TO LENDERS’S APPROVAL.”

This is how prices come down.

When short sales and REO’s are more the rule than the exception, prices will fall. Zillow thinks this property is worth $853,413. A sale for less than $700,000 will certainly lower the comps in this neighborhood. How many does it take before a new, lower value is established?

This knife-catcher gave up after only 6 months. Redfin shows the purchase price as $820,000, but property records show it as $830,000. Since this is probably a first payment default, I suspect fraud. The sale prior to the 11/17/2006 was on 3/15/2005 for $735,000, so it is possible the 11/17/2006 buyer was a straw buyer saving our previous flipper. As you can see, even without any commissions, the bank is going to lose $131,000. Factor in even a 3% commission, and the bank is going to lose $151,970.

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PMC Bancorp “A leader in Prime and Alt-A mortgage banking” is the bagholder on this one. They have a $622,500 first mortgage and a $200,000 second. With the second mortgage being a total loss, you can see why lenders have stopped issuing them. The days of the 80/20 loan package are numbered.

I wonder who owns the Mercedes Benz in the driveway, or is my identification in error? 1. Starving Realtor? 2. Bagholding Banker? 3. Failed Straw-man Flipper? 4. Rescued Flipper?

38 thoughts on “Brookside Comp Killer

  1. ripcord

    Wow… that’s not too far from what would make me think about it… West Irvine is a nice area. I imagine we have another 100k to go, however.
    —–

  2. mino2126

    IrvineRenter…..did you compile a list of other homes for sale in that neighborhood? I would love to see what happens to them in the coming months. I think it would be a great tool to prove to all the bulls out there that when this happens it hurts everybody.

  3. lee in irvine

    The car in the driveway belongs to the Realtor. I don’t think there’s any way to argue otherwise.

    Zillow is useless!

    I think we’re going to discover in the coming months that these type of deals are going to become much more common.

    Here’s another one in Laguna Niguel that was purchased for 1.3m in 2005, and now the owners want to make the mortgage company the bagholders at 850k or 269 a sqft. If approved, which I highly doubt, this property would become a sore spot for the neighbors who are expecting 370-455 a sqft.

    http://www.redfin.com/stingray/do/printable-listing?listing-id=600760

  4. IrvineRenter

    The data source I use has a link to check out comparable sales and neighborhood properties. This particular neighborhood does not have much for sale. Many of these older neighborhoods have long-term homeowners. Most shouldn’t be in any trouble. We will see how many of them HELOCed themselves into oblivion soon enough…

  5. IrvineRenter

    That would be a HUGE haircut. There comes a point when lenders don’t have many options. The market will only bear what the highest bidder can offer. If the lender forecloses and attempts to resell, they will face the same problem.

  6. No_Such_Reality

    It won’t be a comp-killer because it won’t sell. I’ve been seeing and watching “short-sales” for months. They don’t sell. Not because they don’t offers, but because the Agent and Seller haven’t done their homework and lined the lenders up.

    They post a teaser price which generates traffic and offers which the lender then doesn’t approve because they see support for offloading the property.

    With a last sale price of $830K, this home is effectively off the market until the seller grows the conjones to eat the loss in the low-mid 700s range or decides to further ding their credit by letting the bank take it. If they aren’t behind on their payment now, that means if they stopped paying today, the bank would probably take it from them in time for next spring’s selling season.

    San Diego is ahead of the OC on the RE slide curve, they have more FBs, more NODs, more foreclosures, and the lenders still aren’t playing. Maybe this winter, if SD is mired in bank owned properties, the OC continues to ramp up like they are, LA follows suit and the banks get their REO operations going, we might see movement. Maybe not.

  7. IrvineRenter

    I have a post coming out tomorrow of a property the bank has had on the market for over 250 days. They don’t seem to be in any hurry to liquidate. It seems even banks have wishing prices.

  8. No_Such_Reality

    At the moment, the banks are playing a giant game of chicken.

    They’ll hold the properties until their stock-holders scream and pummel the stock for underperforming ROE. Until that time, they know once they start to liquidate, they kill the golden goose.

  9. awgee

    It is my understanding the lenders can keep reporting the uncollected interest payment as collateralized interest earned, thus including the non-payment as earnings in their quarterly and annualized reports. They do not have to show the loss until they sell the property or the property is sold, therefore they have little or no incentive to sell the property at a loss and much incentive to carry the mortgage on their books as earnings. How will these accrued earnings end? Badly, I think.

  10. Bkshopr

    The Foo dog or the lion statue on the step indicate that the owner is Chinese. The statue there is to scare off the evil spirits that come to harm the family. Many Chinese love Mercedes and It may be the owner’s car. Agents usually park their car on curbside to avoid the vehicle in the picture. I could not see the plate number. Most Chinese Mercede owners like to personalize the plate with their last name followed by”888″.

    I could not see the 2 story portion of the house in the picture. I think the neighborhood is not West Irvine. West Irvine was a entry level community developed by The Irvine Company during the last recession 1993. The year of this home built was 1971. The lot size is too big to be in any of the newer communities developed within the last 15 years.

  11. oc_fliptrack

    Those three Westpark 2/2 condo sales I tracked at $390 to $408/sq ft 5-7 months ago have made absolutely no impact on seller pricing. One was a short sale (in Aventura). Brio is back up to eleven units listed and the sellers all picked-up where they left off last autumn (up to $500/sq ft).

    There’s a reason why sales were so punk in April. It’s wishing prices like these.

  12. Melissa

    That’s really interesting and makes sense when you think about how accrual accounting works – you recognize income when it is earned rather than when you actually get the $. But, accounting firms will probably not be willing to let banks get away with too much of this for too long. They will have to adjust the allowances for bad debts on their financials to more accurately account for what’s really going on. I would imagine that these days most accounting firms don’t want any part in inflating earnings… But, it will probably take a while for all of those changes to occur – maybe until next winter when most co’s 10-Ks come out.

  13. irvinefsbo

    This is located in El Camino Real (Irvine schools) not West Irvine (Tustin schools)

  14. lendingmaestro

    Once the bank has foreclosed and the property is held as an asset in its portfolio there is no mortgage any longer and there is no unpaid interest. Unless the sale is a short sale, there isn’t a loss either.

    Banks do however count principal balance increases of negatively amortzing loans as income because at some point the loan is going to be paid. Unless of course the borrower defaults and a short sale/foreclosure has occured.

    A bank cannot maximize its ROE for its shareholders by owning a vacant property. That is money that can be used for many other investments. That’s why they can sell it and take a loss if they deem the loss is not too great to bear. They will still want to minimize that loss.

  15. lee in irvine

    The banks are in no present position to eat losses. I have little doubt they will ultimately start playing ball in future, the question is how long will it take.

    Quick Story:

    There was a foreclosure next door to my childhood home in the early nineties. Our families were very close, and this event had an extensive affect on me and the way I look at real estate. I remember this sad event like it was yesterday.

    Here’s the chain of events.

    a) Buyer pays 360k (I think) for the home in 1988.

    b) Comps explode and home increases to 550k by mid 1990.

    c) Home is foreclosed in 1993, and sold by the bank for 187k.

    Just so happens that I was visiting another old friend on a Saturday afternoon in my old neighborhood in 2005. Low and behold, the previous foreclosed home was for sale (880k), and was open for viewing (open house). I had to go in and reminiscence … I couldn’t resist telling the realtor showing the home that I grew up next door and my family was close to the family that lived in this home. The realtor then informed me that the home was actually her personal residence, and she had purchased it from the bank in 1993 for 187k. I was somewhat taken back by such a cheap price in a very nice part of Orange County. She didn’t have much sympathy for the previous owners, probably because she felt guilty and uncomfortable talking to someone who knew the family that lost the home.

    The purpose of this story is to say it’s very likely going to take another 18 – 38 months before the banks become so overwhelmed with REOs, that they start making super deals. I have little doubt that these super deals are coming.

  16. Mr Vincent

    Thats a pretty nice looking house from the outside.

    Why only the one pic in the listing? What does the inside and/or backyard look like?

    Maybe not much of a backyard given the 5600 sq ft lot. Tiny!

    I would pay 450k for it, although I am sure there are many who would pay more.

  17. awgee

    To think that the main priority for many lending instituions is to maximize ROE for it’s shareholders may be a bit naive. Many decisions are made to show maximum earnings for the present year or quarter with the purpose of maximizing corporate officer salary and bonuses, and to keep share price high.

    No one is going to stop lending institutions from reporting their earnings in this manner. It is GAAP. For Q1 of 07 258% of Downey S&L’s net earnings are neg-am interest; 166% of FirstFed Cal Y 06; 152% of BankUnited Q1 07; 46% of WaMu Q1 07; 24% of Countrywide Y 06; and there are many, many more. And this is not normal. These are huge increases over previous quarters and last year. As an example, Countrywide’s negative amortization “income” jumped from $74.7 million at 12/31/05 to $654.0 million at 12/31/06 – an increase in excess of 8 times in one year. And Countrywide sold the majority of it’s paper, especially that which was likely to become non-performing. Lending institions are more intersted in hiding losses than they are in minimizing them. Try to find the portion of WaMu’s 10k that describes that portion of earnings attributable to “interest capitalization”.

  18. Michael

    I think this site is wonderful – thank you to whoever is investing their time doing it.

    As an aside I believe this cycle will be much worse than the 1990s cycle because there are so many more factors today (the insane mortgages for example) than in the 90s. Here quickly are all my factors – everyone will force prices down. If you would like figure out the factors that have never existed in a previous down cycle.

    2.2 million vacant homes for sale
    Housing prices now dropping
    Mortgage underwriting standards tightening
    Foreclosures increasing
    $2 trillion ARMs restating at higher rates (07, 08)
    Psychology of buying housing more negative
    Speculators now sellers not buyers
    Housing P/E out of line
    Selling existing homes problematic for buying new home
    Loss of financial safety net of home appreciation
    ARMs rate increase (more significant than fixed)
    Amount of “short sale” inventory increasing
    Fixed mortgage rate increases (relatively small)
    Sub-prime mortgages
    Stated income loans
    Zero down payment loans
    Negative amortization
    Housing related jobs going away
    Mortgage Fraud
    Appraisal Fraud
    Vacation home buying curtailed
    Economic stimulus of using your home as an ATM
    Building in process will increase supply when completed
    Country in debt to the rest of the world
    Large negative current account balance
    Negative Savings Rate
    Excess Liquidity (M3 Unknown)
    Unproven financial instruments (derivatives, etc)
    Increased hurricane insurance costs
    Country’s balance sheet has non productive assets (homes)
    Builders forced to monetize excess land supply

  19. IrvineRenter

    Michael,

    Welcome. You might enjoy some the analysis posts on the site. Click on the tag titled “analysis” on the left side of the page. It will give you a distilled list of the analysis posts which go into detail about the factors in your list. I look forward to your future comments.

  20. IrvineRenter

    oc_fliptrack,

    I hope you start posting soon. I miss your site.

    It is amazing how sellers can simply ignore information they don’t want to here. A new comp tells them where the market is, and they pretend it didn’t happen. It isn’t too surprising there have been few sales this year.

  21. IrvineRenter

    I would not be surprised to see the banks wait until fall or winter to start clearing out the inventory. If I were in their shoes, I would see what I could sell during the prime season hoping to minimize losses by selling at the “ask” rather than the “bid.” Once they have to start selling at the bid, prices will drop quickly depending on the amount of inventory.

  22. No_Such_Reality

    Awgee, you’re talking about a capitalized Neg-Am loan. Those are reported. However, missed interest from a property that has gone REO is not.
    The problem for the banks with the NEG-AM is the contractual paper (the mortgage) ends the Neg-AM period under conditions or time, at that point, they can no longer capitalize the interest.
    Once the house becomes bank owned property it’s a non-performing asset which just makes it harder for the bank to make their numbers.
    It’ll take investor’s a bit to realize it again, but they’ve been bit by the “pro-forma” earnings before. Sooner or later, someone is going to come collecting for those virtual earnings.
    Overall though, you’re dead right, it’s a giant shell game and there’s a lot of vested interests in keeping it going.

  23. awgee

    All agreed, and I think they are doing their darndest not to foreclose or own property, not because they are trying to help the borrowers, or do their shareholders any favors, but rather, they are inflating earnings in a legal manner. Caveat Emptor.

  24. lendingmaestro

    The ultimate goal of any Corporate officer is to increase and sustain shareholder value. Of course they want to get rich as well, but if the company is performing poorly than they probably won’t hold their positions for too long.

    Corporate officers are either boardmembers themselves or appointed by them. They have a vested interest in the company. I know that the Enron, Tyco, and World Com, debacles would seem to contradict this fact, but they only represent a small number out of thousands.

    I agree totally that loose accounting standards allow companies to “cook the books” and disclose revenue in “creative ways”, thereby making its financial position look stronger than it is.

    There is little that can be hidden when accounting for a REO properties.

  25. bought_high

    The key point is that the sale is “subject to lender approval”. Unless we know how much the owner (soon to be former) has paid off of the loan, we cannot assess whether the lender will accept the short sale. If we assume 0% paid off, then I would expect the bank to approve this loss also at 0%.

    The question becomes whether the bank will accept a $150K loss over 6 months or simply ride it out some more… Only the bank will determine that.

    The bank may prefer the house to go to foreclosure auction and try its luck there before sucking up the loss here…

    Good home to track for future column updates, I think.

  26. WiseWithMoney

    Don’t trust a Banker trying to lend you, do ur homework

    “A banker is a fellow who lends you his umbrella when
    the sun is shining, but wants it back the minute it
    begins to rain.” Mark Twain

  27. IrvineRenter

    From Calculated Risk:

    “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.”

    John Maynard Keynes, “Consequences to the Banks of a Collapse in Money Values”, 1931

  28. Darin

    I’ve been lurking and loving the site.

    An observation… Banks are in the business of turning a profit. I don’t know to what extent they think about comp-killing, but I would take it into consideration if I was a bank. One or a small set of comp killers would reduce all future refinances and sales in a given area. Basically, giving an inch and losing a mile. I have no idea if banks consider this or not.

    Question: Is there some way to identify currently comp-killers? Or what would be a good set of analytics? Would 1 house do it at 20%? 2 at 10%? The comps I’ve always seen have 3 comparables. I suspect that cherry picking comps can be done for awhile, but considering the homogenity of communities nowadays and the volume of foreclosures, I can’t imagine it would last. How can we go about figuring out numerically when X number of low ball sells kills a community?

  29. IrvineRenter

    Darin,

    Banks don’t like to hurt the comps because it devalues their REO inventory as well. As long as their are no sales (which is today’s market) they can remain in denial. At some point, they will have to liquidate, and when that process gets going, it takes house values down.

    Your analysis of the situation relative to comps is a good one. A single sale can be written off as an aberration, but if enough of them happen, and they are more recent, an appraiser cannot ignore them. Appraisal is part art and part science (and it is corruptible), so there is not hard and fast rule as to which comps must be considered and which can be ignored. As banks start getting burned, they will start demanding multiple appraisals or go with known conservative appraisers for their loans. It will all be part of the credit tightening phenomenon.

  30. Michael

    Darin –

    You made an excellent point.

    But let us take your thought process to a more macro level.

    Vacant inventory is already double the norm. REOs will just add to this number.

    We have an economy leveraged on housing prices.

    At what point does the government step in (who else is going to do it) and say we have to somehow control the supply like OPEC uses supply constraint to control oil prices?

    I hate government involvement – but is there an alternative?

    Michael

  31. lendingmaestro

    It will take many comp killers to make a significant difference. Remember there is still a significant amount of fraud in the appraisal area. Even if the appraiser is reputable, it’s up to he/she to decide what compas are used.

    If they have a target value they area looking for, which they aren’t supposed to do, then they may conveniently overlook that short sale.

    As more and more homes are selling for less, you’ll see appraisers get squeezed. I know already that appraisers are being more cautious about values becuase they don’t want to be put on any exclusionary lists.

  32. A POV

    While I am bullish on ‘long-hold’ real estate, I agree with many of you, we are in a serious tough-patch for lenders with paper gone bad.
    In such a case, why wouldn’t a bank (or portfilio holder) do what other wealthy folks do in tough patches–lease the asset and wait for sunny days?
    Even with the high management expenses, why is this not a likely option?
    Back when I delt with banks, a bankers refrain was, “we are not in the home ownership business”. Well guess what, you are now.
    Non-performing assets need to see the light of day. The marketplace will require no less in public trading.
    The new story from my point of view is, the current paper-holder is the ultimate flipper. What will these paper-holders do? Cut and run? Moth Ball? List and prey? All bad.
    The good news is location and weather. It simply does not get better on the planet than here. International money will protect our bottom.
    Tough-patch: Yes. Sky falling: No.

  33. awgee

    Just a guess, but I would think that since the lender borrowed the money in the first place, to loan out in the second place, the amount of rent the lender can collect will not pay for the monthly expense of the money the lender borrowed in the first place. And that particular loss shows as negative earnings and future negative earnings on a 10k. I would guess carrying negative earnings would be a CEO’s way of saying I was stupid and will continue to be stupid and will not try and change the situation. A stated future negative earnings is not good for a stock price.

  34. No_Such_Reality

    International money will protect our bottom.

    Ah, when all the other justifcations run dry, we turn to international money.

    Sure, let’s buy in The OC that’s where I want to be. A cramped little American suburban home. Not on a the coast of Hawaii. Not in Phukat, or Lisbon, or Rio, or Santiango, or Miami, or Sydney, no, right here in OC, that’s where I’m going to go when I’ve got money to go anywhere.

    LOL.

  35. Witheroney

    My parents were the first owners of this house, they paid $38,000 in 1971. Orange shag carpet in the living room and bedrooms… Originally it was one story, 3 bedrooms, with bare dirt for landscaping. Greentree was then surrounded by orange groves. Too bad they sold it in 1974!!!

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