Monthly Archives: March 2008

Investment Value of Residential Real Estate

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Investment Value of Residential Real Estate

The United States Department of Labor Bureau of Labor Statistics measures the Rent of primary residence (rent) and Owners’ equivalent rent of primary residence (rental equivalence). They make this distinction because a house has both a consumptive purpose and an investment purpose. The consumptive value is measured by rent or rental equivalence. There is legitimate financial reason pay more than the rental equivalence price. The normal rate of house appreciation – not the unsustainable kind witnessed during the Great Housing Bubble – can provide a return on investment. The source of this added value is the leverage of mortgage financing and the hedge against inflation obtained through a fixed-rate mortgage. The investment premium, which is about 10%, is less than most people think.

The rental equivalence value is the fundamental value of real estate, and it is also its consumptive value. This value can be easily measured as demonstrated in the post Rent Versus Own. There is an independent investment value that can also be measured and added to the consumptive value to arrive at the maximum resale value of the property. Investment value is derived from two sources: the increase in property value through appreciation and the long-term savings over renting caused by inflation. These two components are measured separately to demonstrate how they function and how much each of them is worth.

Since the return on investment generated from residential real estate occurs in the future, a discounted cashflow analysis is required to determine the net present value of the future returns. Calculating net present value sounds complex, and manually going through the calculations is quite cumbersome, but electronic spreadsheets make this an easy task. The concept is simple: how much money would an investor put money in an investment today if they knew the rate of growth and the cash value to be realized in the future. For instance, if an investor put $100 in a bank earning 5% interest, they would have $105 at the end of the year. Net present value looks at the situation in reverse. If the investor knew they would receive $105 at the end of the year and the market interest rate was 5%, they would be willing to pay $100 for it today. Similarly, the investment value of residential real estate is the value today of an amount of money to be received in the future either through sale or savings on rent.

Discount Rates

The investment value of a property can only be measured against other investment opportunities available to an investor. If an investor can earn 4.5% in government treasuries, they will demand a higher return to invest in an asset as volatile and as illiquid as residential real estate. The rate of return an investor demands is called a “discount rate.” The discount rate is different for each investor as each will have different tolerances for risk. During the Great Housing Bubble discount rates on most asset classes were at historic lows due to excess liquidity in capital markets. The discount rate used in the analysis is the variable with the greatest impact on the investment value. Because of the risks of residential real estate, a strong argument can be made that a low discount rate is unwarranted and investors would typically demand higher rates of return for assuming the inherent risks. A low discount rate exaggerates the investment premium and makes an investment appear more valuable, and a high discount rate underestimates the investment premium and makes an investment appear less valuable.

The US Department of the Treasury sells a product called Treasury Inflation-Protected Securities (TIPS.) The principal of a TIPS increases with inflation, and it pays a semi-annual interest payment providing a return on the investment. When a TIPS matures, they buyer paid the adjusted principal or original principal, whichever is greater. This is a risk-free investment guaranteed to grow with the rate of inflation. The rate of interest is very low, but since the principal grows with inflation, it provides a return just over the rate of inflation. Houses have historically appreciated at just over the rate of inflation as well; therefore a risk-free investment in TIPS provides a similar rate of asset appreciation as residential real estate (approximately 4.5%.) Despite their similarities, TIPS are a much more desirable investment because the value is not very volatile, and TIPS are much easier and less expensive to buy and sell. Residential real estate values are notoriously volatile, particularly in coastal regions. Houses have high transaction costs, and they can be very difficult to sell in a bear market. It is not appropriate to use a 4.5% rate similar to the yield on TIPS or the rate of appreciation of residential real estate as the discount rate in a value analysis.

Another convenient discount rate to use when assessing the value of residential real estate is the interest rate on the loan used to acquire the property. Borrowed money costs money in the form of interest payments. A homebuyer can pay down the loan on the property and earn a return on that money equal to the interest on the loan as money not spent. Eliminating interest expense provides a return on investment equal to the interest rate. Interest rates during the Great Housing Bubble on 30-year fixed-rate mortgages dropped below 6%. An argument can be made that 6% is an appropriate discount rate; however, 6% interest rates are near historic lows, and interest rates are likely to be higher in the future. Interest rates stabilized in the mid 80s after the spike of the early 80s to quell inflation. The average contract mortgage interest rate from 1986 to 2007 was 8.0%. If a discount rate matching the loan interest rate is used in a value analysis, it is more appropriate to use 8% than 6%.

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Investors in residential real estate, those who invest in rental property to obtain cashflow, typically ignore any resale value appreciation. These investors want to receive cash from rental in excess of the costs of ownership to provide a return on their investment. Despite their different emphasis for achieving a return, the discount rates these investors use may be the most appropriate because it is for the same asset class. Cashflow investors in rental real estate have already discounted for the risks of price volatility and illiquidity. Historically, investors in cashflow producing real estate have demanded returns of near 12%. During the Great Housing bubble, these rates declined to as low as 6% for class “A” apartments in certain California markets. It is likely that discount rates will rise back to their historic norms in the aftermath of the bubble. If a discount rate is used matching that of cashflow investors in residential real estate, a rate of 12% should be used.

Once money is sunk into residential real estate, it can only be extracted through borrowing – which has its own costs – or sale. Money put into residential real estate is money taken away from a competing investment. When a buyer is facing a rent versus own decision, they may chose to rent and put their downpayment and investment premium into a completely different asset class with even higher returns. This money could go into high yield bonds, market index funds or mutual funds, commodities, or any of a variety of high-risk, high-return investment vehicles. An argument can be made that the discount rate should approximate the long-term return on high yield alternative investments, perhaps as high as 15% or 18%. Although an individual investor may forego these investment opportunities to purchase residential real estate, it is not appropriate to use discount rates this high because many of these investments are riskier and more volatile than residential real estate.

The discount rate is the most important variable in evaluating the investment value of residential real estate. Arguments can be made for rates as low as 4.5% and as high as 18%. Low discount rates translate to high values, and high rates make for low values. The extremes of this range are not appropriate for use because they represent alternatives investments with different risk parameters that are not comparable to residential real estate. The most appropriate discount rates are between 8% and 12% because these represent either credit costs (interest rates) or the rate used by professional real estate investors. The examples in this section will use these two rates to illustrate the range of values rational investors in residential real estate would use to value an investment premium.

Appreciation and Transaction Fees

The portion of investment value caused by appreciation can only be evaluated by an accurate estimate of appreciation during the ownership period. The general public grossly overestimates the rate of home price appreciation . Historically, houses have appreciated at a rate 0.7% over the general level of inflation. From 1983 to 1998, a period of low inflation and declining mortgage interest rates before the bubble, the rate of house price appreciation was 4.5% nationally which was 1.4% over the rate of inflation. Appreciation rates are tied to income and rents because this is the fundamental value of residential real estate.

Profiting from house price appreciation requires getting more money from the sale of a property than was originally paid for it. Buying and selling residential real estate incurs significant transaction costs that are not reflected in the price. It is quite common for properties to sell for more than their purchase price and still be a loss for the seller. When people purchase residential real estate they pay numerous closing costs including title insurance, recording fees, document stamps and taxes, mortgage application fees, survey fees, inspection fees, appraisal fees, et cetera. These fees often total between 2% and 4% of the purchase price not including any prepaid interest points on the mortgage. When people go to sell residential real estate they generally go to real estate broker who will charge them a 6% commission. There is an increasing popularity in discount brokers, but the National Association of Realtors has done a remarkable job of keeping brokerage commissions at 6% despite market pressures to lower them. These transaction costs are part of every residential real estate transaction, and they take a substantial portion of the profit on properties with short holding periods, and if the holding period is not long enough, transaction fees create losses.

The negotiating abilities of buyers and sellers and the overall market environment greatly impact the profits from real estate. Sellers almost universally believe their properties are worth more than the market will bear. People become emotionally attached to their houses, and because it is very valuable to them, they assume it is just as valuable to a person who is not attached to the property. Sellers always hope to find the buyer who will appreciate their home as much as they do and thereby pay top dollar for it. All homeowners have unrealistic expectations of appreciation. The combination of emotional attachment and unrealistic appreciation expectations cause sellers to believe their house is more valuable than it is, and when it comes time to sell, they price it accordingly. Sellers usually are forced to discount a property from their perceived value in order to sell it. In raging bull markets, sellers can sometimes get more than their asking price, and in bear markets, they may have to discount the property significantly in order to sell it. Bear markets are the most difficult because sellers have difficulty lowering their prices, particularly if they must sell at a loss. Sometimes the difficulty in lowering price is caused the amount of debt on the property, and sometimes it is caused by seller’s emotional issues. No matter the cause, the inhibition to lowering price often results in a failure to sell the property. Since this process of discounting to sell is already reflected in the historic appreciation rate, no further adjustment is required to account for it.

The key variables for the calculation of the portion of investment value due to appreciation are the rate of appreciation, the investment discount rate and the transaction fees. In the calculation that follows the rate of appreciation is 4.5%, the discount rate is 8%, and transaction costs are 2% for the purchase and 6% for the sale. There is a 20% downpayment, and the loan is assumed to be an interest only to avoid the complications of a decreasing loan balance in the calculation and isolate the appreciation premium.

Appreciation Premium and Holding Period using an 8% Discount Rate

Due to the high transaction costs, the property does not reach breakeven until two full years of ownership. In a discounted cashflow basis, the property does not break even until after 4 full years of ownership. It is these high transaction costs that compel many with short-term housing needs to rent rather than own. Assuming an 8% discount rate and a term of ownership of 10 years or more, there is a premium for ownership of approximately 10%. This means the owner could pay up to 10% over the rental equivalent value and still obtain an 8% return on their money – assuming they can sell it for 10% over rental equivalent as well.

There is a tendency in the general public to assume the leverage of real estate provides excessive returns. It does magnify the appreciation, but since the historic and sustainable rate of appreciation is a low 4.5%, the leverage is applied to a small growth rate resulting in less than stellar investment returns. In the previous examples, if the downpayment is lowered to 10%, the investment premium at an 8% discount rate rises to 15%, and with a 12% discount rate, there are some ownership periods justifying a premium. If the downpayment is dropped to 1%, the ownership premium rises as high at 20%. At its most extreme with 100% financing, any positive return becomes infinite because the investor has no cash investment. Ownership premiums of 10% to 20% sound large, but in coastal markets during the Great Housing Bubble, buyers were paying ownership premiums in excess of 100%. There is no rational justification for these price premiums.

Appreciation Premium and Holding Period using a 12% Discount Rate

Appreciation Premium and Holding Period using a 12% Discount Rate

Larger discount rates eliminate the appreciation premium on residential real estate. The money tied up in a 20% downpayment on residential real estate appreciating at 4.5% provides a rate of return less than 12%; therefore when the gains from appreciation are discounted at 12%, the net present value never goes positive. When investors demand returns equal to or greater than 12%, there is no investment value from appreciation in residential real estate.

Inflation Premium

Residential housing does have a cash-saving value, if financed with a fixed rate mortgage. Over time, the growth in income and rents increases the cost of housing for renters. The inflation of housing costs for renters is not experienced by homeowners using a fixed-rate mortgage because their housing costs are effectively frozen at the rate of their ongoing mortgage payment. Over time, the savings accruing to homeowners can be quite substantial. Applying the same technique of discounted cashflow analysis, this savings over time can be evaluated. Since the savings grow every year, the value of the inflation premium grows as the term of ownership is extended, and this premium is not as sensitive to changes in the discount rate as is the appreciation premium.

Inflation Premium from Rental Savings

Inflation Premium from Rental Savings

The premium accruing from the savings on rent can be substantial, but ownership periods vary, and the national average is less than 7 years; therefore, if a buyer pays this premium up front by paying more than the rental equivalent value, they may do not reach breakeven for several years. In the early years of the mortgage, the owner who paid in excess of the rental equivalent value actually falls behind the renter in terms of out-of-pocket cash outlays for housing. Over time, as the renter faces yearly increases in rents, the homeowners will eventually be paying less, and the savings will make up for the earlier period of deficit.

Inflation Premium from Rental Savings with 7 year Ownership Period

Inflation Premium from Rental Savings with 7 year Ownership Period

The above analysis assumes renters face the full brunt of increasing rental rates. For many apartment dwellers, this is true as landlords will raise rents every year knowing that if a renter moves out, there will be another to replace them at market rates. The circumstance is a bit different for private landlords. Most private individuals that rent out investment properties are far more concerned with the loss of cashflow resulting from the property sitting vacant than they are about maximizing income through raising rents each year. Most long-term landlords have conventional, fixed-rate financing on their properties, and because their costs are not increasing, and because they do not want to endure vacancy loss, they seldom raise rents, and when they do, they do not tend to raise them to market for fear of the tenant moving out. The result of this is that housing costs are somewhat fixed for long-term renters who rent from private individuals. These renters get to enjoy the same benefits of fixed housing costs as homeowners. The implication of this landlord behavior is that homeowners do not necessarily see the dramatic savings over renting suggested in the calculation of the inflation premium.

The investment value for home ownership is a combination of the appreciation value and the inflation value. Both accrue to the homeowners for different reasons. The appreciation value is caused by the general tendency of house prices to increase over time with the inflation of income and rents. The inflation value is a cashflow savings accruing to owners as rental rates increase while their cost of ownership is fixed. There are many variables that influence the investment value, and much depends on the assumptions behind the variables selected. Based on a typical ownership period of 7 years, and an investment environment adhering to historic norms, residential real estate has an investment value of approximately 10% the fundamental value of the property. Buyers who pay this 10% premium will see a return on their investment if they stay in the property long enough. Buyers who pay premiums in excess of this amount or who own the property for shorter timeframes do not see a return on their investment. Buyers in the Great Housing Bubble paid well in excess of the fundamental and investment value of real estate primarily due to unrealistic expectations for appreciation. If a buyer believes properties are going to appreciate at a 15% rate every year forever, paying a 100% premium over fundamental value is justified; however, since house prices cannot rise at that rate in a sustained manner, such premiums are ill advised.

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The Wonder StuffWell I hope I make more money than this in the next world.

I hope there’s a lot more in it there for me.

I’d like my trousers pressed and my shoes

shined up by a rich girl,

who’s only care in the world is me.

“But are these all the brains I’m entitled to have?

Don’t try to make me happy, when I’m happy feeling bad.

I’ve got no manners or a hand you shake,

and when I won’t tell the truth it’s easier to fake.”

So….Give, Give Give, Me More, More, More

I’d like it all.

Is the bank big enough?

coming ready or not to the next world.

I hope there’s a whole lot more in it there for me.

I’d like my friends to be rich and I’ll never do a stitch,

in the next world, and my only care in the world is me.

“IS THE BANK BIG ENOUGH

COMING READY OR NOT TO THE NEXT WORLD

Give, Give Give, Me More, More, More – The Wonder Stuff

IHB Upgrade Planned for Saturday, April 5th

Yup, IHB is growing up! In order to add more features in the future, we’ve decided to upgrade the site. We’re planning for the upgrade to take place next Saturday (4/5/08). During the upgrade, IHB will not be accessible. The estimate is for ~4 hours of downtime that day.

The plan is to move as much content as possible to the new system. Your existing forum username/password will continue to work. One item to note is that Forum Whispers will not be part of the migration. So if you have any important info in your Whispers, please copy it out before next Saturday.

We’d like IHB to be a resource for all things related to Irvine Housing. If you have ideas for how IHB can be more useful, please send them in. If you are a Real Estate Agent or work in New Home Sales, we’d love to hear from you too.

Efficient Markets vs Behavioral Finance

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A few notes from some of my research for you to ponder over the weekend…

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Efficient Markets Theory

The efficient markets theory is the idea that speculative asset prices always incorporate the best information about fundamental values and that prices change only because new information enters the market and investors act in an appropriate, rational manner with regards to this information(i). This idea dominated academic fields in the early 1970s. Efficient markets theory is an elegant attempt to tether asset prices to fundamentals through the common-sense notion that people would not behave in irrational ways with their money in financial markets. This theory is encapsulated by the “value investment” paradigm prevalent in much of the investment community.

Efficient Markets Theory

In an efficient market, prices are tethered to perceived fundamental valuations. If prices fall below the market’s perception of fundamental value, then buyers will enter the market and purchase the asset until prices reach their perceived value. If prices rise above the market’s perception of fundamental value, then sellers will enter the market to sell the asset at inflated prices. Efficient markets theory explains the majority of market behavior, but it has one major flaw which renders it inoperable as a forecasting tool: it does not explain those instances when prices become very volatile and detach from their fundamental valuations. This becomes painfully obvious when adherents to the theory postulate new metrics to justify fundamental valuations that later prove to be completely erroneous. The failed attempts to explain anomalies with the efficient markets theory lead to a new paradigm: behavioral finance theory.

Behavioral Finance Theory

Behavioral Finance abandoned the quest of the efficient markets theory to find a rational, mathematical model to explain fluctuations in asset prices. Instead, behavioral finance looked to psychology to explain asset valuation and why prices rise and fall. The primary representation of market behavior postulated by behavioral finance is the price-to-price feedback model: prices go up because prices have been going up, and prices go down because prices have been going down. If investors are making money because asset prices increase, other investors take note of the profits being made, and they want to capture those profits as well. They buy the asset, and prices continue to rise. The higher prices rise and the longer it goes on, the more attention is brought to the positive price changes and the more investors want to get involved. These investors are not buying because they think the asset is fairly valued, they are buying because the value is going up. They assume other rational investors must be bidding prices higher, and in their minds they “borrow” the collective expertise of the market. In reality, they are just following the herd. This herd-following has long been a valid investment technique employed by traders known as “momentum” investing(ii). It is not investing by any conventional definition because it relies completely on capturing speculative price changes. Success or failure often hinges on knowing when to sell. It is not a “buy and hold” strategy.

Behavioral Finance Theory

Behavioral Finance Theory

The efficient markets theory does explain the behavior of asset prices in a typical market, but when price change begins to feedback on itself, behavioral finance is the only theory that explains this phenomenon. There is often a precipitating factor causing the break with the normal pattern and releasing the tether from fundamental valuations. In the Great Housing Bubble, the primary precipitating factor was the lowing of interest rates. The precipitating factor simply acts as a catalyst to get prices moving. Once a directional bias is in place, then price-to-price feedback can take over. The perception of fundamental valuation is based solely on the expectation of future price increases, and the asset is always perceived to be undervalued. There are often brave and foolhardy attempts to justify these valuations and provide a rationalization for irrational behavior. Many witnessing the event assume the “smart money” must know something, and there is a widespread belief prices could not rise so much without a good reason: Herd mentality takes over.

Psychological Stages of Bubble Market

Psychological Stages of a Bubble



(i) Much of the history of the Efficient Markets theory is outlined in Robert Shillers paper (Shiller, From Efficient Market Theory to Behavioral Finance, 2002), “The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a blossoming of research on behavioral finance. Some important developments in the 1990s and recently include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money.”

(ii) In House Prices, Fundamentals and Bubbles (Black, Fraser, & Hoesli, 2006), the behavior of momentum investors is characterized as evidence against rationality in the marketplace. For the typical amateur speculator this is certainly true, but for momentum traders who have learned how to buy and sell to profit from the momentum, it is a rational and profitable method of speculation.

Illin'

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One of the unique phenomenons of the Great Housing Bubble was the intense speculative activity, particularly the purchase of multiple properties. When speculators who purchased multiple properties implode financially, they allow multiple properties to fall into foreclosure. One of the reason we have had such a dramatic spike in foreclosures even before the bulk of the adjustable rate mortgages begin to reset is because of the collapse of speculators.

Today’s properties are all owned by two men with the same last names. Some of the properties are owned jointly, and some are owned in the name of only one of the men. All of the properties are for sale for less than they paid and less than they owe on them. They can’t feel good about it. When they built their financial empire, they probably thought they would be spending their fortune hanging out chillin’; Instead, they be illin’…

5052 Apple Tree Front 5052 Apple Tree Inside

Asking Price: $505,000IrvineRenter

Income Requirement: $126,250

Downpayment Needed: $101,000

Monthly Equity Burn: $4,208

Purchase Price: $525,000

Purchase Date: 11/2/2004

Address: 5052 Apple Tree, Irvine, CA 92612Short Sale

Beds: 3
Baths: 2
Sq. Ft.: 1,532
$/Sq. Ft.: $330
Lot Size: 4,982 Sq. Ft.
Type: Single Family Residence
Style: Farm House
Year Built: 1974
Stories: One Level
View(s): Park or Green Belt
Area: University Park
County: Orange
MLS#: S518530
Status: Active
On Redfin: 68 days

Beautiful home located on cul-de-sac. Concrete tile roof. Inside laundry, built-in microwave, dishwasher and ceiling fan in kitchen. Association pool, spa and clubhouse very close. Close to university!! Lender Approved Short Sale!! Lowest price in the area!

Note the restrained use of exclamation points, he only used two instead of three to end his sentences.

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This was our tycoons’s first property. It was purchased in November of 2004 for $525,000. The buyers put 5% down ($26,250) and took out two loans totaling $498,500. In March of 2005, they refinanced into a 1% adjustable. At that point, they still had their downpayment in the property. In October of 2005 they refinanced again with a $500,000 first and an $85,000 HELOC. It appears as if this HELOC money was used as the downpayment to acquire property #3 today as it was purchased 10 days after the refinance, and the downpayment was $65,000. The cash-out refinancing means that between this property and property #3, our tycoons have a total of $6,250 in equity invested between them. Aren’t Ponzi Schemes great?

If the sellers manage to get their current asking price, Countrywide stands to lose $110,300.

In April of 2005, just after their first refinance of property #1, our tycoons purchased property #2:

13 Deodar Front 13 Deodar Inside

Asking Price: $390,000IrvineRenter

Income Requirement: $97,500

Downpayment Needed: $78,000

Monthly Equity Burn: $3,250

Purchase Price: $485,000

Purchase Date: 5/11/2005

Address: 13 Deodar, Irvine, CA 92604Short Sale

Beds: 3
Baths: 2
Sq. Ft.: 1,172
$/Sq. Ft.: $333
Lot Size: 3,035 Sq. Ft.
Type: Single Family Residence
Style: Cottage
Year Built: 1976
Stories: One Level
Area: El Camino Real
County: Orange
MLS#: S518487
Status: Active
On Redfin: 68 days

Turkey BEAUTIFUL HOME IN TURNKEY CONDITION!! 2 CAR ATTACHED GARAGE. BIG ENCLOSED PATIO, STEPS TO IRVINE BIKE TRAILS, END UNIT, MOTIVATED SELLER!!! CLOSE TO UNIVERSITY!

MOTIVATED SELLER!!! LOL! Why would this seller care? Their 5% down is long gone…

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WTF Market ChaserThis property was first mentioned in the post Deodar of Destruction that came out on June 12, 2007. At the time, they were asking $565,000 for this property. A 30% drop in asking price is some first-class market chasing. If they manage to find a buyer at this price and pay a 6% commission, the total loss will be $118,400. The sellers will lose $48,500 plus their carrying costs, and Countrywide will lose $69,900, assuming the sellers are current on their payments. All three of today’s properties are soon to be owned by Countrywide. As if Countrywide didn’t own enough homes in California already…

4932 Seaford Front 4932 Seaford Kitchen

Asking Price: $539,000IrvineRenter

Income Requirement: $134,750

Downpayment Needed: $107,000

Monthly Equity Burn: $4,491

Purchase Price: $650,000

Purchase Date: 10/28/2005

Address: 4932 Seaford, Irvine, CA 92604Short Sale

Beds: 4
Baths: 2
Sq. Ft.: 1,480
$/Sq. Ft.: $364
Lot Size: 5,000 Sq. Ft.
Type: Single Family Residence
Style: Ranch
Year Built: 1971
Stories: One Level
Area: El Camino Real
County: Orange
MLS#: S519408
Status: Active
On Redfin: 61 days

Rollback

4 bedroom, 2 bath, plus bonus room den. Currently 5 renters, great rental income $2,700-$3,300. New kitchen is currently being installed. Great neighborhood and location. Lender approved Short Sale!!

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4932 Seaford Back YardFive renters! I guess that is one of the reasons you want an HOA so you can police this kind of thing (I don’t believe this neighborhood of El Camino Real has one). Do you think they get 5 cars in the driveway? I am guessing the circular grass dead spot in the back is remnant of a keg party, but I could be wrong. BTW, do you think these guys are current on all their payments to Countrywide, or are they skimming these people’s rent?

As I mentioned above, the downpayment for this property appears to have been financed with equity extraction from property #1. Plus the first mortgage is a 1.5% negative amortization loan. If it was a 2/28, it exploded in November of last year. If they manage to get their selling price on this property and pay a 6% commission, the total loss on the property will be $143,340. Since I accounted for the loss of the $65,000 downpayment on property #1, Countrywide will only lose $78,340 on this one.

Countrywide must have really liked doing business with these gentlemen. On property #1, they lost $110,300, on property #2 they lost $69,900, and on property #3, they lost $78,340 for a total loss of $258,540. Our tycoons did lose some of their own money. They lost $6,250 between properties 1 and 3, and they lost $48,500 on property number 2. Their total loss was $54,750.

Another day, another quarter-million dollar loss in Irvine.

I hope you have enjoyed this week at the Irvine Housing Blog. I wanted to return to our roots and profile properties without all the intense analysis. More analysis posts are coming, for those of you that look forward to them, but it was nice to take a break and just enjoy the schadenfreude for a while. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

🙂

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(One) day when I was chillin’ in Kentucky Fried Chicken

Just mindin’ my business, eatin’ food and finger lickin’

This dude walked in lookin’ strange and kind of funny

Went up to the front with a menu and his money

He didn’t walk straight, kind of side to side

He asked this old lady, “Yo, yo, um…is this Kentucky Fried?”

The lady said “Yeah”, smiled and he smiled back

He gave a quarter and his order, small fries, Big Mac!

You be illin’

You be illin’

You be illin’

You Be Illin’ — Run-D.M.C.

Big Time

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When you run with the big dogs, you have to lift your leg high. Today’s property is a big house for throwing big parties attended by people with big names. This is a property for those who live a big life and spend money big time. When you live here, you don’t have to keep up with the Jones’s, you have to pass them — they have to keep up with you. It is a big church where you pray to the big God of financial consumerism. If you aren’t a big player, a person of distinction and importance, you can’t live here. This is the big time…

6 Plumeria Kitchen

Asking Price: $1,650,000IrvineRenter

Income Requirement: $412,500

Downpayment Needed: $330,000

Monthly Equity Burn: $13,750

Purchase Price: $733,000

Purchase Date: 12/30/1998

Address: 6 Plumeria, Irvine, CA 92620Short Sale

Beds: 5
Baths: 5
Sq. Ft.: 4,400
$/Sq. Ft.: $375
Lot Size: 8,500 Sq. Ft.
Type: Single Family Residence
Style: Mediterranean
Year Built: 1999
Stories: Two Levels
View(s): Hills
Area: Northwood
County: Orange
MLS#: S514221
Status: Active
On Redfin: 115 days

Unsold in 90+ days

Rollback

LAST CHANCE FORECLOSURE OPPORTUNITY!!! Executive Estate with all the upgrades and amenities. Prestigious Gated community, end of cul-de-sac, no neighbors behind. Wonderful location within walking distance to award winning schools. Abundant amemities within community. Some of the best schools in California.

LAST CHANCE FORECLOSURE OPPORTUNITY!!! How can this be? Do you think some HELOC abuse is involved?

Abundant amemities? Say that 3 times real fast…

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So how did it come to this? Why is this a potential short-sale preforeclosure opportunity? It started out normally. In 1998, the property was purchased for $733,000 with 20% down. There was no activity until 2005 when the owner took out a HELOC for $147,191. A couple of months later, the house was refinanced with a 1% Option ARM for $1,190,000. This was followed by two more HELOCs for $250,000 each. There are two scenarios by which this could be a short-sale / preforeclosure: 1. The two HELOCs are maxed out, and the total property debt would be $1,690,000 which leaves this seller underwater, or 2. The Option ARM exploded, and the payments are far greater than the seller’s income. The seller has a different mailing address than the property listed, so it is possible they moved to a different home and could not sell this one and just stopped making payments. No matter how they got there, this house has a stated asking price more than $900,000 greater than its purchase price, and it is a foreclosure opportunity. Only in Irvine…

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I have an interesting fact I would like to share with you today that may help put the economic stimulus the housing bubble provided in perspective. From 2001 to 2006, the median income of Irvine households averaged $78,934, and the increase in the median home price during the same period averaged $77,637. Every single homeowner in Irvine had another breadwinner in the household — the house itself — which was earning the median income. Also, since withdrawing one’s equity was untaxed at the time, anyone withdrawing this equity — which there were obviously many doing this — was experiencing a doubling of their household spending power during this time. Is it any wonder people were living large and felt they were “big time?”

Big TimeIm on my way, Im making it

Ive giot to make it show, yeah

So much larger than life

Im going to watch it growing

The place where I come from is a small town

They think so small

They use small words

-but not me

Im smarter than that

I worked it out

Ive been stretching my mouth

To let those big words come right out

Ive had enough, Im getting out

To the city, the big big city

Ill be a big noise with all the big boys

Theres so much stuff I will own

And I will pray to a big god

As I kneel in the big church

Big time

Im on my way-Im making it

Big time big time

Ive got to make it show yeah

Big time big time

So much larger than life

Big time

Im going to watch it growing

Big time

My parties all have big names

And I greet them with the widest smile

Tell them how my life is one big adventure^

And always theyre amazed

When I show them round my house, to my bed

I had it made like a mountain range

With a snow-white pillow for my big fat head

And my heaven will be a big heaven

And I will walk through the front door

Big Time — Peter Gabriel