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The Sharpsburg Bloodbath - Update #2

Jul 21st, 2007 by IrvineRenter 

10 Sharpsburg actually sold at the auction on 7-18-2007 for $670,114.35 a full penny over the opening bid amount. At $270 a sqft that puts an Irvine home below the $300 mark. Ouch!

(A special thanks to graphix for the update)

Sharpsburg

President Abraham Lincoln and Gen. George B. McClellan in the general's tent
Sharpsburg, Maryland|Antietam, Maryland, October 3, 1862

(Sorry, no property photos are available.)

Old Asking Price: $850,000

New Asking Price: $795,000

Purchase Price: $799,000
Purchase Date: 6/27/2005

Address: 10 Sharpsburg, Irvine, CA 92620

Beds: 4IrvineRenter
Baths: 2.5
Sq. Ft.*: 2,710
Lot Sq. Ft.*: 5,300
Year Built: 1979
Stories: 2
Type: Single Family Residence
Neighborhood: Northwood
$/Sq. Ft.*: $314
MLS: S481159
Status: Active on market
On Redfin: 15 days

I learn something new with each of these posts. Today I learned the civil war battle most of us know as Antietam, the bloodiest single day in our nation's military history, was known in the South as the Battle of Sharpsburg. Is our flipper on Sharpsburg due for a bloodletting? Let's see.

From Redfin: "This home shows beautifully. NOW REDUCED TO THE RIDICULOUS!!!! Very light and bright with vaulted ceilings, french doors, lots of added can lights through out. Remodeled baths include new fixtures and granite counters. Great floorplan with master bedroom down, 3 bedrooms up AND pool table sized bonus room too!! Freshly painted and newer berber carpet and tile floors through out. Great cul de sac location W/ 2 car garage AND covered parking for 3rd car. BANK READY FOR OFFERS!!!!"

Another realtor who uses too many exclamation points... and the words "light and bright"...

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.

If this house sells for asking price and assuming a 6% commission, our seller will net exactly $0, nada, nothing. Almost two years of ownership with no appreciation. Doesn't leave them with much room to negotiate on the price, does it? I can just imagine the negotiations: you would be haggling over how much this guy was going to lose. It might actually be entertaining if you are in to inflicting pain. Are you feeling the schadenfreude?

Who was saying they wouldn't just "give it away?"

**** UPDATE #1 ****

Now the seller is looking at a $55,000 loss. Also, it appears the short sale has been cleared through the bank.


Posted in House Flips

Sumac Attac

Jul 20th, 2007 by IrvineRenter 

Guess what? I found another 100% financing deal where the borrower walked. What a surprise? The bulls must have a hard time ignoring the obvious with these 100% financing deals. Big Mac AttackWhen the going gets tough, the tough get... out. With the huge number of these deals during 2004-2006, how many of these properties will need to be absorbed by the market? How long will it take? If I were bullish, I wouldn't be holding my breath.

Sumac Front

Asking Price: $759,900IrvineRenter

Purchase Price: $663,147

Purchase Date: 5/22/2007

Address: 14911 Sumac Ave., Irvine, CA 92606

Pre-foreclosure data:

Purchase Date: 10/28/2005
Sale Price -- $795,000
1st Loan -- $636,000
2nd Mtg. -- $159,000
Rollback
Beds: 4
Baths: 2.5
Sq. Ft.: 2,350
$/Sq. Ft.: $323
Lot Size: 5,000 sq. ft.
Year Built: 1972
Stories: 2
Type: Single Family Residence
County: Orange
Neighborhood: Walnut
MLS#: U7002468
Status: Active
On Redfin: 35 days

From Redfin, "THIS IS WHAT YOU HAVE BEEN WAITING FOR. A HUGE FAMILY HOME IN ONE OF T HE MOST SOUGHT AFTER CITIES IN ORANGE COUNTY! THIS IS THE CITY OF IRVINE, WITH THE GREAT SCHOOLS, THE GREAT PARKS, AND SO MUCH MORE. THIS IS A TWO STORY WITH FOUR BEDROOMS AND TWO AND ONE HALF BATHS. .. ASSOCIATION PARKS. WALK TO SCHOOL AND SO MUCH MORE. HOME IS BEING SOLD 'AS-IS' WITHOUT WARRANTY. "

THE ALL CAP ATTACK!!!

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.

If the bank can manage to get their asking price, and if they only pay a 2% commission (banks are cheap), they will lose $50,298. A few more like this, and they will stop making 100% loans to people with poor credit -- Oh wait, that has already happened. A few more like this, and they will stop making 100% loans entirely...

.

Video link to Big Mac Attack Rap

Second Big Mac Attack Rap Video



Posted in House Flips

What is this?

Jul 19th, 2007 by IrvineRenter 

Sometimes you come across a listing where something just isn't right.

No Photo

Redfin Asking Price: $999,000IrvineRenter

Zip Realty Asking Price: $1,213,000

Purchase Price: $1,300,000

Purchase Date: 10/31/2006

Address: 11 Santa Rida, Irvine, CA 92606

Beds: 5
Baths: 3
Sq. Ft.: 2,420
$/Sq. Ft.: $413

Rollback

Lot Size: -
Year Built: 1997
Stories: 2
Type: Single Family Residence
County: Orange
Neighborhood: Westpark
MLS#: P582566
Status: Active
On Redfin: 33 days

From Redfin, "Rare opportunity for those Buyers with no credit. This beautiful home on a quiet cul-de-sac shows better than a model home. Mr. clean lives here, great marble flooring, too many upgrades to mention. no need to preview. "

There are two statements in this description that are setting off alarms in my head.Mr Clean

  1. Rare opportunity for those Buyers with no credit.
  2. no need to preview.

How does someone with no credit afford a $999,999 home? My first thought is this must be a fraud scam, but when you see a $300,001 loss based on asking price, that scenario makes no sense. Perhaps the price is a teaser to generate interest and if they find a straw buyer the purchase price will suddenly be raised $500,000?

No need to preview? Is this a realtor note trying to assure another realtor of the quality? Wouldn't a realtor want to preview it anyway (or are they that lazy?) If you were the realtor, and you had this great listing, wouldn't you want everyone to see it to generate excitement and hopefully a sale? If this is a note to a potential buyer, I would be very worried. What is it they don't want me to see? Why no pictures after 30 days? Is there something to hide?

Why the quick sale? This seller just purchased the property 8 months ago. I would consider them a flipper or knife-catcher if they were trying to sell at a profit, but they are looking at a big loss. What is going on?

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Let's assume for a moment this is a legitimate listing. If so, this seller is going to lose a huge sum of money. At current asking price minus a 6% commission, this seller will lose $ 360,940. Ouch!

I guess Mr. Clean wanted to clean out his bank account. He won't be doing any favors for the other sellers in Westpark. This is another comp killer.


Posted in Price Rollback

100% Financing Failure

Jul 18th, 2007 by IrvineRenter 

Part of the bearish argument for a dramatic drop in prices is predicated on an infusion of "must sell" inventory to the housing market. Sellers won't sell at a loss unless they have no choice. This is why prices generally are sticky in a housing market decline.

KeysForeclosures and short sales are by their nature must-sell inventory. For this must-sell inventory to be forced onto the market people must be unable or unwilling to make the payments on their mortgage. The "unable" part will come from reseting ARMs with higher interest rates; the "unwilling" part will come from people walking away from 100% financing deals when market prices do not continue to rise.

It is this latter category of unwilling homedebtors that is unusual in this market. In previous bubbles, lenders were not so stupid as to offer 100% financing, so there were not as many people who utilized "jingle mail" as they went underwater. It is my opinion that jingle mail will be epidemic as this bubble unwinds.

Today's property is a typical short sale. The seller overpaid with 100% financing and now is going to walk away.

Van Buren Front Van Buren Kitchen

Asking Price: $390,000IrvineRenter

Purchase Price: $410,000

Purchase Date: 3/20/2006

Prior Purchase or Refi: 10/17/2005 -- $405,000

Prior Purchase or Refi: 6/3/2005 -- $395,000

Address: 10 Van Buren, Irvine, CA 92620

Beds: 2
Baths: 2
Sq. Ft.: -
Lot Size: -
Year Built: 1987
Stories: 1Rollback

Type: Condominium
County: Orange
Neighborhood: Northwood
MLS#: P579283
Status: Active
On Redfin: 53 days

From Redfin, "Lower Unit w/ Front Patio. 2 Bedroom, 2 Bath CONDO. Great Opportunity for First Time Buyers. This is a SHORT-SALE. Sales Price, Terms, Conditions Subjet To Lenders approval of Short Sale. Very clean Unit includes, Range, Microwave, Dishwasher."

Did you spot the misspelled word?

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The bank is going to lose money. Depending on how much commission they pay (they don't like to pay 6%) and how much more this unit is discounted, they stand to lose between $20,000 and $80,000. I would guess it will be closer to the bigger number.

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(I GOT SPURS) JINGLE JANGLE JINGLE
Kay Kyser
- words by Frank Loesser, music by Joseph J. Lilley

I got keys that jingle, jangle, jingle
As I go ridin' merrily along
And they sing, "Oh, ain't you glad you're single"
And that song ain't so very far from wrong

Link to amateur singing Jingle Jangle Jingle


Posted in Price Rollback

Timber…

Jul 17th, 2007 by IrvineRenter 

Paul BunyanFinding a loser in the Collage complex in Northwood is like finding trees in the forest: wherever you look, you find more. Zovall has profiled this place on a number of occasions:

  1. Collage - Northwood - The second casualty in this complex,
  2. Collage - Northwood, We’ve got a WINNER! - UPDATE #3,
  3. Buy 1 bedroom and get a second for free (or almost)!

It is always nice to start off the week with a rollback well off its 2004 purchase price. Will we be seeing 2003 soon?

Prices are falling -- Timberrrrr...

Timberwood 1Timberwood 2

Asking Price: $440,000IrvineRenter

Purchase Price: $474,000

Purchase Date: 8/27/2004

Address: 1520 Timberwood, Irvine, CA 92620

Beds: 2
Baths: 1
Sq. Ft.: 1,270
$/Sq. Ft.: $346
Lot Size: -
Year Built: 2001
Stories: 3
Type: Condominium
View: Peek-A-Boo
County: Orange

Rollback

Neighborhood: Northwood
MLS#: S486596
Status: Active
On Redfin: 70 days
Fixer-upper

From Redfin, "This is just a great location and beautiful complex! Your client will thank you for your hard work, their gain. Property needs TLC! Carpet and paint is all it takes. Large dog on premises"

"Your client will thank you for your hard work, their gain." What is that about? Is this a realtor talking to another realtor? Why will their client gain from buying a run down condo? Are they implying the price is so low that it is a bargain? Are they trying to find a knife catcher? If it is a true fixer-upper I suspect it needs more than just carpet and paint.

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Perhaps this was purchased as a specu-vestment. The owner either trashed the place himself or put a renter in there who trashed the place for him. Given that he utilized 100% financing, he probably doesn't care. The bank can clean up his mess. Whatever the case, if this seller gets full asking price, either he or the bank stands to lose $60,400 on a property purchased in 2004.

Keep on rollin' those prices back...

Rollback

Rollin' Rollin' Rollin'

Keep movin', movin', movin',
Though they're disapprovin',
Keep them doggies movin' Rawhide!

Link to Blues Brothers performing Rawhide.


Posted in Price Rollback

Land Value 101

Jul 16th, 2007 by IrvineRenter 

IrvineRenterThe valuation of land used for residential housing is mysterious and often misunderstood. The purpose of this post is to explain how residential land is valued. Once the forces governing land value are understood, it becomes obvious why the Irvine Company is so protective of house prices in Irvine, and why the Irvine Company wants to maximize salable density on its land holdings.

The equations which govern the valuations of large parcels are very similar those which determine the value of an individual lot; therefore, to better understand the valuation of large parcels, one should fully understand how to evaluate an individual lot.

Individual Lots

The market value of a individual lot is equal to the revenue it could generate minus the cost of creating that revenue. Sounds simple enough, but what is the potential revenue and what are the costs?

Sales revenue will largely be determined by what can be built on the lot and how much that house would sell for in the market. The dimensions of the lot, building codes, and the local zoning ordinances will all create constraints on what can be built. Most often there will be some variety in choices available to construct on a given lot. Each of these options will have a potential revenue and an estimated cost. The combination which yields the greatest profit is the product that should be built.Setbacks

Imagine a 6,000 Square Foot lot that is 60' wide by 100' deep. A typical lot such as this would have a front setback of 20', side setbacks of 5', and a rear setback of 30' leaving a 50' wide by 50' deep envelope for the house foundation. This site could comfortably accommodate a 2,000 SF house (some area is lost by not making the house a perfect rectangle.) For the sake of making the calculations easy, let's say this house could sell for $1,000,000 (peak prices).

An individual speculator would be paying retail prices for house construction. This would be upwards of $150 SF. The cost of construction would be around $300,000 (2000 * 150 = $300,000.) There would be a 6% sales commission (1,000,000 * 0.06 = $60,000), plus financing costs, overhead costs, and other miscellaneous costs which will add up to about 10% of the project cost (1,000,000 * 0.1 = $100,000.)

BuilderTherefore, your revenue minus expenses would be $1,000,000 - $60,000 - $100,000 - $300,000 = $540,000. This is how much money would be available to pay for a lot at the breakeven point. Since a speculator would want to make a profit, the lot is discounted from $540,000 until an amount is reached to compensate for the risk and the headaches that go along with the project.

Perhaps the speculator would want to make $120,000 (approximately 12% of sales price) in order to do this work? If so, the speculator would be able to offer $420,000 ($540,000 - $120,000 = $420,000) for the lot. If they are the highest bidder, they get the lot, and the project is theirs. (BTW, this same basic calculation also works for tear-down projects -- often called "scrapers.")

Multiple Lots

Production homebuilders control the price of larger parcels with multiple lots because they can bid higher than individuals and still make a healthy profit (and they have the larger sums required to complete the purchase). They have a much lower construction cost than any individual because they are geared up for mass production. They have the buying power to squeeze costs down far lower than any individual working on their own or with a custom home builder. Production builders costs in today's market average around $85 SF.Home Builders

A note about the numbers: Part of the process when you sell a large parcel to a production homebuilder is to come to an agreement as to the costs to complete the infrastructure of the project. In order to facilitate this negotiation, both parties often turn to a neutral third party to establish costs. In Southern California, many cost estimates are handled by Developers Research. A real cost estimate is much more detailed than what I am presenting in this post, but the numbers are reflective of a typical situation. As for the builders cost structure, this comes from my experience from sitting on both sides of the table at different points in my career and another source whom unfortunately I can't reveal because it would give away my identity.

So let's look at how a production builder would analyze a 100-lot subdivision in which they believe they can sell homes for an average of $1,000,000 per unit.

$1,000,000 Sales Price

Fixed Costs
2,000 Average Square Footage
X
$85.00 Average Cost Per SF
===================================
$170,000 Average "Box" Cost
+
$40,000 Average Per lot Infrastructure Cost
===================================
$210,000 Total Average Fixed Construction Costs

Variable Costs
* 12% Profit
* 5% Marketing
* 3% Overhead
* 5% Finance
* 3% Other
===================================
28% Variable Costs Percentage

$280,000 Variable Costs Dollars
===================================
$490,000 Total Costs (Fixed Costs + Variable Costs)

$510,000 Land Residual (Finished Lot Value)
X
100 Number of Lots
===================================
$51,000,000 Finished Lot Land Value

The production builder can pay more for each lot because of their advantage in construction costs. Noticed the very large dollar amount builders were paying for finished lots during the peak of the bubble. Lately many of the builders have been taking "impairment" write-offs. Basically, they are admitting they over paid for land, and the asset on their books is not worth what they paid for it. Later in this post, we will examine the sensitivity of land price to changes in house price, and we will see why the homebuilders have been taking such huge hits to their balance sheets.

Land Price as a Residual Value

As you may have noted above, the value of a piece of land is whatever is "left over" after all the other costs of production are subtracted from revenue. This is a key point. If revenue increases -- like in a bubble -- the value of land increases; however, it revenue decreases -- like after a bubble -- the value of land decreases. If production costs increase, the value of land decreases, and visa versa.

The value of a piece of land used for residential housing is directly tied to the revenues and costs of production homebuilders.

Density and the Value of an Acre of Land

Dense Housing

A builder is going to bid for the land based on the number of units. They don't care if this is on a single acre or on a thousand acres: Builders pay for lots, not land. Therefore, if you are a seller of land -- like the Irvine Company -- you want to maximize salable density. In other words, you want to get the highest number of units per acre that you possibly can sell.

Once this point is understood, it becomes obvious why the Irvine Company is constantly trying to innovate with its high-density product, and why the density keeps increasing as they go along.

House Price and the Value of an Acre of Land

To fully understand why the Irvine Company is obsessed with maintaining high home prices, an understanding of how changes in home prices impact the value of land is required. Examine the above equation carefully, and notice that the variable costs are only 28% of the total.

This is another very important point: Land value is very sensitive to changes in house prices.

How sensitive? Let's take a look at an example to which we can all relate: Irvine's Woodbury.

Woodbury

Woodbury is one of the Irvine Companies newest communities. It is listed as 4,270 units. As this Village is constructed on a 1 mile square, it sits on 640 acres for a density of 6.67 dwelling units per acre (DU/AC).

Woodbury Map

Based on the equation above, we can estimate the total land value of the residential portion of the Woodbury Village:

$650,000 Sales Price

Fixed Costs
2,000 Average Square Footage
X
$85.00 Average Cost Per SF
===================================
$170,000 Average "Box" Cost
+
$40,000 Average Per lot Infrastructure Cost
===================================
$210,000 Average Fixed Construction Costs

Variable Costs
* 12% Profit
* 5% Marketing
* 3% Overhead
* 5% Finance
* 3% Other
===================================
28% Variable Costs Percentage

$182,000 Variable Costs Dollars
===================================
$392,000 Total Costs (Fixed Costs + Variable Costs)

$258,000 Land Residual (Finished Lot Value)
X
4,270 Number of Lots
===================================
$1,101,660,000 Finished Lot Land Value

$1.1 Billion dollars worth of land -- that is Billion with a "B." If the Irvine Company can build out this village for an average home sales price of $650,000, that is how much they stand to make (their land cost is almost zero).

Now lets look at another scenario: the housing bubble crash scenario:

$325,000 Sales Price (50% decline)

Fixed Costs
2,000 Average Square Footage
x
$85.00 Average Cost Per SF
===================================
$170,000 Average "Box" Cost
+
$40,000 Average Per lot Infrastructure Cost
===================================
$210,000 Average Fixed Construction Costs

Variable Costs
* 12% Profit
* 5% Marketing
* 3% Overhead
* 5% Finance
* 3% Other
===================================
28% Variable Costs Percentage

$91,000 Variable Costs Dollars
===================================
$301,000 Total Costs (Fixed Costs + Variable Costs)

$24,000 Land Residual (Finished Lot Value)
X
4270 Number of Lots
===================================
$102,480,000 Finished Lot Land Value

$102 Million dollars worth of land -- That is million with an "M."

Is that right? Does a 50% reduction in home prices really reduce the land value 90%?

Yes, it does.

Can you see why the Irvine Company is so protective of home prices?

Why is land value so sensitive to home prices?

As discussed previously, variable costs are only 28% of the home sales price. Remember, land value is a residual calculation, that means everything which isn't a cost falls to land value.

Therefore, 72% of any increase or decrease in the price of a home flows directly to land value.

In essence, this makes land an extremely leveraged commodity. If the value of a house changes by $10,000, the value of the lot it sits on changes $7,200. Multiply that times the 6.67 units per acre, and you can see how each $10,000 change in the value of a house changes the value of an acre of land in Woodbury by $48,024. Since Woodbury sits on 640 acres, the total value of Woodbury changes by $30,735,360 for each $10,000 change in the sales price of a home. (If you want to see a really mind-blowing number compute this for all the land in the Irvine Company's holdings.)

The Irvine Company will capitulate.

In the end, the Irvine Company will lose its battle to prop up the market. They don't control the market, they only control the "ask." Potential buyers determine the "bid." If the bids don't reach the ask, there is no sale (which is what is happening in Portola Springs.) If there are no sales, the Irvine Company has no revenue, and without revenue, they will cease to exist. They have more holding power than most organizations, which is why The Irvine Company has not been cutting prices and offering incentives like all the homebuilders, but the Irvine Company still must sell its holdings in order to survive. If they didn't, they could just decide all houses in Irvine must sell for $10,000,000. In 300 years when those prices may be reasonable, they will start selling homes again. Do you see the absurdity of the Irvine Company holding to peak prices forever?

ConclusionIrvine Master Plan

This is my world: I work for a company that develops raw land. The people who were actively investing in land development during the bubble made more money than you can possibly imagine. The extreme sensitivity of these investments to changes in home sales price resulted in properties obtaining sales multiples of 10 times or greater in just a few years.

As an example, I did some consulting work on a property in 2003 which was purchased by a land developer as raw, unentitled land for $2.4 million dollars cash. When they received their entitlements in 2005, they sold the land in three phases to a production builder for a total of $100 million dollars (4x for the entitlements and 10x for the bubble rally.)

If you thought the bubble rally was a good time to be a homeowner or a homebuilder, you were missing out on where the real action was: land development.


Home Sales Data thru 6-21-2007

Jul 15th, 2007 by IrvineRenter 

Home Sales Data thru 6-21-2007

Let's see: prices are up where volume is way down, prices are down where volume is way up, and 92618 is having a massive price rally. Wait a minute. Didn't we just profile 92618 last week and show many examples of lower prices? Why is the median up 41%?

Do you see how a few sales can skew the median and make it look high when prices are dropping?


Posted in News
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