Irvine Housing Blog

WOT 6-7-2008

You can see where the subprime blew up...

Making a Small Fortune in Real Estate

Mack the Knife - Frank Sinatra 

The people who bought properties as flips in 2007 had to put their own money into the transaction. All of these people made a small fortune by starting out with a larger one.

One of the myths of the real estate bulls is the rich-foreigners-will-save-us fallacy. This myth has a hint of racism to it: foreigners must be culturally superior to have the money to come to the rescue of us poor Americans. Whenever I see this argument raised, I always link to a post done by Rich Toscano at Piggington.com called The Dumb Money. As stated in the article, "Far from being a positive fundamental, a sudden excess of foreign participation in an asset market is indicative of ill-informed speculative money at work. When the foreigners really start piling on, it's always a good sign that the end of the bubble is nigh." As you might have surmised, today's featured property was a flip attempt by someone with a non-Westernized name (as was yesterday's.) The stupidity of this particular flip is breathtaking to me. It was purchased as REO for well over what the lender paid, and now it is being offered for much less. The entire loss is going to be the flipper's money.

If the property looks familiar, it is because we have featured it before: Brookside Comp Killer.

Asking Price: $660,000

Income Requirement: $165,000

Downpayment Needed: $132,000

Monthly Equity Burn: $5,500

Purchase Price: $740,000

Purchase Date: 12/19/2007

Address: 4342 Brookside Street, Irvine, CA 92604

A Foolish Flip

 Sugar Shack -- Jimmy Gilmer and The Fireballs

There were people attempting flips in 2007. There were looking for their own Sugar Shack to sweeten their lives. Prices in our area were still at or near the peak, but all the signs were pointing to a downturn which was already underway in many markets. Residential real estate markets are dominated by amateurs because professionals do not bother with the headaches of what is generally a poor investment. Non-professionals by and large have no idea what they are doing, and they only make money when they get lucky because the emotions of speculators always lead them astray (remember Speculation or Investment?) Today's featured property was purchased after the collapse of subprime was front page news in March of 2007. Our would-be Donald Trump either wasn't watching the news, or he truly believed the subprime containment BS put out by the media. This guy actually put some of his own money into the deal, so it wasn't just gambling with the lenders money. You would think if someone was going to put their own money in the deal they might have a clue about what he was doing: apparently not.

Asking Price: $699,000

Income Requirement: $174,750

Downpayment Needed: $139,800

Monthly Equity Burn: $5,825

Purchase Price: $850,000

Purchase Date: 4/4/2007

Address: 36 Gillman Street, Irvine, CA 92612

My House Is Worth More

Luxurious -- Gwen Stefani

Some people still have not figured out there is an epic price crash taking place. When you look at the asking prices in Irvine, people are still of the opinion their houses are worth at or above peak prices. The fact is that prices have dropped more than 20% and they continue their downward descent. Even when confronted with neighboring properties selling for less, people lapse into denial and believe "my house is worth more." I guess $15,000 in pergraniteel can add $150,000 in luxury value to a property. Who knew?

Asking Price: $800,000

Income Requirement: $200,000

Downpayment Needed: $160,000

Monthly Equity Burn: $6,666

Purchase Price: $556,000

Purchase Date: 7/24/2003

Address: 206 Tuberose, Irvine, CA 92603

There Goes the Neighborhood

Walnut Tree -- Keane

Do you remember our recent discussion on Financing in a Declining Market? This REO is going to obliterate the neighborhood comps. Any property the lender considers comparable to this one will not get good financing (it doesn't matter what we might think is comparable, it only matters what the lender thinks.) Remember our optimistic seller one block over on Sweetan Street? Any lender is almost certainly going to consider today's featured property to be a comparable, and with a $400,000 lower asking price, anyone looking to buy the property on Sweetan Street is going to have to come up with almost $500,000 cash to close the deal (Those sellers are pwned.) This is the first real jaw-dropping price buster we have seen here in Irvine. It is happening everywhere else, and now it is happening here as well.

Asking Price: $351,500

Income Requirement: $87,875

Downpayment Needed: $70,300

Monthly Equity Burn: $2,929

Purchase Price: $475,000

Purchase Date: 7/30/2004

Address: 5228 Walnut Ave #10, Irvine, CA 92604

The Place You Rent is For Sale

Life for Rent -- Dido

Attention occupant of today's featured property: it is for sale. From the MLS description, "Driveby Only Please! Do Not Disturb Occupant. No Sign, Tenant not aware Property is For Sale." Well, they are now. If any of you know this renter, please go tell them what is going on -- the power of the internet.

Today is a great case study in what a property is really worth. We have both an asking price and a statement of what the unit currently rents for. That should eliminate most of the conjecture concerning rent. I am going to show the calculations for cost of ownership and calculate the breakeven amount for an owner occupant.

Asking Price: $515,000

Income Requirement: $128,750

Downpayment Needed: $103,000

Monthly Equity Burn: $4,291

Purchase Price: $495,000

Purchase Date: 4/16/2004

Address: 437 Deerfield #130, Irvine, CA 92606