The IHB Forums are a great resource and there are many solid contributions being made there every day. Some of you have been hanging out there for well over a year and a half. If you haven't stopped by, check it out. Recently, we had a new member, Cuatro, join the forums. He created a topic on Tips for leasing an IAC apartment. There is some great advice there so I thought I'd put it up on the blog for the weekend post:
Tips for leasing an IAC apartment:
Leasing Consultants (LCs) are NOT the enemy. Rather than viewing them
like other sales people, consider the following. The typical IAC
Leasing Consultant has zero interest in the amount of rent you pay for
your apartment. They are paid on a tier system that rewards the number
of leases they get signed per month...period. They will usually do
anything in their power to get you the best deal, because at the end of
the day, your signature on a $1200 studio pays the same as your
signature on a $3000 3x2. Their first and foremost priority is to fill
their property. (As an interesting aside, IAC LCs make between $32k
and roughly $85k per year...the primary difference is volume).
Visit the property when you are ready to make your decision. Never
give the impression that you won’t reserve an apartment on that first
visit. The sooner you tell them you are ready to move, the more likely
you are to get the best deal. NEVER say you are looking to move 45+
days from now. As a general rule, the best deals are on vacant
apartments. Vacant apartments must be moved into within 2 weeks. If
you are looking to move more than 2 weeks out, you are automatically
going to be offered apartments that are “on notice” with other
residents currently living in them. Discounts on these apartments are
rare and always significantly worse than vacant apartment specials.
If I were the king of the world; Tell you what I'd do... I'd throw away the loans and the moans and the unknowns; Make home sweet home for you...
When I started writing for this blog, part of my drive was emptying my Reservoir of Schadenfruede. It has grown beyond that, and I appreciate all the people who thank me for convincing them to wait and saving them a great deal of money. I am not a pessimistic or bearish person by nature, and I would rather everyone experience the joy of living rather than the pain and stress of the collapse of an epic financial bubble. However, I am a realist who is willing to face the truth come what may. The truth is prices have fallen, and they will continue to do so. The government may be able to ease the transition to lower prices and borrower solvency by keeping interest rates low for a time. However, sub-6% mortgage interest rates will not be available forever, and after a big push to restructure and refinance existing borrowers out of their bad loans (that may be mandated,) market pressures will cause a gradual rise in long-term rates.
Mortgage interest rates are a combination of the risk-free rate, the inflation premium, and the risk premium. Risk premiums during the bubble were artificially low. If they weren't, our banking system would not be in trouble, and the bailout of the GSEs would not have been necessary. When the government took over the GSEs, they knowingly took on the investment risk in order to control the risk premium in the open market. This allows them to keep rates artificially low during the upcoming restructure period (I am of the opinion that the government took control of the GSEs to rid the market of toxic paper through a combination of low interest rate refinancing and foreclosure). Government ownership of the GSEs is not going to be a permanent condition, unless of course the government wants to be the defacto subsidized mortgage insurer of the country forever. At some point, the government will want to get out of the mortgage insurance business, particularly since it will not be profitable. Risk premiums will rise to market when the government moves to get out of the business. Three to five years from now, I would look for the government to spin off the GSEs once again (they did this first in the early 70s). I doubt it will take that long for mortgage interest rates to rise again, so if you ever thought about refinancing, now is the time.
Just in case you needed a reminder of what caused this problem, today's featured property was purchased with an Option ARM with a 1.5% teaser rate. Restructuring this borrower into a mortgage they could afford would require a very low interest rate and likely some significant principal reduction. Since this is well outside of the parameters for a reasonable restructuring, and since this wasn't a GSE insured loan, it is another foreclosure-in-waiting.
Today's featured property demonstrates the living-off-your-house mindset in action. Apparently, all you had to do was buy a house, any house, and start extracting money from it. It didn't require any money of your own to invest, and if things go bad, well... it's not your problem. This house was purchased on 2/10/2006 for $705,000. The owner used a $564,000 first mortgage, a $141,000 second mortgage, and a $0 downpayment. On 9/29/2006, a mere 7 months later, the property was refinanced using a $632,000 first mortgage and a $158,000 second. This netted the owners $85,000 in mortgage equity withdrawal. That is the median income in Irvine, and these people got it simply for owning a house for 7 months! Actually, it is better than that because if you earned $85,000, you would have to pay taxes and have withholdings. To net $85,000, you would need to be making more like $120,000. Further, to get this in 7 months, you would need to be making $205,000 per year. That is one hard working house!
I profile these day after day. Are you starting to get a sense how common this was? Look at how much money these people got to spend for doing absolutely nothing. Is it any wonder houses were such a popular investment? Was it logical to think this could go on forever?
As a society during the real estate bubble, we put enormous sums of money into assets that produce nothing. This isn't like investing in a factory or machinery or infrastructure of some other sort of productive use. These are houses. They only have consumptive value. There is no production here. Is this where society's resources should be diverted?
How can a society thrive when it ties up all its resources in non-productive assets? I joke about hard-working houses because the whole idea is so absurd. Imagine if we took every resource in our economy and put it into house production. For a time, everything would be OK because everyone would be working in construction, they would be making money, and we would all have houses, but what happens once we were done? Houses can't produce anything else. Once the boom was over, the entire economy would collapse because there are no productive assets.
This is basically what we did since the collapse of the NASDAQ stock market bubble. Our manufacturing base never did recover from the recession of 2001. When liquidity was added to the financial system, this money poured into mortgage loans rather than business infrastructure. It is a misappropriation of resources that will likely haunt us for quite some time.
Sometimes I come across a property where the circumstances around the speculative purchase lead to one of two possible conclusions: fraud or cluelessness. I am giving the benefit of the doubt to call this one clueless. This property was purchased in April of 2007. The news of the subprime implosion were on the front page. News of weakness in the housing market was everywhere as sales volumes were already declining and prices were dropping in many markets. And, of course, outlets like the IHB were screaming from the rooftops that prices were going to crash. It was in this environment that our flipper purchased today's featured property.
The purchase allowed the previous owner who purchased in 2004 to sell at a small profit. It is the kind of circumstances that also has potential for fraud, particularly since the property went into foreclosure in just over a year after its purchase.
But was it really clueless? The flipper didn't have any money in the transaction. This was a 100% financing deal, so Affiliated Funding provided the money, and the loan was packaged and sold in the secondary market. Some faceless investor is eating the loss. If prices had rebounded, this flipper would have made money. If it went down (which it did in a big way) then only their credit score was at risk. In those circumstances perhaps those of us who did not participate were the clueless ones...
What really caught my attention with this property was the discount. The asking price is 34% off its 2007 purchase price. That is a substantial drop. Perhaps they are hoping for multiple bids over asking. Perhaps there are enough knife catchers out there that they will succeed. In the comments recently, we were reminded about all the bullish commenters in the early days of the bubble blogs who were certain that if prices dropped 10% that investors would swoop in and buy up the entire inventory. This one is 34% off. Where are they now?
Many people during the bubble took out HELOCs and extensively renovated their properties. Historically, interior property renovations add $0.70 for every dollar spent. Exterior renovations add $0.50 per dollar. It was not uncommon to see property listings touting $200,000 in renovations to justify a $500,000 price increase. It isn't the renovations that were adding value to property; it was the financing that was inflating it. There were several properties in Irvine that were torn down to a single wall and rebuilt from the ground up. Those that attempted this kind of extreme home makeover in 2007 did not fair to well.
We first profiled 2 Angell, Irvine, CA 92612 in February of 2008 when it first came on the market. The flippers who were trying to sell this property took a $600,000 house, rebuilt it, and asked $1,469,000 for it. I was thinking they might get lucky to get $1,000,000. Now the property is back on the market for $1,199,000.
Today's featured property is another total redo. It is an interesting story of renovation gone awry.
If you haven't stopped by, check it out. Recently, we had a new member, Cuatro, join the forums. He created a topic on Tips for leasing an IAC apartment. There is some great advice there so I thought I'd put it up on the blog for the weekend post:
