The flippers are back. Will they make a buck or be crushed by the falling market?
Asking Price: $949,000
Address: 26 Desert Willow Irvine, CA 92606
Another over-improvement property praying for a knife catcher. Are there any left?
Asking Price: $729,000
Address: 4535 Sandburg Way Irvine, CA 92612
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Today’s featured property shows what happens when you do everything wrong when investing in real estate. The result is the wrong house in the wrong neighborhood at the wrong time. Someone is going to lose money on this one; it is only a matter of who and when.
Asking Price: $1,399,000
Address: 4931 Karen Ann Ln, Irvine, CA 92604
Whip It—Devo 
When a prop’ty comes along
You must flip it
Before the home sits out too long
You must flip it
When somethings going wrong
You must flip it
Now flip it
Into shape
Shape it up
Get straight
Go forward
Move ahead
Try to detect it
Its not too late
To flip it
Flip it good
When you buy as a flipper, you are a fool. Your task is to find someone more foolish than yourself to buy you out before prices crash. There are bagholders for every price crash. Someone has to own the asset while it declines in value. The trick to flipping is not to be that someone.
Speculative flipping only works when prices are rising. There are a few people who manage to make a few bucks buying at foreclosure auctions and quickly selling before the declining prices take them underwater, but these people are the exception rather than the rule. Most people who made money flipping during the bubble simply bought property, waited for a while, then sold it to some greater fool. That method does not work when prices are falling.
Despite the total collapse of pricing at the bottom of the market and the obvious signs of an impending market implosion, some people chose to buy real estate as speculative flips in recent years. I have already profiled a couple who have changed their minds and are trying to get out, but it is the ones who actually price the property to make a profit I find most interesting. They really believe there is someone out there who is even more stupid than they are.
Today’s featured property is one such flipper. I know the penthouse is supposed to be nice, but is the premium really $900,000 or worse yet $1,575,000? Should people really pay $1,000/SF when properties in the same building are selling for less than $400/SF?
Asking Price: $1,950,000
Income Requirement: $487,500
Downpayment Needed: $390,000
Monthly Equity Burn: $16,250
Purchase Price: $1,823,000
Purchase Date: 8/3/2007
Address: 8153 Scholarship, Irvine, CA 92612
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Living on the Edge—Aerosmith
There’s somethin’ wrong with the world today
The light bulb’s gettin’ dim
There’s meltdown in the sky
Fringe markets are those regions where properties are less desirable due to proximity to large employment centers. These markets develop as people are priced-out of the more desirable markets closer to work. Eventually, employment centers also migrate to these fringe market areas, and development pushes even further into the wilds.
When Irvine was first developed, it was a fringe market. The primary employment centers were in the LA basin, and those who bought in Irvine commuted to these far-away employment centers. As Orange County continued to develop, it became a strong employment center of its own.
There are still fringe markets even in Orange County. San Clemente and Rancho Santa Margarita are examples. There is limited employment in these sub-markets, and people commute to employment centers.
Fringe markets have characteristically volatile house prices. People only live in fringe markets because they are priced-out of more desirable areas, so when prices drop in the better areas, people leave fringe markets, and prices really plummet.
Proximity to employment is not the only defining characteristic of a fringe market. Even within primary markets like Irvine, we have fringe neighborhoods that experience greater price volatility because they are undesirable for other reasons. One such neighborhood in Irvine is Columbus Grove.
Columbus Grove was developed at the peak of the housing bubble, and it was overpriced from the beginning. The continuing activity of the builders coupled with the ubiquitous toxic financing has resulted in many home sales of the must-sell variety. This created a nasty downward spiral in prices.
Columbus Grove also suffers from its proximity to powerlines, underground toxic waste, a nearby cement factory, and other elements which make it less desirable. The combination of inflated prices, huge numbers of must-sell homes, and low desirability has caused prices to absolutely crater.
Every single homeowner there has a property worth less than the paid for it, and the vast majority are hopelessly underwater on their mortgages.
Tell me what you think about your sit-u-a-tion
Complication - aggravation
Is getting to you
Actually, conditions like these make for ideal places for vultures to be active. When we do reach the bottom, the best deals will be in neighborhoods like this one. Unfortunately for the flipper who owns today’s featured property, we are not at the bottom.
If chicken little tells you that the sky is fallin’
Even if it wasn’t would you still come crawlin’
Back again?
I bet you would my friend
Again & again & again & again & again
Asking Price: $699,000
Income Requirement: $174,750
Downpayment Needed: $139,800
Monthly Equity Burn: $5,825
Original Purchase Price: $800,000
Original Purchase Date: 11/28/2006
Flip Purchase Price: $479,774
Flip Purchase Date: 10/30/2008
Address: 78 Fringe Tree, Irvine, CA 92606
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Terror & Hubris in the House of Frank Pollard—Lamb of God
It is a recurring theme in our culture that the rich and famous live by a different set of rules than the rest of us. Once you achieve wealth and fame, people treat you differently. They look up to you with respect and envy. Many people desire wealth and fame for the status it brings—at least in their own minds. Some people want to be envied, they want to believe everyone wants what they have, and they find it very empowering to be able to put themselves above others. For these people, the lure of a prestigious neighborhood is their belief that living there makes other people envy them. The pretense of owning a McMansion in Turtle Ridge or Shady Canyon makes some people do whatever it takes to purchase there—including paying ridiculous prices. There are people who buy in these neighborhoods because they are nice places to live, and they want a beautiful home just for their own enjoyment. Many people do not care what others think, and they do not base their home buying decisions on those considerations. However, there is a significant group that does, and these people often have artificially inflated opinions of themselves and the value of the properties they own.
Kill my hopeless life I cannot be hypnotized. You owe me.
Push aside the veil to welcome in the visitors.
I don’t know the owners of today’s featured property, and I have no idea why they bought in Turtle Ridge. They may be very nice people who bear no resemblance to the profile above. However, the asking price they have put to their property says something about them: they do not live in a reality-based real estate market. The high-end of the Irvine market has shown the least stress so far. Very little is selling, but those few properties that do sell do not show large losses. I recently profiled a $5,000,000 property selling for 10% off in Shady Canyon, so prices are starting to fall, but by and large, the high end has not seen the carnage witnessed at the low end so far. However, these properties are certainly not appreciating, and to believe they have doubled in price, well… that is a little crazy. The kool aid still flows in Turtle Ridge.
Asking Price: $2,860,000
Income Requirement: $715,000
Downpayment Needed: $572,000
Monthly Equity Burn: $23,833
Purchase Price: $1,433,000
Purchase Date: 9/29/2004
Address: 28 Blue Summit, Irvine, CA 92603
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Flipper -- Vars and Dunham
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Do you remember the extreme arrogance and smugness of flippers and other kool-aid intoxicated people during the bubble? Isn't everyone who buys in a bull market a genius? They were all so sure the market could only go up, and every property was a gold mine. They were all living in their private wonderland.
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!
And of course, now they are under water, drowning in debt and sinking to the bottom. When it comes to flippers, my schadenfreude overfloweth...
Today's featured property has been profiled before. It has been on and off the market for about a year and a half. This is the third listing we have documented here. It takes a great deal of courage to flip a $2,000,000 property. Either that or a great deal of ignorance and kool aid.
Asking Price: $1,880,000
Income Requirement: $470,000
Downpayment Needed: $376,000
Monthly Equity Burn: $16,666
Purchase Price: $2,050,000
Purchase Date: 5/23/2006
Address: 29 Mahogany, Irvine, CA 92620
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