House Is On Fire

This House Is On Fire — AC/DC

I last profiled a property in the Marquee at Park Place in May of this year. In it, I noted “As you can see, the HOA dues are a value killer. The breakeven value for an owner-occupant is only $321,893 which is nearly 70% off the asking price for this unit. The monthly cashflow drain the owners of these units are experiencing
is remarkable, particularly for the plethora of empty boxes.” Is it possible for prices there to drop all the way to rental parity? Well, today’s featured property is making significant progress…

{adsense-ir}

3141 Michelson Dr 807 Kitchen

Asking Price: $475,000IrvineRenter

Income Requirement: $118,750

Downpayment Needed: $95,000

Monthly Equity Burn: $3,958

Purchase Price: $600,000?

Purchase Date: 2/23/2006

Address: 3141 Michelson Dr. #807, Irvine, CA 92612

Beds: 2
Baths: 2
Sq. Ft.: 1,367
$/Sq. Ft.: $347
Lot Size: -
Property Type: Condominium
Style: Contemporary/Modern, Hi-Rise/Mid-Rise Condominimum
Year Built: 2006
Stories: 1 Level
Floor: 8
View: City Lights, Hills, Park or Green Belt, Pool, Has View
Area: Airport Area
County: Orange
MLS#: S514938
Source: SoCalMLS
Status: Backup Offers Accepted
On Redfin: 300 days

Unsold in 90+ days

FORECLOSURE LOOMS…BEAT THE BANK!!! The ‘pied-a-terre’ of the United
States West Coast elite. Prestigious California Riviera High-Rise
Condo. Experience Sunny SoCal’s Newest Luxury Lifestyle. Modern yet
sophisticated 2 bed/2 bath + den/office on the 8th floor with
spectacular views! Truly, a one-of-a-kind combination of location and
convenience with extensive amenities incl: concierge service, billiard
and meeting rooms, pool, spa, fitness center, CCTV bldg surveillance +
much more! Centrally located in the ‘Heart of OC’. HOA dues also
include water and gas service. HOA enforces strict ‘no pet’ policy. NO
Mello-Roos!!!

The ‘pied-a-terre‘ of the United
States West Coast elite? OMG, how full of crap can they be?

{adsense-ir}

Check out this asking price history:

Date Price
Dec 10, 2007 $1,000,000
Jun 25, 2008 $549,000
Aug 01, 2008 $499,000
Sep 17, 2008 $475,000

That is some serious market chasing. It must have been quite a shock when they dropped their asking price 45% and they found no buyers.

The property records I have do not tell how much these owners paid. They used a $479,200 and a $119,800 HELOC, so assuming this was 100% financing, they probably paid $600,000. On 7/11/2006 they refinanced with a $600,000 first mortgage and opened a $75,000 HELOC, so it looks as if they did manage to “make” $75,000 on the deal. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $228,500.

What I find most interesting about this property is the strength of the kool aid in its water system. These people really believed they were going to make $400,000 flipping this property. I know the bubble was crazy, but WTF?

Many of us who have written about this property have speculated that REOs and short sales were going to obliterate the comps here. This is the beginning. In fact, this is the pattern we will see on most high-end properties in Irvine and surrounding communities as the Alt-A and Prime ARMs begin to reset over the next few years. With jumbo loan interest rates increasing rapidly, potential buyers are seeing a significant reduction in their buying power. In fact, an increase in interest rates from 6% to 9% finances 25% less money. With rapidly declining bids, REOs are going to see rapidly declining prices.

I characterized the Marquee at Park Place as an Equity Inferno. Well, the House Is On Fire.

.

Yonder she walked
Yonder she walked, hittin one of dream
A little tongue in cheek, hot poisonality
She bring on the flames, and it’s burning and burning
My body’s aching, tossing and turning
House is on fire
House is on fire
This house is on fire
And the flame is gonna burn you, you
She got me running for shelter
Needin’ quarantine
She got me red hot and wired
Call an emergency
She bring on the flames, and it’s burning and burning
My body’s aching, tossing and turning
House is on fire
House is on fire
This house is on fire
And the flame is gonna burn you, you
You got me burning and burning
You got me tossing and turning
Burn, burn, burn
This house is on fire, House is on fire
This house is on fire, House is on fire
This house is on fire, This house is on fire
House is on fire
And the flame is gonna burn you,
The flame is gonna burn,
You’re gonna burn you

This House Is On Fire — AC/DC

47 thoughts on “House Is On Fire”

  1. Very nice place, but I think within the next 2 years, a unit in that building will go for less than 250K. I will come back on Labor Day 2010 so you can tell me if I was wrong or right.

  2. Ok guys, I reported earlier on new bank regulation where 2nd home buyers/speculators were not under the gun, my friend just got a rejection of loan from FHA on his 2nd home purchase. Aparantly, the new rule requires any homeowner trying to buy 2nd home have equity of at least 30% in their first home and pony up 20% cash downpayment. This will definitely kick out lots of speculators and folks. The era of easy money and credit is history and new era of cash is king is here. I wonder if 20% would be enough going into 2009 given the fact that banks are not trusting anyone.

    1. I’m confused – don’t know how to classify this – different part of the country, regional bank, people w/ high credit scores, people w/ money in the bank??? Was talking to a friend earlier today, they are planning to buy his brother’s house (to use either as a rental or for their daughter). They own their own home, small balance remaining, plus paying on two rentals. She called their bank for HELOC rates to finance the new purchase. She was offered multiple financing options. HELOC line of credit (How Much Do You Want?), regular mortgage, zero down mortgage, interest only mortgage. Thought banks were done w/ zero downs & interest only products…

  3. What’s with the old fashioned country style furniture? Seems out of place in a ultra modern high rise apartment building. It’s like they had no money left over after the purchase and decided to fill the place with grandma’s hand-me-downs. They really just need to empty the place rather than try to make it seem “homey”.

  4. When all of the F’d buyers eventually get evicted from this Phallic Tower of Greed/ Consumption/Douchbagery, I am thinking it would make a great dormitory Internment Camp / Re-Education center for the local real estate agents.

    They could play in the pool, shoot some billiards, run on the treadmill, do some arts and crafts while detoxing from the Kool-Aid and attending Economics Awareness and Tulip-Manias Anonymous courses throughout the day.

    At the end they’d all get a little certificate of graduation from the Marquee declaring that they are fit to return to society. Perhaps some of them will even go on to produce a thing or two and give up the life of a sponge in the middle who soaks up 6% and produces nothing but debt transactions.

    1. With the Internet (Redfin, etc.) and the opening up of the MLS, I think the days of 6% are numbered. I paid 4% when I sold my house using a “discount” realtor.

    2. Now that REO is driving the market, does anyone know what the banks pay the RE agents? I would think it is south of 6%.

      Is it so little the RE agents don’t even care and that that is why we get one outside picture and a 5 word description on REOs?

      1. Another bearish theory: a given bank has a contract with a particular real estate agent/office, and the agents have too many REOs to give any one of them any time.

    3. Ah David that’s some funny stuff. I think you should be next to write a book…

      One minor quibble: those towers aren’t really “phallic” unless you’re sporting some really unusual , ummm, er equipment ;-)

  5. I had to click back to the earlier post to which you link, to remind myself of the outrageous HOA fees.

    $1100 a month.

    That’s more than a lot of people’s mortgages, including mine.

    I wonder how many of these units are still paying their HOA fees. Can you imagine if these towers had a 30% or 40% foreclosure? The HOA fees could easily soar past $2000 to make up the difference.

    1. The HOA fees can only increase 20% annually unless there’s a majority vote to increase past that percentage. It has been my experience that the BOD, comprised of homeowners, does not want to increase the HOA amount at all, but will do so if necessary to adjust for inflation.

      I have seen budget shortfalls, due to repairs, litigation etc, handled with a one-time special assessment, which again requires a majority vote of the homeowners. For whatever reason a one-time special assessment is more palatable than the same increase in the form of increased monthly dues.

      I do see a problem with the “gas and water service included” feature of this building. Generally the water has to be commonly metered or the high pressure pumps required for individual units would be a nightmare to install and maintain, however, that wonderful feature of highrises, never-ending high pressure, hot on demand, free-flowing water,leads to overconsumption. Who can resist a half hour shower?

      The real problem is the included gas. When the economy is tight, there is a tendency to use the gas fireplace to heat the unit, especially if the fireplace is a good quality “heatolater” type that will throw out a lot of heat. This leads to much heavier gas usage than the initial, DRE-approved budget estimates and over time the building’s gas usage becomes exorbitant. I do not know why the developers don’t individually meter the gas in a highrise, but I suspect it’s just the additional cost of the initial construction, that is, the purchase of the meters and that portion of the installation, plus the space necessary for a gas meter room for so many units, which is valuable real-estate that could be parceled off and sold as storage cubicles. In my experience I have seen that during the construction phase the gas lines are all run separately in mid-rise buildings, unlike the water lines/pumps.

      1. At $1100/month, 20% is $220 a month potential increase with no approvals needed. My experience with HOAs is once out of the initial burn in period, the increases come annually like clock work up to the max amount. HOA boards are notoriously bad even though they are home owners because they are literally, spending other people’s money. I’ve seen situations where the HOA is burning major money replanting the little flower gardens on a regular basis because it was the president’s wife’s hobby and she replanted four or five of the planters 4ftx8ft areas every week with product selected from one of the local nurseries.

        Getting an HOA increases of 15% or 20% when you are paying $150, bumping it to $180 is one thing, getting a $100/month or $200/month increase will be quite another.

        1. Wow! Sounds like you really had bad experiences. I guess I’ve been lucky in my involvement personally with 4 HOA’s, plus the others I was involved in for work. I have only seen an attitude of no increases unless absolutely necessary. You are correct that the % increases on large HOA fees can increase substantially over time and that’s why I won’t live in a deluxe high-rise building. I saw how difficult it was to control costs in a mid-rise building with 3-4 elevators and underground parking garages with drop-down gates and exhaust systems with sensors. Pleasing everyone by heating the pool and spa year-round was exorbitant, and those gas fireplaces I mentioned in the last post broke the budget for gas, so much that the HOA sent letters practically begging people not to use the fireplaces.

          1. I saw this building driving by on 405, wondering what sort of person would pay big bucks to live there…I didn’t even think about the HOA fees. Seriously, $1100 per month?

            My experience with HOA hasn’t been that bad–it went from $90 to $103 in 5 years, which I figure is in line with inflation. Then again, I don’t live in a gated community, there are no pretty flowers planted near sidewalks, and no high-rise requiring elevator maintenance. :-)

          2. SFR HOAs are very different than Townhome or condo HOAs. The responsibility is very different as is, IMHO, the homeowner mindset for who has responsibility for what.

            The other main item is age, once the association hits it’s teens and beyond, the replace/repair cycle really kicks in and it becomes painfully obvious if the boards have been planning properly for the last 15 or 20 years.

        2. They will also increase the HOA to make up for the shortfall of “owners” not paying, for whatever reason.

  6. What’s crazy is that if this insanity had been allowed to continue some moron would of coughed up the $1 Mill thinking they’d make a killing in the upcoming year.

  7. That’s a major concern in other cities as well. After all, why the hell should you pay this kind of mortgage and HOA fee when the odds are pretty good that the building will convert back into apartments in another six months?

  8. Considering I work at Park Place, I enjoy walking past these towers at night. It’s like what if they built condominiums and nobody showed up? I can’t wait until the Central Park West complex comes online, will anyone “show up”?

  9. I absolutely cannot hear the phrase “Pied-à-terre” without flashing on this description from the man who is still the world’s only funny Republican, P. J. O’Rourke:

    But I have this pied-à-terre in New York, or pied-à-dirt is more like it. This is a big chunk of raw loft space looking as only New York raw loft space can look *mdash; like the planet Neptune decorated by wild hogs.

  10. Almost half a million, and you can’t even own a dog or cat? I agree these will either stay empty or they will convert to fancy apt’s. I remember a couple of years ago when these first opened up, you could see the few owners, they were foreigners, I guess they are use to not having any room for family and pets.

    1. Lots of pets in Germany. Maybe foreigners did not know that this was a silly rule and not the norm, and if they objected and threatened to walk away, the rule would disappear.

    2. The no pet rule, according to the OC Register, was a requirement to get the atrocity built – the fear was that dogs and cats would roam in the somewhat adjacent San Joaquin nature preserve. This was rather ridiculous since the pets would have to traverse the Park Place shopping center and then dodge cars on Michelson before they could wreak havoc on the local wildlife.

      The supposed joy of living in these urban boxes is to avoid the upkeep on a home but then they fist you with over a thousand a month on HOA? Some joy that must be.

      1. The concern was that natural creatures would ruin a nature preserve.

        :lol:

        That’s just plain funny. I can wrap my head around the reason, but it’s still funny.

  11. My experience in the Bay area, with several CC & R’s in the initial writing thereof, is that the pet policy conforms to local zoning ordinances…2 common household pets per unit, each not to exceed 25 lbs. This of course leads to 25 lb golden retrievers, standard poodles, and even a St. Bernard, not to mention a protracted legal battle over whether ferrets are common household pets!

  12. $1100 a month is pretty horrific for a monthly assessment for a 1300 sq ft. condo in a spanking new building with the standard amenities. What does that assesment include, and is at least 10% being allocated to a building reserve? Does it include your taxes, as though it were a co-op? If not, it’s insane. What will it be like when the building begins to age and needs major mechanical upgrades and repairs?

    I am eyeballing a 1920s vintage (ancient by Irvine standards) highrise unit here in Chicago that has 3 beds, 2 baths, 1,678 sq ft, and a monthly assessment of $670 that includes HEAT (a very large item in Chicago), water, common area utilities, all exterior and common maintenance, and a reserve for repairs.

    1. It’s a sucker trap.

      Truely wealthy people build these kinds of places to sell to people who want to pretend that they are wealthy.

      It’s a great scam (until credit freezes). The idiots who buy these apartments don’t even know that they are the marks in the scheme.

  13. IR, these really are the wildcard in this whole Irvine real estate mess in my opinion.

    I’ve been less bearish then you have overall because of the lack of bank owned homes and foreclosures in Irvine compared to the rest of OC.

    From the NOD rate i’m seeing, its going to stay that way *except* for all these units, along with avenue one, watermarke, etc.

    It will be very interesting to see what happens to the residential condo/housing market when banks are unloading these midrise and high rise places by the truckload.

  14. Oh man, I visited the apartment of a friend-of-a-friend at this place a couple years ago. I think they were renting rather than owners, but I could not believe how much money they were paying – can’t remember how much, but it was way more than I would have expected for a place right next to the freeway. The whole place had a very strange vibe. Beautiful apartment, but it was weirdly dead. Usually in a huge complex like that, you see people going in and out, but we didn’t see a single other person anywhere.

  15. This entry today made me laugh hysterically at the screen. I mean really, this is hilarious on so many levels!

    I stop by Park Place to visit Fatburger or Houston’s on occasion, and I recently sat and watched who was going in and out of that place while I slurpled my Fatburger shake. It was a ghost town, with only about 10% of the balconies with any furniture or evidence of human life. Two cars left the garage, both big black German SUV’s with stern drivers that looked very foreign and drove very fast towards the freeway. It didn’t look like a place for fun and games around the pool with the neighbors.

    And now we get a peak inside one of the smaller, less desirable units with a view of the other tower and we see that it apparently belongs to Laura Ingalls Wilder?! I wonder if Ma and Pa know she took off for the city with the good dining room chairs?

    And a monthly HOA of $1,125?! Are you getting? And for that I get what exactly, beside the standard pool/gym/bbq? What the heck does the lobby concierge do for me for that extra 900 a month that I can’t hire out myself for half the price? Don’t tell me they have resident social events, because if the angry foreigners driving the black Audi’s are any indication, I have no desire to play backgammon with those people in the lounge.

    But gosh this gave me a good laugh today! Thanks for the fun here! Keep ‘em coming!

    1. “Marquee Owner” posted the following in the forums section. It gives the interesting perspective of an owner at this place and why the HOA’s are so high. Something about a cross-easement (dunno what it means so maybe someone could enlighten me?)

      “Yes, I am an owner of a unit at Marquee. 4th floor unit, $590,000 purchase price. We have had it leased for 2+ years now and the current rent is $2,750. We are underwater by about $200 a month, or $700 a month if I factor in the annual property taxes. It is not a pretty situation, but there is still no decent for-sale market. I bought several pre-construction condos in San Diego and flipped out of each one immediately upon completion. Did very well on each one. This is the only one I have left and no more in contract. This Irvine project has been a debacle, primarily because of timing, but also because of the HOA’s which are absurdly high as has been pointed out in this forum. Like all luxury buildings the HOA includes all of the common area amenities, insurance, gas, water. The big expense is people—concierge, 24-hour guards, housekeeping, etc. The HOA in this building should be about $700 but unfortunately we are on the hook for a huge monthly payment to Maquire Properties (master developer of Park Place) for a “cross easement.” What an idiotic thing to saddle the homeowners with. Bosa should have paid for the cross easement and why on earth would it be so expensive that it consumes about 1/3 of the total HOA budget? That’s something like $1,000,000 per year! The HOA has filed suit against Maguire and Bosa over this issue but of course it will be many years before anything is decided and probably only the lawyers will profit from the action. I never intended to own the condo for more than a few weeks or months so quite frankly I did not pay attention.”

      1. By the way, if you’re near 100% or more financed and underwater, what’s to stop you or others from just walking away. Some appear to have borrowed with 2nd or HELo to cover more than their downpayments.

        I heard that some another couple had 100% financing and didn’t pay for 6 month. The bank tried to get them to stay with new terms (in middle CA with little sales). The couple said here are the keys and their credit score was not that badly hurt 800’s and then reduced ~70 points.

  16. HOA fees, to me are a scam by the city and the developer. I really can’t understand the logic why someone would go along with it. The whole point of owning a home is to OWN IT, but if you have to pay HOA’s they never end, once you pay off your home you still have to pay HOA’s and they never go down they only get higher! I also heard that there are only a couple of Management Companies that are in charge of managing the HOA’ sounds a little corrupt to me.

  17. “$590,000 purchase price. We have had it leased for 2+ years now and the current rent is $2,750. We are underwater by about $200 a month, or $700 a month if I factor in the annual property taxes.”

    With $1100/month for HOA, I don’t see how you can be only under $700 month unless you have a come on rate or negative amortization loan. The interest would be below 3%. The rent seems steep unless it’s rented to a reloc company.

  18. Good GOD those HOA’s are expensive! You’d be better off staying in a sky-rise hotel in Vegas than owning this thing. WTF?

    It reminds me of a little city trying to look big. Come on Irvine. WTF? Your not quite cosmopolitan yet.

    Boy reality hurts doesn’t it?

  19. IR, I agree these high-rise condos are going to be comp-killers.

    Years back when I was looking for my condo I took a look at the Metropolitan, which correct me if I’m wrong, was one of the first residential high-rises in Irvine. At the time, nobody would touch those with a ten-foot pole. High HOA’s and not very family-friendly. Takes a special kind of buyer to want this place.

    I guess you have to be “West Coast elite”…lol

  20. These people will end up peeling the payroll in the place, and reducing the level of amenity with it, just to stay afloat in thier overpriced aeries. A building concierge, doormen,and huge housekeeping staff, are for RICH people.

    This place should have an engineer and maintenance man to tend to the mechanicals, and a housekeeper to do the halls. Things like doormen and concierges are optional luxuries- the first things you dispense with when you are treading water economically and your mortgage payment doubles. Or you are a bank trying to unload a bunch of foreclosures.

    That’s what folks in snazzy Miami and Chicago South Loop highrises are discovering. These folks have lots of pretensions and didn’t pay $400K to $800K for a 1200′ one bed so they could play doorman, sweep the driveway, and live in a place with frayed carpets and half the lights burning in the halls, but that’s how life is in these pretentious roosts these days, what with half of them in foreclosurs.

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