Once, Twice, Three Times a Lady — Commodores

And now that we’ve come to the end of our rainbow
There’s something I must say out loud…

WHERE THE HELL IS MY POT OF GOLD?!

There was supposed to be a pot of gold here. At least that is what our third flipper thought. I have written on other occasions about the phenomenon of trading stucco boxes (Houses and Commodities Trading, and Houses Should Not Be a Commodity). People were buying properties, often not even living in them, waiting for a short time, and then selling them to another speculator who would do the same thing. It was a classic Ponzi Scheme dependent upon greater and greater levels of debt to perpetuate higher and higher prices. Today’s property is probably the finest example of this phenomenon I have encountered here in Irvine. Let’s take a closer look.

Asking Price: $549,000

Income Requirement: $174,750

Downpayment Needed: $139,800

Monthly Equity Burn: $5,825

Purchase Price: $680,000

Purchase Date: 5/4/2006

Address: 422 Quail Ridge, Irvine, CA 92603

highly upgraded? What does this mean? Can a property be just “upgraded?” Can it be “lightly upgraded?” Can it be “highly, highly upgraded?” Where does it end?

nestled… I am developing an aversion for that word.

The sales and mortgage history of this property gets a bit involved, but bear with me, it tells a great story of greed gone wild.

Flipper #1

This property was first purchased from the builder on 9/30/2004 (just over 4 years ago) for $502,000. Flipper #1 used a $400,000 first mortgage, a $76,750 second mortgage, and a $25,250 downpayment. He waited two whole months before opening a HELOC for $120,000 on 11/22/2004 withdrawing his downpayment. On 5/5/2005, about 6 months later, he opened another HELOC for $200,000 and paid off the first. On 5/26/2005 he sold the property to flipper #2 for $610,000 netting him $63,400 after a 6% commission. Not a bad profit for holding property around 9 months.

Flipper #2

Flipper #2 paid $610,000 on 5/26/2005. He used a $496,000 first mortgage, and a $124,000 second mortgage. If these numbers are correct, he cashed out $10,000 at the closing. He then sold the property almost a year later to flipper #3 for $680,000. If he paid a 6% commission, he only made $29,200.

Flipper #3

Flipper #3 paid $680,000 on 5/4/2006. He used a $544,000 first mortgage, a $136,000 second mortgage, and a $0 downpayment. His rainbow had no pot of gold. He is now a short sale asking $540,000

Look at these three transactions. Only the first one had any kind of downpayment, and he only had that in the property for about 60 days. Every penny of the remaining transactions was borrowed money. Of all the painful lessons lenders learned during the bubble, giving out 100% financing to anyone with a pulse has to be the most painful. If leverage is very low (large downpayments or low CLTV limits,) then speculators have to use large amounts of their own money to capture what become relatively small price movements. If leverage is very high (small downpayments or high CLTV limits,) then speculators do not have to put up much money to capture what become relatively large price movements. The more leverage (debt) that can be applied to residential real estate, the greater the degree of speculative activity that market will see. Also, the smaller the amount of money required to speculate in a given market, the more people will be able to do so because more people will have the funds necessary to participate. When lenders began to offer 100% financing, it was an open invitation to rampant speculation. This makes the return on investment infinite because no investment is required by the speculator, and it eliminates all barriers to entry to the speculative market. Further, it passes all of the risk on to the lender as the speculator can simply refuse to pay the debt and allow the lender to foreclose on the property. 100% financing, coupled with negative amortization loans, caused our market prices to get inflated, and its elimination is one of the main reason prices are falling now.

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Thanks for the times that you’ve given me
The memories are all in my mind
And now that we’ve come to the end of our rainbow
There’s something i must say out loud

You’re once, twice, three times a lady
And I love you… I love you…

Once, Twice, Three Times a Lady — Commodore

A Hard Rain’s a-gonna Fall — Bob Dylan

I was looking through the local rags this weekend, and I was overwhelmed by the number of “you should buy now” articles. There was one titled, “Why you’re nuts if you don’t buy now.” There is no limit to the bull$hit the real estate community can put out there. I would like to see that changed.

The sales tactics of the National Association of Realtors should be examined and potentially come under the same restrictions as securities brokers through the Securities and Exchange Commission. After the stock market crash which helped precipitate the Great Depression, Congress created the Securities and Exchange Commission to regulate the sales activities of securities brokers. There are strict regulations in place governing the representations made concerning the future performance of investment opportunities. These protections were put in place to protect the general public from the false promises made by stockbrokers in the 1920s which many naïve investors believed. The same analogy holds true for Realtors.

The National Association of Realtors has launched numerous advertising campaigns suggesting erroneously that residential real estate is a great investment and appreciation will make home buyers wealthy. The mantra of all realtors is that house prices always go up. There are currently no limits to the distortions and outright lies realtors can tell prospective buyers with regards to the investment potential of residential real estate. Buyers are already prone to believe the fallacies of unlimited riches in real estate, and these fallacious beliefs lead to housing bubbles. Realtors should be prevented from making representations concerning the investment potential of real estate. Since the regulatory framework for this kind of regulation and oversight is already in place under the auspices of the Securities and Exchange Commission, Congress would merely need to make Realtors subject to these regulations in order to solve the problem.

We really need to do this…

Today’s featured property is a high-end REO being offered for 25% off its peak purchase price — a discount greater than $250,000. Is it a good buy? Are you nuts for not buying it? IMO, this house will likely drop another $200,000 in value, depending on how quickly the crash plays out. If I am right, it is not a good time to buy. If the realtors are right, this is the bottom, and it is a great time to buy. Since I have been consistently right, and they have been consistently wrong, you can choose between an impartial observer giving advice based on detailed analysis, or you can place your faith in a group looking to profit off the transaction who have done no analysis at all. You decide.

Asking Price: $764,500

Income Requirement: $191,125

Downpayment Needed: $152,900

Monthly Equity Burn: $6,370

Purchase Price: $1,040,000

Purchase Date: 11/9/2006

Address: 3 Raines, Irvine, CA 92602

That description must have taken all of 10 seconds to write.

As you might have guessed, this was a 100% financing deal. DB Home Lending Inc. loaned these people $1,040,000 and required no money down. Think about how insane that is. Over $1,000,000 with no personal investment? The insanity of lenders during the bubble was truly remarkable. No wonder our entire banking system is insolvent.

If this property sells for its asking price, the total loss to the bagholder who bought this mortgage will be $321,370 after a 6% commission.

What happened? I thought real estate always went up?

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BTW, if you want to find out who I am, buy the ebook linked on the sidebar. My name is on the front cover.

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Oh, where have you been, my blue-eyed son?
Oh, where have you been, my darling young one?
I’ve stumbled on the side of twelve misty mountains,
I’ve walked and I’ve crawled on six crooked highways,
I’ve stepped in the middle of seven sad forests,
I’ve been out in front of a dozen dead oceans,
I’ve been ten thousand miles in the mouth of a graveyard,
And it’s a hard, and it’s a hard, it’s a hard, and it’s a hard,
And it’s a hard rain’s a-gonna fall.

Oh, what did you see, my blue-eyed son?
Oh, what did you see, my darling young one?
I saw a newborn baby with wild wolves all around it
I saw a highway of diamonds with nobody on it,
I saw a black branch with blood that kept drippin’,
I saw a room full of men with their hammers a-bleedin’,
I saw a white ladder all covered with water,
I saw ten thousand talkers whose tongues were all broken,
I saw guns and sharp swords in the hands of young children,
And it’s a hard, and it’s a hard, it’s a hard, it’s a hard,
And it’s a hard rain’s a-gonna fall.

A Hard Rain’s a-gonna Fall — Bob Dylan