Empires rise and fall. The Great Housing Bubble witnessed the creation of many real estate financial empires. These are now starting to crumble.
Today’s featured property is one of 15 owned by the same man. Will his empire survive?
Asking Price: $1,219,900
Address: 30 Foxboro, Irvine, CA 92614
{book2}
Everybody Wants to Rule the World — Tears for Fears
All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
Empires are created and destroyed every day. The Egyptians created an entire culture around the idea that humans could create something permanent and everlasting. Of course, even the Pharaohs turned to sand.
This fact doesn’t stop many of us from trying. Building political and financial empires is a practice as old as humanity itself. The drives of the ego for power and pleasure compel many to forego more meaningful and spiritually fulfilling pursuits. People who pursue these goals think they are creating something significant for their families, yet these people often die isolated and lonely. The only evidence of their existence is a group of spoiled heirs waiting to pick over the bones and to consume the remains of the emperor’s financial carcass.
The Seven Deadly Sins and the Four Last Things
Building a financial empire is not an inherently evil thing. Much of the progress in our capitalist system comes through the invisible hand of capitalism guided by the greed of individuals. Problems come with when the acts of individuals building their financial empire have negative consequences for other individuals in society.
The housing bubble is a classic example of people building financial empires at the expense of other individuals and families. As people buy up multiple properties using loose financing and unstable loan terms, prices are driven up and ordinary citizens are “priced out” of the real estate market. This would not have occurred had lenders not enabled would-be Donald Trumps to acquire multiple properties using liar loans, Option ARMs, and other dubious mortgage techniques.
There is no overriding societal benefit obtained by allowing people to create these unstable real estate empires. In fact, there is a large societal cost associated with bailing out lenders and speculators who created this mess. Also the individuals and families caught up in the mania are going to pay a tremendous emotional and financial price for their mistakes as the bubble deflates. There are few identifiable societal benefits and many identifiable societal costs.
The conventional wisdom among property owners in the Irvine market today is they must wait out this “temporary” downturn in the market and the economy. It is a comforting delusion. It is natural to maintain such denial particularly when you have no other viable options.
What else can these people do? They’re underwater so they can’t sell and they can’t refinance, they are facing a loss of income, and they have reached the limit of their available credit lines. Realistically they have only two options: hope and hold on, or give up and lose their financial empires. Given these two realistic alternatives it is not surprising that most are choosing to hope and hold on. Unfortunately, since this was a financial mania, both roads lead to the same destination: financial disaster. Everyone capitulates to market forces in the end.
Theres a room where the light wont find you
Holding hands while the walls come tumbling down
When they do Ill be right behind you
Today we are going to look at more than just a single featured
property. Today we are going to examine one man’s entire financial
empire. There is only one property this man owns that is for sale
today, but it is one of 15 highly-leveraged properties this man owns.
Please do not refer to this owner by name in the comments. It is not difficult to figure out who owns these properties, but I am not out to humiliate anyone. He is one of many who did the same thing. We can learn from the behavior without making it personal.
{book1}
Asking Price: $1,219,900
Income Requirement: $304,975
Downpayment Needed: $243,980
Monthly Equity Burn: $10,165
Purchase Price: $1,000,000
Purchase Date: 6/2/2004
Address: 30 Foxboro, Irvine, CA 92614
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,458 |
| $/Sq. Ft.: | $496 |
| Lot Size: | 5,800
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Other |
| Year Built: | 1984 |
| Stories: | Split-Level |
| Area: | Woodbridge |
| County: | Orange |
| MLS#: | S560157 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 37 days |
MMACULATE HOME AND WHAT AN OPPORTUNITY TO BUY IN WOODBRIDGE’S MOSTDESIRABLE NEIGHBOURHOOD LANDING 2 BY J M PETERS, HOME WAS REFURBISHED
WITH APPROX 1500SQ FT OF TRAVERTINE ON GROUND FLOOR, REMODELLED ISLAND
KITCHEN WITH GRANITE COUNTERS, NEW KITCHEN CABINETS, NEWER APPLIANCES
AND BUILT-IN FRIDGE. DOWNSTAIRS BEDROOM & BATH IS ALSO SET UP FOR
OFFICE. PLANTATION SHUTTERS, DESIGNER COLOURS, TANKLESS WATER HEATER,
ELECTRIC AWNING OVER KITCHEN WINDOW, EXTRA LARGE YARD FOR
NEIGHBOURHOOD. STEPS TO LAKE, TENNIS COURTS AND SPRINGBROOK ELEMENTARY
The Financial Empire
| Address | Sales Date | Sales Price | 1st Mortgage | 2nd Mortgage | Total Debt |
| 30 FOXBORO IRVINE, CA 92614-7523 |
6/2/2004 | $1,000,000 | $750,000 | $200,000 | $950,000 |
| 19232 BEACH BLVD HUNTINGTON BEACH, CA 92648 |
11/24/2004 | $3,700,000 | $2,405,000 | $370,000 | $2,775,000 |
| 2 PINTAIL IRVINE, CA 92604-3634 |
1/31/2002 | $694,000 | $750,000 | $250,000 | $1,000,000 |
| 49 NIGHTHAWK IRVINE, CA 92604-3609 |
8/12/2004 | $750,000 | $1,000,000 | $1,000,000 | |
| 5 MOUNTAIN ASH IRVINE, CA 92604-4612 |
7/14/2005 | $945,000 | $708,750 | $270,000 | $978,750 |
| 3 BIRCHWOOD IRVINE, CA 92618-3945 |
3/24/1999 | $293,000 | $727,500 | $727,500 | |
| 22931 BRIARCROFT LAKE FOREST, CA 92630-5428 |
4/26/2006 | $795,000 | $461,500 | $461,500 | |
| 169 W YALE LOOP # 1 IRVINE, CA 92604-3620 |
2/16/2006 | $610,000 | $450,000 | $122,000 | $572,000 |
| 125 W YALE LOOP # 11 IRVINE, CA 92604-3620 |
2/6/2003 | $492,000 | $572,000 | $572,000 | |
| 111 W YALE LOOP # 17 IRVINE, CA 92604-3620 |
6/11/2002 | $323,500 | $470,250 | $470,250 | |
| 28 CRESTHAVEN # 26 IRVINE, CA 92604-3315 |
6/10/2005 | $535,000 | $438,400 | $54,800 | $493,200 |
| 12 E YALE LOOP # 30 IRVINE, CA 92604-3333 |
1/24/2006 | $690,000 | $552,000 | $552,000 | |
| 24 THUNDER TRL # 21 IRVINE, CA 92614-7419 |
10/22/2003 | $436,500 | $572,000 | $572,000 | |
| 73 WEEPINGWOOD # 40 IRVINE, CA 92614-5473 |
7/25/2005 | $525,000 | $420,000 | $52,500 | $472,500 |
| 435 E YALE LOOP # 3 IRVINE, CA 92614-7976 |
7/26/2002 | $355,000 | $572,000 | $71,500 | $643,500 |
| $12,144,000 | $10,849,400 | $1,390,800 | $12,240,200 |
There are a couple of key numbers at the bottom of the table that are worth noting: 1. This gentleman purchased $12,144,000 in real estate at inflated bubble prices, mostly in 2004, 2005 and 2006. 2. He owes $12,240,200 on these properties due to a high degree of initial leverage and multiple refinances. It is hard to evaluate what these properties are worth today as some are still above water and some are not. Also, the actual loan balances are higher than what is reported here. I would estimate he is about $2,000,000 underwater, and he will be worth a negative $5,000,000 before prices stabilize.
If you look at the properties that he has refinanced and the mortgage debt is greater than the original purchase price, excluding his downpayments, he has extracted $1,675,000 in mortgage equity withdrawal. Some of this was likely used to acquire other property. There is no way to know. Given the amount, you have to suspect some of it was used to fuel consumer spending. After all, he is rich. He should be able to spend like a rich guy, right?
Of course none of this is going to matter to this guy because almost all of his first mortgages are Option ARMs with 1% teaser rates. His bets are pure speculation with a minimum of ongoing debt service. All these Option ARMs are going to explode over the next couple of years. He will be underwater, so he will be unable to refinance. The rent on these properties only covers about half of his ownership costs, so he will not be able to survive as a floplord. His equity curve is the worst possible combination of market forces and increasing costs. In short, he is totally screwed.
So what do you do if you are in this guy’s shoes? Based on what he does for a living, he certainly is not going to make enough to service $12,240,200 in debt. Perhaps if he can sell off some of his properties that he believes are not underwater, he can hope to delay the inevitable. That explains today’s WTF listing. A floorplan identical to this one just sold at 4 Rainstar for $920,000. Perhaps this neighborhood commands a $300,000 premium for the exact same product. Somehow I doubt it.
If this property sells for its asking price, and if a 3% commission is paid to the buyer’s broker, the total gain on the sale will be $183,303. He will eliminate $950,000 in debt which will at least start chipping away at the $12,240,200 mountain. Of course, there is little or no chance of this property selling for this price, but the listing will maintain denial a little bit longer.
Lets keep an eye out for the other 14 properties. We will see them on the market soon enough.
This speculator is not alone. Many people bet that prices would go up forever and that they could serial refinance from one Option ARM to another and service their debt endlessly at 1% interest rates. The folly is easy to indentify in hindsight. For some it was easy to identify in foresight.
This system was a Ponzi Scheme. Financial prosperity cannot come at the cost of ever-increasing debt. Contrary to popular belief, creating and sustaining financial Ponzi Schemes is not sophisticated financial management. Many individuals, corporations and government regulators came to believe complicated financial structures are something other than unsustainable Ponzi Schemes. They were sadly mistaken.
Prosperity is obtained through retiring debt and increasing cashflow. Buy cashflow and retire debt: it is a simple formula. Using complex debt structures and relying on speculative gains may result in temporary prosperity, but it is all an illusion. It is an illusion that is crashing down around us all right now. This is not an abberation or some freak, random occurrence. This crash and the resulting termoil were the inevitable results of bahaviors and practices that built our house of cards.
I hope we can all learn the lessons of the Great Housing Bubble and not repeat them in our own lives. If the writings on this blog prevents even one person from repeating the mistakes we have seen here, it will all have been worthwhile.
{book7}
Welcome to your life
Theres no turning back
Even while we sleep
We will find you
Acting on your best behaviour
Turn your back on mother nature
Everybody wants to rule the world
Its my own design
Its my own remorse
Help me to decide
Help me make the most
Of freedom and of pleasure
Nothing ever lasts forever
Everybody wants to rule the world
Theres a room where the light wont find you
Holding hands while the walls come tumbling down
When they do Ill be right behind you
So glad weve almost made it
So sad they had to fade it
Everybody wants to rule the world
I cant stand this indecision
Married with a lack of vision
Everybody wants to rule the world
Say that youll never never never never need it
One headline why believe it ?
Everybody wants to rule the world
All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
Everybody Wants to Rule the World — Tears for Fears
New Listing (24 hours)
