How to Lose $2,650,000 in Irvine Real Estate

Today's featured property is the largest loss in Irvine to date at $2,650,000. Will the flipper turn it around, or will he be a knife catcher?

Irvine Home Address … 29 BLACK HAWK Irvine, CA 92603

Resale Home Price …… $3,599,999

This time, you have to face your future

Although it’s just a dusty road

It’s clear that backing down don’t suit you

I’d hate, to break your sacred code

People, along for the ride

High noon, getting closer

I think you’ll find, everybody loves a loser

So you’ll be fine, you won’t be lonely long

Morcheeba — Everybody Loves a Loser

I recently wrote a post titled How to Lose $1,100,000 in Irvine Real Estate. That condo in the North Korea Towers was the largest closed-sale to closed-sale loser I had seen to date. Today's featured property shatters that record.

This property was purchased in 2005 for $5,925,000. It was purchased at auction in 2010 for $3,275,000. The closed-sale to closed-sale loss is $2.650,000.

A $4,485,000 Option ARM!

This is perhaps the worst loan I have seen to date. Washington Mutual underwrote a cash-out refinance for $4,485,000 to the previous owner of this property. WTF!

This property was purchased on 5/9/2005 for $5,925,000. The owner used a $4,147,500 Option ARM first mortgage and a $1,777,500 down payment. Apparently, this owner is a big developer in Las Vegas. He was probably solvent when this loan was made. The prospects for recovery are pretty grim right now.

On 12/15/2006 he refinanced with a $4,485,000 Option ARM. I guess he needed $350,000.

It's loan like these that inflated high end prices beyond all reason, and it is the delinquency on these loans and eventual liquidation that is going to cause the high end to come tumbling down. With delinquency rates on $1,000,000+ loans over 15%, this isn't a one-off. This is one of many where the owners aren't paying. Since most of these jumbo loan are held on the balance sheets of banks, we aren't seeing the distressed properties hit the market yet. But since this one was WAMU, which is backstopped by the FDIC, Chase is liquidating its holdings. More will follow.

Foreclosure Record

Recording Date: 06/15/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 03/11/2010

Document Type: Notice of Default

Nerves of steal

If I had access to that kind of cash, I would not have touched this deal. I don't care how steep the price reduction is, there is almost no market for properties at these price points, and there is no valuation metric I trust. The flipper who bought this put $3,275,000 of his own cash down to buy a property he really has no idea what he can sell for. Maybe he will make the $350,000 he has priced for. Perhaps he will get bids over his asking price. Or perhaps, this property will sit there forever along with the numerous other over $2,000,000 properties waiting for buyers who are few and far between. I wish him luck.

Irvine Home Address … 29 BLACK HAWK Irvine, CA 92603

Resale Home Price … $3,599,999

Home Purchase Price … $5,925,000

Home Purchase Date …. 5/9/2005

Net Gain (Loss) ………. $(2,541,001)

Percent Change ………. -42.9%

Annual Appreciation … -8.0%

Cost of Ownership


$3,599,999 ………. Asking Price

$720,000 ………. 20% Down Conventional

4.60% …………… Mortgage Interest Rate

$2,879,999 ………. 30-Year Mortgage

$711,843 ………. Income Requirement

$14,764 ………. Monthly Mortgage Payment

$3120 ………. Property Tax

$800 ………. Special Taxes and Levies (Mello Roos)

$300 ………. Homeowners Insurance

$500 ………. Homeowners Association Fees


$19,484 ………. Monthly Cash Outlays

-$1947 ………. Tax Savings (% of Interest and Property Tax)

-$3724 ………. Equity Hidden in Payment

$1240 ………. Lost Income to Down Payment (net of taxes)

$450 ………. Maintenance and Replacement Reserves


$15,503 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$36,000 ………. Furnishing and Move In @1%

$36,000 ………. Closing Costs @1%

$28,800 ………… Interest Points @1% of Loan

$720,000 ………. Down Payment


$820,800 ………. Total Cash Costs

$237,600 ………… Emergency Cash Reserves


$1,058,400 ………. Total Savings Needed

Property Details for 29 BLACK HAWK Irvine, CA 92603


Beds: 5

Baths: 6 full 1 part baths

Home size: 7000

($514 / sq ft)

Lot Size: .48 ac

Year Built: 2005

Days on Market: 7

MLS Number: 10-466827

Property Type: Single Family, Residential

Community: Shady Canyon


THIS IS NOT A SHORT SALE, CORPORATE OWNED REO BARGAIN . .(please see cancelled listings for pictures) Reminiscent of the Spanish Revival Estates of California's Montecito District, 29 Black Hawk in Shady Canyon is the perfect marriage between Old World ambiance and World Class amenities found only in the finest custom homes. Located on an expansive private lot bordering Bommer Canyon and the pastoral Irvine Ranch open preserve, this custom residence features 5 bedrooms, 6.5 baths, an office/library, a sun-drenched pool with cabana which includes a shower, fireplace & 1/2 bath. With the finest in custom features and fixtures, artisan applied Venetian Plaster, top-of-the-line appliances, state-of-the-art media and electronics, a finished 3-car garage and a 2,500 bottle wine room , 29 Black Hawk is the idyllic setting to enjoy the California lifestyle.

Still a bear at the high end

Many people seem to think the trouble has passed for the high end and that these properties somehow escaped the ravages of the bubble. Well, so far that has proven true because lenders are not foreclosing, owners are continuing to list at WTF prices, and very little is selling. Lenders are not going to give away these homes. They will have to foreclose and put these properties in the hands of owners who can afford them.

Take a careful look at today's featured property and think about the many that are like it. This property's value was inflated to $6M by stupid lending. The buyer who had $1,777,500 cash available generally would have purchased a home for no more than $2,777,500 as loans over $1M used to be very rare. You can't deduct the interest on a loan over that amount, and there aren't many people with the income to support the payments on loans that large. However, during the housing bubble, massive loans became common, and they were used to inflate property values all over the California coastline.

Nobody is underwriting $4,485,000 loans today, nor is anyone likely to any time soon. The buyer to replace this previous owner will not be so leveraged, and as a result, this house will sell for much less. Think about it, if the high end were a safe haven, wouldn't a cash buyer come along and pay $2,400,000 over the current asking price to get the value back up to $6,000,000? Doesn't the fact that a $6M home is selling for 45% off going to impact the values of other homes in the area. Is the buyer of this property getting this property at a steal?

Loans were the air of the housing bubble. Nobody is providing any air to the jumbo market. We have a huge number of homes that can only be afforded by a very small number of people. The high end is going to be crushed, and the fallout will reverberate through the entire chain of housing values. Picture it like an ice cream cone on a hot day. The top slowly melts downward, and the resulting ooze spreads out over the rest of the housing market.

Income-Price mismatch

The basic problem is a mismatch between the number of people who can afford a property and the number of properties available at any given price point. In Orange County, there are not enough properties being made available at the low end — a phenomenon that has stabilized prices there, and there is an overabundance of properties available at the high end. Even Steve Thomas's made-up numbers show that.

The problem is much deeper than unemployment related market distress. There are simply not enough households that earn the kind of money required to support high end prices. During the bubble, all the home values were raised in the neighborhood, and many people could not afford they houses they lived in. In order for prices to remain high, when these people sell, they must sell it to someone who can afford the property. If that buyer is not available, the price must be lowered to find a buyer that can afford the property.

Banks are not foreclosing on high end properties because they know there is no replacement buyer available. Prices will need to take a big step down just like today's featured property. Lenders are fantasizing that borrowers will go back to work and make enough money to support these prices. It may work in certain areas, but most of jumbo loan land prices are going to fall significantly.

For those who think the high end is stable and the market has recovered, how do you explain this property?

31 thoughts on “How to Lose $2,650,000 in Irvine Real Estate

  1. Gray

    Well, Black Hawk down!
    But is this the real address? Is this where Irvine’s keyboard kommandos reside, maybe?

  2. notjonathon

    This is just off the top of my head, but as you noted it will take a cash buyer to purchase these high-end properties.
    I read recently that there are almost 8 million millionaires in the U.S. I’d guess from normal distributions that 80-90% of these millionaires have less than 2 million dollars in total assets. Furthermore, most of them likely have some substantial percentage of their assets in real property–meaning no liquidity.
    Cocktail napkin math tells me that a retired individual or couple with 1 1/2 million in cash could probably afford a three hundred thousand dollar house.
    A three million dollar house would require a cash buyer with at least ten million dollars in liquid assets, I would think. How many potential buyers are there?
    In may, I picked up a real estate magazine in Santa Barbara. I counted over 160 properties listed for more than 2 million dollars.
    Irvine, Anaheim inland, San Clemente, West LA, Malibu, San Francisco, Palo Alto, Santa Barbara, Carmel, etc. on the coast (well, Palo Alto is near the coast anyway)–how many multimillion dollar homes (or sometimes, shacks) are listed in these “desirable” locations alone?
    In Santa Rosa, where the bubble has imploded, lists 30 pages of properties for sale and 67 pages of foreclosures. Some of the foreclosure lien amounts are astounding, even rivaling Santa Monica.
    I would guess that there are more multimillion dollar listings in California alone than there are decimillionaires in the entire country to buy them.

  3. E

    Are you *sure* it was purchased by a flipper and not the bank?

    The listing says “corporate owned REO”

    Corporate usually means “bank”.

    1. IrvineRenter

      Foreclosure Radar lists this one as sold to a third party on 7/8/2010 which means it did not go back to the beneficiary (bank). My property records source does not say who the new owner is.

        1. chipotle

          That’s not an uncommon strategy. Third parties will say “corporate owned/REO” as a marketing play. Buyers think they are more likely to get a quick deal at a good price if they are dealing with an unemotional seller.

  4. scottinnj

    Technically speaking there was no loss to the FDIC from Wamu liquidating its assets. Specifically Wamu was acquired by JP Morgan Chase in a transaction where JPM paid $1.9Bn. At the same time JPM wrote down Wamu’s mortgage portfolio by $31Bn. The value to JPM was in the significant retail branch deposit network of Wamu and essentially the cost to JPM was the one-time asset write down. There was no loss to the FDIC from the failure of WAMU

    Now clearly JPM is a major beneficiary as Too Big to Fail and is backstopped by the taxpayer and all that. But JPM not the FDIC stepped into Wamu’s shoes.

    1. IrvineRenter

      I have updated the post to reflect the Chase involvement. Thanks for the clarification.

  5. winstongator

    Your analysis on the price-income mismatch is spot-on, but you could extend it further down the property ladder. If you have too many properties > 500k than households that can support those payments, you’ll get significant price pressures there. This is the problem I see in So Fla, and imagine exists in LV and Phoenix, and to a somewhat lesser degree in SoCal.

  6. winstongator

    I would also imagine at that price that properties closer to the beach are in direct competition with this.

  7. tenmagnet

    Besides the $3.275M all cash price the flipper paid.
    There were multiple bidders on this one.
    Nerves of steal and deep pockets loaded with cash is right.

    1. IrvineRenter

      Did you attend that auction? It must have been interesting watching bids at those price points.

      I always get a kick out of how dressed-down the bidders are. Some of those guys look like they either slept in the gutter or just left their construction gig to go spend a couple of million dollars cash.

    1. irvine_home_owner

      Uh… if I were in the market for a house this expensive… I would say something.

      It’s not just the bulls who are silent as this is probably out of the range for the majority of your commenters.

      I don’t think any of us feel the high end is stable anywhere.

      1. IrvineRenter

        You must admit, you have to be a little surprised to see Shady Canyon have a property go for 45% off the peak.

        1. irvine_home_owner

          Actually not really.

          We’ve seen tons of Shady properties approaching these discounts for the last few years.

          What surprised me is someone dropping that kind of cash at an auction on a single property… I would think they would be able to minimize this risk on smaller ones.

          While I like Irvine… I don’t think Shady is worth the premium it was demanding. I’ve said it before… the ultra-high end and the low end will see those discounts… it’s the mid to high that doesn’t seem to be moving very much in Irvine.

        2. chipotle

          Quite the contrary. Under my former identity on IHB, I predicted that Shady would be among the biggest price declines in the high end. It’s fabricated wealth (not all residents of course, but enough) living in a fabricated luxury community that sold at the peak of the market. And it’s infested with flippers. There was no way it wasn’t going to end badly. Not a surprise at all.

          Now, my wife and I are trying to figure out that the prices are compelling enough to ignore the crazies and move there. Sadly, I think the answer is still no. OC pathology, and all that.

  8. tonye

    Being that most of you are anglos and have little experience in the high mountains of Aragon and Catalunya I can understand why you miss the value of this property.

    This is not a house, it’s a masia. Its’ a farmer’s house see? An ongoing business.

    The garage and backroom will be great to cure the jamon serranos, the fuets and the chorizos. The pool in the backyard will be great for the hogs and the 2000 sheep will graze happily in the valley just below.

    You can keep the Deux Chevaux and the Renault van on the drive way.

    And I think you could grow enough grapes to have a nice supply of vino year ’round.

    It’s a business… see? 😉

    1. lowrydr310

      Just make sure none of those sheep wander into your neighbor’s yard, which is only 15 feet away.

      1. tonye

        Ay paisano…. therein lies the rub.

        The neighbors better be in the cheese making business. 😛

        Like my wife once commented about the latest housing styles:

        “If I wanted to live in Tuscani or the Pyrenees I would move there… and besides those homes are one on top of the other”

  9. BD

    The compression in pricing that the fall of the ‘high-end’ is unknowable. That’s why I believe that prices in general will grind lower… There may be some upticks and ‘dead cat bounces’ but, this will take several more years to play out. Even then we are set up for disappointment. Rates will rise and for all of those that don’t believe people that make $400K a year are sensitve to rates and prices you are kidding yourself.

    Fletcher Jones only runs commercials touting the monthly payment. Rates make a huge difference. We could be entering a 10 or 20 year period of RE deflation or stagnation. Wages can’t possible keep up… we are still a mulitpe off what is the long term trend and we are likely to break that trend before this is done…

    ..just .02


  10. BD

    Why do you think a 30 year bond is selling sooooooooo cheaply? The smart money expects deflation = prices fall. Or maybe there will be run away inflation due to all the deficits and printing of money = prices fall. Or maybe we will have a decade or two of stagnation = prices stay the same or rise or fall a little.

    All scenarios suck for RE investors. I’ll still take the option and rent – at least untill I can buy cheaper than I can rent.

    my .02


  11. BD

    last point…if you had $3M cash – not borrowed money what do you think is the best investment – a SoCal house or AAPL?



  12. Scott

    What’s amazing is the property tax assessed value for the land is (was) nearly $5 million, which works out to nearly $10 million per acre — that is crazy, even for Shady Canyon.

    The assessed value for the improvements is (was) only $1.3 million, a bit under $200 per sqft, perhaps on the low side for that type of construction, but not way off base.

    People often forget that the value of the improvements have changed only modestly in the last 10 years (construction costs have gone up some), while the “value” of the dirt jumped enormously.

  13. BBB

    I have been looking consistently at homes for homes the last 18 months: Here are observations

    – Prices are dropping (duh)
    – Nothing is Moving (many homes that I saw in the last two months would have been swooped up in a week if they were listed last year at their current price)
    – Buyers are smarter than they have ever been, many do not fall for realtor “urgency” tactics
    – If interest rates go down any further, those with a horizon for owning the home 6+ years should look to move in and buy as long as they keep DTI less than 33 HER / 38 TER for PITI
    – Homes with high tax rates and Mello Roos are getting hurt more than others

    For those that drank the kool-aid and bought homes in Woodbury between Jan 2010 and today, I feel for you since you many of you will spend 100k getting the house landscaped, upgraded to your taste, and outfitted (blinds, etc.), you will get Mello Roos’d to death and you will not see a positive return on your investment for 8-10 years… is not to late to cancel

    1. Scott

      In my opinion current buyers are underestimating the interest rate risk of buying now.

      If, in your 6-year scenario, interest rates go back up to something like 6% (which is quite low by historical standards), buying power will be reduced by 25-30% compared with today.

      To offset the interest rate normalization, incomes will have to grow by a similar percentage merely to keep house prices flat. This will have the effect of restraining any capital gains.

      The good deal now is the loan, not the real estate. Unfortunately, your asset is the real estate, and not the loan (except for FHA, but that has its own problems).

  14. JB

    BD is absolutely righton. If you want to see where the econmy is headed watch the 10yr. and 30yr. bond. Those guys will tell you. Even with thestock market going up the bond market is predicting deflation. Watch the coming crash this of the S&P.

Comments are closed.