Monthly Archives: August 2010

Existing-Home Sales Sink to Lowest Level Ever Recorded

On Monday, I reported that California home sales were down 21.4%. Now the national figures show a similar, alarming drop.

Irvine Home Address … 4511 CHARLEVILLE Cir Irvine, CA 92604

Resale Home Price …… $850,000

When I was younger, so much younger than today,

I never needed anybody's help in anyway.

But now these days are gone, I'm not so self assured,

Now I find I've changed my mind, I've opened up the doors.

Help me if you can, I'm feeling down

And I do appreciate you being 'round.

Help me get my feet back on the ground,

Won't you please, please help me?

The Beatles — Help!

Help! Sales are hitting record lows. Months of supply is hitting record highs. Asking prices are starting to come down. Housing market prices are about to double dip.

We have been waiting almost 18 months for the government to allow housing prices to fall to their natural market-clearing levels. First, the Federal Reserve lowered interest rates and directly purchased mortgage-backed securities, then the federal government began providing tax incentives and credits to further prop up prices, even California got into the tax credit act. And for what? Prices are still going to fall.

July Existing-Home Sales Fall as Expected but Prices Rise

National Association of realtors — Washington, August 24, 2010

Existing-home sales were sharply lower in July following expiration of the home buyer tax credit but home prices continued to gain, according to the National Association of realtors®.

Notice how carefully the NAr spins this disastrous headline. First, they fail to mention that the sales fell to a record low. Second, they suggest that a decline of this magnitude was expected. And third, they add that prices rose even though the rise was tiny and more likely attributable to a changing mix rather than an increase in value. So they downplayed the devastating truth and added some feel-good nonsense to soften the blow. It is laughably obvious, and it should be embarrassing, but this is the NAr.

Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.

How can this be interpreted as any way other than a complete catastrophe? We have more people and more homes than we did in 1995 or 1999, yet we managed to sell far fewer homes. The viability of the housing market is in question. It certainly appears that prices are going to have to come down for transaction volumes to increase. We already have record low interest rates. Doesn't record low sales and record low interest rates suggest that prices are too high?

Lawrence Yun, NAr chief economist, said a soft sales pace likely will continue for a few additional months. “Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September,” he said. “However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.

Consumers rationally jumped into the market? People were paying $30,000 to $40,000 more for properties to obtain an $8,000 tax credit. Is that rational, or is Yun trying to justify the taxpayer ripoff he supported?

The pace of recovery could pick up quickly? You better buy now, right? Lawrence Yun has mastered the art of bullshit over the last few years. He obviously has no conscience. At least he bothered to add his weasel statement about the economy consistently adding jobs. Since he knows that isn't going to happen, he can always argue that his prediction would have come true if the condition had been met.

“Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years,” Yun said.

More spin. First, do you think the activity in the first half of the year truly healthy? The housing market was smoking government tax-credit crack, and buyers purchased in a stupor. Now that the stimulants are gone, the market is crashing to sleep it off. Second, the annual sales rates over the last 20 or 30 years should be lower than today; we had fewer homes! If you adjust the current sales rates for population or housing stock, the rate would be at an all-time low. This is a blatant misuse of statistics.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 4.56 percent in July from 4.74 percent in June; the rate was 5.22 percent in July 2009. Last week, Freddie Mac reported the 30-year fixed was down to 4.42 percent.

Mortgage interest rates are at the lowest level every recorded too.

The national median existing-home price2 for all housing types was $182,600 in July, up 0.7 percent from a year ago. Distressed home sales are unchanged from June, accounting for 32 percent of transactions in July; they were 31 percent in July 2009.3

“Thanks to the home buyer tax credit, home values have been stable for the past 18 months despite heavy job losses,” Yun said. “Over the short term, high supply in relation to demand clearly favors buyers. However, given that home values are back in line relative to income, and from very low new-home construction, there is not likely to be any measurable change in home prices going forward.”

Volume always precedes price. There almost certainly will be a measurable downward change in home prices going forward. I will agree with Yun that prices will not be going up any time soon. Notice that when the signs are unambiguously bearish, the furthest he will go is to say the prices will remain flat.

Months of Supply hits highest level ever recorded

Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply4 at the current sales pace, up from an 8.9-month supply in June. Raw unsold inventory is still 12.9 percent below the record of 4.58 million in July 2008.

While we are looking at housing market records, the months of supply of homes on the market is at an all-time high. We have high unemployment, record low sales, increasing inventory, and record high of months of supply. How do prices hold up with pressures like that?

NAr President Vicki Cox Golder, owner of Vicki L. Cox & Associates in Tucson, Ariz., said there are great opportunities now for buyers who weren’t able to take advantage of the tax credit. “Mortgage interest rates are at record lows, home prices have firmed and there is good selection of property in most areas, so buyers with good jobs and favorable credit ratings find themselves in a fortunate position,” she said.

She had to slip in the nonsense about prices firming to convince people that it is okay to buy when its likely that prices will be heading lower. Although, to be fair to her, in Arizona where she is, prices have already been crushed, so prices don't have near as much bubble air in them as they do in Orange County.

A parallel NAr practitioner survey shows first-time buyers purchased 38 percent of homes in July, down from 43 percent in June. Investors accounted for 19 percent of sales in July, up from 13 percent in June; the balance were to repeat buyers. All-cash sales rose to 30 percent in July from 24 percent in June.

Single-family home sales dropped 27.1 percent to a seasonally adjusted annual rate of 3.37 million in July from a pace of 4.62 million in June, and are 25.6 percent below the 4.53 million level in July 2009; they were the lowest since May 1995 when the sales rate was 3.34 million. The median existing single-family home price was $183,400 in July, which is 0.9 percent above a year ago.

Single-family median existing-home prices were higher in 11 out of 19 metropolitan statistical areas reported in July in comparison with July 2009 (the price in one of 20 tracked markets was not available). However, existing single-family home sales fell in all 20 areas from a year ago.

This is a broad-based drop. All real estate may be local, but all local markets are seeing the same dramatic decline in sales.

Existing condominium and co-op sales fell 28.1 percent to a seasonally adjusted annual rate of 460,000 in July from 640,000 in June, and are 24.0 percent below the 605,000-unit level in July 2009. The median existing condo price was $176,800 in July, down 1.7 percent from a year ago.

Condo prices have already rolled over.

… Existing-home sales in the West fell 25.0 percent to an annual level of 870,000 in July and are 23.0 percent below a year ago. The median price in the West was $224,800, up 3.3 percent from July 2009.

Sales volumes are very weak.

WTF are they thinking?

Do any of you think house prices have appreciated 11% per year each and every year since 2002? These owners do.

Perhaps in 2003 and 2004 that really did happen. The housing bubble frenzy was ridiculous. However, the rate of appreciation dropped in 2005, and the market peaked in 2006. In 2007 and 2008 prices dropped. They stabilized in 2009 — thanks to our expired stimulants — and now they are about to roll over again… But don't provide these facts to the owners of today's featured property. They think prices are still going to the moon. Perhaps they wanted to give some room to negotiate down to $550,000 where this property might have a chance to sell.

This property was purchased on 3/27/2002 for $337,500. The owners used a $269,900 first mortgage, a $50,000 second mortgage, and a $17,600 down payment. From that seed, they believe they should make $461,500.

They refinanced on 6/12/2003 for $309,000, and they have a credit line that has increased since then, but an increasing credit line is not proof positive that they took out the money. If they did, the final HELOC was for $275,600.

Obviously, at this asking price, it would be an equity sale…

Irvine Home Address … 4511 CHARLEVILLE Cir Irvine, CA 92604

Resale Home Price … $850,000

Home Purchase Price … $337,500

Home Purchase Date …. 3/27/2002

Net Gain (Loss) ………. $461,500

Percent Change ………. 136.7%

Annual Appreciation … 11.0%

Cost of Ownership

————————————————-

$850,000 ………. Asking Price

$170,000 ………. 20% Down Conventional

4.51% …………… Mortgage Interest Rate

$680,000 ………. 30-Year Mortgage

$166,315 ………. Income Requirement

$3,450 ………. Monthly Mortgage Payment

$737 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$71 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$4,257 ………. Monthly Cash Outlays

-$823 ………. Tax Savings (% of Interest and Property Tax)

-$894 ………. Equity Hidden in Payment

$284 ………. Lost Income to Down Payment (net of taxes)

$106 ………. Maintenance and Replacement Reserves

============================================

$2,931 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,500 ………. Furnishing and Move In @1%

$8,500 ………. Closing Costs @1%

$6,800 ………… Interest Points @1% of Loan

$170,000 ………. Down Payment

============================================

$193,800 ………. Total Cash Costs

$44,900 ………… Emergency Cash Reserves

============================================

$238,700 ………. Total Savings Needed

Property Details for 4511 CHARLEVILLE Cir Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 3 full 1 part baths

Home size: 1,369 sq ft

($621 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1970

Days on Market: 27

Listing Updated: 40388

MLS Number: P745790

Property Type: Single Family, Residential

Community: West Irvine

Tract: Othr

——————————————————————————

Great Area, Good Curb Appeal, Sharp Home, Kitchen Has New Stove, Dishwasher Eating Area,living Room W/fireplace, Family Room, 2 Car Garage With Roll Up Garage Door & Garage Access. home is also located at the end of a cul-de-sac street. All award winning schools are within walking distance.

The pictures and the description read to me like the realtor knows this listing is hopeless and he doesn't want to waste any effort on it. I wouldn't want to either.

Professional Investment Funds Take Over the Foreclosure Flipping Market

Hedge funds are forming to buy auction properties and flip them. Individuals investors are being crowded out by an increasingly professional group.

Irvine Home Address … 52 CAPE COD Irvine, CA 92620

Resale Home Price …… $949,500

That ain't workin' that's the way you do it

Money for nothin' and your chicks for free

Now that ain't workin' that's the way you do it

Lemme tell ya them guys ain't dumb

Dire Straits — Money For Nothing

When the housing crash first began, there were few funds organized to take advantage of it. As the need for more liquidity at the auction site grew, so did the discounts which enticed more bidders. At first, these were mostly wealthy individuals, but now, the hedge funds have moved in to the auction market.

Professional investors move into flipping foreclosed homes

Squeezing out amateurs, private equity funds and wealthy individuals are buying distressed properties at public auctions, refurbishing them and selling them for quick profits.

By Walter Hamilton and Alejandro Lazo

Los Angeles Times

August 20, 2010

Hoping there are big profits to be made in the aftermath of California's housing collapse, professional investors are flocking to the business of buying foreclosed homes at distressed prices.

The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.

Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.

There are huge differences between the amateur flipper of the bubble and the professional flipper of the bust. Amateurs used leverage to buy resale properties. Professionals use cash to buy auction properties. Amateurs made money because the frenzy drove prices higher. Professionals make money because they buy at a discount and resell at whatever price the market will bear. Amateurs can only make money when the market rallies. Professionals make money in any market where they can reasonably forecast prices 90 days out.

"In crisis there's opportunity," said Rick Hudson, president of investment firm Prosperity Group Real Estate in Irvine. "Right now there's huge opportunity with flipping houses."

Closely watched gauges of professional buying have surged over the last two years.

The number of homes sold at foreclosure auctions statewide increased to 4,336 in April, from 884 in January 2009, according to research firm ForeclosureRadar. It eased back to 3,483 in July as banks offered fewer properties for sale. The auctions are dominated by professional investors who shop with cash (although not usually with actual greenbacks, for practical reasons).

Another measure, the percentage of all homes sold to absentee buyers, paints a similar picture. In the hard-hit Inland Empire, for instance, 30% of all homes sold in April went to absentee buyers — up from 19% at the end of 2008 and the highest level in at least seven years, according to San Diego research firm MDA DataQuick. It was at 28.2% in July.

The binge of professional buying has helped spark a nascent housing recovery in Southern California because investors have cut significantly into the glut of foreclosed properties after the subprime mortgage meltdown.

Professional flippers have not stabilized the market. If anything, the continued activity of flippers adds more supply to the market and keeps appreciation in check. Auction flippers are merely a conduit between the two markets.

The main reason funds are forming to buy these properties is because there is a huge need for liquidity at the auction site. The banks have far too many delinquent borrowers, and there is not enough cash at the auction site to absorb the inventory of these foreclosures.

Banks gauge the liquidity at the site through dropped bids. Not every dropped bid gets purchased by an investor. It is quite common for a lender to drop their bid 20% below resale value and no third party steps forward to purchase the discounted property. When banks see their dropped bids are not being purchased, they don't bring more properties to auction because it will become another REO.

The reason you are seeing articles like this one is because the banks want more liquidity at the auction site. By telling the investment world about this opportunity through articles like this one, lenders hope more funds will form to absorb their massive shadow inventory.

Home sales in the six-county region rose 7.2% in June from May and 2.6% from a year earlier, according to MDA DataQuick. In July, overall sales tumbled primarily because of the expiration of federal tax credits, falling 20.6% from the month before in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. But the region's median home price of $295,000 was off only 1.7% from June.

The fragile rebound in the broader market contrasts with the behind-the-scenes scramble at foreclosure auctions.

"There's a tremendous amount of capital that is desperate to just buy anything right now," said Gil Priel, principal of a real estate investment firm in Woodland Hills.

That is nonsense. This guy simply doesn't want other competitors at his auction site.

In some cases, well-financed newcomers are elbowing out smaller investors at auction sales.

"The people who want to go and buy a house to flip, and do one or two, are already exiting the market," said Jan Brzeski, who manages a residential investment fund at Standard Capital in Los Angeles.

That much is true: small investors are being crowded out.

I have watched the big fish at the Orange County auction site bid up small investors to prevent them from getting a good deal. The big fish didn't want these properties, but he reads the poker faces of the small investors and knows he can bid them higher. After one such incident, I heard him quip, "I would have taken the property." True enough, but he didn't want the property, he merely wanted the small investor not to make any money so he wouldn't come back and become a competitor.

The swarm of new investors, however, is making a treacherous and labor-intensive business even tougher.

Investors must do their homework on dozens of homes for every one they buy. Legal and other impediments usually prevent them from going into homes prior to buying them, leaving no way to gauge repair costs. And despite being foreclosed on, the original owners often still live in the houses. That forces buyers to pay them to leave, a dynamic known as cash-for-keys.

The influx of new players is pushing up auction prices and squeezing profits. The average discount at auctions — the difference between a home's sale price and its actual value — is 21.6%, down from 28% in January 2009, according to ForeclosureRadar.

Shall we shed a tear for the auction investor who only makes a 21.6% profit?

Last year, Chase Merritt, a Newport Beach private equity fund management firm, notched strong returns from auction sales, said Chad Horning, its chief executive. Chase Merritt bought a property in Costa Mesa in June 2009 for $315,500 and sold it 21/2 months later for $470,000. It bought a Mission Viejo home for $305,371 and sold it within two months for $375,000.

Chase Merritt launched its first foreclosure fund in May 2009 and has started two more funds since then. But "it's literally gone from a business that's very attractive, even lucrative, 12 to 18 months ago to something that almost doesn't make sense," Horning said.

"It's just like the housing bubble," he said. "It's almost like we're in a bubble at the courthouse steps."

Spoken like a man who doesn't want any more competitors…. Ask any auction buyer, and they will tell you that the margins are poor now compared to some past golden era. The truth is that margins are still pretty fat, and they want to keep them that way.

The scramble was on display recently at an auction at the Norwalk courthouse.

A semicircle of people crowded around auctioneer Elwood Brown. Most were clad in cargo shorts and flip-flops. A few sat in lawn chairs. But their laptops and cellphones, as well as the thousands of dollars' worth of cashier's checks they clutched, marked them as professional investors girding for battle.

Brown took a swig from his oversized water bottle and announced that bidding for a four-bedroom duplex in Hawthorne would start at $179,598.60.

The price shot up within seconds as two men and a woman raised one another's bids in $1,000 increments.

"It's at 229, Daryl," a man in a polo shirt and sunglasses whispered intently into his cellphone. "About to close. Do you want it?"

He increased his offer, but a rival bidder claimed the home a few seconds later for $237,000.

I have watched these guys on the phone at the auction site. I think they are crazy. Don't they know the most they are willing to pay in advance? Why would you be exercising discretion on the bid amount at the auction site? In my opinion, it is a recipe to overpay on emotion.

Competition at the auctions is brutal, said Bruce Norris of Norris Group, a real estate investment firm in Riverside.

Norris unwittingly bought a house that was the site of a gruesome double murder. No one else bid — a rare occurrence that showed others knew the history — leaving Norris with less cash to bid for other houses.

"It's a very lonely place out there," Norris said.

That's only one of many risks in the foreclosure business. People who've lost their homes through foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets.

"We've literally had people take $20,000 of cabinetry out and feel perfectly justified doing it," Norris said.

Aaron Norris stopped my on August 11, and relayed the following comment: "We’ve had to kick out the same “tenant” from two houses that we’ve purchased. Some will hop from house to house knowing they can draw up fake lease agreements and go for cash for keys."

They have seen everything.

The daily auction ritual begins each morning when banks signal which homes they are likely to dispose of that day. That sets off an early-hours scramble as would-be buyers speed through suburban neighborhoods to investigate the homes.

I have been asked on many occasions why banks don't announce their dropped bids in advance. It seems obvious that they would get more bids and a better recovery if they announced a dropped bid well in advance. I wish I had a good answer for that question. My guess is bureaucratic incompetence, but I honestly don't have a good answer. I do know that it costs them money, and it makes the job of finding deals much more difficult.

On a recent day, Norris steered his sport utility vehicle into the driveway of a 3,300-square-foot McMansion on a corner lot in Moreno Valley. The front lawn was brown and the backyard was littered with garbage. But the windows were intact and there was no visible damage — far better than many foreclosures.

Aiming for an all-important look inside, Norris rang the doorbell and delivered the bad news to the teenage boy who answered the door that the home was scheduled to be sold that day.

"Do you mind if I poke around a little bit to see what kind of condition it's in?" Norris asked, angling his body to get a glimpse of the living room.

Then another car sped up and a rival buyer hurried up the driveway. She studied the house for a few seconds and craned her neck over the wooden fence protecting the backyard.

"This is a dream compared to a lot of them," she said in a satisfied tone as she rushed back to her car.

In the end, no one bought the home. The sale was delayed after the owner filed for bankruptcy protection.

Norris was philosophical, knowing that there were plenty more foreclosures.

"If you miss one," he said, "oh well, tomorrow's another pile."

walter.hamilton@latimes.com alejandro.lazo@latimes.com

Yes, tomorrow's another pile. At our current rate of absorption, it will take another 18 months just to deal with the visible inventory and another 60 months to deal with the shadow inventory. The flipping funds will be busy for a while.

Private Placement Hedge Funds

The funds described in the article above are private placements, also known as hedge funds. These funds provide a mechanism for investors to pool their money to invest in opportunities that may be too large or too risky to purchase on their own. This makes them ideal for trustee sale flipping.

Smaller investors may have $25,000 to $100,000 available to invest, but with houses costing $200,000 or more, auction properties are out of their reach. However, if ten or more investors band together, they have sufficient buying power to be successful at auction. A wealthy individual takes significant risk investing in auction properties on their own. It is difficult to diversify into a large number of properties due to the high capital requirement. Pooling smaller investments into a large fund creates more investment opportunities and diversifies risks into a broader collection of properties.

Private Placements are typically open to what are termed "sophisticated" or "accredited" investors, and usually have some minimum threshold for investment. These aren't like mutual funds that take small contributions and are available to anyone.

Accredited investors are usually one of the following:

Either individually or with a spouse, a net worth (i.e., total assets in excess of total liabilities) currently exceeds $1,000,000;

A natural person who has an individual income in excess of $200,000, or $300,000 jointly with a spouse, in the last two years and reasonably expect an income in excess of $200,000, if an individual, or $300,000 if jointly with a spouse, in this year.

There are trusts and institutions that can also qualify as accredited investors.

Sophisticated investors are defined as:

not an accredited investor possessing such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of, and protecting personal interest in connection with investing in the Interests. The total investment in the Interest does not exceed 20% of the Investor’s net worth at the time of purchase of the Units (excluding personal residence(s), furnishings, and automobiles).

Private placements qualify under an exemption from SEC regulations, and as such, they must maintain fewer than 35 sophisticated investors to maintain their exemption. There is no limit to the number of accredited investors.

Private placements are limited to these special investment classes because they are risky. The SEC doesn't want to see grandma put her life's savings into a risky investment and lose it, so these regulations are designed to bar those who are not financially savvy from participating in them.

Expect to see more of these funds popping up over the next few years as the foreclosure crisis grinds on. There is a huge need for liquidity at the auctions, and hedge funds are just now starting to deliver the capital to where it is needed.

Renovation gone wrong

Today's featured property was the wrong project at the wrong time. The property was purchased near the peak on 3/21/2006 for $699,000. The owner used a $559,200 first mortgage, a $139,800 stand alone second, and a $0 down payment. No risk on his part.

The owner then formed an LLC and deeded the property to it. On 12/28/2006, he found a private party to loan him $1,000,000 to cover the original loan and renovation costs. Presumably the property renovation was complete at that time, but the bird's eye view shows the construction in progress, and based on the auction price, this renovation may have been only partially complete.

Foreclosure Record

Recording Date: 01/19/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/14/2009

Document Type: Notice of Default

According to ForeclosureRadar, this property sold for $400,727 at auction. If that is accurate, and if the property did not require major work to complete, the flipper is going to make a fortune. Since this auction was back in February, I suspect there was significant renovation work still to be completed.

The current asking price of $949,500 suggests this property is overbuilt for the neighborhood, but at $256/SF, it will likely find a buyer.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 52 CAPE COD Irvine, CA 92620

Resale Home Price … $949,500

Home Purchase Price … $491,727

Home Purchase Date …. 2/9/2010

Net Gain (Loss) ………. $400,803

Percent Change ………. 81.5%

Annual Appreciation … 118.3%

Cost of Ownership

————————————————-

$949,500 ………. Asking Price

$189,900 ………. 20% Down Conventional

4.51% …………… Mortgage Interest Rate

$759,600 ………. 30-Year Mortgage

$185,784 ………. Income Requirement

$3,853 ………. Monthly Mortgage Payment

$823 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$79 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$4,755 ………. Monthly Cash Outlays

-$919 ………. Tax Savings (% of Interest and Property Tax)

-$998 ………. Equity Hidden in Payment

$318 ………. Lost Income to Down Payment (net of taxes)

$119 ………. Maintenance and Replacement Reserves

============================================

$3,274 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,495 ………. Furnishing and Move In @1%

$9,495 ………. Closing Costs @1%

$7,596 ………… Interest Points @1% of Loan

$189,900 ………. Down Payment

============================================

$216,486 ………. Total Cash Costs

$50,100 ………… Emergency Cash Reserves

============================================

$266,586 ………. Total Savings Needed

Property Details for 52 CAPE COD Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 3 full 1 part baths

Home size: 3,710 sq ft

($256 / sq ft)

Lot Size: 4,725 sq ft

Year Built: 2006

Days on Market: 42

Listing Updated: 40411

MLS Number: S624928

Property Type: Single Family, Residential

Community: Northwood

Tract: Kb

——————————————————————————

Fantastic custom home remodeled from the ground up! No Home Owner Association Dues! No Mello Roos! Located in the highly sought after, award winning Northwood High School District! Travertine and granite features accent the architectural beauty of this home. A gourmet kitchen offers new cabinetry with plenty of storage and a island. This open floor plan is perfect for entertaining while enjoying the ambiance of a fire in the fireplace on those cool evenings. This home has two master bedroom suites: a main floor master suite as well as another on the second floor with a private retreat and fireplace for those relaxing times. A walk-in closet and balcony overlooking a lovely, serene greenbelt are just two more of this home s special features! The second floor provides an open area perfect for study, den or media niche. The third floor offers a unique opportunity for the creative. . . a home theatre? a library? a music studio? or maybe a romantic hideaway?

Frightened Sellers Who Missed the Market Lower Prices in a Panic

The spring rally is officially over as sales in Southern California have dropped dramatically. Sellers are getting frightened and greatly reducing their asking prices.

Irvine Home Address … 14911 DOHENY Cir Irvine, CA 92604

Resale Home Price …… $499,000

You’re such a catastrophe

Hold on, you’ve been running for oh so long

And soon I’ll be gone

You’ve got to build it up and then break down

Four Year Strong — Catastrophe

The Federal Reserve and the government spent the last 18 months engineering a market bottom through a variety of market props. The powers-that-be hoped the market would support itself as the artificial props were removed. Well, it isn't working out that way.

Home sales slump in July

Southern California sees a 21.4% drop in home sales from 2009 but tax credits skew the figures.

[Before the article even starts, the writer has to put in some reassuring bullshit for nervous bulls. It goes downhill from here.]

August 18, 2010 — By Roger Vincent, Los Angeles Times

Southland home sales fell dramatically in July as federal tax credits for buyers expired, yet the median home price declined only slightly from June.

Volume always precedes price. In 2007 volume dropped off, inventory ballooned, and prices began to roll over. It was the beginning of a slide that went unabated until early 2009 when supply was constricted enough to prevent further declines. Since the bubble was not allowed to naturally deflate, we are awaiting another leg down to return us to reasonable valuations.

Observers say buyers' rush to take advantage of the tax benefits pushed forward sales that would otherwise have taken place later in the summer, creating a statistical drop that didn't signify sudden underlying market weakness.

Observers say? Well, I am an observer, and I say that the volume drop has far exceeded any "statistical drop" and falls into the category of complete disaster showing underlying market weakness. This guy is trying to make a huge drop in sales volume sound like no big deal. Typically, a sudden 20% drop in sales is a signal that the market has topped. The last time a similar event occurred was June of 2006.

When averaged, home sales have been fairly flat in recent months, said Gerd-Ulf Krueger, principal economist at HousingEcon.com.

"The lack of progress on the economic front is just having a very problematic impact on the psychological situation of a lot of American consumers," Krueger said. "They are very cranky."

So now we are all cranky? That explains a lot. Perhaps we will change our mood with a few more feel-good nonsense stories in the newspaper.

Notice how this is being portrayed as a completely psychological problem. This implies that the condition will change as quickly as people can change their mind. Such an idea is comforting to bulls, but it ignores the structural problems of foreclosure-induced bad credit, increasing unemployment, and tightening credit standards that are preventing people from buying. There is a legitimate reason for people's "crankiness" that will not disappear if people suddenly change their state-of-mind.

The median price for all new and resale single-family homes, condominiums and town homes in July in Southern California was $295,000, according to MDA DataQuick of San Diego. Although that was a 1.6% drop from June, it represented a 10% increase from a year earlier, the real estate research firm said Tuesday.

Prices have rolled over at the peak of the spring selling season. That is not a good sign. What is going to happen in the historically weak fall and winter? Notice the writer had to spin it with some good news about a higher median to lessen the impact. Of course he ignores that a higher median only reflects a change in product mix and not a real increase in prices.

Year-over-year price increases have occurred throughout 2010, with the exception of a 1% dip in April. But such advances will be harder to come by in future months, DataQuick analyst Andrew LePage said. Median prices — the point at which half the homes sold for more and half for less — were depressed early last year by a glut of distressed sales in cheaper inland markets, then moved up in later months as sales activity spread to wealthier neighborhoods.

"The high end came alive in the middle of last year," LePage said. "Sellers got real and buyers started buying."

"came alive" and "started buying" Let's put on our cheerleader uniforms and shout "Go team!" The real point lost in the rah rah is that sellers finally started lowering their prices in order to sell their properties.

A total of 18,946 homes were sold in the six-county region, a 20.6% drop from the previous month and a decline of 21.4% from July 2009, DataQuick said.

Those numbers are a catastrophe. New home sales plummeted 33% with the expiration of the tax credits. And now resales are confirmed at 20% off what was already 20% below historic norms. People can try to spin that all they want, but another 20% decline from already a weak sales volume does not bode well for the market.

"It was to be expected," LePage said, because many sales closed in May and June after buyers rushed to take advantage of a federal tax credit of up to $8,000.

Let's be a bit more specific here. Some kind of decline in sales was expected; that much is true. Nobody forecast a 33% drop in new home sales or a 20% drop in resale volume. If anyone had credibly forecast such a decline, the government probably would have extended the credit. I'm glad they didn't ask me.

About 34% of resales of existing homes involved foreclosed properties, compared with 33% in June and 43.4% in July 2009 in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. Foreclosure sales have been flat for the last few months, LePage said.

Home prices will also be mostly flat in the months to come, perhaps with a slight upward trend, Krueger predicted.

That is pure NAr shilling nonsense. What is going to make prices trend upward? Ballooning inventory? Falling demand? A weakening economy? The only thing holding up prices at all is the falling interest rates, and Low Interest Rates Are Not Clearing the Market Inventory.

"That won't change until we hit the wall in terms of supply," he said.

Irvine's inventory hit 879 homes on Saturday, August 21, 2010. Where exactly is this wall Mr. Krueger speaks of? Is it when we eclipse the 2008 inventory peak of 948 houses? Or have we already hit it because of low demand?

Krueger found some encouragement in the number of homes being snapped up by investors. Almost 22% of July home sales were to absentee owners who intend to resell or rent them to tenants.

Krueger found some encouragement? Good for him. Why do I care? Is this supposed to be a news story giving me information, or is this an NAr press release to make homeowners and knife catchers feel good about their speculative bets.

"There is pent-up demand for speculative product," he said, and even a shortage of foreclosure-related bargain properties on the market as far as investors are concerned.

The old "pent-up demand" nonsense. Desire is not Demand. If we had actual demand — people with desire who can put dollars behind it — we would not have a huge decline in sales volumes. What we have done is pull all our available demand forward with a plethora of government incentive programs. The evidence clearly shows a total lack of demand, nothing is pent-up.

Recent first-time buyer Steven Kaplan said he and his wife were not impressed with the distressed properties they saw on the market around Melrose and La Brea avenues in Los Angeles. Many were "short sales" priced for less than the banks were owed.

"What we were seeing for $600,000 were totally trashed houses," the 33-year-old sound engineer said.

The couple ended up buying a smaller house for less than $600,000 last month that didn't need a lot of work. He and his wife, Lola Stewart, had been thinking about buying a house for about five years. They decided to plunge ahead when they saw both home prices and apartment rents tick up a bit earlier this year.

This couple bought out of fear of being priced out. Very sad. This false price signal from the bear rally has enticed many to buy prematurely.

"We were looking to get a better place," he said, "and low interest rates made us able to actually afford something."

The lure of loans at rock-bottom interest rates, though, still isn't strong enough to overcome weak consumer confidence, said broker Syd Leibovitch, president of Rodeo Realty Inc. in Los Angeles.

"Interest rates are at 1950s levels," he said. "I am surprised that hasn't spurred more activity."

Inventory on the market is almost double what it was in February, Leibovitch estimated. "Agents are no longer complaining they have nothing to show. There are lots of choices now."

Mr. Krueger said we won't have any problems until inventory hits a wall. Isn't a doubling of inventory a telltale sign that we have have hit the wall already?

Agent Lynette Williams, who specializes in northeast Los Angeles and Pasadena, said she was also seeing more houses on the market, and some of them in select neighborhoods sell rapidly. Still, she is apprehensive about how the market will perform without federal tax credits. State subsidies are also phasing out.

Interest rates may be low, but getting financing is no picnic, she added. "Banks are scrutinizing everything."

roger.vincent@latimes.com

Banks are scritinizing everything? LOL! Let's go back to 100% financing on stated income and see how that turns out.

WAMU Option ARM

Today's featured property was purchased for $815,000 on 1/18/2007. The owner used a $652,000 Option ARM from WAMU and a $163,000 down payment. That has got to hurt….

She has squatted for about 18 months so far, so I suppose she is getting some of that value back.

Foreclosure Record

Recording Date: 05/10/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 08/12/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 05/06/2009

Document Type: Notice of Default

She has not received her notice of trustee sale yet, so she will likely get to drag this out for quite some time.

The real story with this property is the dramatic price reduction.

Date Event Price Appreciation
Aug 20, 2010 Price Changed $499,000 —
Jun 18, 2010 Price Changed $625,000 —
May 27, 2010 Listed $650,000 —
Jan 18, 2007 Sold (Public Records) $815,000 0.0%/yr

This has been for sale since May, and apparently it has not attracted the kind of bid the holder of WAMUs trash wants to see. I imagine the seller hopes this will start a bidding war. At $499,000 with low interest rates, no HOAs and no Mello Roos, the price is attractive. The total cost of ownership is less than $2,000 per month. Surely this would rent for that much. To be honest, an updated 3/2 with a pool at less than $500K piques my interest (Did you see the cool home theater?)

Over the weekend, I profiled 5 FERN Cyn Irvine, CA 92604, also being offered for under $500K. It too had recently witnessed a dramatic price drop. That property might actually transact because it was an equity seller. These are both solid middle-class properties with costs of ownership at $2,000 a month. That kind of value — prices with a cost of ownership below rental parity — will entice buyers.

Perhaps two properties does not make a trend, but both today's featured property and 5 Fern Canyon show desperation by the sellers. Ballooning inventory and swooning demand will prompt more sellers to lower their prices if they want to transact. If enough of them lower their prices, that becomes the market, and prices fall.

Is this a trend, or are these two properties outliers that will be snapped up quickly for above their asking prices?

Irvine Home Address … 14911 DOHENY Cir Irvine, CA 92604

Resale Home Price … $499,000

Home Purchase Price … $815,000

Home Purchase Date …. 1/18/2007

Net Gain (Loss) ………. $(345,940)

Percent Change ………. -42.4%

Annual Appreciation … -12.9%

Cost of Ownership

————————————————-

$499,000 ………. Asking Price

$17,465 ………. 3.5% Down FHA Financing

4.51% …………… Mortgage Interest Rate

$481,535 ………. 30-Year Mortgage

$97,637 ………. Income Requirement

$2,443 ………. Monthly Mortgage Payment

$432 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$42 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$2,917 ………. Monthly Cash Outlays

-$392 ………. Tax Savings (% of Interest and Property Tax)

-$633 ………. Equity Hidden in Payment

$29 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves

============================================

$1,983 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,990 ………. Furnishing and Move In @1%

$4,990 ………. Closing Costs @1%

$4,815 ………… Interest Points @1% of Loan

$17,465 ………. Down Payment

============================================

$32,260 ………. Total Cash Costs

$30,300 ………… Emergency Cash Reserves

============================================

$62,560 ………. Total Savings Needed

Property Details for 14911 DOHENY Cir Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,880 sq ft

($265 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1971

Days on Market: 87

Listing Updated: 40410

MLS Number: S618914

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Wl

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Expanded home in the Willows. Located on a culdesac. Remodeled kitchen with beautiful cherrywood cabinets. Bathrooms feature spa tubs. Bamboo style laminate flooring.

IHB News 8-21-2010

Meet up with us Sunday night at JT Schmids from 5:00 to 9:00. I hope to see you there.

Irvine Home Address … 5 FERN Cyn Irvine, CA 92604

Resale Home Price …… $499,900

Seize the day or die regretting the time you lost

It's empty and cold without you here, too many people to ache over

I see my vision burn, I feel my memories fade with time

But I'm too young to worry

These's streets we traveled on will undergo our same lost past

Avenged Sevenfold — Seize the Day

IHB News

We are having another event Sunday night at JT Schmids at the district. I will be addressing interested parties on how they can invest in the trustee sale market. I am expecting a smaller turnout, and I should be able to give each attendee individual attention to ask questions.

As always, we encourage everyone to attend and enjoy an evening of comradery and conversation about real estate. Appetizers and drinks will be served.

Huge Price Reduction

The burgeoning inventory in Irvine is starting to frighten buyers who really want to sell. Today's featured property was originally profiled on March 4, 2010 when the owner was asking $629,000. I noted back then that they were not likely to get their asking price. A few days ago, they lowered their asking price from $559,900 to $499,900 — a decrease of more than 10% and more than 20% from their original asking price. At its current price, and 4.5% interest rates, it is quite affordable.

This is exactly what the banks fear. If too much inventory hits the market — and it is still steadily climbing — sellers will start to lower price to find a buyer. If a great deal of inventory hits the market, the price reductions may get quite aggressive like today's featured sellers. That is how a market price drop happens.

Irvine Home Address … 5 FERN Cyn Irvine, CA 92604

Resale Home Price … $499,900

Home Purchase Price … $276,000

Home Purchase Date …. 10/1/1999

Net Gain (Loss) ………. $193,906

Percent Change ………. 81.1%

Annual Appreciation … 5.5%

Cost of Ownership

————————————————-

$499,900 ………. Asking Price

$17,497 ………. 3.5% Down FHA Financing

4.51% …………… Mortgage Interest Rate

$482,404 ………. 30-Year Mortgage

$97,813 ………. Income Requirement

$2,447 ………. Monthly Mortgage Payment

$433 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$42 ………. Homeowners Insurance

$50 ………. Homeowners Association Fees

=============================================

$2,972 ………. Monthly Cash Outlays

-$393 ………. Tax Savings (% of Interest and Property Tax)

-$634 ………. Equity Hidden in Payment

$29 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves

=============================================

$2,037 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————–

$4,999 ………. Furnishing and Move In @1%

$4,999 ………. Closing Costs @1%

$4,824 ………… Interest Points

$17,497 ………. Down Payment

=============================================

$32,319 ………. Total Cash Costs

$31,200 ………… Emergency Cash Reserves

=============================================

$63,519 ………. Total Savings Needed

Property Details for 5 FERN Cyn Irvine, CA 92604

——————————————————————————–

3 Beds

2 baths Baths

1,350 sq ft Home Size

($466 / sq ft)

4,500 sq ft Lot Size

Year Built 1974

1 Days on Market

MLS Number S607254

Single Family, Residential Property Type

El Camino Real Community

Tract Di

——————————————————————————–

MUST SEE THIS…GREAT CURB APPEAL-Beveled Glass bay window – NEW THOMASVILLE CUSTOM KITCHEN! Cherry wood cabinets, Granite Counters,Frigidare Professional Series Stainless appliances-Vaulted Ceilings-New windows and Doors-Ceramic tile floors-Custom Lighting–Cul de sac–Private side enterance – Concrete tile roof – New roll-up Garage Door – Lush mature landscaping – Tile hardscaping – Large back yard, great for children – Best Schools…5 Deerfield pools..Tennis in the park…Standard sale –

From the previous post:

HELOC dependency

Day after day, I see sellers who have spent their home price appreciation as it came in as if it were a source of managed income. I believe this practice is so widespread that many who live in California consider it an entitlement; buy a house and you automatically get to double your spending power. With entitlement comes a social acceptance of the means to obtaining that entitlement — taking on excessive debt. To the chagrin of lenders, borrowers have also figured out that if things don't work out it is easy to walk away from debt and start over, and any social stigma associated with foreclosure and bankruptcy has vanished.

  • Today's featured property was purchased on 10/1/1999 for $276,000. The owners used a first mortgage and a $50,000 down payment — well, kind of…

  • On 10/13/1999 a stand-alone second for $50,000 was recorded on the property. The real down payment was $0.

  • On 5/9/2001 they refinanced with a $273,000 first mortgage reflecting a $3,000 decline in their mortgage balance.

  • On 2/13/2004 they went over to the dark side and refinanced for $313,000.

  • On 1/3/2005 they opened a stand-alone second for $90,000.

  • Total mortgage debt is $403,000.

  • Total mortgage equity withdrawal is $127,000.

I gave these owners a "D" because the $90,000 stand-alone second is more than just paying off a few credit cards; that is simply adding to a mortgage to get the money to spend which crosses the threshold of knowingly spending anticipated appreciation which is a "D" by definition. Since their withdrawal was relatively small by Irvine standards — $127,000 — and since they paid down the mortgage at times, one could argue for a "C."

Not a bad take for a $0 investment — plus, if they get their asking price, they stand to make another $200,000. They won't get it.

I have been inside both neighboring properties 1 Fern Canyon and 3 Fern Canyon, the latter in particular was much larger and very nice inside. It appears that the original listing was for $529,000 — a more realistic although still inflated asking price. Perhaps the owners feel they added $100,000 in value by installing an over-the-top Thomasville kitchen. ~giggles~

Is Cashflow Investing Making a Comeback?

Cashflow investors sat on the sidelines for the better part of the 00s. Now they are finding opportunities in many markets to buy cashflow properties at attractive valuations.

Irvine Home Address … 19 PERRYVILLE Irvine, CA 92620

Resale Home Price …… $668,000

I can open your eyes

Take you wonder by wonder

Over, sideways and under

On a magic carpet ride

A whole new world

A new fantastic point of view

No one to tell us no

Or where to go

Or say we're only dreaming

Aladdin — A Whole New World

The crash in housing prices has created a whole new world for cashflow investors. Investors have been waiting for years for the speculators to flame out. Now that the crash has occurred, many markets are inexpensive enough to present fantastic cashflow investment opportunities.

Vulture investors: They're back – and making a bundle

By Les Christie, staff writer — August 5, 2010

NEW YORK (CNNMoney.com) — These are the glory days of the residential real estate investor. Low prices, rock-bottom interest rates and stable rental markets have created huge buying opportunities.

"It's awesome right now. I don't think we'll ever see another time like this," said Tanya Marchiol of Team Investments, which has operations in about 10 states but focuses mostly on the Phoenix market.

These investors are known to many as vultures because they swoop in and buy "distressed properties" — foreclosures and short sales — cheap. Places like Las Vegas, Phoenix and Miami are popular because home prices there have dropped as much as 70%.

But how they're investing has changed. In the boom years, they would buy a property and flip it for a quick cash out. Today, they are holding and renting for hefty, steady incomes.

Once they analyzed their decisions based on home-price appreciation, which is very speculative. Now they consider potential rental profits, which is far more stable.

Back then, they flipped often and helped to bid up home prices into a froth. Now, the investors say, they can be a part of stabilizing neighborhoods.

This writer is conflating speculators and investors as if they are the same individuals, but they are not. Speculators were the idiots buying up properties because they were rising in price in hopes of capturing appreciation. Cashflow investors don't do that.

Speculation

Speculators are currently groping for a safe haven for their money trying to find properties that are going to fall in value less than others. Speculators by nature have no concept of value other than recent changes in price. They are herd followers who may profit for a time, but eventually, they get stampeded when the herd bails on the speculative bubble of the moment. In contrast, investors are the ones buying for cashflow that don't care about resale value. They are the investors who create a bottom with their buying activity.

Condos for less than the cost of a Corolla

"People are not in it to flip like back in the old economy," said Matt Martinez, an investor and author whose new book, "How to Make Money in Real Estate in the New Economy" comes out next February. "The new economy dictates that you have to have a long time horizon."

Marchiol, for example, does not even factor in home price appreciation for at least a year. After that, she calculates only a 3% annual increase — a return that won't turn heads of investors who only want to buy low and sell high.

Marchiol just purchased four separate four-plexes in North Phoenix. Three years ago, each four-unit building sold for $310,000; she paid just $70,000 per building. She intends to spend about $64,000 rehabbing the properties, making her total investment $344,000.

In total, she currently owns about 17 rental units. Usually she buys the properties to keep herself, but she also works with a group of investors who are intent on holding them and renting them out. She can spot the deals and then sell to them.

For example, with her North Phoenix buildings, the investors will buy the buildings for $95,000 each. They'll put 20% down and finance the rest, about $76,000 per building.

At today's low interest rates, they'll get a near 5% loan. That yields a payment of about $400 a month. Figure another 10% of the price for property management, 10% for maintenance, an 8% vacancy rate, taxes, insurance and other home ownership expenses, and you're talking about a monthly nut of roughly $1,300.

Marchiol projects the apartments will rent for $600 a month each, for a total rent roll of $2,400. That gives the owners a profit of $1,100 per month and $13,200 per year — a nearly 70% annual return on investment.

I question those numbers, but the basics of what this woman does is brilliant cashflow investment. She is buying low and not selling. She is not buying high in hopes it goes higher.

After I wrote a recent post about Las Vegas, some investors there contacted me and said they were buying condos south of the strip for $50,000 cash and renting them for $750 a month. I can't verify those numbers, but they sound realistic, and the represent a GRM of 67. Locally, you would be lucky to find a GRM less than 200.

Although conditions are very favorable, investors have to be adaptable because the market is evolving rapidly. In Phoenix it's changed in just the past six months. Foreclosure auctions are no longer a fertile hunting ground for Marchiol.

"Amateurs have come in and run up the prices," she said. "In 2009 I bought 76 properties at foreclosure auctions, at an average of about 60 cents on the market dollar. This year, I've bought four."

That part of her story sounds like bullshit. All the great deals are already taken, right? Give me a break. She wants to brag about her home runs, but she doesn't want any competitors to come in and drive down her margins. I have had some similar discussions with trustee sale flippers. Just ask one, and they will tell you all the good deals were some time in the past and that margins are tight now.

Glenn Plantone faces a similar situation in Las Vegas. A veteran real estate broker and investor, he has switched from buying mostly foreclosures and repossessions to short sales almost exclusively. That's because the inventory of distressed properties available in Vegas is way down, to about a two-week supply.

There are no distressed properties in Las Vegas? I imagine the banks will be relieved to hear that. Forget about the 25% delinquency rate and the fact that 88% of mortgage holders are underwater. If there is any shortage of currently available properties, the shadow inventory is the entire city.

"The banks make better profits with short sales, so they're not foreclosing," Plantone said. "They've switched staff to processing short sales and they've gotten faster at processing them."

I don't know if that is true or not in Las Vegas, but lenders certainly have not gotten any faster at processing short sales in Orange County.

He tries to purchase properties for at least 10% less than what he considers to be true market value, then he does some light rehabilitation and sells them to some of the 3,000 buyers he works with.

Since prices have fallen about 70% in some Vegas communities and rents have only declined by about 20%, it's possible for his investors, who are cash buyers, to make money from the first month the homes are rented.

"We're getting cash flow (net return on investment) of 12% to 14%," he said.

That is why I want to invest in properties in Las Vegas.

He doesn't completely ignore potential profits from home price appreciation because he believes the town is bouncing around the bottom. (Homes already sell for below what it would cost to build new homes.) He does not, however, emphasize that aspect of the investment.

It's the income from rentals that's paramount right now.

The beauty of cash flow, of course, is that even if the prices decline another 10% or 20%, the investors should be able to live with that.

"I tell them to plan on holding for five years," he said. "With cash flow, there's no need to worry about price drops."

Doesn't that read like stuff I have written in the past?

Buying rental properties in Las Vegas

Over the last few weeks, I have had many discussions with people who want to invest in my fund to flip properties locally. Many of these investors also want to own rental properties as long-term investments. in reaction to my post Buy Las Vegas Real Estate, many have done independent research on prices there and reached the same conclusion I have: the next three to five years represent a great time to invest in Las Vegas real estate. There is no huge urgency to buy today. It will take quite some time to grind through the inventory, but the combination of very low interest rates and very low prices make that market particularly attractive.

I have stated, "I personally plan to acquire all the Las Vegas real estate I can buy. And no, neither Ideal Home Brokers nor the mystery fund I might know something about is going to invest in cashflow properties there. I am not selling you on Las Vegas because I will profit from convincing you. I am bullish on Las Vegas real estate because I perceive it as the best buy-and-hold value we will see in our lifetimes."

That was then. This is now. I have been asked, "If you are doing this for yourself, can you get some properties for us?" Yes, I can. After discussing this at length with several investors, I am going to buy properties and offer them for sale to investors who read this blog. I have several interested parties already. I will try to supply however much is demanded.

I will be the trailblazer. I will find the lender who will consider the rental income from the unit in qualifying for the loan. I will find a competent management company locally to handle landlord-tenant issues. And I will find the properties, usually at trustee sale, and acquire them on speculation. I won't recommend any deal I would not take myself. In fact, if the property does not sell on the blog, I probably will take it myself. And yes, I probably will cherry pick some too.

Realistically, it will take a few months to get everything together and go through the process a time or two myself. If you are interested in this kind of investment, keep reading the blog, and you will see them as they become available. If you are not interested, feel free to ignore them.

Peak Buyer loses 10% down

Many of the properties I profiled in 2007 and 2008 were 100% financing deals. They are the weakest hands, and it isn't surprising they were the first to walk away. Over the last 18 months, many of the properties I have profiled put 10% down. They are also underwater, but since they sunk money into the property, they generally hold on a little tighter and try a little harder to stay put.

Today's featured property was purchased for $796,000 on 9/21/2005. The owner used a $632,800 first mortgage, a $79,100 second mortgage, and a $84,100 down payment. He gave up in early 2009 and got to stay for about a year.

Foreclosure Record

Recording Date: 10/13/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 07/06/2009

Document Type: Notice of Default

Have you ever stopped to think that there would have been no real estate bust if prices have never risen above rental parity? Properties get distressed because they cannot be rented for enough to cover the payments, particularly investment properties. Even a primary residence could be rented out to someone with a job if the owner becomes unemployed and needs to move to less expensive accommodations. Paying above rental parity is the path to destruction.

The flipper purchased it at auction on 6/10/2010 for $620,000. It appears they are having a little buyer's remorse as they have priced this property to get out near breakeven.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 19 PERRYVILLE Irvine, CA 92620

Resale Home Price … $668,000

Home Purchase Price … $620,100

Home Purchase Date …. 6/10/2010

Net Gain (Loss) ………. $7,820

Percent Change ………. 1.3%

Annual Appreciation … 30.1%

Cost of Ownership

————————————————-

$668,000 ………. Asking Price

$133,600 ………. 20% Down Conventional

4.51% …………… Mortgage Interest Rate

$534,400 ………. 30-Year Mortgage

$130,704 ………. Income Requirement

$2,711 ………. Monthly Mortgage Payment

$579 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$56 ………. Homeowners Insurance

$75 ………. Homeowners Association Fees

============================================

$3,421 ………. Monthly Cash Outlays

-$453 ………. Tax Savings (% of Interest and Property Tax)

-$702 ………. Equity Hidden in Payment

$223 ………. Lost Income to Down Payment (net of taxes)

$84 ………. Maintenance and Replacement Reserves

============================================

$2,572 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,680 ………. Furnishing and Move In @1%

$6,680 ………. Closing Costs @1%

$5,344 ………… Interest Points @1% of Loan

$133,600 ………. Down Payment

============================================

$152,304 ………. Total Cash Costs

$39,400 ………… Emergency Cash Reserves

============================================

$191,704 ………. Total Savings Needed

Property Details for 19 PERRYVILLE Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 2,000 sq ft

($334 / sq ft)

Lot Size: 4,465 sq ft

Year Built: 1985

Days on Market: 1

Listing Updated: 40400

MLS Number: S628520

Property Type: Single Family, Residential

Community: Northwood

Tract: Cs

——————————————————————————

Gorgeous upgraded single family house in NORTHWOOD. It has been renewly remodeled & upgraded with kitchen cabinets, granite countertops and wood flooring on first floor. Master bedroom with Retreat can be easily converted to 4th bedroom. Fire place w/granite tile & mantel, wide hardwood floor, plantation shutters, vaulted ceiling, Spacious backyard w/patio cover, No mello roos, Walk to Top Rated schools. Convenient to shopping and transportation. Awarded schools!!!

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter