If you are renting rather than owning, you are “flat” real estate. Going flat can be a trading position to profit from, if the drop is deep enough.
Asking Price: $600,000
Address: 15 Iowa Irvine, CA 92606
{book3}
In ten minutes I’ll be laying out flat on the floor
Like I need to defend my own innocence
So what, I did it, I admit it, and I’m pleading the 5th
One more anthem for the know it all
I won’t be standing up for long I better learn how to crawl
Learn how to crawl
In ten minutes I’ll be laying out flat on the floor
Flat On The Floor — Nickelback
When traders takes a position in a market, they can be either “long” or “short.” If traders have no position, they are said to be “flat.” Traders who are long the market have an ownership stake, and they want to asset to go up in price. Traders who are short the market borrowed the asset, sold it, and they must repurchase the asset later to repay the debt. The short position is profitable if prices go down.
In residential real estate, it is not realistically possible to be short (you could play the futures though). Someone is not going to loan you their house and allow you to sell it to time the peak. What homeowners can do is to functions much the same: they can sell their home, go flat, and buy a different (presumably better) home later and profit from the difference. The “flat trade” is much more difficult than it sounds.
Real estate as an asset class has two significant drawbacks: (1) illiquidity and (2) high transaction costs. The problems make the flat trade challenging. When you sell a house, you will most likely pay a 6% commission. When you buy a house, you will incur closing costs and fees amount to about 4% of the transaction. When you consider the transaction costs, you must time the market to capture a 10% move, or you will actually lose money. Last year in Irvine, the Median Irvine home price is down 7.2 percent.
Nobody other than renters wants to see the flat trade be a success. Lenders know falling prices make for greater losses, the Federal Reserve knows low interest rates support higher prices, and the Government knows if they do not help the lenders and the Federal Reserve, then taxpayers are going to get the bill for the clean up; therefore, all the powers-that-be are scheming to keep prices high.
On a local level, we have tight supply and low transaction volumes sustaining prices about 30% above rental parity. Limiting supply — to the degree such a thing is possible — can theoretically keep prices at elevated levels indefinitely assuming the market remains at relatively low transaction volumes. This is certainly what property owners in Irvine want. Who can blame them?
If the REO inventory entering the system is large, and if it is sold relatively quickly, the increase in volume will cause prices to fall — probably the remaining 30% down to rental parity. If the market conditions that prevailed in 1997 recur, or if interest rates return to their historic norms, prices will fall more than 30%, and the flat trade would be very successful here.
Another variable that must be considered when contemplating the flat trade is your monthly cost versus renting. There are many people who may be able to profit from the short trade, but their current payments are less than rents because they locked in a payment many years ago. The people that have substantial equity may not want to try the short trade because it will cost them extra each month to rent. In fact, I would not recommend trying the short trade if you monthly cost of ownership is significantly below what the property would rent for.
The flat trade is getting much more difficult in many markets because the bulk of the declines have already occurred. Many nearby communities have declined below rental parity, and there are real bargains in some of these markets. There is still interest rate risk and overwhelming supply in these markets, but the subprime dominated markets are much closer to the bottom than to the top. The window of opportunity for the flat trade has closed in these markets.
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Another problem with the flat trade is timing it properly, and Timing Does Matter. It is difficult to sell into the frenzy because it is hard to predict when an irrational crowd will change. There were signs of a market top in 2004, just before the Option ARM took off and market prices went skyward. When timing the market, most people look for clear signs in the rear-view mirror.
For The Great Housing Bubble, the clear signal was the credit crunch and the onset of falling prices in August of 2007; unfortunately, the best signal is also a sign of a collapse in liquidity which makes a property much more difficult to sell. Waiting for the signal is clear may cost 5% or 10% of the sales price as a discount. Few have the savvy to identify and act on these signals; although, some of our esteemed members in the forums have done it — the flat trade is possible.
In any market decline, the most desirable properties will decline last. The mid to high end of the market has declined the least so far, but this merely means they have the furthest to fall. The flat trade is still possible here, and in the beach communities around Southern California, but this opportunity will pass quickly. Once prices get within 10% of the bottom, there isn’t enough drop left to profit from the flat trade.
Asking Price: $600,000
Income Requirement: $150,000
Downpayment Needed: $120,000
Purchase Price: $860,000
Purchase Date: 6/29/2006
Address: 15 Iowa Irvine, CA 92606
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,200 |
| $/Sq. Ft.: | $273 |
| Lot Size: | 4,840
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Mediterranean |
| Stories: | 2 |
| Year Built: | 1999 |
| Community: | Walnut |
| County: | Orange |
| MLS#: | P697358 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 1 day |
COMMUNITY ON A QUITE CUL DE SAC.THIS HOME FEATURES PLANTATION SHUTTERS,
TILED FLOORS, MAPLE CABINETS, CUSTOMBUILT-INS, EXTRA LARGE
PROFESSIONALLY LANDSCAPED TROPICAL YARD WITH BUILT IN BARBEQUE. GREAT
PLACE TO ENTERTAIN AND RELAX. THIS HOME SHOWS VERY WELL. COLLEGE PARK
ELEMENTARY AWARD WINNING SCHOOL.
HIGHLY UPGRADED?
ALL CAPS
This property was purchased on 6/29/2006 for $860,000. The owners put some money down, but not enough to warrant hanging around.
| Date | Event | Price | Appreciation |
|---|---|---|---|
| Jul 30, 2009 | Listed | $600,000 | — |
| Jun 29, 2006 | Sold | $860,000 | 13.3%/yr |
| May 01, 2003 | Sold | $579,000 | 15.0%/yr |
| Aug 31, 1999 | Sold | $347,000 | — |
This property is on a fast-track from default through foreclosure and eventual sale.
Foreclosure Record
Recording Date: 05/13/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000240902
Foreclosure Record
Recording Date: 02/11/2009
Document Type: Notice of Default
Document #: 2009000063919
If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $296,000.
This property is nearly a 2003 rollback, and it is asking 30% off its peak purchase price.
Bank Owned Beauty! Enjoy the relaxing lifestyle that will come along
