Category Archives: Investment Property

How Hedge Funds Could Crush the Banking Cartel and Keep Original Buyers in Foreclosures

Loan modifications are no longer a borrower's only option to stay in their home. Hedge funds can buy up properties, rent it to the former owners, and offer to resell it back to them when they qualify for a loan. The hedge funds win, the buyers win, and the lenders lose. Perfect.

Irvine Home Address … 7 ROANNE Cir Irvine, CA 92604

Resale Home Price …… $750,000

Party time, going down

you better not mess us around

the stakes are rich, take a hit or stay

the price is high, someone's gonna pay

Looking for trouble, now you've found it

you're a drum and we're gonna pound it

Last one standing wins the fight

hear us scream and shout all night

down on the floor and eat the grit

this is gonna hurt a little bit

Megadeth — Crush 'em

The banking cartel has tied up most of the inventory in California. A third to half of homeowners are now underwater and unable to sell without lender approval. Many more borrowers are facing foreclosure as about 15% of homeowners are not paying their mortgages. The lenders already own many properties. Between what they own and what they control, lenders have withheld inventory and kept much of the air in the real estate bubble.

I think this is shameful. I want to see the lending cartel crushed. Californian's have too much of their incomes going to debt service so Goldman Sachs' investors can make a few more pennies.

I have a better idea.

Short Sellers are reviled

Many people have a negative view of short sellers. They feel that short-selling is profiting at the expense of others. The people who really hate short sellers are owners of overpriced assets.

Short sellers borrow assets and sell them only to buy them back later at a lower price and profit from the difference. Short selling has a very valuable place in financial markets. Without the activity of short-sellers, assets become hopelessly inflated in price, and money that should be freed up for more productive uses is tied up in unproductive assets. For money to be released, the assets must be sold. Short sellers actively sell when no other sellers are motivated, and in selling, they re-balance market prices.

Real estate markets are very inefficient, and part of the reason is a lack of short sellers. Nobody, including the banking cartel, is anxious to sell real estate right now. That simply maintains an overly inflated valuation in the market. The activity of owners buying and renting has not been significant, and that only puts people in a "flat" financial position. What the market needs is short sellers — true short sellers. Until now, nobody has known how to be short real estate. Today, I am going to explain how it can be done.

Hedge Fund Basics

Hedge funds are investment pools formed as a company and managed with a specific investment plan. Hedge funds are generally private capital limited to sophisticated investors. Joe Six Pack is not permitted to invest in hedge funds. There are as many hedge funds as their are investment strategies capable of raising money. Some are very successful, most are not.

Since hedge funds are private investment pools made up of sophisticated investors, they are free to invest in whatever they want within the constraints of law. Many hedge funds invest in real estate, and many are forming now to clean up the debris from the Great Housing Bubble.

Real Estate Hedge Fund Investments

Today we are going to discuss the investment strategy of a mythical company, Cartel Crusher, LLC. Limited Liability Companies are a favored form of many hedge funds because they provide limited risk and all gains or losses are passed through to the individual investors.

Cartel Crusher LLC is real estate investment fund that buys rental properties at auction and keeps them in portfolio to obtain the cashflow from rentals. Last week, in the post, Buying a Rental at Trustee Sale, I outlined the math and analysis required to obtain a rental property at foreclosure auction.

In areas where the subprime foreclosures are common, pricing is 50% or more below the peak, and cap rates range from 6% to 8%. For an investment company like Cartel Crusher LLC, this return is sufficient to bring in outside capital to buy foreclosures. A typical deal would be like the Corona property below going to auction on 3 May 2010.

A property like this one could increase returns and free up capital for more acquisitions by applying 15-year debt at a payment with positive cashflow.

This is the type of long-term hold acquisition that is the ultimate goal of Cartel Crusher LLC.

From Cartel Crusher LLC's perspective, it doesn't matter who the renter is as long as they pay the rent reliably and don't trash the place. The landlord's dream is to find a renter that cares for the place as if it were their own and doesn't want to move out. That is difficult to find, but in the aftermath of the housing crash, a special opportunity exists to find that special renter — the former owner.

Making owners a better deal

Cartel Crusher LLC would very much like to keep the former owner in the property. Note some of the key numbers from page 2 above that are improved by this arrangement:

  1. Real Estate Improvements.
  2. Tenant move-out allowance.
  3. Gross Rent
  4. Vacancy and Collection loss

All four of those numbers improve by keeping the owner in place. There are no real estate improvements, and no tenant move out allowance when the owner stays in place. Vacancy and collection loss is also eliminated because the owner will stay for the duration (more on that later). Gross rents are also higher and more predictable. These benefits to Cartel Crusher LLC are great if the owner can be persuaded to stay in the property.

Why would an owner do this? Why not get a loan modification?

In the short term, if the owner were to obtain a loan modification, they may be able to lower the payment enough to be competitive with a rental for a while; however, loan modifications are a temporary fix, and the debt on the property is still double what it should be. The only way an owner is going to see a principal reduction is through a foreclosure. There is less opportunity for most owners in a loan modification to have equity because their loan balance is simply too high.

The deal being offered to an owner by Cartel Crusher LLC will give them peace-of-mind on their cost of housing, and if they buy the property back later, the debt will be reduced significantly. Basically, Cartel Crusher LLC is offering owners a much better deal.

Owner stays on as a renter

After the foreclosure, no lender will give the newly foreclosed a loan. There is a mandatory waiting period — recently reduced to two years — when former owners must be renters. When most face foreclosure and walk through this valley of death, they have no idea when, where, or if they will be owners again. Very scary.

Cartel Crusher LLC makes these worries go away. Cartel Crusher LLC will go to auction to acquire the property and rent it back to them, and it will give them an option to buy the property back at a later date at a pre-negotiated price.

For this feeling of ownership continuity, the renting former owner will pay a 5% premium on area rents, plus they will agree to an automatic 2% yearly rental increase. Since this rental payment will be much less than the mortgage payment, the lower cost of housing will be a major financial benefit. If they can't afford the rent, then they are hopeless and need to move on.

Owner gets right to repurchase

Cartel Crusher LLC will establish a baseline value from comparable resales on the date of the sale. The price increases 4% per year. After 10 years, if an owner still has not purchased, the deal expires.

There is one very important condition, the price actually paid for the property is the greater of the number in the chart below and appraised value at the time of sale. If California inflates another housing bubble, this right-to-repurchase can't be exercised like an option to a third party to profit from the difference. If the borrower is unable to get their act together to qualify for a loan and resale values are higher than the numbers above, the benefit of the irrational market exuberance comes back to Cartel Crusher LLC. If values never come back, the owner is certainly no worse off by renting.

Consider the resale value chart above compared to the deal the owner gets from the government or their lender if they get a loan modification. In the Corona property, the debt today is $704,000. If it were an owner-occupied property, the owner would not be above water until 2023. Cartel Crusher LLC would sell it to him for less than his current debt for the next 13 years. And in doing so, Cartel Crusher LLC would make a great return on its investment through rent and appreciation while keeping an owner in their home.

The government can't do that.

The lenders won't do that.

Cartel Crusher LLC will do that.

Busting the cartel through strategic default

The private sector hedge funds have the answer. Any fund operating like Cartel Crusher LLC will be able to keep owners in their properties until they can own again. Since this offer is so enticing to underwater homeowners whose payments exceed rent, waves of strategic default will inundate the land. Owners who strategically default and rent from Cartel Crusher LLC will be short real estate. They will be ditching their mortgage and their higher tax basis and buying the same house back later for a lower price. By selling short, stategic defaulters will rebalance pricing at cashflow levels.

The only thing the owner has to do is stop paying their mortgage. The lender cannot evict an owner from a property for being in default. The only option available to a lender to compel payment is foreclosure, and as we have all seen, they are choosing not to foreclose and allowing squatters to live all over the nation. That's fine. The owner is still living in the property, and they are never going to give the bank another dime. From the owner's perspective, this state of affairs can go on forever.

When the lender finally gets around to foreclosing, Cartel Crusher LLC will be at the auction to buy the property. And since Cartel Crusher LLC has established a higher rental rate and knows there will be no improvement costs, holding costs, cash-for-keys and the like, Cartel Crusher LLC will be able to bid higher than others who will be facing those costs.

There are no guarantees at auction, and Cartel Crusher LLC may not be the high bidder, and the property owner may still have to move out, but with the lower cost structure, Cartel Crusher LLC will bid higher than the rational professionals, and most often that will be a successful acquisition.

The banks could defeat this fund by failing to drop bids. If the bank bought every property at auction, the bank could go out of its way to boot the strategic defaulters out. If lenders go that route, there will be millions and millions of REO properties.

Everyone benefits except the banks

The only party who suffers in this process is the lender, and perhaps the US taxpayer who is paying their losses. The aggrieved party in this instance is the one most deserving of pain, the irresponsible lenders who ruined the housing market and the economy. Screw them. Crush them.

What is best in life?

To crush the banks, see them driven into oblivion, and to hear the lamentation of their bondholders.

Will owners really strategically default in large numbers?

The picture above is taken near Canyon View Elementary School in Irvine. There are two closely-spaced signs that say "no parking any time." They are conspicuous and obvious. Whenever I drive by this location, cars are parked in the street, sometimes two or three of them because this parking spot is adjacent to a daycare center. The illegal parking place is 40 feet from the door. The proper alternative is to drive up the street, turn right, and enter a parking lot about 200 feet away.

Here is what happens: A few parents reason that they are not going to be very long, and it is inconvenient to park in the proper location, so they brazenly park between the two signs. Other parents driving by to get their own children see the lawbreakers obtaining the advantage of their disobedience, so they too decide to park on the street in the no parking area.

After enough parents do this, there is a critical mass where everyone ignores the law and does what is convenient for them, park on the street. At that point, nobody really cares about the law. In fact, those that do the right thing (like stupid me) are playing the fool. Those who follow the law are missing out on the benefit obtained by all those breaking the law.

This is the phenomenon lenders fear most. Once people start to strategically default, and others in the same circumstances see how much the defaulters benefit for their actions, many others will join them. After a time, the stigma disappears, and the final holdouts realize they are foolish not to join the default party and obtain the benefits for themselves.

Once strategic default clears out the debt in one community, the substitution effect will lower prices in nearby communities putting more homeowners in position to benefit from strategic default. Like small outbreaks of lender virus, the spread of strategic default will cleanse the land of its excess debt and put prices at cashflow levels everywhere. Houses will be affordable, borrowers will have manageable debt-service payments, and the California economy will benefit from a citizenry with more disposable income — the real kind, not borrowed money.

Driving the message home

Cartel Crusher LLC will extol the benefits to every underwater homeowner facing foreclosure with high payments. It's a simple message:

Are you facing foreclosure? Do you owe more on your home that it is currently worth? Can you rent a similar home for much less? Do you want to stay in your home, reduce your monthly payments, and cut your debt in half? Cartel Crusher LLC is here to help.

Cartel Crusher LLC will send that message to every house in neighborhoods like the one in Corona where a Notice of Default has been filed. It will get a response. After a few of these deals go through, the floodgates will open up and the inflated property debt will be washed away through strategic default. I will feel good about it.

The Lending Cartel is on notice

This is coming, and there isn't much the lending cartel can do about it. Cartel Crusher LLC has arrived, and it's hungry.

Dogs of war and men of hate

With no cause, we don't discriminate

Discovery is to be disowned

Our currency is flesh and bone

Hell opened up and put on sale

Gather 'round and haggle

For hard cash, we will lie and deceive

Even our masters don't know the webs we weave

One world, it's a battleground

One world, and we will smash it down

One world … One world

Invisible transfers, long distance calls,

Hollow laughter in marble halls

Steps have been taken, a silent uproar

Has unleashed the dogs of war

You can't stop what has begun

Signed, sealed, they deliver oblivion

We all have a dark side, to say the least

And dealing in death is the nature of the beast

One world, it's a battleground

One world, and we will smash it down

One world … One world

The dogs of war don't negotiate

The dogs of war won't capitulate,

They will take and you will give,

And you must die so that they may live

Isn't Cartel Crusher LLC helping out HELOC abusing squatters?

Yes, it is.

The nefarious characters of the housing bubble all deserve to suffer. But I have argued that lenders are more culpable than borrowers in creating this mess. If bailing out a few HELOC abusing squatters is necessary to crush the banking cartel, so be it.

  • I can't tell what is happening with this property from the available records, but I do see a purchase for $615,000 on 11/3/2004. The owners used a $492,000 first mortgage and a $123,000 down payment.
  • Exactly two months later (the required waiting period), the owners obtained a $123,000 HELOC and got their money out.
  • On 7/15/2005 they obtained a $253,000 HELOC.
  • On 8/31/2006 they obtained a $300,000 HELOC. Since these are all HELOCs after the first, there is no way to know if the borrower took out the money. But why would borrowers keep enlarging it if they weren't spending it?
  • Total property debt is $792,000.
  • Total mortgage equity withdrawal is $300,000.

Foreclosure Record

Recording Date: 04/07/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 02/24/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 11/17/2009

Document Type: Notice of Default

This appears to have been sold short on 25 March 2010, but Redfin shows it as still being for sale.

Cartel Crusher LLC isn't soft on the borrowers

Some investors may feel that the investment plan for Cartel Crusher LLC is not balanced because it hurts only the banks and rewards the borrowers. Perhaps some of the proceeds from crushing the banks could be reinvested in foreclosed second mortgages and other zombie debt to even the score with HELOC abusing squatters. Sounds like a winning combination.

Irvine Home Address … 7 ROANNE Cir Irvine, CA 92604

Resale Home Price … $750,000

Home Purchase Price … $615,000

Home Purchase Date …. 11/3/2004

Net Gain (Loss) ………. $90,000

Percent Change ………. 22.0%

Annual Appreciation … 3.6%

Cost of Ownership


$750,000 ………. Asking Price

$150,000 ………. 20% Down Conventional

5.16% …………… Mortgage Interest Rate

$600,000 ………. 30-Year Mortgage

$158,136 ………. Income Requirement

$3,280 ………. Monthly Mortgage Payment

$650 ………. Property Tax

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

$63 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees


$3,992 ………. Monthly Cash Outlays

-$808 ………. Tax Savings (% of Interest and Property Tax)

-$700 ………. Equity Hidden in Payment

$305 ………. Lost Income to Down Payment (net of taxes)

$94 ………. Maintenance and Replacement Reserves


$2,884 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$7,500 ………. Furnishing and Move In @1%

$7,500 ………. Closing Costs @1%

$6,000 ………… Interest Points @1% of Loan

$150,000 ………. Down Payment


$171,000 ………. Total Cash Costs

$44,200 ………… Emergency Cash Reserves


$215,200 ………. Total Savings Needed

Property Details for 7 ROANNE Cir Irvine, CA 92604


Beds: 4

Baths: 2 full 1 part baths

Home size: 2,225 sq ft

($337 / sq ft)

Lot Size: 7,705 sq ft

Year Built: 1971

Days on Market: 148

MLS Number: S597813

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Rc


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

This property is in backup or contingent offer status.

Fantastic end of cul-de-sac 4 bedroom pool home. Move-in ready! Close to park on cul-de-sac in desirable Ranch/El Camino neighborhood. Award winning school district. Major interior upgrades and remodeling. Granite counter kitchen with center island, Newer double pane windows. Living room with fire place, formal dining room, family room set-up as theater, master with walk-in closet. Tiled remodeled bathrooms, tiled and wood flooring, carpeting in bedrooms. Ceiling fans, Attached 3-car garage, Gas forced-air heating/AC. cable ready. Easy access to 3 major freeways. Must see to appreciate! No HOA, Low tax rate with NO Mello Roos. Home is highlighted by a large Family room and four bedrooms, all on this quiet street. Custom window coverings, wood floor, crown molding, home also has newer pool equipment and much more.


Buying a Rental at Trustee Sale

Buying a rental property at trustee sale is not as risky and as speculative as many believe. With proper analysis and an accurate estimation of value, this can be a relatively low-risk way to obtain stable cashflow.

Irvine Home Address … 203 Briarwood, Irvine, CA 92604

Resale Home Price …… $299,000



Came to my door

When I was down on my luck

In the shape

Of an old friend

With a plan, guaranteed

He showed me the papers

As he walked me to his car

His shoes

Finest leather

He said

You could wear this style

If you follow my advice

Bobby McFerrin — Opportunity

The common perception of me is that of a housing bear. It is true that I believe resale prices will fall as foreclosures wash though the market, but I also see good reasons to own real estate — I mean really own it when you don't have any debt. It isn't necessary to time the bottom tick of the real estate market to invest wisely and profitably. Your goal should be to obtain the most cashflow for the money regardless of resale price. If prices drop further, that creates additional opportunity to get even greater returns.

The people buying with an eye toward positive cashflow are the ones who stabilize the market. They always are because they are the only ones who will buy when prices are going down.

The fake appreciation engineered by the Federal Reserve and our various tax incentive programs has created a low-volume plateau that is about to crumble under the weight of higher interest rates, high unemployment and large numbers of foreclosures. When the public stops believing HELOC riches are right around the corner, the bubble will continue to deflate until cashflow investors set a durable bottom.

There are abundant opportunities to acquire cashflow properties in many markets, and trustee sales offer a unique opportunity to obtain a solid portfolio of properties pruned of weeds that do not perform as expected.

Back in January, I went through the basics of Trustee Sales:

Foreclosure 101: Vesting Title

Foreclosure 101: Non-Judicial Foreclosure

Foreclosure 101: Mechanics of a Trustee Sale

Over the next couple of weeks, we are going to explore the various ways you can participate in the clean up from the Great Housing Bubble:

Foreclosure 201: Buying a Trustee Sale Property as a Primary Residence

Foreclosure 201: Buying a Rental at Trustee Sale

Foreclosure 201: Flipping Trustee Sale Houses on Speculation

Foreclosure 201: Flipping Trustee Sale Houses to a Buyer in Escrow

Foreclosure 201: Buying Trustee Sale Properties Using Conventional Financing

Investment portfolio real estate

Diversification protects investors from price volatility in any one asset class. Real Estate is typically the largest portion of a retirees net worth, and in many cases, it is the only asset they have. Mortgage equity withdrawal is particularly problematic for those approaching retirement because it allows consumption of what used to be a forced-savings account. Californians emptied their housing piggy banks, and they are broke. Foolish borrowers cannot easily access their IRAs and 401Ks for spending money leaving these investment vehicles as the only retirement savings reservoir outside of Social Security most retirees have — assuming borrowers did not deplete their retirement accounts attempting to save their homes.

Working-class owners should diversify into stocks, bonds and other investment classes before looking to acquire cashflow-positive real estate. However, once equity in the family home represents less than a third of total net worth, families should diversify into cashflow investment properties to maintain a real estate exposure between 25% an 50% of total investments. Note that real estate investment trusts, which are a security like stocks, provide real estate exposure and cashflow and these holdings should be considered the same as holding real estate directly.

The size of the portfolio and the allocation to real estate establish an investment budget. The next task is to determine how and where to deploy capital in a way that balances risk and return.

Capitalization rates and opportunity costs

Investors review of the risks and returns of any asset class, and savvy investors realize that every investment creates an opportunity cost because the capital deployed in one investment could have gone to another. Opportunity costs drive all current investment choices; when asset prices are high and returns are low, investors seek other assets where prices are low and returns are high. During the bubble disciplined cashflow investors were not adding to their portfolio of real estate, and many investors liquidated when prices were too high. Now that prices are softening, cashflow investors are finding opportunities once again.

I described cashflow investment in greater depth in the post IHB Investor Reports:

One key concept for Investment Value of Residential Real Estate is capitalization rate. The Capitalization (cap) Rate is the (yearly) Net Operating Income divided by Asking Price (assumed purchase price). It is the simplest measure of an investment’s financial performance, and it provides a convenient comparison to competing investment alternatives. A cap rate is like an interest rate on a checking account, a mutual fund return, or a bond yield. Cap rates change over time to reflect the perception of risk in real estate as compared to other investments.

The cap rate is inversely related to price; in other words, high cap rates are synonymous with low prices and visa versa. The cap rate an investor will accept varies from person to person. There is no single appropriate rate to apply to value.

Historically, cap rates on investment real estate are 10% to 12%, but in our era of cheap money and sub-5% interest rates, cap rates of 5%-6% are common today. The spread premium between real estate cashflow and savings account interest compensates holders of real estate for the additional risk. The current spread is very small, which reflects a lack of viable alternative investments and residual kool aid intoxication (people are overpaying).

Cash-on-cash returns and leverage

The cash-on-cash return is of greater interest to the typical leveraged investor as described in IHB Investor Reports:

The Cash-On-Cash Return is similar to a capitalization rate in that it shows a return on investment, but it is measured by comparing the Total Profit and Loss after Expenses, Debt and Taxes to the Total Cash Costs. This is the important rate of return for investors who are not purchasing with all cash. As long as debt is less expensive than the cap rate, the cash-on-cash returns can be magnified by increasing debt. This is an appropriate use of leverage to increase investment returns—to a point.

The over-use of leverage is biggest mistake made by speculators who think they are investors. Leverage (debt) magnifies the capitalization rate. For example, if a property had a 10% cap rate, the application of 5% debt results in a cash-on-cash return much greater than 10%. For this reason, many naively assume that more leverage must be better; on paper it certainly looks that way. However, leverage cuts both ways, and if rents or property values decline, the magic of leverage can drive stellar returns into a black hole.

Judicious use of leverage can increase returns, but the investment goal is to eliminate debt and own cashflow properties with no debt at all, particularly for retirement. Retirees gain little benefit from assets that fail to deliver cashflow.

Cashflow investing versus speculation

Many people who label themselves investors are really speculators. I detailed many of the differences in the post Speculation or Investment. Speculators and investors differ greatly on their use of debt.

Speculators are only interested in assuming a position in a financial market with hope they can exit that position later at a higher price and make a profit. Speculators will maximize debt and minimize debt-service payments because debt is merely a means to the end of taking a position in the market. Resale price is everything to a speculator.

Investors also take positions in a financial market, but they look for low prices which increase their rate of return on a cashflow basis. Investors will minimize debt and maximize debt-service payments in order to retire debt and maximize investment cashflow. Resale price is irrelevant to an investor who need never sell to obtain maximum value from the investment.

To further illustrate the investment style of allocating money, read the posts Accelerated Amortization and Time to Payoff.

Note: take a moment to watch this informative video. Take special note of the cashflow return on investment Bruce Norris is getting in Riverside County (about 40 seconds in).

Advantages of trustee sale purchases

Trustee sale purchases represent the best method for sophisticated investors to acquire cashflow real estate. The first advantage is obvious; the property is acquired at a lower price, which increases the cap rate, and if low-cost debt is used, the lower price increases the cash-on-cash return. The second advantage is not so obvious; if the property does not perform as projected, if purchased properly it can be sold for a profit, and capital is released to pursue other investments.

These two advantages suggest a method for acquiring, evaluating, and operating a rental property portfolio that retains only the best performing properties.

Procedure for acquiring, evaluating, and operating rental property

The procedure Ideal Home Brokers recommends is as follows:

  1. Establish ownership parameters and scan for targets.
  2. Select and bid on best candidates.
  3. Acquire property at trustee sale.
  4. Prepare property for occupancy.
  5. Offer for rent at rate consistent with financial projections for market rents for 30 days.
  6. After 30 days, offer for rent at the proforma price and for sale at a decreasing price until it is rented or sold.
  7. If rented, place new debt on the property (this may require "seasoning" the property by holding for 90 days) if this fits within a larger strategy and only if the interest rate is lower than the capitalization rate.

The first four steps are similar for any acquisition, but steps five, six and seven are unique to this opportunity. Since the property is generally acquired at auction for a price below resale, if the property does not perform as expected, there is little reason to keep it. The property should be offered for rent at or slightly above the projected rental rate, and if it fails to rent for that amount in a timely manner, the property should be disposed of.

Current returns favor flipping

Cashflow properties rarely offer investors rates of return exceeding 20%, and in today's market, 5% is far more common. So why not flip the property and make more than 5% in 120 days? Why not take that capital and flip in and out of two or three properties a year and make more than a 20% rate of return?

The only reason is lack of opportunity, and for the next three to five years, there will be no shortage of flip opportunities as California turns over a significant percentage of its housing stock. Perhaps after this debacle is truly behind us and we have mopped up the foreclosures, keeping money tied up in long-term hold properties is warranted, but until the foreclosure wave recedes, investors with the cash to play in this market should consider doing so.

Flipping houses is the subject for next week.

IHB Property Evaluation Reports

To help buyers and investors, we designed the IHB Fundamental Value Reports, to have some consistency in format and information. The differences in the reports are primarily in the information they present because different audiences have different needs and wants. They all pull from the same basic data. Everything is transaparent. The report for Trustee Sales used as rentals is the most complex of the group, so bear with me as we delve into the details.

The cover page has pictures if they are available. The vast majority of foreclosures never hit the MLS, and often all we can get is a picture of the front elevation and perhaps a floorplan. We advise owners to budget for complete renovations. If they do not need to spend the renovation money, they should consider it a savings.

The basic property information is present: address, beds, baths, and so on. The scheduled date of the Trustee Sale (subject to postponement), and the published opening bid are presented for reference; however, the published bid is often meaningless as these bids are frequently dropped at the last minute.

The maximum bid amount is our recommended amount. The financial performance of the investment is calculated based on this price. If we obtain price improvement at auction, the performance of the investment is improved.

Of course, this brings up the key conflict of interest between investors and the IHB as service providers. Investors want to get the best possible deal — which means bidding less — and we do not want to research hundreds of properties and go to countless auctions and not buy anything. Our solution is standardization. The maximum bid price is set to an amount that allows the investor to get out unscathed (and usually make a profit) if the investment does not cashflow as planned. If an investor wants to guarantee price improvement by lowering the maximum bid amount, then we charge a fee to attend the auction.

The most important items are bold faced: the final bid decision deadline and the sale day cash requirement. If a buyer is interested in a property, we don't want to wait until the last minute to finalize our research and and gather the necessary cashier's checks. In an investor missed the deadline or fails to come up with the cash, they missed the deal.

We provide our opinion of the likelihood of success given the foreclosure market comps, and we provide a breakdown of the total cost as well as the equity obtained on auction day.

The next two numbers are the net income and the capitalization rate. The net income is annualized from the positive cashflow detailed on page two. When this annualized net income is divided by the total trustee sale cost (also detailed on page 2), the result is the capitalization rate.

The final three numbers are of great interest to cashflow investors who plan to obtain cash-out refinancing to free up capital to acquire other properties. This spreadsheet calculates the maximum cashflow-positive loan the property will support (within other limits). The remainder is capital investment after financing. The cashflow after financing is divided by the capital required to obtain that cashflow to measure the cash-on-cash return.

Let me be clear: this is still an all-cash deal to get the property at auction. The cash-out refinancing comes later, probably after three to six months of seasoning.

I recognize this sounds antithetical to my mantra of eliminating debt, but debt does have its uses. Debt is very dangerous if too much is used, or if it is considered a permanent part of the plan. Debt used in acquisition, which this debt is indirectly used for, is not an inherently bad use of debt. As long as there is a plan for consistent reduction and final elimination of this debt, it is useful. As long as the investor keeps debt elimination as the goal, using debt to obtain cashflow-positive property is beneficial, and for many would-be landlords, essential.

Page 2

The second page provides the detail for the summary numbers on page 1. The sale day cash requirement is the sum of the maximum bid amount and the trustee sale fees. The total trustee sale cost includes renovation and improvements, property taxes (both back and current), an allowance for tenant move out and cash-for-keys if necessary, and transer taxes due. The cost of ownership includes the standard costs minus any financing costs as this is an all-cash deal.

The rental income is derived from comparables found in the MLS. An allowance for vacancy and collection loss is provided. Realistically, tenant turnover will cause the loss of one month's rent once every two years or so. In fringe markets, this number may be higher. Wise landlords set aside this money in a cash account to cover the missing payment when it occurs. The net monthly rental income is the gross rent minus the vacancy and collection loss.

The operating expenses are typical of a rental including a property management fee. These fees can be as low as 3% and as high as 12% depending on where the property is located. Six percent is relatively common in Southern California.

Net Operating Income is the monthly cash expenses is subtracted from monthly rental income. This is the stable cashflow capable of covering a mortgage payment. This is where the magic of this spreadsheet comes in.

Jump ahead to lines 28 and 29. These are the two limiting factors when considering cash-out refinancing. Line 28 has the maximum loan amount the lender will allow. In the example above, it is assumed the most a lender will allow on a cash-out refinance is 80%. During the bubble — and during the Saving and Loan disaster — lenders were willing to go much higher than 80%. This number is totally dependent upon lender standards.

Line 29 is the maximum cashflow positive loan the property will support. In Irvine, it is very rare to get properties where the cashflow justifies a loan greater than 80% loan-to-value. If I were to model the property Bruce Norris bought in the video above, the maximum cashflow positive loan would likely exceed 100%.

Note: The Savings and Loan fiasco of the late 80s and early 90s was caused by the phenomenon illustrated here. Lenders in the S&L era would provide cash-out refinancing in excess of 100% for nothing more than an aggressive proforma. Basically, you could walk into an S&L loan department with a spreadsheet like mine that projected a cashflow that justified loan of 120% of the development cost, and the lender would give you the money. There were deal makers all over California and Texas drawing up proformas and walking out of banks with millions of dollars. As one might imagine, there was fraud and theft on a grand scale. It has only since been eclipsed by the Great Housing Bubble.

On most properties in Irvine, the actual monthly cashflow will be zeroed out by the loan. The actual profit and loss is captured in the amortization on the loan. This is a viable way to acquire and pay off real estate.

The financing section details how the maximum loan is calculated and the remaining capital the investor must leave in the property to remain cashflow neutral.

Page 3

Page three shows the various comparable ranges and cashflow values with a summary chart.

Page 4 has comparables and notes.

When people think about buying foreclosures at auction, the whole activity seems extremely risky and speculative. I hope I have demonstrated today that investing in this market with limited risk is easier than most imagine.

The most important part of this process is selecting the right comparables. The spreadsheet will do the math quickly and accurately, but if the data is bad, or if the proper adjustments to the data are not made, the whole deal falls apart. If the comps are too high, there is a chance the investor will overpay. If the comps are too low, the investor will be outbid.

For instance, when I ran the report for this property, my maximum bid amount was under the amount the buyer ultimately paid. Based on his current asking price and the previous reductions, it appears this buyer was too aggressive in his valuations, and he overpaid. That is the random nature of this market. There is no way to know if someone with aggressive assumptions is going to compete with you at auction, and that includes the lenders and their willingness to drop bids.

Knowing the market where you are buying is the key. Many of the investors that have contacted us are already expert in the valuations and rents in a given market area. These are the clients most likely to have a positive result. We assist in the research, analysis and acquisition, but ultimately it is the investor who must decide if the deal is right for them.

Irvine Home Address … 203 Briarwood, Irvine, CA 92604

Resale Home Price … $299,000

Home Purchase Price … $257,800

Home Purchase Date …. 1/12/2010

Net Gain (Loss) ………. $23,260

Percent Change ………. 16.0%

Annual Appreciation … 45.3%

Cost of Ownership


$299,000 ………. Asking Price

$10,465 ………. 3.5% Down FHA Financing

5.19% …………… Mortgage Interest Rate

$288,535 ………. 30-Year Mortgage

$63,257 ………. Income Requirement

$1,583 ………. Monthly Mortgage Payment

$259 ………. Property Tax

$12 ………. Special Taxes and Levies (Mello Roos)

$25 ………. Homeowners Insurance

$328 ………. Homeowners Association Fees


$2,206 ………. Monthly Cash Outlays

-$151 ………. Tax Savings (% of Interest and Property Tax)

-$335 ………. Equity Hidden in Payment

$21 ………. Lost Income to Down Payment (net of taxes)

$37 ………. Maintenance and Replacement Reserves


$1,780 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$2,990 ………. Furnishing and Move In @1%

$2,990 ………. Closing Costs @1%

$2,885 ………… Interest Points

$10,465 ………. Down Payment


$19,330 ………. Total Cash Costs

$27,200 ………… Emergency Cash Reserves


$46,530 ………. Total Savings Needed

Property Details for 203 Briarwood, Irvine, CA 92604


Beds: 2

Baths: 1 bath

Home size: 1,000 sq ft

($299 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 74

MLS Number: P720337

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Vg


==== PRICE REDUCED FOR QUICK SALE ==== Private end unit overlooking greenbelt in beautiful, peaceful neighborhood of Irvine. This unit has been renovated with new paint throughout, new carpet, new baseboards around all rooms and brand new kitchen appliances. Tile entry opens to spacious living room. There is also a separate room for laundry.

Property History for 203 BRIARWOOD

Date Event Price
Mar 20, 2010 Price Changed $299,000
Mar 15, 2010 Price Changed $306,000
Feb 23, 2010 Price Changed $309,000
Feb 22, 2010 Price Changed $314,900
Feb 12, 2010 Price Changed $319,000
Feb 03, 2010 Listed $324,900
Jan 27, 2010 Sold (Public Records) $258,000

One percent price reductions really don't seem like enough, do they?

Former Owner

The former owner of today's featured property was an ordinary HELOC abuser. She bought the place in 2003, and by 2006 she was in an Option ARM that finally blew up. There is no way to tell how long she was delinquent before they issued the notice of default, but the lender wasted no time in the foreclosure process:

Prior Transfer

Recording Date: 01/27/2010

Foreclosure Record

Recording Date: 12/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 09/18/2009

Document Type: Notice of Default

IHB Trustee Sale Services

The cleanup of this mess has been delayed 12 to 18 months by the various moratoria and lender delays, but they are finally moving to clean up this mess. This clean up will create opportunities everywhere.

There is no reason the prudent readers of this blog who carefully saved their money should not step in to profitably clean up the mess from the mass stupidity of lenders and borrowers. I will feel good about being an active part of the solution. Someone has to come forward and buy these properties. Those buyers will be compensated with steep discounts (otherwise they wouldn't bother).

Our service gives you this opportunity. Seize it.

Unencumbered Cashflow: The Best Measure of Real Wealth

Acquiring real wealth requires understanding what it is and how it is measured. The most common measure people use, net worth, is inadequate, and it suggests strategies more akin to speculation than true investment.

The sellers of today's featured property followed a strategy of wealth building that is serving them well.

Irvine Home Address … 50 GREENFIELD Irvine, CA 92614

Resale Home Price …… $324,900


Now everybody's got advice they just keep on givin'

Doesn't mean too much to me

Lot's of people out to make-believe they're livin'

Can't decide who they should be.

I understand about indecision

But I don't care if I get behind

People livin' in competition

All I want is to have my peace of mind.

Boston — Peace of Mind

Peace of mind is an underrated and undervalued emotional state. Most people choose lives of speculation, competition, and make believe. They erroneously believe if they arrive at some destination known as "being rich," they will have everything they ever wanted, and that will make them happy. It won't.

There is a peace of mind that comes with wealth, but this emanates not from the pile of money, but the cashflow that pile of money gives off. The size of the pile may get bigger or smaller depending on the market winds, but if the cashflow is stable, the size of the money pile is irrelevant. The real wealth is in the income stream.

I last wrote about this subject in Real Estate, Cashflow Investment and Retirement, but it is an important topic worthy of revisiting.

Many people dream of being rich. At its core, the desire to be rich is the desire for power, and with most people, it is the desire for unlimited spending power. Of course, rich people didn't get rich by spending all their money, but most people want money for what it buys rather than the peace of mind true wealth brings.

Formulas for measuring wealth

People who study accounting and finance are taught how to measure wealth. They believe wealth can be captured in a formula:

Wealth = Assets – Liabilities

That wealth measure, also known as net worth, is convenient because it is easily measured, and it provides a conceptual framework for money managers to measure performance.

It is also hopelessly inadequate. Let me explain.

Perhaps for the uber-rich, an asset and liability model is useful, but for anyone who feels compelled to work for a living — which is most people — the model is not very helpful. Focusing on the balance sheet does not solve the problems of daily life. For that, people need to examine their income statement:

Savings = Income – Expenses

That wealth measure, also known as net income, is better because it captures the real world lives of the vast majority of the population. Maximizing net income is more important than maximizing net worth.

Short of working until death, people need alternate sources of income to substitute for wage income. Some retirees may have savings or annuities from pension or investments, but many end up living only on social security. A steady stream of income from cashflow-positive real estate can make a major difference in a retiree's standard of living.

What would life be like?

Take a moment to imagine your own retirement. If you follow a plan of maximizing wealth as measured in the net worth equation, if you are fortunate, you may acquire significant wealth, but you may not be able to do much with it. If you can't easily convert this wealth to cash, you will feel limited and impoverished regarless of what your balance sheet says.

If you follow a plan of maximizing savings and net income, you may not acquire significant wealth, but you may obtain an abundant income stream to meet your daily living needs for the rest of your life. You will have spending money that no one can take away from you. It is the ultimate peace-of-mind. In addition, you will be able to pass this form of wealth to your heirs with a minimum of taxes.

That is the life I want.

One rich man's cashflow woes

Over the last several months, I have been sharing Wednesday lunches with a man who is very wealthy by the first measure — his net worth is nearly eight figures — but he is totally broke; his assets provide him no income. This causes him stress because he has to sell assets and increase liabilities to live his life.

What's worse, his financial advisors are telling him to sell some properties he owns with no debt — properties he could rent for significant cashflow — and increase the debt on other properties he owns that he wants to keep for his personal use. It is the worst possible advice, shameful, in my opinion.

What this man needs — what every investor needs — is unencumbered cashflow.

What is unencumbered cashflow?

The one characteristic of all true investments is positive cashflow. Any asset valued for potential cashflow or growth is speculation. Many assets blur the line between speculation and investment, but all true investments have one thing in common: they need never be sold to obtain their value.

The man I described above has a speculation problem. None of the assets he controls give off cash; therefore, in order for him to have spending money, he must sell or borrow. This is not a sound way to manage finances.

Many people bought houses during the bubble and thought that made them rich. The land barons in particular were guilty of this mistake. Acquiring assets with negative cashflow with copious amounts of debt may make people wealthy on paper for a while if the assets increase in value (Wealth = Assets – Liabilities); however, this is a huge drain on their income statements (Savings = Income – Expenses). Since asset prices are often volatile, acquiring negative-cashflow assets only works as long as lenders are willing to continually increase debt — the essence of a Ponzi Scheme.

Instead, if investors buy property and work to pay it off, they may not look as wealthy on paper, but their stable income stream provides them the benefits of real wealth; spending power and peace-of-mind. However, to really have peace-of-mind, the cashflow should be as free from claims as possible. It should be unencumbered.

Eliminating encumbrances

There are two main encumbrances to any source of cashflow: taxes and debt service. Real estate has property taxes, income taxes, and a host of expenses that lay claim to the rental income, but by far the largest claim to this income stream is the debt investors typically put on the property.

Depending on the location, rental income can be very stable and predictable which makes it an ideal source of cashflow. The goal of asset management is to minimize the claims against the property because these claims represent risk. Investors who own property without debt never face foreclosure. Speculating land barons lose all their properties to foreclosure in a market bust. The prudent use of debt is the distinguishing characteristic separating investors from speculators.

If an investor can arrange it, owning un-debted real estate — or real estate investment trust shares — in a Roth IRA is the best of both worlds. After age 59 1/2, there is no longer income tax claims on the rental income. If an investor owns the property in California, the property taxes are limited too. Personally, I want to own as much cashflow-positive real estate or other income streams in a Roth IRA. It is the focus of my investment and financial planning.

How do you obtain unencumbered cashflow?

Since this method of investment is how I run my own financial life, I have put significant energy into figuring out how to do it. With respect to real estate, I have created a series of analysis spreadsheets that allow me to look at the income and expenses of any property. These spreadsheets from the basis for the IHB Fundamental Value reports shown in a series of upcoming posts on investing in trustee sales and in the posts IHB Investor Reports and IHB Property Valuation Reports.

Upcoming posts include:

Foreclosure 201: Buying a Rental at Trustee Sale

Foreclosure 201: Flipping Trustee Sale Houses on Speculation

Foreclosure 201: Flipping Trustee Sale Houses to a Buyer in Escrow

Foreclosure 201: Buying Trustee Sale Properties Using Conventional Financing

Today's featured property

This property will likely sell quickly. It is at or below rental parity, and it is one of the lowest priced on the market. The prices are still bloated, but with the low interest rates, this property could be a decent buy-and-hold.

These properties are the traditional move-up. A buyer gets in under rental parity, saves money for the next property, and then when it is time to move, this one is rented for positive cashflow.

The owner's of today's featured property did not HELOC it. I commend them on their financial prudence, and I hope this post helps them find a buyer. They display the habits of true wealth.

Irvine Home Address … 50 GREENFIELD Irvine, CA 92614

Resale Home Price … $324,900

Home Purchase Price … $190,000

Home Purchase Date …. 6/29/2001

Net Gain (Loss) ………. $115,406

Percent Change ………. 71.0%

Annual Appreciation … 6.1%

Cost of Ownership


$324,900 ………. Asking Price

$11,372 ………. 3.5% Down FHA Financing

5.24% …………… Mortgage Interest Rate

$313,529 ………. 30-Year Mortgage

$69,124 ………. Income Requirement

$1,729 ………. Monthly Mortgage Payment

$282 ………. Property Tax

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

$27 ………. Homeowners Insurance

$361 ………. Homeowners Association Fees


$2,399 ………. Monthly Cash Outlays

-$289 ………. Tax Savings (% of Interest and Property Tax)

-$360 ………. Equity Hidden in Payment

$24 ………. Lost Income to Down Payment (net of taxes)

$41 ………. Maintenance and Replacement Reserves


$1,814 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$3,249 ………. Furnishing and Move In @1%

$3,249 ………. Closing Costs @1%

$3,135 ………… Interest Points @1% of Loan

$11,372 ………. Down Payment


$21,005 ………. Total Cash Costs

$27,800 ………… Emergency Cash Reserves


$48,805 ………. Total Savings Needed

Property Details for 50 GREENFIELD Irvine, CA 92614


Beds: 2

Baths: 2 baths

Home size: 1,267 sq ft

($256 / sq ft)

Lot Size: n/a

Year Built: 1984

Days on Market: 3

MLS Number: S613513

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Ad



ALL CAPS and asterisks instead of periods.

What is wrong with a period? Isn't a simple dot more efficient than two of those strange looking star-like things? And why no spaces? That description is nearly impossible to read.

Arizona Officials Apportion Bailout Funds and Wrestle with Moral Hazard

Arizona officials are trying to help house debtors with bailouts. They recognize the moral hazards, and they struggle selecting whom to save and whom to let lose their houses.

Today's featured property is a Trustee flip in Woodbury scheduled for sale on 30 March 2010.

Irvine Home Address … 215 Groveland, Irvine, CA 92620

Resale Home Price …… $549,000

T-sale Home Price …… $571,912


Sweet dreams are made of this

Who am I to disagree?

I travel the world

And the seven seas–

Everybody's looking for something.

Some of them want to use you

Some of them want to get used by you

Some of them want to abuse you

Some of them want to be abused.

Eurythmics — Sweet Dreams

Sweet dreams come from HELOC abuse. Every house debtor and kool aid intoxicated knife catcher is riding the dream of endless appreciation and unlimited spending power. Sweet dreams indeed.

What happened to the American Dream? Has a "better, richer, and happier life" come to mean money for nothing? Consumption without production? Gain without contribution?

Microcosm of Housing Crisis on an Arizona Street

Published: March 22, 2010

[Gary Setbacken, right, talks to his neighbors in the Tatum Ranch community of Cave Creek, Ariz. Mr. Setbacken and his wife, who arrived in 1993, paid down their mortgage even as home prices skyrocketed.]

CAVE CREEK, Ariz. — … Arizona is one of five states that, with money from Washington, hopes to help at least some of these people hold on to their homes. Under a new, federally financed pilot program for the hardest-hit housing markets, state officials will decide who will get a homeowner bailout, and who will not.

The idea is as controversial in Washington as it is here. Do the neighbors next door who lived beyond their means — the ones who, say, bought that house they could not afford, or who binged on home equity loans to buy new cars and flat-panel TVs — really deserve to be bailed out with taxpayer dollars? Do they deserve to have some of their debts forgiven? And is that fair to the cautious ones who paid their mortgages?

I am amazed those questions are not rhetorical. Someone, somewhere believes HELOC abusers should be given a pass — forgiveness without consequence. At least a few officials — the few whose primary job is not to enrich lenders — are concerned about moral hazard and do not want to help those that do not deserve it.

For the people of Cave Creek, the answers will fall to state officials like Michael Trailor, the director of the Arizona housing department.

A former real estate developer, Mr. Trailor knows firsthand about the perils of the property market.

“I feel for all of them,” Mr. Trailor said of the struggling homeowners. “But we do not have the funds to help all of them. If we can help 6,000 people, which ones should we help?”

The government never fails to reinforce my cynicism; they develop a program to keep house debtors paying for a house with no equity praying for a bailout that isn't coming. More people will win the lottery than will be helped by this program or any other.

If lenders keep people in place long enough, debtors will be invested in their own poor decision, and they will endure. It will take forever for house debtors to pay off these monster loans. As each debtor gives up and sells, it adds supply and prevents appreciation from saving other debtors.

The federal government will pay for pilot programs in Arizona, California, Florida, Michigan and Nevada with $1.5 billion from the federal banking rescue. That figure is a small fraction of the funds that would be needed to help all of the people at risk. Arizona, for instance, received $125 million. If it allocates $30,000 of aid for each residence, 4,166 homeowners would benefit. But the Phoenix area is bracing for as many as 50,000 foreclosures this year alone.

Mr. Trailor said he was reluctant to help homeowners with “self-inflicted wounds,” like those who overspent or cashed out the equity in their homes during the bubble years. He wants the banks to match the public money being used for debt forgiveness, and he is focusing on people whose incomes have fallen but who still hold jobs.

He is considering an approach known as “earned forgiveness,” where the state and the banks promise to forgive mortgage debt later on, but only if the homeowners stay in their homes and keep making their payments.

OMG! How much more obvious can they be. Prove you're worthy of debt slavery by making onerous payments with no hope of equity, and the government will modify your loan in a way that keeps you in your house and maintains your fantasies of appreciation. What a deal!

Delusion is the new American Dream.

Three out of four abuse their HELOCS

Do you remember to old Trident gum ads, "Four out of five dentists surveyed…?" Well, Three out of four neighbors surveyed for this article were HELOC abusers. This is one typical street in a typical suburban town. From the many cases I have documented here, do you think Irvine is any different?

New Heroes

The new reality is evident on East Montgomery Road, where the bust is playing out in a variety of ways.

There are the Setbackens, at 4355, who arrived in 1993 and paid down their mortgage even as home prices skyrocketed. [lower right couple.]

I think you all know how I feel about what these people did; they observed the insanity around them and failed to participate. They passed up hundreds of thousands of dollars in consumer spending, and now they are going to keep their house while others search for rentals. They are true heroes and great role models.

Rationalizing their own bailout

Across the street are the Chatburns, Tim and Leslie. They also arrived in the 1990s, before prices exploded, but struggled recently to keep up with the bills after an injury kept Mr. Chatburn out of work.

Mr. Chatburn, an air-conditioning repairman, used to say that bailing out his neighbors would be unfair, but he changed his mind after watching news programs about the rescues of big financial companies like the American International Group.

“I started thinking about all this money we paid as taxpayers to the banks,” he said, “and I thought, ‘Why don’t we take care of our own a little bit?’ ”

Why don't we take care of our own? Because they are HELOC abusers! Let me buy a house and spend foolishly so I can reach into his pocket and see how he feels.

And notice the bullshit about how an injury added $100,000 to his mortgage. Perhaps, if he was injured and unable to earn as much money, they should scale back on lifestyle expenses and even downsize. No, that would require sacrifice. It is much more expedient for house debtors to live as entitled and pass the bills on to us.

Ms. Carter, at 4344, arrived in 2005, as the bubble was inflating. She took out tens of thousands of dollars in home equity for repairs and other items, and by this year, she was underwater on her mortgage by $86,000. A single mother, she moved out this month, days before her home was sold in a short sale, which meant her mortgage lender allowed her to sell for less than the value of her mortgage and the lender took the loss.

What "other items" did she purchase? What was she entitled to that she could not afford?

And then there is the young couple with a toddler, at 4343. They moved out on the same day as Ms. Carter, before a scheduled foreclosure of their home that was $115,000 underwater. The couple, who asked not to be named, also bought near the peak and took out a home equity loan to pay off their student loans and other debts. Then, a year ago, they stopped paying their mortgage, after both of them lost their jobs for a time. They now have office jobs again.

This couple really benefited from the bubble. Their student loans could not be bankrupted out of, but since they paid it off with a HELOC — a debt obligation removed in bankruptcy — they could wipe the slate clean. Of course, like everyone else who did what they did, they are hoping they never hear from either their former lender or the tax man and they will not need to declare bankruptcy. What becomes of their $115,000 debt?

Who should we help?

The Arizona official faces an easy decision about who to help. Have you noticed that the people you would feel good about helping are those that do not need it? And those people who you do not feel good about helping — HELOC abusers — are the ones who are going to get help? The frugal couple who paid down their mortgage; I would help them out if they became unemployed. The HELOC abusers; screw them, they can move into their cars like unemployed renters.

Mr. Setbacken, a salesman, said he had warned his neighbors not to get in over their heads but they did not listen. He and his wife might have stepped up to a bigger house if they, like so many of their neighbors, had gambled recklessly on the housing market, he said.

“Everybody that I know that got themselves in trouble was because of one word: greed,” said Mr. Setbacken, 63, a former Marine who remains in tip-top physical condition. “I have no sympathy for any of them, on the financial end. When I hear about dropping the amount you actually owe, I could stick my finger down my throat.”

I could care less about the default, it is paying the bill that makes me want to puke.

… Ms. Carter said she felt guilty about leaving. With her short sale, the price of the home went down to the benefit of the new homeowner. But it dragged down prices in the neighborhood, she said.

Ms. Carter, a mother of two and a real estate agent who poses as an angel with wings on her Web site, has been through hard times before. Years ago, she considered filing for bankruptcy but then changed her mind. She said she was accountable for her actions and was making what amounted to a business decision to leave her home.

“I had to take emotion out of it,” said Ms. Carter, 36. “If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.”

Strategic default is now the norm. Everyone has finally realized it makes no sense to keep paying when they are at scuba depth.

Sitting at her dining room table, before a large tank of fish, she recalled how she had made this a perfect home. It is one of the few on East Montgomery Road with grass in the yard, an expensive proposition in the desert. A Mercedes sits in the driveway.

She said she did not feel she deserved to have her debts forgiven, but added that if her mortgage had been lowered, she would have tried harder to stay. The worst part, she said, is that her decision will hurt Mr. Setbacken, who has watched out for her over the years. “For Gary, he’s going to have to deal with the ramifications of what I’m doing because I’m bringing his property value down,” she said. “I pray at church. I feel horrible for what I’m doing to my neighbors.”

That guilt will disappear a nanosecond after she leaves the area. She will not keep in contact with any of those people, and she will not give them a second thought. She wouldn't worry so much about what the neighbors thought about her if she realized how little they did.

Later, after Mr. Setbacken talked to Ms. Carter — she “cried and cried and cried,” he said — he had a change of heart. In an e-mail message, he said that perhaps wealthy Americans could donate money to aid homeowners. If he had more money himself, he might help some neighbors pay their mortgage bills.

He feared that he looked heartless and sent an apologetic email to the reporter. He has nothing to be ashamed of. He is the only character in this story worthy of respect and admiration.

“I have focused on the financial issues during these times and overlooked what was more important, the emotional stress that my neighbors are feeling,” Mr. Setbacken wrote. He walked down East Montgomery Road and gave a bottle of wine to the young couple facing foreclosure. It was, he said, “to help them pack.”

That is compassion. He helped them get on their way to their new sustainable life with fewer entitlements. It is far more compassionate to help them pack than try to keep them in a home they cannot afford, particularly when someone who can afford the home is waiting for it to be vacated.

Mr. Setbacken,

I salute you.

You represent the best of American character.

Irvine Home Address … 215 Groveland, Irvine, CA 92620

Resale Home Price … $549,000

T-sale Home Price …… $571,912

Home Purchase Price … $293,000

Home Purchase Date …. 4/24/1998

Net Gain (Loss) ………. $244,597

Percent Change ………. 95.2%

Annual Appreciation … 5.7%

Cost of Ownership


$571,912 ………. Asking Price

$114,382 ………. 20% Down Conventional

5.05% …………… Mortgage Interest Rate

$457,530 ………. 30-Year Mortgage

$119,095 ………. Income Requirement

$2,470 ………. Monthly Mortgage Payment

$496 ………. Property Tax

$305 ………. Special Taxes and Levies (Mello Roos)

$48 ………. Homeowners Insurance

$39 ………. Homeowners Association Fees


$3,358 ………. Monthly Cash Outlays

-$424 ………. Tax Savings (% of Interest and Property Tax)

-$545 ………. Equity Hidden in Payment

$226 ………. Lost Income to Down Payment (net of taxes)

$95 ………. Maintenance and Replacement Reserves


$2,710 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$5,719 ………. Furnishing and Move In @1%

$5,719 ………. Closing Costs @1%

$4,575 ………… Interest Points

$114,382 ………. Down Payment


$130,396 ………. Total Cash Costs

$41,500 ………… Emergency Cash Reserves


$171,896 ………. Total Savings Needed

Property Details for 215 Groveland, Irvine, CA 92620


Beds: 3

Baths: 2 full 1 part baths

Home size: 1,971 sq ft

($279 / sq ft)

Lot Size: 2,100 sq ft

Year Built: 2005

Days on Market: 163

MLS Number: P709421

Property Type: Condominium, Residential

Community: Woodbury

Tract: Wdgp


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

This property is in backup or contingent offer status.

Lovely home in the award winning Woodbury Community, a perfect place to live, dine and shop. Conveniently located next to the Woodbury Towncenter, I5 Frwy. and the O.C. Great Park. This luxurious home features a formal dining room, a great room perfect for entertaining, harwood floors throughout 1st level, Santa Cecilia granite counter tops, plantation shutters, recessed lighting w/ dimmers, a walk-in closet and balconies. —- Enjoy the Woodbury outdoors! Jeffrey Open Space Trails, lagoon & competition pools, tennis, basketball and volley ball courts, play parks, bbq and much more. Agents, please see remarks.

It is looking increasingly unlikely this will be an approved short and will instead become a trustee sale.

Short Sale Asking Prices

Have you noticed that short sale asking prices are low just to attract 20 offers? Today's featured property is no different. The resale comps suggest a value of about $590,000.

115 Spanish Lace — A 3 bed 1,960 SF CONDO — 2006 12/09/2009 $ 550,000
84 Townsend 1 — A 3 bed 2,100 SF CONDO — 2005 12/22/2009 $ 594,000
81 Mission — A 3 bed 1,960 SF CONDO — 2005 8/28/2009 $ 560,000
53 Chantilly — A 3 bed 1,960 SF CONDO — 2006 12/31/2009 $ 625,000

Is the bank going to sell this property as a short for less than comparable sales at $549,000?

Lenders use the short sale offer time to establish fair market value for resales which is useful information for their loss mitigation teams. Many times they are a servicer who isn't authorized to sell as a short which is why you often see properties go to foreclosure when there are short sale bids at higher prices. Knowing fair market value also gives the lender guidance on how much they can drop a bid at auction.

Irvine has been seeing action among cash buyers, and the gap between trustee sales comps and resale comps is small on the more desirable properties. The trustee sale comps suggest this property will go for about $490,000 at auction; although, we would not bid that high. Even at a $571,912 trustee flip price, the maximum bid is probably too low to get the property.

84 TOWNSEND — A 3 bed Condominium — 2005 9/23/2009 $ 502,200
92 TOWNSEND — A 3 bed Condominium — 2005 12/3/2009 $ 451,000
68 TOWNSEND — A 3 bed Condominium — 2005 2/3/2010 $ 501,000
89 WINDING WAY — A 3 bed Condominium — 2005 2/10/2010 $ 515,597
77 CANAL — A 3 bed Condominium — 2005 2/17/2010 $ 430,000

84 Townsend was a quick flip for about a $90,000 gain. Rental parity is a surprising $585,000, courtesy of Ben Bernanke and 5% interest rates.

62 Shadowplay — 3 bed SF CONDO — 2,146 33 $ 2,900
28 Pink Sage — 3 bed A SF CONDO — 1,745 66 $ 2,800

If you believe rents and interest rates are stable, or if you see this property as a long-term personal residence, there are reasons to consider this property.

Market Slices First Wave of Knife Catchers

Many who "bought the dip" in 2007 and 2008 are discovering the market correction is more severe than they realized.

Today's featured property is one of the ugliest in Irvine, but some knife catcher saw an opportunity — an opportunity to get sliced….

Claremont Kitchen

Irvine Home Address … 3922 CLAREMONT St, Irvine, CA 92614

Resale Home Price …… $485,485


Sweet child in time, you'll see the line

Line that's drawn between the Good and the Bad

See the blind man, he's shooting at the world

Bullets flying, ooh taking toll

If you've been bad – Oh Lord I bet you have

And you've not been hit oh by flying lead

You'd better close your eyes, you'd better bow your head

Wait for the ricochet

Deep Purple — Child in Time

Buying into a declining market on speculation is a fools game. When I first studied stock trading, I noticed an important truth about picking tops and bottoms versus playing a trend; every attempt to pick a top or a bottom fails except the last one which is a big winner. Every attempt to trade momentum is a winner except the last one which is a big loser. It is better to hit many singles trading momentum than it is to try to hit home runs picking bottoms.

Many active buyers today are basing their decision on the belief that the market has bottomed, and they are betting on appreciation. They may be right, but I rather doubt it. It is much wiser safer to wait and see if positive price momentum can continue through the removal of government market props and the disposition of shadow inventory.

Mortgage delinquencies at historic highs

The state of the housing market has long reached a point where it's good news to hear, "It's not getting worse." Unfortunately, according to a firm that tracks borrowers behind on their mortgages, you can conclude at best, "It's getting worse, but less quickly."

Rising sales, largely spurred by first-time buyer credits, have given people hope that the beleaguered housing market has finally hit bottom and is even showing signs of life. It's been impossible, however, for me to get excited about this, considering that the number of people falling behind on their loan payments is growing, not shrinking. Unemployment continues to produce new delinquencies, and it's been many quarters now since we were talking only about subprime mortgages. No, delinquencies are hitting regular old fixed-rate mortgages to borrowers with good credit, too.

And here's the latest report from Lender Processing Services out of Jacksonville, Fla.: Delinquency rates have hit historic highs. More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure, with another 1 million properties either bank-owned or sold out of foreclosure. An incredible 10% of all U.S. loans are delinquent.

The worst-hit areas are the usual suspects: the boom-and-bust states of Florida, Nevada, Arizona, California, plus the economically savaged areas of Michigan and Ohio. Also up there are Mississippi, Georgia, Indiana and Illinois. But few states are escaping the problem; it's just that the worst states are so, so bad it makes the others look relatively good.

LPS says, "The pace of deterioration has slowed." That's the supposed good news. But I have a hard time thinking optimistically about this, not just because in January alone 346,000 borrowers fell behind on their payments for the first time. The other disturbing statistic is that older loans make up a higher percentage of new delinquencies — that means people who already had fallen behind and pulled themselves out of it (maybe through a loan modification program) are delinquent again. This confirms what many have said about the federal programs to reshape mortgages into loans people can actually pay: They're not doing the job for enough people.

The sheer number of bad loans surely means more foreclosures, which means more houses on the market being sold at bargain-basement prices. And that means we'll watch our property values continue going down, down, down.

Bulls are dismissive of shadow inventory as if it is just another argument bears make about house prices. Shadow inventory is a result of every expedient decision lenders made to avoid recognizing losses.

Every problem bears noted over the years — ARM loans, liar loans, negative amortization loans, artificially low interest rates, excessive speculation with 100% financing and so on — have all proven to be prescient. The predictable result of each of these problems is mortgage default followed by foreclosure which leads to more inventory and lower prices. Lenders have merely delayed this step-by-step process by refusing to foreclose. That doesn't make the problem go away; it just makes the problem worse. Appreciation from a strong economy is not coming, and even if it were, it wouldn't counteract the effect of so many distressed homeowners.

Lender Processing Services Chart Porn

Last week when I posted One Defaulting Owner’s Free Ride: Three Years and Counting, many wondered how common it was to find home debtors who have not made payments for a very long time. Take a careful look at the numbers in the chart below. According to LPS, there are almost a quarter million homeowners who have squatted for more than two years, and 33,723 of them have not begun the foreclosure process.

The shadow inventory and foreclosure problem is growing. For each property we resolve through the foreclosure process another two and one-half properties are defaulting.

If you had a virus, and if the medication you were taking to combat the disease were killing viruses at a slower rate than they reproduced, would you consider yourself healthy or improving?

Can you find good news in these conclusions?

Dean Baker: We’re Still In a Housing Bubble

Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. “There’s no plausible fundamental explanation for that,” he says.

Why? Simple, he says: Economic fundamentals are all going in the other direction. Rental apartment vacancies are reaching record highs. Many segments of the housing market are still oversupplied. And the core demographic in the country—the baby boomers—are reaching the age where they’re more likely to downsize, buying less house in the years to come.

Far from some rosy estimates that housing is going through a temporary, once in a lifetime downturn, and that once the market bottoms, homes will again appreciate well beyond the rate of inflation, Mr. Baker argues that home prices are far more likely to increase annually at the rate of inflation, at best.

“If anything, I expect housing to be weaker than normal rather than stronger over the next decade,” he says. “People who say this is a temporary story, there’s no real reason to believe anything like that.”

The recent burst of good housing news has been fueled by government stimulus, including the tax credit, low mortgage rates and easy financing from the Federal Housing Administration. Mr. Baker, who had been a skeptic of the tax credit, concedes that it has worked. So, too, he says, has the FHA effectively supplied credit to goose sales.

But that’s likely for the worse, he argues, taking the opposite view of policymakers at the FHA.

“As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011,” he says. “In so far as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner. We didn’t do those people a favor.”

We are not doing ourselves any favors as taxpayers who are guaranteeing the inevitable losses these loans will incur. When our current batch of knife catchers realize they overpaid and prices are not going to recover any time soon, they will strategically default.

Knife Catchers and the second wave of foreclosures

Today's featured property is an example of what Dean Baker is worried about: defaults and foreclosures among those who were encouraged by the government to overpay during the price decline.

I first profiled today's featured property back in September of 2007 in You Ugly:

This listing is the least desirable single family detached home in Irvine. Everything about this property is a negative:

  • It is 36 years old.
  • There is no back yard.
  • It only has 1 full bathroom.
  • The front elevation has no windows. It looks like a 3 car garage next to a 2 car garage. Nice…
  • The colors are awful. Check out the dark brown flooring and the blue cabinets and walls. The view of the block wall is a reminder of your prison sentence.
  • The living room has three incompatible shades of ugly.
  • The house itself is right on the 405 on ramp at Culver. A location guaranteed to have maximize noise and air pollution as people accelerate onto the freeway.
  • If that wasn't bad enough, it is adjacent to a huge power pole with enough electricity running through it to make your hair stand on end and give your children brain cancer. Perhaps the hum of the power lines drowns out the freeway noise. Who knows?

I would not live in this house.

The property was purchased on 2/28/2008 for $458,500. The owner used a $412,650 first mortgage and a $45,850 down payment. It appears he paid for less than one year before giving up:

Foreclosure Record

Recording Date: 02/11/2010

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

Foreclosure Record

Recording Date: 04/01/2009

Document Type: Notice of Default

The lender, HIGH TECH LENDING INC, danced for ten months before deciding to push this owner out.

Ideal Home Brokers and Financed Trustee Sales

Today's featured property, ugly as it is, will probably sell to a third party at auction. Thanks to 5% interest rates, recent comparable sales value the property at $500,500 — which surprises me that the owner is not trying to sell it an get his down payment back — but this property is headed to auction.

If a buyer steps forward and puts 3% down on a $485,485 purchase price, our hard-money capital partner will authorize us to go to auction and bid on the property. In the event we are the successful bidder, the property is automatically in escrow with the buyer who placed the down payment.

Personally, I can't recommend anyone pay $485,485 for this house, but based on the requirements of our hard money lender and the other costs in the deal, that is the price we must charge to make the deal work.

Claremont Kitchen

Irvine Home Address … 3922 CLAREMONT St, Irvine, CA 92614

Resale Home Price … $485,485

Home Purchase Price … $458,500

Home Purchase Date …. 2/28/2008

Net Gain (Loss) ………. $(2,144)

Percent Change ………. 5.9%

Annual Appreciation … 2.7%

Cost of Ownership


$485,485 ………. Asking Price

$16,992 ………. 3.5% Down FHA Financing

5.05% …………… Mortgage Interest Rate

$468,493 ………. 30-Year Mortgage

$101,097 ………. Income Requirement

$2,529 ………. Monthly Mortgage Payment

$421 ………. Property Tax

$101 ………. Special Taxes and Levies (Mello Roos)

$40 ………. Homeowners Insurance

$50 ………. Homeowners Association Fees


$3,142 ………. Monthly Cash Outlays

-$419 ………. Tax Savings (% of Interest and Property Tax)

-$558 ………. Equity Hidden in Payment

$34 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves


$2,280 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,855 ………. Furnishing and Move In @1%

$4,855 ………. Closing Costs @1%

$4,685 ………… Interest Points

$16,992 ………. Down Payment


$31,387 ………. Total Cash Costs

$34,900 ………… Emergency Cash Reserves


$66,287 ………. Total Savings Needed

Property Details for 3922 CLAREMONT St, Irvine, CA 92614


Beds: 3

Baths: 2

Sq. Ft.: 1222

$/Sq. Ft.: 375

Lot Size: 5,521 Sq. Ft.

Property Type: Residential, Single Family

Style: One Level, Traditional

Year Built: 1971

Community: Westpark

County: Orange

MLS#: S503237


You'll love this great home in a wonderful school district. The light and bright floorplan features neutral carpet, pergo flooring and cathedral ceilings. The large yard provides lots of space for entertaining & play. This home is located just steps to the community pool and park. Plus, there are no Mello Roos! This is a bank owned property. Bring us an offer!