Category Archives: Library

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

{book1}

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

——————————————————————————

EQUITY SALE**NOT A SHORT SALE**NO NEED TO WAIT THAT LONG AS A SHORT SALE**DOWNSTAIRS END UNIT**QUIET INSIDE LOCATION**VERY POPULAR OPEN FLOORPLAN**VERY CLEAN AND WELL MAINTAINED PROPERTY**VERY SPACIOUS LIVING ROOM**NICE SIZED KITCHEN WITH BREAKFAST BAR**KITCHEN OPEN TO SPACIOUS DINING ROOM**LARGE MASTER SUITE SEPERATE FROM 2ND BEDROOM**INSIDE LAUNDRY ROOM**NEUTRAL CERAMIC TILE ENTRY, KITCHEN, AND DINING AREA**MUST SEE**PRICED TO SELL FOR FAST**

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.

Buying a Trustee Sale Property as a Primary Residence

Buying a personal residence at trustee sale can be financially rewarding. Ideal Home Brokers will locate and research the properties as well as attend the many auctions necessary to obtain one.

Irvine Home Address … 1 RIMROCK Irvine, CA 92603

Resale Home Price …… $1,550,000

{book1}

The silicon chip inside her head

Gets switched to overload

And nobody’s gonna go to school today

She’s gonna make them stay at home

And daddy doesn’t understand it

He always said she was good as gold

Tell me why

I don’t like Mondays

Boomtown Rats — I Don't Like Mondays

I enjoy writing the news article posts, but its back to class for a more cerebral look at foreclosure sales.

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

IHB Fundamental Value reports for Owner-Occupied Trustee Sale Properties

There are many plusses and minuses of participating in the foreclosure market:

save money,

buy from inventory unavailable to financed buyers, or

put money to work with a higher return than bank interest.

There are risks and disadvantages as well:

Cash Only

Limited Selection

No Inspection

No Title Insurance

No Remorse Period

Unannounced Postponements and Late Cancellations

High Opening Bids

Competition

For more detail on these risks, please see Foreclosure 101: Mechanics of a Trustee Sale.

For buyers it isn't always about the discount as simply having "first dibs" is a big advantage, the fact that it is discounted to resale is a bonus. For instance, many properties that are tied up as unapproved short sales end up going to auction. All the finance buyers in the short sale queue get bumped by the purchasers at Trustee Sale. Cash brings the power to cut to the front of the line.

Also, In today's zero interest-rate environment, having cash tied up in real estate can provide a return on investment though saving on rent — assuming of course the property does not decline in value while during the holding period.

Page 1

When we designed the IHB Fundamental Value Reports, we determined what information was most relevant, and we organized the reports to present this information clearly and concisely.

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. Most will spend the money to enjoy their home once it is properly budgeted.

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

The maximum bid amount is the most we recommend buyers pay for the property. At that price level, the all-in cost leaves enough room to get out at breakeven after commissions and closing costs if it turns out the buyer does not like the property. If people want to bid higher because they really like the property, that is their decision. If they want to bid less to obtain a bigger discount, we charge additional fees to attend the auction because most often it is a waste of time. Remember, a maximum bid doesn't mean it will cost the full amount; it represents the most that could be paid for the property.

The bold-faced items are the two data points of high importance. The first is the date by which a buyer must make a decision to bid on the property. If a buyer is interested in a property, we must do additional title research and we don't want to scramble around on the morning of the sale and risk missing it. The second key datum is the total amount of cash required on the day of the sale. Most often buyers have funds tied up in accounts that may take a few days to get liquid. The full amount is required in cash on the day of the sale. If a buyer is short of cash, nobody goes to the auction.

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 savings versus resale.

The final two lines show the annualized savings that accrue to an owner by eliminating rent. This savings divided by the total investment yields a capitalized ownership savings rate that owners may compare with the returns their are obtaining in other investments. This number is generally quite small, and it usually does not provide a return justifying the risk, but in today's savings environment, it is usually far better than a certificate of deposit.

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 comparable rental rate minus the cost of ownership is the monthly savings the owner enjoys by not having a house payment.

The bottom of page 2 has comparable information for trustee sales, resales, and rentals.

Page 3

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

The owner of today's featured property bought it for well under his current, delusional asking price. Despite his delusions, he did get a great deal on a large and very desirable property in Turtle Rock. If he is fortunate, the next leg down in pricing won't drop below his purchase price. If he is very fortunate, some fool will buy this from him and make him half a million dollars.

Irvine Home Address … 1 RIMROCK Irvine, CA 92603

Resale Home Price … $1,550,000

Home Purchase Price … $903,000

Home Purchase Date …. 7/9/2009

Net Gain (Loss) ………. $554,000

Percent Change ………. 71.7%

Annual Appreciation … 66.6%

Cost of Ownership

————————————————-

$1,550,000 ………. Asking Price

$310,000 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$1,240,000 ………. 30-Year Mortgage

$329,769 ………. Income Requirement

$6,840 ………. Monthly Mortgage Payment

$1343 ………. Property Tax

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

$129 ………. Homeowners Insurance

$150 ………. Homeowners Association Fees

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

$8,462 ………. Monthly Cash Outlays

-$1599 ………. Tax Savings (% of Interest and Property Tax)

-$1425 ………. Equity Hidden in Payment

$644 ………. Lost Income to Down Payment (net of taxes)

$194 ………. Maintenance and Replacement Reserves

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

$6,276 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$15,500 ………. Furnishing and Move In @1%

$15,500 ………. Closing Costs @1%

$12,400 ………… Interest Points @1% of Loan

$310,000 ………. Down Payment

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

$353,400 ………. Total Cash Costs

$96,200 ………… Emergency Cash Reserves

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

$449,600 ………. Total Savings Needed

Property Details for 1 RIMROCK Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 2 full 1 part baths

Home size: 3,000 sq ft

($517 / sq ft)

Lot Size: 11,305 sq ft

Year Built: 1977

Days on Market: 38

MLS Number: S608756

Property Type: Single Family, Residential

Community: Turtle Rock

Tract: Hh

——————————————————————————

Excellent location! Panoramic views of hills and city lights! One of the best street in Turtle Rock! Completely remodeled. Spacious, open and convenient floor plan, 5 bedrooms and 3 full bathrooms. Main floor bedroom with full bath. Gourmet kitchen with breakfast nook. New cherry wood cabinetry, granite counter tops and state-of-the-art stainless steel appliances. Remodeled bathrooms. Remodeled fireplaces in living room & family room. Cathedral ceilings in the formal dining room. Premium hardwood flooring. Designer carpeting in bedrooms. New dual pane windows. New garage doors. Freshly painted. Spacious private gated courtyard. Endless views from cozy back yard. Fabulous association amenities pools, spas, tennis courts, club house, playgrounds & parks. Steps from award winning Bonita Canyon Elementary School & park area & minutes from desired University High School and UCI.No Mello Roos, low association fee. Excellent opportunity!

The spending former owners

The owners who lost this house in foreclosure owned longer than my property records go back. The earliest record I have is a $100,000 HELOC in 1997. It is safe to assume these owners paid very little a very long time ago.

On 12/19/2002 these owners refinanced thier first mortgage for $450,000.

On 8/25/2004 they refinanced again for $650,000.

On 9/7/2006 they refinanced one last time for $825,000.

It looks like they needed an extra $200,000 every two years to keep up with the Joneses.

I am surprised this went to auction because they appeared to have equity on auction day. Now the new owner has it.

Foreclosure Record

Recording Date: 05/26/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/18/2009

Document Type: Notice of Default

The MLS for Foreclosures

Ideal Home Brokers is the multiple listing service for foreclosures. If there is a property coming to auction, we will facilitate bidding in that market just as others do in the resale market. Many people search for foreclosures because they want to find a bargain, but most people have no idea how to research properly, and even fewer know the mechanics of the trustee sale. We do.

Let us be your portal to the foreclosure market.

Extreme HELOC Abuse from Extreme Makeover Home Owners

From the extremes of generosity springs the extremes of stupid borrower behavior. Several Extreme Makeover Home Edition families are facing foreclosure because of their HELOC abuse.

Irvine Home Address … 18 SUNSET Riv Irvine, CA 92604

Resale Home Price …… $669,000

{book1}

Extreme ways they help me

They help me out late at night

Extreme places I had gone

That never seen any light

Dirty basements, dirty noise

Dirty places coming through

Extreme worlds alone

Did you ever like it planned?

I would stand in line for this

There's always room in life for this

Oh baby, oh baby

Then it fell apart, it fell apart

Moby — Extreme Ways

The show Extreme Makeover Home Edition helps families coming from difficult circumstances have a new life. The extreme examples they choose make for interesting drama, and I have found myself watching this show and rejoicing with the happy families. Watching the show makes you feel good; it leaves you believing that good people can come together and make a real difference for those who would otherwise struggle mightily.

There is a fine line between extreme joy and extreme anger and sadness. When you see people who have been given so much waste it irresponsibly, the intense joy becomes something very different. I find it difficult to contain my anger when I read stories like these. How do people who were given so much do something so stupid? Like the stories of lottery winners who go bankrupt, people can experience a change in circumstances without fundamentally changing who and what they are.

A video from Wall Street Journal on today's HELOC abusers.

Extreme Stories

By DAWN WOTAPKA

Some families featured on "Extreme Makeover: Home Edition" find themselves in trouble once the cameras leave town. Some struggle to pay the upkeep on their expensive new homes while others tap the equity in their homes and end up with bigger mortgages that are hard to maintain. Some seek a quick-fix by trying to sell. But because Extreme Makeovers tend to be big, fancy residences plopped in working-class or rural communities, the houses can be a hard sell. (See related article.) "Like many homeowners in the nation, Extreme Makeover: Home Edition families aren't immune to the current state of the U.S. economy," said a spokeswoman for the show. Here are five tales:

Notice how the writer is trying to put a positive spin on the inexcusable behavior of these HELOC abusers. Is she really trying to get us to believe that higher utility bills and taxes caused these people to take out hundreds of thousands of dollars in mortgage equity withdrawal? That doesn't even pass the giggle test. If we were talking about $10,000, I might understand, but these people are losing their houses in foreclosure because they spent hundreds of thousands of dollars.

Eric Hebert and Family

Following his sister's sudden death in 2004, Eric Hebert relocated to Sandpoint to raise her young twins. In an early 2006 episode of the show, the family home, described as a basement with a roof, was replaced with a multi-story house resembling a mountain lodge. Tyson Foods Inc. threw in a $50,000 check for Mr. Hebert and his family.

"We'll definitely be able to call this our home for ever and ever and ever," Mr. Hebert said when he saw his new home for the first time.

Public records show Mr. Hebert's original mortgage was for $110,000 in September 2004. In January 2006–just before the show aired–he refinanced for $250,000. About a year later, came another refinance with Wells Fargo for $382,500. A notice of default was recorded in January 2009 and the home was foreclosed on in October—the first known foreclosure in the Extreme series' history.

Mr. Hebert did not respond to multiple requests for comment.

Some local residents are angry over what became of the community project. "It's kind of like we have egg on our face," said Sydney Icardo, a realtor with Century 21 RiverStone, who cut down aspen trees used to decorate Mr. Hebert's bedroom. "It cuts deep. We're a tight community."

After being given a new house and plenty of cash, what did these people do? They spent every penny, borrowed more, then spent every penny of that. After their spending orgy, they are destitute and homeless.

Perhaps their lender will forgive their principal balance and let them do it all over again? That would be the compassionate thing to do in this circumstance; after all, they were in a tough spot with a new home, no mortgage and money in the bank back in 2006. Anyone could have failed under those circumstances… not.

The Woffords

In September of 2004, just as the real-estate bubble was heating up, an episode featuring the Wofford family, a widowed father raising eight children, showed a roughly 1,200-square-foot home replaced with a 4,337-square-foot model in Encinitas, Calif.

Brian Wofford reportedly paid $186,700 on the home in 1989. But, after tapping the equity and two additional liens, his debt had ballooned above $700,000. In 2005, OneWest Bank originated a new loan for $735,000, according to a spokeswoman.

As he faced foreclosure late last year, Mr. Wofford entered a three-month trial modification and was recently offered a permanent modification. Mr. Wofford did not return several requests for comment.

That sounds like a California debtor, doesn't it? This family spent $548,300 after a group of well-meaning people added tremendous value to their property. Like the other HELOC abusers, they took full advantage of the charity of others. You have to wonder if the people who did this hard work for them feel good about the way this family pissed away the money. I wouldn't.

The Harpers

Later in the 2004-2005 season, the Harper family's makeover in Lake City, Ga. aired, showing a modest home with septic-tank issues replaced by a 5,300-square-footer resembling an English castle.

The makeover came with a paid mortgage and scholarship fund for the children. But the Harpers used the home as collateral to fund a construction business that failed. As foreclosure loomed last March, the family filed for bankruptcy, halting the process.

The family recently sold raffle tickets via the Internet–with the home as the prize–though it's unclear if the raffle was ever held or if anyone actually won the home. A foreclosure sale is scheduled for April 6.

Do you think they took the raffle money and spent it? It wouldn't be out of character.

Notice the half-truth about starting a construction business. It is an attempt to justify enough HELOC abuse to cause them to lose their home by making this guy look like a hard-working ordinary guy who fell on hard times. How does someone lose enough money to consume the value in a 5,300 SF McMansion? If the business was struggling, wouldn't a reasonable person pull the plug before losing everything? Let's be real. These people spent their house on consumption just like everyone else.

The Okvaths

After the Harpers' show came the Okvaths. This family–daughter Kassandra was recovering from cancer–received a 5,346-square-foot home with six bedrooms, a movie theater and carousel in the backyard.

In 2006, Nichol Okvath and her husband, who lost his job as a truck driver, took out a $200,000 home-equity loan "to survive off of," says Ms. Okvath. Next came a $400,000 loan to pay off the first one and medical bills. Ms. Okvath says she hasn't made the $3,056 monthly mortgage payment since December of 2008.

The property is on the market for $599,000, slashed from $1.3 million a year ago. But there have been no offers: The area has an 18-month supply of homes in that price range and the Okvaths' Spanish-style mansion seems out of place with its modest surroundings, said Tony Moore, the Keller Williams Realty agent who is handling the listing.

Two hundred thousand dollars to live off of? If they were accustomed to living on a truck driver's earnings, they should have survived for five years or more of unemployment. I could see $20,000, but $200,000 is ridiculous.

Of course, they resorted to the "medical bills" excuse when all else fails. Didn't they have health insurance? That must be quite a large deductible.

Irvine's extreme HELOC abuse

Not to be outdone by irresponsible loan owners from other parts, Irvine residents routinely spent their homes. Today's featured property is one of many.

This property was purchased on 6/14/1996 for $315,000. The owners used a $252,000 first mortgage and a $63,000 down payment.

On 10/15/1998 they opened a HELOC for $50,000.

On 7/29/1999 they refinanced their first mortgage for $300,000.

On 11/6/2002 they refinanced again for $300,000. So far they have been trying to manage the growth of their mortgage.

On 4/18/2003 they got a HELOC for $100,000.

On 7/23/2004 they enlarged the HELOC to $150,000.

On 3/28/2005 they refinanced with a $532,000 Option ARM with a 1.25% teaser rate.

On 4/19/2005 they obtained a $80,000 HELOC.

On 4/13/2007 they refinanced with a $637,000 first mortgage.

On 7/20/2007 they obtained a $100,000 HELOC from Bank of America.

Total property debt is $737,000.

Total mortgage equity withdrawal is $485,000.

They quit paying last year.

Foreclosure Record

Recording Date: 12/31/2009

Document Type: Notice of Default

How would you grade them?

I'll give you my opinion:

Eric Hebert and Family = F. They refinanced before the show even aired.

The Woffords = F. Over $500,000 in MEW between 2004 and 2005.

The Harpers = F. Massive HELOC abuse and raffle fraud.

The Okvaths = E. $400,000 in HELOC abuse, but I don't see evidence of gaming the system. They were merely thoughtless and stupid.

Irvine abusers = E. Once they went Ponzi in 2004, it was obvious they were going to lose the house, and their spending was clearly reckless.

Irvine Home Address … 18 SUNSET Riv Irvine, CA 92604

Resale Home Price … $669,000

Home Purchase Price … $190,000

Home Purchase Date …. 6/29/2001

Net Gain (Loss) ………. $438,860

Percent Change ………. 252.1%

Annual Appreciation … 14.2%

Cost of Ownership

————————————————-

$669,000 ………. Asking Price

$133,800 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$535,200 ………. 30-Year Mortgage

$142,332 ………. Income Requirement

$2,952 ………. Monthly Mortgage Payment

$580 ………. Property Tax

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

$56 ………. Homeowners Insurance

$140 ………. Homeowners Association Fees

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

$3,728 ………. Monthly Cash Outlays

-$729 ………. Tax Savings (% of Interest and Property Tax)

-$615 ………. Equity Hidden in Payment

$278 ………. Lost Income to Down Payment (net of taxes)

$84 ………. Maintenance and Replacement Reserves

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

$2,745 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,690 ………. Furnishing and Move In @1%

$6,690 ………. Closing Costs @1%

$5,352 ………… Interest Points @1% of Loan

$133,800 ………. Down Payment

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

$152,532 ………. Total Cash Costs

$42,000 ………… Emergency Cash Reserves

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

$194,532 ………. Total Savings Needed

Property Details for 18 SUNSET Riv Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 3 baths

Home size: 2,580 sq ft

($259 / sq ft)

Lot Size: 7,650 sq ft

Year Built: 1976

Days on Market: 87

MLS Number: S603391

Property Type: Single Family, Residential

Community: El Camino Real

Tract: Dc

——————————————————————————

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

Deerfield Home in cul-de-sac. Complete with a large master bedroom and two other rooms upstairs as well as a bedroom with a full bath on the main floor. Home also has formal dining room, cathedral ceilings, and a fireplace in family room.

A second post today

This afternoon, there will be a second post. The afternoon post will be on Buying a Trustee Sale Property as a Primary Residence.

Foreclosures Increasing as Expected: 216,263 Filings on California Debtors in First Quarter

The push to drive squatters from houses they are not paying for has begun. We have eclipsed our previous foreclosure records, and foreclosures will continue to increase in number for the remainder of 2010.

Irvine Home Address … 43 PARTISAN Pl Irvine, CA 92602

Resale Home Price …… $655,000

{book1}

Oh yes, I'm the great pretender

Pretending I'm doing well

My need is such

I pretend too much

I'm BROKE but no one can tell

Oh yes, I'm the great pretender

Adrift in a world of my own

I play the game but to my real shame

You've left me to dream all alone

Freddie Mercury — The Great Pretender

Californian's are great spenders living in a world of their own. They play the game with no real shame pretending they really have wealth. They are below broke and left alone dreaming of lives they do not own.

Today's HELOC-abusing squatters

Usually, I conclude with the sordid details about the property owner's finances, but today I am starting with it. When presented with statistics about macroeconomic events like "foreclosure activity goes up," it is easy for readers to lose the connection between the decisions lenders and borrowers made and the macroeconomic event. The increase in foreclosure findings I am reporting today is the direct result of thousands of families making bad financial decisions just like the owners of today's featured property.

When I first started covering HELOC abuse, many readers thought I was searching through many property records to find an isolated case. In reality, I have to search through many property records to find an owner who didn't spend their house. The HELOC abuse and debt dependency is the rule not the exception.

Policy makers have scared everyone into bailing out the banks ostensibly to help loan owners stay in their houses. In reality, this is a poorly disguised bailout of the banks. For the banks to stay in business, they will need to obtain income from their non-performing assets. That means they need to foreclose on people and either rent the place out or sell it to be rid of it.

It is appropriate to feel compassion for people losing their homes, but this compassion must be tempered by wisdom. For the most part, the people losing their home made bad decisions — remember, responsible homeowners are NOT losing their homes. Expressing compassion does not mean bailing these people out. That is enabling. Do California debtors really deserve our financial assistance?

Let's take a careful look at the loans that were made and how these owners lived and see if the lending or the borrowing is wise behavior we want to see more of.

This property was purchased for $321,000 on 12/18/1998, near the last market bottom. The mortgage information is not available, but the borrower likely put 20% or more down.

The first mortgages was refinanced on 4/11/2002 for $200,000. A second party appears on the mortgage. Apparently, when the owner was single, the demands for money were a bit less.

On 2/4/2005 the first mortgage was refinanced for $480,000. A HELOC was also opened for $195,750.

On 7/31/2006 the owners refinanced with a $693,000 first mortgage and a $153,000 HELOC.

On 10/2/2006 the HELOC was increased to $200,000.

Total property debt is $893,000.

Total mortgage equity withdrawal was $693,000 since April of 2002.

They have since been squatting for more than a year:

Foreclosure Record

Recording Date: 10/29/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/22/2009

Document Type: Notice of Default

What prompted these people to spend nearly $700,000 in just a few years? And does it matter? Are there any circumstances where you believe these debts should be forgiven at the expense of the US Taxpayer? How do you feel about their squatting for over a year on your dime?

When you read the grim statistics about foreclosures, do you tear up for the poor families who lost everything or rejoice for their new lives free of entitlement and debt? Foreclosure is not the crisis; it is the cure.

FORECLOSURE ACTIVITY INCREASES 7 PERCENT IN FIRST QUARTER

By RealtyTrac Staff

New Quarterly Records for Scheduled Auctions and Bank Repossessions

All Foreclosure Types Spike in March, Which Posts Highest Monthly Total for Report

IRVINE, Calif. – April 15, 2010 — RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for Q1 2010, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 932,234 properties in the first quarter, a 7 percent increase from the previous quarter and a 16 percent increase from the first quarter of 2009. One in every 138 U.S. housing units received a foreclosure filing during the quarter.

Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

“Foreclosure activity in the first quarter of 2010 followed a very similar pattern to what we saw in the first quarter of 2009: a shallow trough in January and February followed by a substantial spike in March,” said James J. Saccacio, chief executive officer of RealtyTrac. “One difference, however, is that the increases were more tilted toward the final stage of foreclosure, with REOs increasing 9 percent on a quarterly basis in the first quarter of 2010 compared to a 13 percent quarterly decrease in REOs in the first quarter of 2009.

“This subtle shift in the numbers pushed REOs to the highest quarterly total we’ve ever seen in our report and may be further evidence that lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure prevention programs and processing delays slowed down the normal foreclosure timeline.” …

… California foreclosure activity decreased 6 percent from the first quarter of 2009, but the state still documented the nation’s fourth highest foreclosure rate — one in every 62 housing units receiving a foreclosure filing. …

… California alone accounted for 23 percent of the nation’s total foreclosure activity in the first quarter, with 216,263 properties receiving a foreclosure notice — the nation’s highest foreclosure activity total.

Readers here are not surprised by these numbers. Last year, there were stories planted in the mainstream media that the foreclosure crisis is ending because filings were down. Well, filings were down because banks stopped filing, not because borrowers stopped defaulting. Shadow inventory is a disgraceful squatter's paradise. Fortunately, lenders are finally moving to clean up their books. It is about time.

Irvine Home Address … 43 PARTISAN Pl Irvine, CA 92602

Resale Home Price … $655,000

Home Purchase Price … $321,000

Home Purchase Date …. 12/18/1998

Net Gain (Loss) ………. $294,700

Percent Change ………. 104.0%

Annual Appreciation … 6.1%

Cost of Ownership

————————————————-

$655,000 ………. Asking Price

$131,000 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$524,000 ………. 30-Year Mortgage

$139,354 ………. Income Requirement

$2,890 ………. Monthly Mortgage Payment

$568 ………. Property Tax

$117 ………. Special Taxes and Levies (Mello Roos)

$55 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,629 ………. Monthly Cash Outlays

-$714 ………. Tax Savings (% of Interest and Property Tax)

-$602 ………. Equity Hidden in Payment

$272 ………. Lost Income to Down Payment (net of taxes)

$82 ………. Maintenance and Replacement Reserves

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

$2,667 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,550 ………. Furnishing and Move In @1%

$6,550 ………. Closing Costs @1%

$5,240 ………… Interest Points @1% of Loan

$131,000 ………. Down Payment

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

$149,340 ………. Total Cash Costs

$40,800 ………… Emergency Cash Reserves

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

$190,140 ………. Total Savings Needed

Property Details for 43 PARTISAN Pl Irvine, CA 92602

——————————————————————————

Beds: 5

Baths: 3 baths

Home size: 2,300 sq ft

($285 / sq ft)

Lot Size: 8,500 sq ft

Year Built: 1998

Days on Market: 17

MLS Number: S611660

Property Type: Single Family, Residential

Community: West Irvine

Tract: Heri

——————————————————————————

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

One of the Larger lot in the Tract. Cover Patio, Extra Long Drive Way. Formal Living Room, Downstairs Bedroom with full bath. Large Master Bedroom and Bath, Walk-in Closet. 4th Bedroom Upstairs is the size of a 2 Rooms combined and can easily be converted into a 5th Bedroom to become a SIX BEDROOM house. Award Winning Schools, NO HOA, Low Tax.

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

House Prices Will Not Reach Bubble Highs for Over 15 Years

In The Great Housing Bubble, I predicted Irvine resale prices would not reach their bubble peak for over 15 years. The analysts at Fiserv Case-Shiller have drawn a similar conclusion.

Of course, the owner of today's featured property doesn't believe that. In his world, prices never stopped appreciating in 2006.

Irvine Home Address … 35 WOODS Trl Irvine, CA 92603

Resale Home Price …… $2,589,000

{book1}

If I could … Maybe I'd give you my world

How can I … When you won't take it from me

You can go your own way Go your own way

You can call it … Another lonely day

You can go your own way Go your own way

Tell me why … Everything turned around

Packing up … Shackin’ up’s all you wanna do

If I could … Baby I'd give you my world

Open up … Everything's waiting for you

Fleetwood Mac — Go Your Own Way

Every seller must go their own way. Some accept the reality of the market and price accordingly. Some do not. Every owner wants house prices to take flight, particularly those who are underwater. Unfortunately, fundamentals that support the housing market can only go up so fast, and in case you didn't notice, wages are going down.

Fiserv Case-Shiller Home Price Insights: For Many U.S. Markets, the Return to Peak Home Prices Will Be a Long, Slow Road

Bubble-era home prices won't be seen again until 2025 or beyond in California, Florida, Arizona and Nevada

BROOKFIELD, Wis., Apr 08, 2010 (BUSINESS WIRE) — Fiserv, Inc., the leading global provider of financial services technology solutions, today released an analysis of home price historical trend data and forecasts for more than 375 U.S. markets based on the Fiserv(R) Case-Shiller Indexes(R), which is owned and generated by Fiserv, data from the Federal Housing Finance Agency (FHFA) and Moody's Economy.com.

The Fiserv analysis indicates the markets that experienced the greatest price bubble, including certain metro areas in California, Florida, Arizona and Nevada, won't see home prices return to peak levels until 2025 or later. That represents an unprecedented market cycle that will last a full generation from the top of the market in 2006-2007. Many other markets, including major urban centers in the Northeast and industrial Midwest, may need to wait a decade or more until prices return to their market peaks.

"Nationally, Fiserv Case-Shiller data points to a further seven percent decline in home prices through the end of this year, with a prolonged recovery beginning early in 2011. In many markets, the emphasis is on the word 'prolonged,'" said David Stiff, Chief Economist, Fiserv. "We see several powerful forces in the market that will severely hinder the housing recoveries of many metro areas, particularly in the hard-hit states of California, Florida, Arizona and Nevada. It will take these markets 15 or more years before home prices climb back to their peaks."

… Home sales grew dramatically, jumping from 4.5 million units in January to 6.5 million units in November 2009, the highest gains since 2006. This was attributed to lower prices, almost record-low mortgage interest rates, and the $8,000 tax credit for first-time home buyers. Another factor that temporarily slowed the erosion of home prices has been the financial institutions' inability to effectively sell homes with distressed mortgages.

… Detailed home price data and information on the Indexes can now be found at the new Fiserv Case-Shiller website at www.caseshiller.fiserv.com. At that site, users can get the latest housing news and find detailed information and home price forecasts for 381 U.S. markets.

In The Great Housing Bubble, I noted the following:

Table 11: Summary of Predictions for Irvine, California Home Prices

Method

Total Decline

Appreciation Rate

Recovery Year

S&P/Case-Shiller Inflation Support

55%

3.3%

2039

Median House Price and Historic Appreciation

45%

4.4%

2023

Price-To-Rent Ratio

22%

4.7%

2019

Price-To-Income Ratio

43%

3.2%

2029

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

41%

3.9%

2028

The range of predictions for the decline of home prices in Irvine, California, is from 22% to 53% with an average of 41%. The predicted time of peak-to-peak recovery ranges from 2019 to 2033 with an average of 2028. Of course, since Irvine is in the heart of a bubble-prone market, recovery may happen more quickly, but then again, that would mean prices have entered another unsustainable price bubble.

My predictions of the bottoming price look unlikely at this point. The Federal Reserve has raised the trough with its activity. I think this pushes the bottom forward, perhaps to 2012 or 2013 and raises it. Nothing changes the underlying fundamentals. Unless we inflate another housing bubble, prices will take a very long time to reach the peak.

What is happening in Irvine?

One measure of price activity in a market is dollars-per-square-foot. In The Great Housing Bubble, I described it this way:

The median is a good measure of general price activity in the market, but it does have a significant weakness: it does not indicate the value buyers are obtaining in the market. The houses or structures built on the land compose the most significant portion of real estate value in most markets. These structures deteriorate over time and require routine maintenance that is often deferred. During times of prosperity, many people renovate homes to add value and improve their living conditions. The impact of deterioration and renovation of individual properties is not reflected in the median resale value. Also, at the time of sale, there are often buyer incentives which inflate the recorded sales price relative to the actual cost to the buyer. These buyer incentives also distort the median sales price as a measure of value.

Many data reporting services measure, record, and report the average sales cost on a per-square-foot basis to address the problem of evaluating what buyers are getting for their money. For instance, in a declining market if people start buying much larger homes at the limit of affordability, the generic median sales price would remain unchanged, but since buyers are getting much larger homes for the same money, the average cost per-square-foot would decline accordingly. This makes the average cost per-square-foot a superior measure for capturing qualitative changes in house prices; however, this method of measurement does not capture the relative quality of the square footage purchased, only the price paid for it. High quality finishes may justify a higher price per square foot. There is no way to objectively evaluate the impact finish quality has on home prices. The main problems with using the average cost per-square-foot to measure price is that it does not provide a number comparable to sales prices since it has been divided by square feet, and it is not widely measured and reported.

The change in market mix will also impact the $/SF measure. Larger properties generally sell for less than smaller properties on a $/SF basis; therefore, when the mix changes to larger properties, the $/SF will decline. That is much of what is driving the slide witnessed in the $/SF measure since last September, a period within which the median went up.

If the Federal Reserve had not propped up the market last year, we would likely be seeing $275/SF to $300/SF across most of Irvine. We still might get there depending on interest rates and inventory. It doesn't seem likely that prices will go up given the current market head winds.

Didn't get the press release

The owner of today's featured property obviously did not get the Fiserv press release. In his world, there was no housing bubble, and his house kept on appreciating while the remaining housing market collapsed around him. This property value went up 20% since the peak in summer of 2006. WTF?

The owner put a large amount down, and he has only recently obtained a few private loans to get him through the recession. In his mind, he is still a millionaire.

Irvine Home Address … 35 WOODS Trl Irvine, CA 92603

Resale Home Price … $2,589,000

Home Purchase Price … $2,171,500

Home Purchase Date …. 6/18/2006

Net Gain (Loss) ………. $262,160

Percent Change ………. 19.2%

Annual Appreciation … 4.4%

Cost of Ownership

————————————————-

$2,589,000 ………. Asking Price

$517,800 ………. 20% Down Conventional

5.24% …………… Mortgage Interest Rate

$2,071,200 ………. 30-Year Mortgage

$550,820 ………. Income Requirement

$11,424 ………. Monthly Mortgage Payment

$2244 ………. Property Tax

$417 ………. Special Taxes and Levies (Mello Roos)

$216 ………. Homeowners Insurance

$410 ………. Homeowners Association Fees

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

$14,711 ………. Monthly Cash Outlays

-$1851 ………. Tax Savings (% of Interest and Property Tax)

-$2380 ………. Equity Hidden in Payment

$1076 ………. Lost Income to Down Payment (net of taxes)

$324 ………. Maintenance and Replacement Reserves

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

$11,879 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$25,890 ………. Furnishing and Move In @1%

$25,890 ………. Closing Costs @1%

$20,712 ………… Interest Points @1% of Loan

$517,800 ………. Down Payment

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

$590,292 ………. Total Cash Costs

$182,000 ………… Emergency Cash Reserves

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

$772,292 ………. Total Savings Needed

Property Details for 35 WOODS Trl Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 4 full 1 part baths

Home size: 3,583 sq ft

($723 / sq ft)

Lot Size: 9,270 sq ft

Year Built: 2006

Days on Market: 12

MLS Number: U10001525

Property Type: Single Family, Residential

Community: Turtle Ridge

Tract: Arez

——————————————————————————

Beautiful Tuscan-style home in the Arezzo enclave of the guarded Summit development with 5 bedrooms & 4.5 baths. The home has approx. 3600 sq ft & is situated on a premier lot with 9270 sq ft. Beautiful panoramic views to Shady Canyon, the mountains, parkland & city lights views at night. The stylish flag-stone patio with fountains, built-in stainless steel BBQ & sideyard offers an incredible venue for outdoor entertaining. The gourmet kitchen with stainless steel appliances & granite countertops opens to a great room leading out to the backyard. A formal dining room is adjacent to the living room. Bedroom & full bath on the main floor. 2nd level has 4 bedrooms including a spacious master bedroom with private master bath appointed with Travertine. Large balcony from the master bedroom offers another incredible viewing opportunity out to the mountains & gorgeous parkland. Over $450K in upgrades! The Summit development offers a resort-style pool & clubhouse. Go to www.35WoodsTrail.com