It is possible to significantly lower buyer’s commissions, but it will take a change of buyer behavior to do it. Today’s post shows how this could be done.
All businesses create expectations for service with their customers. The Soup Nazi is the best known example of a business owner whose product was so desirable that customers were willing to do whatever was necessary to get it.
Have you dealt with an attorney lately? Attorneys have trained their customers to expect to pay large retainers and to be billed enormous sums for every passing thought the attorney has about the client. They are second only to the Soup Nazi for training their customers to succumb to their wishes.
Realtors have done the poorest job of any industry that I can think of at setting appropriate customer expectations. The customers of buyer’s agents have been trained that it is OK to demand unlimited hours of an agent’s time to be driven around to look at dozens and dozens of properties for no compensation at all. Agents are actually willing to do this because they hope for the possibility of compensation if the looker actually becomes a buyer. As a result, buyers of real estate are subject to paying an inflated cost to cover the cost of those who look but do not buy.
For an agent, real estate commissions are like playing roulette; you don’t know when you will get compensated or how much it will be, but since commissions are so large, it is a game many are willing to play. It is the size of commissions that encourage realtors to play this game, and it further serves to create poor customer expectations.
Lowering buyer’s commissions requires reframing the compensation system to encourage a more efficient use of a realtor’s time. It starts with customers realizing one important point: when you pay a realtor a 3% commission, you are not just compensating them for the time you spent with them; you are compensating them for the time they spent with the other clients who did not buy a property and generate a commission.
This fact has two important implications for developing methods of reducing commission rates: (1) realtors can charge much less if they know they are going to get paid, and (2) realtors can charge less if they do not have to invest large amounts of time in non-paying customers. This efficiency is best achieved if compensation moves away from a commission basis to a pay-per-services model.
If the buyer and the broker have established a billing rate for the services performed, the buyer knows what they are paying for, and they are likely to be more judicious in their demands on the realtor’s time. For those who judiciously use their broker’s time, they will receive a commission rebate at the close. For those that go over their allotment, they may pay up to the typical 3% commission, but the commission will never exceed the amount specified in the listing contract.
What follows is not a service offering. As you may recall, we are in the process of forming a brokerage, but we are not DRE approved yet, so what follows is a hypothetical of how such a structure could be achieved.
What a buyer’s broker does
When you examine the tasks of a buyer’s broker, there are really only four major tasks they perform: (1) research properties for buyers, (2) show properties to buyers, (3) prepare formal bids and negotiate deals for buyers, and (4) coordinate the outside professionals during the escrow process. There is plenty of routine communication with phone calls and emails between broker and client during the process, but the four items listed are the ones that consume most of a broker’s time.
Once the key tasks are identified, a broker could establish a billing rate for each of these tasks and charge accordingly. Depending on the assurance of getting paid, the rates would be different, but the connection between time invested and compensation would be apparent to both the broker and the client. Once clients see that their actions have a direct association with how much they ultimately will pay for the service, they are incentivized to be more efficient in their use of a broker’s time; both parties benefit.
Traditional Commission Program
Many people will not want to be cost conscious when they purchase a property. They will want to take their time, look at many properties, and feel no obligation to be efficient with using a broker’s time. There is a commission structure for everyone, and those people will pay the full 3% (or whatever commission is specified in the listing contract) for full service.
Billable Hours Program
Lowering the commission is relatively easy with a pay-for-services model. In this model, the services demanded of the buyer’s agent are recorded, and a running total of billings is tracked. If a transaction takes place, the broker will be paid at the close of escrow for amounts billed up to the commission amount specified in the listing contract. If no sale occurs, the prospective buyer is not obligated to the broker for any of the billable time.
This model provides an incentive for buyers to be judicious in their use of a broker’s time, but it does not provide assurance that the broker will get paid. Due to the uncertainty of payment, the billing rates will seem rather high, but as previously noted, buyers who complete a transaction are paying for all those who do not.
The billable hours commission structure could work as follows:
A minimum fee of $8,000 is charged at the close of escrow for coordination of the escrow process and other miscellaneous unbilled services provided during the sales process.
Showings cost $200 flat fee plus $200 per property viewed on each tour.
Brokers Opinion of Value reports, which are required before first written offer, cost $600 for each property.
First written offer on each property costs $600.
Subsequent written offers cost $400 each.
The overall commission is subject to a 1.5% minimum charge. Any funds due to buyer’s broker from the listing contract in excess of the amount billed are returned to the buyer.
Example of a Billable Hours program:
Assume a buyer has a budget for properties in the $800,000 range. During the course of the search, they go on 3 home tours and visit 8 properties. They write offers on 3 properties, and after 5 counteroffers, they end up buying a property worth $780,000. How much would their commission be?
$600 – three showing appointments $1,600 – view eight properties $1,800 – first written offers on three different properties $2,000 – five counteroffers required to close the deal $8,000 – escrow coordination and realtor compensation ======================================================== $14,000 – total broker compensation
$23,400 – listing contract buyer compensation at 3% $14,000 – fee to broker ======================================================== $9,400 – refund to buyer after closing
The buyer would pay a total fee of $14,000 to the broker. Since the commission paid at the closing table would be $26,400, the buyer would receive a check for $9,400 from the closing ($23,400 – $14,000 = $9,400). That works out to a 1.8% commission.
Billable-hours programs such as this one are most favorable to high-end buyers because the fees will quickly consume a 3% commission on a low-cost property. Despite this disadvantage, the potential is there to reduce commissions at most price points.
Retainer Program
To get to the lowest possible price point, a broker must know they are going to get paid for the time and effort invested in the process. Since buyers are so accustomed to getting this service for nothing, a typical billable-hours scenario will not succeed because people who do not buy simply will not pay the invoices when the bills come due. However, if a billing rate is established up front—a lower billing rate than the non-retainer structure due to the assurance of compensation—and if a buyer is willing to put up a retainer to guarantee payment, then a low-cost minimum compensation structure can work for both parties. This will be most advantageous for a buyer who (1) knows with certainty they are going to purchase, (2) does most of their own research, and (3) will not be lowball bidding on dozens of properties. A buyer who fits these criteria can get a significant refund at the closing table.
The Retainer commission structure could be structured as follows:
A minimum fee of $4,000 is charged at the close of escrow for coordination of the escrow process and other miscellaneous unbilled services provided during the sales process.
A retainer of at least $4,000 is required to qualify for this program.
Showings cost $100 flat fee plus $100 per property viewed on each tour.
Brokers Opinion of Value reports, which are required before first written offer, cost $300 for each property.
First written offer on each property costs $300.
Subsequent written offers cost $200 each.
The overall commission is subject to a 1.0% minimum charge. Any funds due to buyer’s broker from the listing contract in excess of the amount billed are returned to the buyer.
Example of a Retainer program:
Assume a buyer has a budget for properties in the $500,000 range. During the course of the search, they go on 4 home tours and visit 10 properties. They write offers on 3 properties, and after 4 counteroffers, they end up buying a property worth $480,000. How much would their commission be?
$400 – four showing appointments $1,000 – view ten properties $900 – first written offers on three different properties $800 – four counteroffers required to close the deal $4,000 – escrow coordination and realtor compensation ======================================================== $7,100 – total broker compensation
$11,400 – listing contract buyer compensation at 3% $4,000 – retainer paid in advance $7,100 – fee to broker ======================================================== $8,300 – refund to buyer after closing
The buyer would pay a total fee of $7,100 to the broker. Since the buyer paid $4,000 in advance, and since the commission paid at the closing table would be $11,400, the buyer would receive a check for $8,300 from the closing ($11,400 + $4,000 – $7,100 = $8,300). That works out to a 1.5% commission.
In general, the retainer program will result in the lowest commission rate. If this same example is repeated for the $880,000 property in the first example, the commission would be subject to the 1% minimum charge.
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Bottom line is that people must be compensated for their time, or they will not perform the task. This is not greed or avarice, it is just a fact of life.
What is stated above is not a service offering; it is a hypothetical example of how alternate commissions could be structured to make the industry more efficient. Perhaps some area brokers reading this post will implement these ideas, perhaps not. As with the post, The New Real Estate Sales Business Model, a discussion of ideas in the public realm is a good thing. The 6% commission model is broken, and its days are numbered. The industry needs to start looking for alternatives to take its place.
Upper level end unit 1 bedroom with a loft that could be a 2nd bedroom.
Cathedral ceilings add volume and spaciousness to this largest 1
bedroom plan in the Lake Condos tract. Living room and balcony overlook
streams and waterfall with ducks. The tract includes pool, spa, tennis
courts and clubhouse. Quiet interior location on a greenbelt away from
the noises of the street. Adjacent to Irvine Valley College, shopping,
restaurants and both the 5 and 405 freeways.
If you were going to stage a picture to make the kitchen look as small as possible, could you do better than today’s picture? This place isn’t fit for hobbits.
P.S. Check out the post at South Coast Homes. Kelli Hart has picked up the story on the Laguna Beach HELOC abuse.
Negotiating to purchase residential real estate can be intimidating, but if you understand the rules of the game, it is not that complex, and you can save yourself a great deal of money.
If you know the enemy and know yourself, you need not fear the
result of a hundred battles. If you know yourself but not the enemy,
for every victory gained you will also suffer a defeat. If you know
neither the enemy nor yourself, you will succumb in every battle.
I stand alone and gaze upon the battlefield Wasteland is all that’s left after the fight And now I’m searching a new way to defeat my enemy
Negotiating the sale of residential real estate is no more difficult that negotiating for any other product of service that does not have a fixed price; however, due to the colossal cost of houses, the process is more important financially than negotiating for other big-ticket items like automobiles. A mistake made while buying or selling a house could cost as much as a new car; sometimes such mistakes could pay for many cars. Skilled negotiators can obtain favorable pricing and terms without the assistance of a broker, but the novice who is inexperienced at this process often will not. Novice negotiators can benefit from using a professional real estate agent.
Perceptions and Motivations of the Negotiators
When two parties enter into a negotiation, they hope to reach agreement and close the deal because negotiations without a deal are a complete waste of time for all parties involved. The one goal both parties have in common is that they both want to close a deal.
Understanding what makes deals happen requires an understanding of the perceptions of the parties, and the motivations for action these perceptions create. Each party entering into a negotiation has (1) perceptions of the value of the property, (2) a belief about the direction of market pricing and (3) a sense of the motivation of the other party in the negotiation. Depending on what buyers and sellers believe about these three issues, they will adjust their bids and asking prices to try to make a deal happen. The greater the degree of alignment between the perceptions and beliefs of the two parties, the more likely a transaction is to occur.
Perception is reality for each individual, but that does not mean that each party to the negotiation shares the same reality or that either parties perceptions match objective Reality. This was nowhere more apparent than with the perceptions of value both buyers and sellers had during the Great Housing Bubble. The parties to transactions during that rally were aligned with their perception of value and both parties where totally incorrect. When prices started to fall, the perception of buyers changed before the perception of sellers did. When these parties began living in alternate realities, deals could not be reached, and transaction volume declined dramatically.
Comparable Sales and the Perception of Value
Sellers almost universally believe the value of their homes is greater than its actual fair-market value. Buyers generally have to be convinced that home values are greater than what they are willing to offer. Once the parties begin to negotiate, the seller usually must lower their asking price and a buyer must raise their bids for a transaction to take place. The actual fair-market value for any property is the price the parties to the transaction agree upon.
Listing brokers will often pander to the fantasies of sellers to obtain the listing. The broker knows the property has little or no chance of selling at a ridiculous asking price, but they take the listing to provide the seller with a wait-and-see opportunity to prove that the asking price is too high. After some period of time, the broker will go back to the seller and prompt them for a price reduction to meet the market.
Buyers will generally offer less than they believe a property to be worth to give themselves room to increase their bids without overpaying. Savvy buyers will establish a maximum bid before they enter the negotiation. If they can get the property for less, they consider it a bonus, if they bid up to their maximum offer without getting the property, they stop bidding and move on to their next-best alternative.
Buyers and sellers do not perform this negotiation in a vacuum. The final sales price the parties agree upon will generally be close to the sales prices of similar properties in the market area. These similar properties are what is known as comparable sales, or “comps” for short. Comps serve as the basis for negotiation for two main reasons: (1) financing is limited based on comparable sales, and (2) if buyers bid too little, or if sellers ask too much, each party has better alternatives to closing the deal; sellers can wait for a better offer, and buyers can find a similar property with a more reasonable seller. Each party to the transaction must be aware of their best alternative to a negotiated agreement because they may need to pursue other prospects.
The Problem of Cherry Picking
Picking comparable sales to establish a basis of comparison is as much art as science. Each party could select comparables they believe best serves their perception of value by “cherry picking” either the highest or the lowest sales to exaggerate the base value. If one party can convince the other that the basis for negotiation is 5% higher or lower than what it really is, then the successful cherry picker will make 5% more on the deal. The incentive to cherry pick is strong.
One approach to solving the cherry picking problem is to obtain an appraisal from a neutral third party; however, appraisals are not free, and the buyer is generally the one responsible for paying for it. Appraisals are rarely ordered during the initial stages of a negotiation, so they seldom work to overcome cherry picking.
Another approach is to obtain a Broker’s Opinion of Value to establish a base value. Unfortunately, brokers being agents of either the buyer or the seller are not neutral third parties. Brokers have a strong incentive to cherry pick to serve their clients.
Broker Duplicity and Failed Transactions
Brokers are primarily motivated to make a transaction occur because they generally do not get paid otherwise. Secondarily, they are motivated to obtain the best possible price for the party they represent; they have a fiduciary duty to serve one party to the transaction (although they can serve both in a dual agency situation). Many sales agents believe deceiving the other party in a negotiation is an appropriate tactic justified by their fiduciary duty. Realtor duplicity contributes to the impression in the general public that real estate agents cannot be trusted. Many cannot be.
The reason for the manipulation and deceit among unethical realtors is that the techniques they use alter the perceptions and motivations of the other party in a negotiation. When these techniques are successful, buyers raise their bids or sellers reduce their asking prices. When these techniques fail—which often occurs—the use of these techniques so offends the other party that a deal that might have otherwise occurred does not go through; that result serves neither party, and it can be argued it is a violation of an agent’s fiduciary duty.
Honest Brokerage Establishes a Value Range
The best solution to the problem of establishing a base value for negotiation is for the broker to provide an honest and neutral opinion of value similar to an appraisal. If a broker prepares the opinion of value in such a way that it could serve the buyer or the seller, both parties to the negotiation can agree on a range of pricing within which the negotiation can take place.
For example, if a particular property has a range of comparable values from $450,000 to $550,000 with an average of $500,000, this information can be presented to both parties. Both can agree that the current comparable value is somewhere in this range as each one could make arguments for one extreme of the other.
The range of comparable sales values does not necessarily dictate a range for negotiating the deal—the initial bid and asking price do that—but it does serve to anchor the negotiations to a range of values that reflect the realities of the current market.
Trend of the Market
Sales prices for properties change over time. In most real estate markets, these prices go up with increases in wages among those who live in the market area. In California, we are prone to bouts with irrational exuberance and price volatility. Instead of slowly climbing prices like stable markets in the Midwest, Californians must cope with markets that can quickly move both up and down. The current trend of the market—if widely understood and accepted—distorts the perception of value and motivates buyers and sellers to stay ahead of the trend. In a rising market buyers are motivated to raise their bids and sellers are motivated to ask over comparable sales values. In declining markets, sellers (who accept reality) are motivated to lower their asking prices and buyers offer bids lower than recent comparable sales.
Motivation of the Other Party
Professional poker players spend hours studying people’s reactions to try to elucidate the cards their opponents are holding. In poker if players can determine what their opponents believe about the strength of their hands, they gain a significant advantage over the other players. If you know the motivations of the other party in a negotiation, you can respond by concealing your own motivation in hopes that the other party will either raise or lower their pricing to come to you. This is not deceitful; it is sound negotiating practice.
The risk of divining the other party’s motivations is that the perception could be incorrect and this may result in failing to complete a deal that otherwise might have gone forward. If parties to a negotiation are strongly motivated but pretend not to be, failure to complete a deal can be very frustrating. For anyone who has ever fallen in love with a property, not raising their bid to close the deal and then losing the property can be very disheartening. For any seller who desperately wants to get out of a property but fails to lower their price to meet the market, watching a buyer walk away is disappointing.
To try to gain advantage in this part of the negotiation, people often ask why the other party wants to buy or sell. Listing agents will almost universally tell buyers some story that makes the seller look less motivated than they really are. Buyer’s agents will tell the seller that the buyer is interested, but not too interested or “in love” with the property. Each side looks to gain advantage over the other by disguising their motivation. Sometimes this practice kills the deal, but sometimes it results in a significant monetary benefit to one party.
Comparable sales and the Negotiating Range
Comparable sales represent an anchor point in the negotiation, and the trend of the market tends to push future transactions in the direction of the current market trend. Understanding this dynamic provides a framework for buyers to present their bids and sellers to quote asking prices. Once an asking price is in the market and an offer is made on a property, the two prices establish a negotiating range. If the seller and buyer move to a common point within this negotiating range, a transaction will take place. If the buyer fails to raise their bid, or if the seller fails to lower their asking price, and the two parties do not find common ground, a deal will not take place.
The final sales price will generally be within a tight range around the price of recent comparable sales, regardless of what fundamental values may be. It is extremely rare for a property to sell for more than 15% below comparable sales prices. There is usually enough buyer competition that sellers will simply hold out for a better offer. It is also rare for a property to sell for more than 15% above comparable sales prices because lenders will not finance the additional sums. To overpay for real estate, buyers must close the deal with their own money. Most buyers either cannot do this, or they chose not to and go bid on other properties. Few properties sell for prices on the extremes, and most sell for near comparable sales prices. In bull markets, these sales are above recent comps, and in bear markets they are below.
Understanding the range of potential transactions is important because it goes to the core of two behaviors that waste time and effort for everyone involved: lowball bidding and ridiculous asking prices. There are many buyers out there looking for a real bargain. Bidding 30% under comparable sales is not going to result in a transaction. Some do this to try to establish a negotiating range and split the difference hoping to get the property for 15% under comparable sales. It does not work. During the deflation of the housing bubble, many bid 30% under comparable sales because they speculated that prices were going to drop 30% from current comparable values. Correct as this assessment was, it did not mean that sellers were going to sell for those values. If a buyer believes prices will fall more than 15% from current comparable sales, they are better off not bidding on properties and waiting for prices to drop.
On the other extreme is the seller asking for a ridiculous price more than 30% over comparable sales. A property priced that high will sit on the market forever and be an embarrassment for the seller and the listing agent. If the seller believes the market is going up and that they may obtain this price in the future, they are better off waiting for that future to come because a property will not sell for 30% over comps in any market.
Seller Urgency and Response
Why do sellers lower their price? The most obvious reason is that they know if they do not, they will not sell their property, but a more nuanced explanation is required to really understand what is going on. Once a seller has established an asking price, greed motivates them to keep it as high as possible. Once a buyer has made an offer, fear motivates a seller to lower the price to close the deal. The battle between greed and fear is the essence of a seller’s struggle.
If the seller perceives their asking price to be “fair” they are not strongly motivated to lower it because they believe any buyer who will not agree to their asking price will be replaced with a buyer who will. This is particularly true in a rising market. To the seller with a “fair” price, it is only a matter of time before a buyer shows up willing to pay their price. It doesn’t matter if the price is fair; it only matters if the seller believes it is. If the price is not fair and the seller is delusional, no buyer will show up to pay how much the seller wants, and no transaction will take place. Denial and delusion distort perception and prevent sellers from doing what is necessary to sell their property.
If the seller perceives their asking price to be fair, but they also recognize the trend of the market is down, they will be much more motivated to lower their price quickly to find a buyer. This is a rational fear because the longer they wait to find a buyer, the more money they lose to declining prices. Of course, this presupposes that sellers recognize the market downtrend and do not believe the market is currently at the bottom.
Buyer Urgency and Response
Why do buyers raise their bids? Again, the most obvious reason is that they know if they do not, they will not get the property because they will either be outbid, or the seller will not lower the asking price to meet their bid. There are a number of motivations buyers have for increasing their bids, and these motivations emanate from their perceptions of (1) scarcity, (2) market trend, (3) bidding competition, (4) property value, and (5) property desirability. Manipulative real estate agents use techniques to generate fear in buyers and alter the buyer’s perceptions and motivate them to increase their bids.
If buyers perceive another property will be available if the current deal falls through, they feel no sense of urgency to raise their bid to close the deal. In order to provide that motivation—through perfidy—realtors taunt buyers with the idea that they should “buy now or be priced out forever.” If buyers believe this fallacious nonsense realtors peddle, they will believe properties are scarce, another deal will not come along, and they should raise their bids to close the deal. It doesn’t matter whether or not this perception is reality, if buyers believe properties are scarce, they will be more motivated to raise their bids and close the transaction.
If buyers perceive the market trend is moving higher, they may believe they will be priced out, but they may also have the more rational belief that if they do not bid higher, someone else may out bid them. If the bidders they are competing with are strongly motivated—for whatever reason—a higher bid may be the only way to secure the property. In the grander scheme, it may be in a buyer’s interest not to buy under these circumstances because such market conditions are indicative of a real estate bubble.
If buyers perceive the market trend is down, they know they can either get a better deal on the property they are bidding on or they will get a better deal on another property if the current negotiation fails. This is perhaps the most difficult problem for a realtor to overcome. When it really is in a buyer’s best interest to wait or make cautiously low offers, the motivation to increase bids is practically non-existent. The answer to this problem for realtors is to publicly call the market bottom every few months even when they know it is not going to happen. Bidders must be convinced that prices are going to rise again soon or there is limited motivation to bid on properties and even less urgency to raise bids.
If buyers perceive they are the only one interested in a property, they are far less motivated to increase their bids because there is no competition, and the negotiation is purely between the bidder and the seller. Realtors have a tactic for this problem; they lie and tell bidders that there are other offers on the property. This is perhaps the most commonly told lie in the real estate industry. If buyers believe it, it renews the sense of urgency for buyers to increase their bids.
If buyers perceive their bid is “fair” relative to the value of the property, they are not motivated to increase their bid. Nobody wants to overpay for real estate. This is where cherry picking comps and arguments about the investment value of real estate are used to convince a bidder that their perception of value is too low and that their bid is not “fair.” The National Association of Realtors spends huge amounts of money to tout the financial benefits of home ownership to convince people homes are more valuable than they really are.
If buyers perceive that a property is uniquely suited to their needs, if they “fall in love” with the property, they are highly motivated to increase their bids to obtain the property. This is the ultimate fantasy of every seller. Once a buyer is in love with a property, they will raise their bids until they either have the property or they reach the limit of their resources. The obvious advice to buyers is not to fall in love with any property you want to get for a “fair” price. For most buyers, this is easier said than done. Many buyers will not even bid on a property unless they are “in love” with it. This behavior almost guarantees overpaying for a house.
The Dynamics of a Transaction
Once a property is offered for sale, and once a bidder presents an offer in a realistic range to complete a transaction, the negotiation for real estate begins. The prospective buyer and the seller generally communicate through intermediary agents through informal messages and formal written offers and counteroffers. The informal messages take two main forms: (1) attempts to solicit information on the motivation of the other party, and (2) attempts to increase the motivation of the other party to either raise their bid or lower their asking price. The informal communications are an integral part of the art of the deal. The formal communications through offers and counteroffers are presented in the context of the narrative provided through the informal communication.
It is the exchange of information through the informal lines of communication that often determines if a transaction will occur. If both parties are not motivated, and the spread between the bid and the ask is wide, no sale will occur. In these circumstances, the motivations of the parties must be increased to meet somewhere in the middle. That is the purpose of the informal communication. If both parties are motivated, then a deal is likely to occur. The price point where they meet is determined by the skill of the negotiators. In these circumstances, concealing motivation results in a transaction with a favorable financial result for the concealing party. It is like the poker player who learns to hide their emotions in order to prevent the other party from reading the strength of their cards.
In reality, the only meaningful communication between the bidders and sellers is the written offers and counteroffers because it is the only actionable communication. Most people do not realize that asking prices are meaningless. A seller is under no obligation to sell a house if a buyer agrees to pay an asking price. In contrast, a written offer is actionable. If a seller agrees to a written offer, a valid contract is formed, and the buyer is obligated to buy the property (subject to contingencies). Once written offers and counteroffers begin going back and forth, acceptance of the written offer by the other party forms a contract, and the deal moves into the escrow process.
Summary
The process of negotiation is a study in human psychology. It can be readily understood, and the process can be mastered. It requires emotional control and an evaluation of reasonable alternatives to completing the deal. The parties to the transaction establish a range of valuations and then negotiate a price somewhere within this range depending on the relative motivations of each party. If the parties are motivated enough, a transaction takes place; if they are not motivated enough, no sale occurs. Seeing the process as one of perception and motivation provides a deeper understanding of dynamics of the process, and it may provide the edge needed to gain financial advantage. To quote Sun Tzu from the Art of War: “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
Gorgeous Home on a Large Corner Lot! Truly Stunning! Shows like a Model
Home – Lush Tropical Landscaping Front and Back Including Extensive
Hardscape – Beautiful Stonework ~ Very Light And Bright! The Kitchen
and Family Room area is massive and leads out to the Courtyard Area ~
Downstairs bedroom that is being used as an office can be converted to
4th bedroom ~ Enjoy living in the Prestigious Gated Community of
Northpark which offers Resort Style Living with Community
Clubhouse,Five Pools, Spas, Barbeque Areas, Parks and Trails, Tennis
and Basketball Courts ~ Walk to Elemtary School and Large Shopping
Center just outside Northpark.
What is with the tildes? Which is more annoying: tildes to separate sentences? or multiple asterisks? ~~~~~ ******
Why the Title Case? Or is it intermittent Capitalization?
Today’s featured property was purchased on 5/17/2002 for $487,500. The original loan amounts do not appear in my property record database.
On 5/22/2003 the first mortgage was refinanced for $450,000.
On 1/24/2005 they refinanced again for $567,600.
On 5/1/2006 they opened a HELOC for $106,000.
On 3/12/2007 they refinanced with a $750,000 first mortgage.
On 8/9/2007 they opened a HELOC for $70,850.
Total property debt is $820,850.
Total mortgage equity withdrawal is $341,000 plus their downpayment. One of the things we forget about when we see these HELOC abuse cases is that these people are also losing their downpayments that may have come from savings from their incomes. If the bad credit doesn’t keep them out of the housing market, the lack of a downpayment will.
If this property sells for its current asking price, the property will show a signficant profit; however, the sellers will end up with nothing, and the bank will lose tens of thousands of dollars.
{book1}
If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.
I stand alone and gaze upon the battlefield Wasteland is all that’s left after the fight And now I’m searching a new way to defeat my enemy Bloodshed I’ve seen enough of death and pain
I will run, they will hunt me in vain I will hide, they’ll be searching I’ll regroup, feign retreat they’ll pursue Coup de grace I will win but never fight
This time I made up my mind This time I’m back on my grind I know there’s things in my life That I’ma let go startin tonight I can’t live my life this way
Imagine living in a world without consumer debt. The first credit cards did not appear until after WWII. Prior to WWII, if you wanted to buy something, you needed to save money from your wage income until you could afford to pay cash for it. There was an absolute dependency upon wage income to provide a lifestyle; living beyond your means was not possible unless you had previously saved money, and it could not continue beyond the day you went broke. Times have changed.
With the invention of credit cards, it became possible to borrow from future earnings to live better today–better than people can currently afford. Credit cards make it possible for people to live beyond their means. However, there comes a point when the future is now and the bills come due, and when that happens, people must live within within their means, minus the payments on the debt. Or does it?
If a new creditor is willing to loan even more money to the debtor, the debtor can use the borrowed money to pay back the previous creditor and continue to live the good life. Borrowing from one party to pay back another is the essence of a Ponzi Scheme. This can go on for a very long time if new creditors can be found and if the debtor can afford the debt service payments (Federal Government financing is a great example of a long-term Ponzi Scheme).
The creditors have to walk a fine line. Like any drug dealer, creditors want to give them enough product to keep them hooked, but they do not want to give them too much product to cause an overdose and death. In the credit world, an overdose leads to insolvency and an inability to service the debt. Insolvency often leads to bankruptcy and the loss of lender funds. The goal of every credit card vendor in the modern era is to maximize the debt service they can extract from each addict without killing them with insolvency.
Many spenders in California have entirely abandoned the idea of saving in favor of personal Ponzi Scheme financing. The idea seems to be that if you can keep borrowing long enough, you can die before the bills come due and avoid the inevitable period where the debts must be repaid. Some even come to believe this is a sophisticated method of financial management; Ponzi Scheme borrowing is lunacy of the highest order.
The system might have gone on longer if creditors had not completely lost their minds. New creditors entered the consumer finance arena by tapping the source of consumer savings securely trapped in the equity of their homes. This permitted consumers to pay off their previous credit card vendors as well as find an enormous source of new spending money. The impact of this new source of spending money created a set of circumstances where home ownership became extremely desirable thereby causing consumers to bid up the prices of homes. The higher home prices meant even more equity was available to spend, so creditors increased their lending to consumers. This made houses even more desirable. This feedback loop is part of the cause of the inflation of the Great Housing Bubble, and it explains much of the residual kool aid intoxication still present in our real estate market (buyers incorrectly believe appreciation and HELOC spending are coming back soon).
The Great Housing Bubble was a grand experiment in financial innovation. Lenders sought to find ways to loan even more money to people through crazy manipulations of loan repayment terms with loan programs like the Option ARM. Unfortunately, The Fallacy of Financial Innovation demonstrates that the loan programs developed during the bubble were not sustainable, and the entire Ponzi Scheme collapsed in a massive credit crunch. The collapse of this Ponzi Scheme is the source of our current financial woes.
Examine the graphic above. The first column shows a graphical breakdown of the income of a typical homeowner. Total home related debt (including taxes, insurance, HOA and other monthly expenses) is limited to 28% of gross income. Consumer debt including all other debt service payments is limited to 8%. Taxes take up about 24% (depending on income and tax bracket), and the remaining 40% is disposable income to cover the other expenses of daily life.
The second column shows what happens as people start to stretch to buy a home in a financial mania (charts are below). The increasing home debt reduces the tax burden a little, but the increased consumer spending and home debt takes a big chunk out of disposable income. The recession of the early 90s lingered for so long here in California because the people who bought in the frenzy of the late 1980s found themselves with crushing debts and greatly reduced disposable income. Prior to the increase in housing debt, this disposable income would have been spent in the local economy; instead, this money was sent out of state to the creditor who made the loan.
The big financial innovation–if you want to call it that–of the Great Housing Bubble was the nearly unrestricted use of cash-out refinancing and HELOCs to tap into home price appreciation. The third column shows the impact this new source of credit had on personal income statements. HELOC money allowed people to pay off their consumer debt while only modestly increasing their home debt. Since this income was untaxed (borrowed money is not truly income), the extracted money was entirely converted to disposable income. This incredible influx of disposable income caused our economy to explode.
Unfortunately, as is documented in the post Our HELOC Economy, the loss of this HELOC income is having devastating effects on local tax revenues and our economy. When you examine the personal income statements of borrowers in column four, you see that home debt and consumer debt have now become so burdensome that there is no longer enough disposable income to cover life’s basic needs; borrowers are insolvent.
The only solution to the problem of borrower insolvency is a monumental restructuring of both home and consumer debt. Realistically, the only way this is going to occur is through foreclosure and bankruptcy. We are not going to re-inflate this Ponzi Scheme because when sustainable loan terms are applied to real incomes, people cannot raise bids to sustain or inflate home prices–even with 4.5% interest rates. Without home price appreciation and subsequent HELOC borrowing, the Ponzi Scheme does not work.
The implications of this are clear; we are going to experience an extended recession bordering on depression here in California that is going to linger for many, many years. During this extended crisis, a significant percentage of California homeowners are going to face foreclosure and personal bankruptcy.
The collapse of a Ponzi Scheme is never pleasant, and that is what we are facing. According to Arthur Miller, “An era can be said to end when its basic illusions are exhausted.” The unsustainable lifestyles and illusions of wealth created during The Great Housing Bubble are exhausted; the era has ended.
{book3}
You have seen these charts before, I want to remind you of just how burdensome home debt became as a percentage of personal income during our last two bubbles.
Debt-To-Income Ratio, California 1986-2006
From 2001-2006, the median home price in Irvine increased by an amount equal to the median income. I want to remind you what a massive economic stimulus this was:
Mortgage Equity Withdrawal 1991-2007
And Calculated Risk has a chart tracking the rising personal bankruptcy rate since the new bankruptcy law was passed in 2005:
This trend will continue. In fact, it will likely get much, much worse as the recession, unemployment, and foreclosures take their toll.
Fabulous ground level end unit three bedroom, two bath condo. Large eat
in kitchen with sliding doors out to a tranquil patio. Light and bright
home with neutral colors. Inside laundry and attached garage. All
pictures on the MLS are current.
Today’s featured property is a 2003 rollback.
The property was purchased on 9/2/2003 for $403,000. The owner used a $322,400 first mortgage, a $80,600 second mortgage, and a $0 downpayment.
On 6/22/2005 the property was refinanced with a $412,000 first mortgage.
On 4/21/2006 the owner opened a HELOC for $148,000.
Total property debt is $560,000.
Total mortgage equity withdrawal is $157,000.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $184,940.
For this owner, the Ponzi Scheme is officially over.
BTW, I would like to call your attention to the newest blog in town: Irvine Homes. Erika Chavez of the OC Register is now writing a daily blog on Irvine real estate, and she has an interview with me posted today. Go check it out.
{book1}
This time I made up my mind This time I’m back on my grind I know there’s things in my life That I’ma let go startin tonight I can’t live my life this way
Today’s post began as an email exhange between me an OC Progressive. He has analyzed the impact of the loss of mortgage equity withdrawal on the local economy. What he found is remarkable.
In trying to follow local politics here in Orange County,
I’ve been looking very closely at local government budgets, and there’
s one trend that seems to be emerging rapidly. We’re seeing a
precipitous decline in local sales tax revenue. And this is not going
to be a temporary problem, but rather one with serious long term
impacts.
I was absolutely floored by OCTA’s fiscal review that showed a
difference over three years, in the projection of revenue from sales
tax, that lowered the 2009-2010 projection of sales tax countywide by
19% over their previous projections. (This was a difference between
projections, not between actuals, but both current and previous
projections were based on solid actual numbers and best case
projections).
The decline in sales tax has two components, and one will not recover. What nobody seems to be picking up is the relationship between the mortgage bubble and the collapse in California sales tax.
Calculated Risk has consistently posted graphs and reports that show Mortgage Equity Withdrawal (people taking money out of their
houses) as a percentage of disposable income. If you read the Irvine Housing Blog,
you’ll see example after example of folks who used their house as an
additional income from 2000 to 2007, turning debt into tax-free income,
frequently in the range of 50,000 a year. The phenomenon peaked in Q4
2006 when MEW was nine (9)% of disposable income nationwide, and 6% of
consumer spending. A year later, it had only dropped by around 20%.
Now it’s essentially cut off because no one will fund the loans
anymore, and no one will even fund the credit card debt that was
routinely paid off with visits to the house ATM machine.
Because Orange County in particular, and California, in
general, have housing prices so much higher than the national average,
and because we were at ground zero for the origination of the new
mortgage products, my guess is that mortgage equity extraction in the
OC may have been as much as twice the national average as a percent of
disposable income, meaning that up to 18% of the county’s disposable
income, and 12% of the taxable sales, were coming from MEW.
So
sales tax revenue money fell off a cliff in fiscal 08-09, although the
lag in reporting and balancing reports is making that truly apparent
only now. Last September the drop-off was in the six per cent range. Costa Mesa is now reporting a 12% year over year decline in sales tax for 08-09.
John Chiang just reported that “sales taxes continue to be hammered by
diminished retail spending across the state”, with an 11.8% year to
year drop-off in March. (And March sales might have borrowed some high
ticket sales in advance of the April 1st sales tax increase!) If you
dig down into the details of this Rockefeller Institute report,
you’ll see that a national decrease in retail sales tax reported by the
Wall Street Journal is actually a phenomenon driven by the real estate
bubble states of CA, FL, and AR. Double digit sales tax losses in those
states pull the national “average” loss of 6.2% down to 3.2%.
It’s hard to figure out how much of the decrease is a result of a
general economic slowdown, and the huge job losses, and how much is
based on the end of MEW, but my observation is that nobody is even
factoring in the disappeared MEW as a part of the problem, and local
and state electeds seem to think that normal cyclical patterns will
reassert themselves so that retail sales will revert to the mean,
Therefore, current assumptions and 2009-2010 budgets at every level
may be underestimating both the current and future drop-off in sales
tax revenue.
Instead, it’s more likely that a significant chunk of our
retail sales (let’s say 10% when compared to FY 2006-07) are gone
forever because of the collapse of MEW, and the jobs in local retail,
restaurants and services are following the jobs in finance, real
estate, and all the affiliated jobs that supported the refinance
industry. There are always lags, especially with small business owners
who are reluctant to throw in the towel, but we already have far more
retail than we need, and much of it is unprofitable.
Because of the budget preparation cycle, and the lagging
revenue information, local budgets for 08-09 were based on retail
sales for Q1-Q4 2007, so cities are drawing down reserve general fund
balances at a rapid rate, leaving very little flexibility for ensuing
years. Mid-year revisions didn’t cut expenses fast enough, so as
budgets are finalized and the retail sales numbers for FY 08-09 receive
real visibility, you’re going to see a series of bad choices.
This will hit transit first and hardest, where local transit
funds come from a 1/4 cent tax, and we’re looking at devastating
impacts in bus and transit systems in Orange County and across the
state.
Effects of sales tax collapse varies dramatically from city to
city and agency to agency based on the share of property tax that local
governments get, which is a bizarre calculation made when prop 13 went
into effect, but the overall effects are dire. Property taxes, whose
gross receipts had been going up around 6% a year, based on the 2%
increase for existing properties, and huge gains for resales. My guess,
more pessimistic than most, is that property tax revenue will now be
decreasing in the 2% per year range as property values drop by 50% and
reappraisals slowly move through the assessors’ systems, with some
additional problems with non-payment. Hotel taxes, which are a big
income source for many cities, are plummeting with the general economy.
Even stable sources like business license fees, franchise frees, and
utility taxes are dropping, so there are no positives to balance out
the drop in sales tax.
Given the way that local politics work, and the incredible
power of public safety unions, my gut feel is that very few California
cities will react quickly enough taking the steps they need to balance
their budgets, and that the Vallejo bankruptcy is a precursor to a wave
of municipal failures. It’s going to hit hardest, first in the places
where we’re already at depression level unemployment numbers, with no
new jobs in sight. Look at a city like Merced that has a 10 million plus gap in a 40 million dollar budget for next
year, after budgeting to dip 4 million into reserves to balance the
08-09 budget, and you’ll get a feel for how deep the cuts are going to
be. Merced anticipated a 7% drop in sales tax, and saw close to 19% in
the the fourth quarter of annual 2008. And there are fine points that
people don’t get. Merced will not only burn through the reserves that
they thought could carry them for five years, but they’ll also lose the
$800,000 or so of revenue that they used to make in interest on the
reserves.
Merced’s an extreme case, but it’s just a little earlier than
a city like Huntington Beach, which is now looking at a shortfall of at
least 6 million in revenue for the 2008-2009 fiscal year.
Every local government is going to be facing double-digit cut
backs in budgets for 2009-2010, and even worse cutbacks in 2010-11 if
their projections are too optimistic, and they get hit with substantial increases in PERS contributions that year.
Obama’s stimulus funds are patching a huge hole in the state
budget, but aren’t going to fill the problems with local funding
shortfalls.
All of the cities are applying for a part of the ONE BILLION
DOLLARS (cue Dr. Evil) that Obama has pledged to maintain local law
enforcement, but that’s divided over three years, and may pay for
5,000 cops nationwide, maybe 500 in California or an average of one
for every one of California’s 458 cities and 58 counties. Innumeracy
reigns at the council dais sometimes when elected officials are
grasping at straws.
We’re going to see an extreme makeover of local government.
Some revenues will recover very slowly. Other revenue, like the phony
money that was coming from the housing ATM, are just not coming back.
Local governments have grown used to steadily increasing
revenues, and have planned accordingly. Now they have to hit the reset
button.
Extreme makeover time!
{book2}
There you have a detailed and data-based analysis from someone who pays careful attention to these issues.
So what do you think our local governments are going to do? I suspect we will see a large number of municipal bankruptcies. A recent court decision concerning the Vallejo, California, bankruptcy allows the City to void its union contracts. When local tax revenues went up dramatically during the bubble, much of this money went to union wage and pension agreements. Now that this revenue is gone, probably permanently, cities will have difficulties meeting these obligations. I expect we will see more bankruptcies and union contract cram downs.
At some point, the reality of the permanent loss of MEW is going to set in on both homebuyers and government officials. When homebuyers realize it, there will be serious withdrawal pains from kool aid intoxication. When government officials realize it, there will be ugly political battles that will likely end up in court battles.
The fallout from the loss of mortgage equity withdrawal has yet to be fully felt and realized. It will be another shock to Californians.
Beautiful Home in Quiet & Prime Location of Woodbridge(near
Woodbridge North Lake). Fabulous floor plan with spacious bedrooms,
Fantastic Up grade Wood Floor. Located at the End of a Cul-De-Sac
street. Perfect for Kids!! 4-Bedroom-Single-Level In Woodbridge.
Random capital Letters?
Two exclamation points.
This property was purchased on 2/26/2003 for $460,000. There was an inter-family transfer on 6/14/2007, but this did not impact the financing on the property. When the property was purchased, the owner used a $413,540 first mortgage and a $46,460 downpayment.
On 2/25/2004 she opened a HELOC for $58,800.
On 4/12/2004 she refinanced the first mortgage for $426,300.
On 3/24/2005 she opened a HELOC for $230,000.
On 8/16/2005 she refinanced the first mortgage for $650,000 with an Option ARM with a 1% teaser rate and got a HELOC for $55,500.
Total property debt is $705,000.
Total mortgage equity withdrawal is $291,460 including her downpayment.
If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $108,100.
From now on, when you see these $300,000 mortgage equity withdrawal numbers on typical Irvine properties, you will have a good idea of the impact that had on our economy, and you will also see the impact the loss of this money will have moving forward.
{book7}
i was lying on the grass on sunday morning of last week indulging in my self defeats my mind was thugged, all laced and bugged, all twisted round and beat uncomfortable three feet deep now the fuzzy stare from not being there on a confusing morning week impaired my tribal lunar-speak and of course you can’t become if you only say what you would have done so i missed a million miles of fun
i know it’s up for me if you steal my sunshine making sure i’m not in too deep if you steal my sunshine keeping versed and on my feet if you steal my sunshine
Many realtors like to blather on about pent-up demand. The reality is our market has an enormous amount of pent-up supply due to hit the market 6-12 months from now.
Pent-Up House — Sonny Rollins: jazz violin maiko live!
Despite the news headlines of a real estate bubble and economic
termoil, many sellers believe their properties have appreciated since
they paid peak prices. They are asking, “What Bubble?”
Denial comes in many flavors. One of the more interesting forms of denial is exhibited by those sellers who are completely oblivious to the price crash. Either these people are completely ignorant to what is happening, or they are willfully ignorant and believe the problems all around them do not apply to their property. If I had to guess, I would lean toward willful ignorance as the most likely explanation.
The market for mid- to high-end homes is like playing the lottery. There are very few sales occurring at these price points because people are no longer being given huge loans, and they will not be any time soon. With mortgage financing going back to qualifying people for amounts they can afford to pay back with their real income, the only sales at the high end are buyers with enough cash to close the deal. There are very few of these people relative to the number of sellers out there. The few lucky sellers are cashing in a lottery ticket funded by a knife catcher.
The 92603 Zip code shows the extreme dissonance between asking prices and selling prices in today’s market. According to DataQuick, the median sales price in 92603 at the end of March was $638,000. According to Redfin, the median asking price is $2,190,000. Someone explain to me how that is supposed to work.
Let’s employ a bit of logic here. Median sales prices reflect what people are paying in the market. Even with super-low interest rates and plenty of kool aid, buyers in this zip code are only bidding prices up to the low $600s. Buyers are not going to raise bids any time soon because that would require toxic financing which isn’t going to be available, probably ever again. If buyers are unable to raise their bids, sellers must either lower their prices, or there will be no transactions. The extremely light transaction volume reflects this reality.
If there were no distressed sellers in the market, transaction volume could fall to near zero, and prices could stay artificially inflated indefinitely. The current asking prices in the market act like an informal cartel. With the huge incentive to cheat by lowering price to capture a knife catcher, prices would come down eventually, but it would be an agonizingly slow process. However, the reality in our market is that there are large numbers of distressed sellers whose properties will be on the market 6-12 months from now (See The Foreclosure Onslaught Continues for nice graphs). Prices will fall.
Now that all the foreclosure moratoria have been lifted, lenders have been sending out notices of default to all the people who defaulted over the last 6 months who were not entered into the process. Months ago, I wrote a satirical piece titled, Moritorium on Defaults Announced. The point of the writing was to demonstrate the absurdity of foreclosure moratoria. The problem isn’t foreclosures, the problems is borrowers who default. Stopping foreclosures does not stop defaults; what is does do is create a backlog of foreclosures as people default and live in their houses rent free.
If you look at the flowchart above, many properties are at the notice of default stage. In 90 days, most of those borrowers will be given a notice of trustee sale. As soon as 21 days after that, the property may be scheduled for foreclosure auction. Then depending on the backlog of REO and the lenders staffing, these properties will be prepared for sale in the open market. From the time of the notice of default until the property is offered for sale in the open market takes 180 days or more. Since this process was restarted in earnest in April, look for the first of these REOs to hit the market in October.
When you think about it, the lenders really hurt themselves by delaying 6 months. The flood of REO to hit the market this fall and winter could have been arriving on the market today when there are more active buyers. Instead, the REO that should be hitting the market now is going to be added to the numbers due to hit this fall naturally. The result is going to be an enormous influx of supply just as demand is starting to wane due to the end of the prime selling season. Supply will overwhelm demand, and the mid- to high-end market will see a big leg down in pricing just as the low end did during the fall and winter of 2007-2008.
The ARM reset schedule has always shown a 2-year gap between the subprime wave of foreclosures and the second wave from the mid- to high-end foreclosures. The defaults from the second wave began early, and they have been exacerbated by the weak economy. This would have had the effect of shifting this wave forward in time and smoothing it out, but instead, the government and lenders embarked on a program of foreclosure moratoria that pent up this supply into another large wave.
Perhaps on a national level, the moratoria may have helped do some workouts and save a few marginal borrowers with conforming loans, but locally, our jumbo-dominated market with extremely leveraged borrowers is not eligible for these workouts. The ARM reset wave may have been lessened on a national level, but here in California, we will see the full brunt of the second wave of the foreclosure crisis.
** One of the Best Location & Most Beautiful Estate in Turtle Ridge
** Magnificent Pano. View from City Lights to Shady Canyon ** Premium
Pie Shape Lot at the end of Cul-de-Sac ** Every Espect of the Home has
been Crafted with the Utmost Attemtion to Detail, Unique Material and
Finest Workmanship Both Inside and out ** 6 BR 5.5 Baths + Library +
Media RM & Bonus Room ** Extra Lrg. Formal Dining RM &
Breakfast Nook * Gourmet Kitchen w Oversized Center Island, 2 Built-In
Refrigerators & Wine Cooler.. & More ** Marble, Granite
Hardwood Floor, Plantation Wood Shutters, and Custom Mirrors ..etc. **
Imported Drapes, Crown Moldings, Euro. Style Cabinetry, French Doors 4
Car Attached Garage w Epoxy Floor ** Luxuriou Resort Like Landscaping
for Relaxed & Entertainment ** Fully Automatic Salt Water pool
& Spa ** Oversized Gazebo, Outdoor Fireplace, Fire Pit ** Natural
& Flag Stone Throughout the Yard ** MUST SEE ** Awards Wining
Schools.
In English, we use this thing called a “period” to end sentences. The double asterisk only works in realtorspeak.
Why Is This In Title Case?
Pano. Do you think the writer did not know how to spell panoramic?
Espect? Luxuriou?
Utmost Attemtion to Detail? Where was the attention to proper spelling?
And this is a description for a $5,400,000 home…
One of the problems with cul-de-sac lots is the difficulty with orienting the front of the house to the street. This house might have a fantastic front elevation, but since it needed to be twisted to fit on the lot, the presentation from the street is of the side of the house with an ugly garage prominent to the visitor. Just what everyone wants in a $5,400,000 showpiece.
When I put the income and downpayment requirements, it was tongue-in-cheek because most buyers of properties over $2,000,000 pay cash. If you can truly afford a property that opulent, you don’t need to borrow. However, during the bubble, lenders will willing to loan people multi-million dollar sums to purchase properties. Today’s owner was one such borrower.
This property was purchased on 4/25/2006 for $4,311,500. The owner used a $3,131,000 Option ARM first mortgage and a $1,180,500 downpayment. Can you imagine a $3,131,000 Option ARM? If WAMU was making loans like that, it is no wonder they collapsed. On 3/2/2007 this owner opened a $700,000 HELOC.
Of course, the financing data doesn’t matter because this seller is going to make another $1,000,000 or so on the appreciation since the peak in mid-2006… Yeah, that is going to happen…
This seller is not alone in the dreams of post-bubble appreciation. I came across these properties that have also appreciated since the owners bought at the peak:
There are plenty of others. The uptick in sales activity is starting to bring out the organic sellers and their WTF asking prices. Everyone wants to hit the appreciation lottery. They better cash in their tickets this spring and summer.
