Deal

Since it cost a lot to win

and even more to lose

You and me bound to spend some time

wondering what to choose

Goes to show you don’t ever know

Watch each card you play

and play it slow

Wait until your deal come round

Don’t you let that deal go down

Deal — Jerry Garcia.

I would like to thank tonye for suggesting this song and the Grateful Dead.

With the extreme leverage and volatility of residential real estate, it does cost a lot to win and even more to lose. It is a very important decision one should spend some time thinking about. Right now is a horrible time to buy, and here at the blog we watch each property as it comes into play. The game right now is to wait until your deal comes around…

I profile Turtle Ridge frequently because the prices are so high, it is easy to find WTF listings — they all are. This isn’t to say Turtle Ridge does not carry a premium. It is a desirable neighborhood. This desirability is reflected in rental rates and amplified in house prices.

The two-bedroom market in Turtle Ridge will cost you $2,400 to $2,500:

$2405 / 2br – Turtle Ridge Town Home. End Unit!

$2450 / 2br – 2 Bedroom 2 bath – Irvine: Turtle Ridge

A three-bedroom house will cost you $2,900 to $3,000 for entry level:

$2850 / 3br – Beautiful Two-Story House in Irvine – Turtle Ridge

$2950 / 3br – Detach home in Turtle Ridge

Of course, Turtle Ridge wouldn’t be Turtle Ridge if someone didn’t think their rental was worth a fortune. Perhaps they are trying to cover half their mortgage payment…

$4500 / 3br – Stunning 3 Bedroom Furnished Home in Turtle Ridge

The fundamentals of property valuation are the same for the high end as they are for the low end. The breakeven cost of ownership for these units will be near 160 (perhaps a bit lower due to high Mello Roos fees.) This puts the value of two-bedroom units at $384,000 to $400,000. The value for the entry level three-bedroom units would be $464,000 to $480,000. So what would you guess these properties are priced in the market?

The degree of overvaluation is stunning…

Asking Price: $875,000

Income Requirement: $218,750

Downpayment Needed: $175,000

Monthly Equity Burn: $7,291

Purchase Price: $480,000

Purchase Date: 5/16/2003

Address: 43 Bower Tree, Irvine, CA 92603

Beds:	3
Baths:	2
Sq. Ft.:	1,500
$/Sq. Ft.:	$583
Lot Size:	1 Sq. Ft.
Type:	Condominium
Style:	Other
Year Built:	2003
Stories:	Two Levels
Area:	Turtle Ridge
County:	Orange
MLS#:	S508333
Status:	Active
On Redfin:	124 days
Unsold in 90+ days

Drastic 200K price reduction below market value!!!!!!Stunning turtle ridge home, completely remodeled throughout. Plank hardwood flooring, Travertine flooring in kitchen and all bathrooms. Master bathroom has custom travertine shower with designer sinks and hardware. Custom built-in closets and garage. Added recessed lighting, ceiling fans, crown molding and baseboards throughout home. Surround sound in family room and master bedroom. Garage also has granite flooring. Gorgeous and turnkey. Furniture optional, owners are very motivated!!!!!!! Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!

This is the most incompetent listing I have seen in quite some time. First, how do you like the sideways pictures? This isn’t a problem with Redfin. Look at the MLS logo in the corner. The pictures were put up sideways, and rather than correcting the error, the MLS logo was put on them, and they have been there over 90 days.

It really annoys me when a realtor tells me a property is priced below market value (and adds multiple exclamation points.) Market value is whatever someone is willing to pay. Unless someone comes in and pays $200,000 over asking price, the property is not priced below market. In fact, they will probably have to lower the price further to sell it, so it is still priced over market. What the realtor is really saying is “this property is priced $200,000 below the fantasy/wishing/WTF price the owners thought it was worth.”

Furniture optional? Can I have the shirt off the seller’s back?

Gorgeous Turkey…

Can you just feel the emotion (desperation) of the realtor holding down the exclamation point button on their keyboard. I don’t have the patience to count them, but this must be a new record: Must SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!

One of the two 3 bedroom rentals featured above is identical to this unit, and it shares the same alley access. You can’t get a closer comparable. The breakeven cashflow value for an owner-occupant would be $464,000 to $480,000 — which is what they paid for the place in 2003. Unfortunately, it is about half of their asking price.

There are other comps in the neighborhood that are priced even higher:

39 Bower Tree, Irvine, CA 92603

49 Bower Tree, Irvine, CA 92603

48 Arborside, Irvine, CA 92603

Turtle Ridge has a long way to fall…

Estimated Prophet

California, preaching on the burning shore

California, Ill be knocking on the golden door

Like an angel, standing in a shaft of light

Rising up to paradise, I know I’m gonna shine.

My time coming, any day, don’t worry about me, no

Its gonna be just like they say, them voices tell me so

Seems so long I felt this way and time sure passin’ slow

Still I know I lead the way, they tell me where I go.

Estimated Prophet — Grateful Dead

This could be the song of the guy who delivers the paperwork for a foreclosure…

Today’s owner must have estimated a fair profit for their property; otherwise, they probably would not have gone out and borrowed more than they paid for the property. In context with the previous HELOC abusers we have profiled, today’s seller is a minor leaguer. They are extraordinary in their ordinariness. They are stereotypical of many homeowner’s behavior during the bubble. People really believed their home appreciation was free money they could spend as income because their house would go up in value forever. In hindsight, it is laughable and ludicrous — and to some of use in foresight it was as well — but to those caught up in the mania, it made perfect sense.

Irvine will not be savaged by subprime (other than the job losses.) Irvine will be devoured by its own consumption. As I demonstrated in What is Equity?, if you consume your equity or buy at too high a price, the inflation hedge is the only thing keeping you above water, and if you consume too much through bad loan terms or HELOC abuse, you will go underwater and you will be at serious risk of losing your house.

Today’s seller bought in the upward trajectory of the speculative equity curve. Since they bought in 2003, they were too late to stay above water at the bottom of the trough; however, it might have been manageable if they had used conservative financing and not used their HELOC. Instead, they chose a different path, and now they are a short sale. This actually makes it easy to estimate their profit: they paid $830,000, and they borrowed $952,000, so the made $122,000 on the property. Of course, since they have recourse loans on the property, and they are a short sale, they have no protection from the lenders collections department. There may be a question as to how much of this “profit” they will be able to keep…

Asking Price: $899,000

Income Requirement: $224,750

Downpayment Needed: $179,800

Monthly Equity Burn: $7,491

Purchase Price: $830,000

Purchase Date: 10/6/2003

Address: 2 Valente, Irvine, CA 92602

Beds:	5
Baths:	5
Sq. Ft.:	3,103
$/Sq. Ft.:	$290
Lot Size:	6,500 Sq. Ft.
Type:	Single Family Residence
Style:	Contemporary/Modern
Year Built:	2001
Stories:	Two Levels
Area:	West Irvine
County:	Orange
MLS#:	S511815
Status:	Active
On Redfin:	94 days
Unsold in 90+ days

Magnificent turnkey gem nestled on ultra-premium lot on end of safe & quiet CDS! Gorgeous curb appeal thanks to contemporary styling + stone detailing & mature landscaping. Dramatic living room entry boasts nice hardwood flooring + custom lighting & French door access to patio. Stunning gourmet kitchen w/ rich European cabinetry, granite counters, backsplash, island & built-in range & hood. HUGE master suite w/ private bath & walk-in closets. Entertainers’ yard.

Ultra-premium end lot? You mean the one backing on to Jamboree? safe & quiet? Have they no shame?

CDS? Collateralized Debt Servitude?

Magnificent Turkey…

This property will probable look like a breakeven transaction when it finally sells. If they had used a 30 year fixed and avoided the HELOC, they probably would escape with some equity. As it stands, any assets they do escape with will be a target for their lender, although in the short term, they made $122,000. If this house sells for asking price and a 6% commission is paid, the lender stands to lose $106,940.

If you were the lender who had the second lien that did not get paid off in full, aren’t you going after the money the borrower took?

Quail Hell

Must be getting early, clocks are running late.

Paint my love a morning sky, its all cold.

Dawn is breaking everywhere, light a candle, curse the glare

Draw the curtains I dont care, but its all right

I will get by, I will get by, I will get by, I will survive.

I see youve got your list out, say your piece and kiss off.

Guess I get the gist of it, but its all right

Oh well anyway, sorry that you feel that way.

Every silver linings got a touch of grey

I will get by, I will get by, I will get by, I will survive.

Its a lesson to me, the ablers and the beggars and the thieves

The abcs we all think of, try to win a little love.

I know the rent is in arrears, the dog has not been fed in years

Its even worse than it appears, but its all right

Touch of Grey — Grateful Dead

What will be the silver lining in the housing bust? What will be the touch of grey? Right now, it is even worse than it appears, but its all right…

(The rent isn't in arrears, but the mortgage payments certainly are.)

Quail Hill is a great Irvine Village. It is unfortunate it was built during the later stages of the housing bubble because it will become Quail Hell for those who bought there. The discussion about housing is no longer about whether or not there was a real estate bubble: there was. The discussion now is about the depth and devastation of the crash which follows. The bulls will call the bottom every so often, and they will be consistently wrong until we ultimately hit bottom. I have made my case housing prices will fall back to fundamental valuations about 40% off the peak in Irvine. It might get worse. If prices do fall back to fundamental valuations, every buyer in Quail Hill will be underwater — all of them. Think about that for a moment… an entire neighborhood where every homeowner owns a property worth less than they paid, and the vast majority owe more on a mortgage than it is worth. The last time that many were underwater, Noah built a boat.

What would it be like at the local shopping center when conditions are bad, and every person you look at is in financial distress? This is Irvine, so we probably will not see much urban blight or other outward signs of distress, but inwardly, it will be hell on earth. A touch of grey? I hope affordable housing is the silver lining…

Asking Price: $525,000

Income Requirement: $131,250

Downpayment Needed: $105,000

Monthly Equity Burn: $4,375

Purchase Price: $621,000

Purchase Date: 12/30/2004

Address: 356 Quail Ridge, Irvine, CA 92603

Beds:	3
Baths:	3
Sq. Ft.:	1,843
$/Sq. Ft.:	$285
Lot Size:	–
Type:	Condominium
Style:	Spanish
Year Built:	2005
Stories:	Two Levels
Area:	Quail Hill
County:	Orange
MLS#:	S519520
Status:	Backup Offers Accepted
On Redfin:	11 days

The largest floor plan in Ambridge community with one bed and bath on main floor. Spacious living room with fireplace, dining area, all hardwood floor. Open kitchen with granite counters, large master suit, direct access to two car garage with full size driveway. Short distance to Laguna Beach, shopping, 405/133 Fwys.

Don't you love the picture of the garage door? That has to be the worst, most useless photo on the MLS.

Look at this unit — a 3/3 in a new Irvine neighborhood selling for $285 / SF. This is almost $100,000 off a 2004 price. As sales like this one set the comps, it will soon become apparent that every homeowner in Quail Hill is underwater. There will certainly be many who hold out for ridiculous wishing prices, but the fact is the market transactions are occurring at steep rollback pricing. If this selling comp killer gets their full asking price (which looks likely as they are in escrow) and pay a 6% commission, they stand to lose $127,500 on their 2004 purchase.

Who said they wouldn't just give it away?

Collage – Northwood – The second casualty in this complex – UPDATE #1

Originally posted December 30, 2006

The first casualty reported by us in the Collage tract was 714 Timberwood. And yes, these are the actual pictures advertising this property. Kinda crappy huh? You really need to evaluate the smaller no-name real estate brokers/agents before you entrust them with your $500k+ sale.

On to the details:

Address: 1602 Timberwood, Irvine, CA 92620 (Northwood)
Plan: 1267 sq ft – 2/2.5
MLS: S467201 DOM: 43
Sale History: 02/21/2006: $560,000
10/31/2003: $300,000
4/18/2001: $240,000
Current Price: $560,000

So what happened here? Well our flippers got in over their heads. They purchased in February 2006 for $560,000 using 100% financing. How common is this?!?! 😉

What I find interesting here is that in the 2.5 years from the original sale in 2001 to the 2003, the price went up $60,000 (25%). And then in the next 2.5 years from 2003 to 2006, the price went up $260,000 (87%).

The buyer in 2003 put down about 27%. The flipper in 2006 put down 0%.

In a rapidly appreciating market (from 2003-2005), flippers used other people’s money and made out like bandits. They were looked up to as ‘real estate gurus’. My guess is the current seller wanted to get in on the game and not be left behind. Too bad for them. At the current asking price, they are facing a loss of about $33,000 (assuming 6% in selling costs). Oh wait! They didn’t put anything down.. I suppose the lender (Fremont Investment & Loan) will be the biggest loser given that the private remarks state: “ALL offers need short sale approval from mortgage holder.”

UPDATE #1 – February 5, 2008

Yes, it has been over a year since this property was featured. It looks like the property went back to the bank (La Salle Bank) on 5/25/2007 at a price of $484,358.

It was then listed as a REO on 6/5/2007 for $532,500. The price kept dropping over a few months and it finally sold on 12/27/2007 for $447,000 (~20% off the 2006 price).

WOT 2-9-2008

Britney Spears explains the subprime Housing Bubble Crash

I love Subprime

Scary chart of the day.

There are some who do not believe we will have a big foreclosure problem here in Irvine. Orange County has already broken all previous records as has San Diego County. If fact, if you look at the chart, the rate of Notices of Default and Notices of Trustee Sale are well past the previous peaks and still increasing. There is no sign of leveling or stabilization. Things will get much worse.

Keep in mind, this is just the ARM reset problem. This is not considering the unique problems of Option ARMs and Liar Loans. Any one of these issues on their own has the capacity to flatten the housing market.

Notice how the foreclosure chart looks like the ARM reset chart with a 9 month lag period for the foreclosure process?

For something on the lighter side…

Irvine Housing Blog

Established September 2006

Deal

Estimated Prophet

Quail Hell

Collage – Northwood – The second casualty in this complex – UPDATE #1

WOT 2-9-2008