All posts by SavedbyGrace

Empty McMansion #4

322 Leda Ln.

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Asking Price $1,999,000 ::: Sq-ft 4,450
Purchased Price $779,000 ::: Lot Size 9,840
Purchased Date 11/03/2006 ::: Beds 5
Days on Redfin 45 ::: Baths 4.5
$/Sq-ft $449 ::: Year Built 2008
20% Downpayment $399,800 ::: Area Santa Anita
Income Required $499,750/yr ::: Type SFR
Est. Payment* $10,107/month ::: MLS# W08008865

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Welcome back to another week at Arcadia Housing Blog. Today I will continue to document yet another empty, equity burning McMansion. Like #3 from last week, this brand new construction is also listed at $1,999,000. Except for the architectural style of the house, it’s very similar to 415 W. Palm Drive with the exact same listing price and number of bedrooms and bathrooms. Both were purchased in mid-late 2006, have similar lot square footage and were torn down to build McMansions of almost identical size for the same asking price.

$1,999,000 (asking price) – 6% commission – $779,000 (purchase price) -$1,001,250 (construction costs @ $225.sqft) – $55,520 (carrying cost @ $3470/month x 16 months) = approx. $43k profit

Purchase Price $779,000
Purchase Date 11/03/2006
1st Loan $623,200
2nd Loan $77,900
Downpayment $77,900

This is starting to get old, but it is what it is – another property bought at the peak of the bubble in 2006, only to be torn down for a McMansion put up for sale in late 2007 or early 2008. It took many months to get this house back on the market. Although experienced flippers can gauge the time it takes to acquire the necessary permits, construction costs and time, many fail to react to market conditions and choose to live in denial. See no evil, speak no evil, hear no evil – everything must be okay…right?

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Since 2006, the market has taken a drastic turn and it’s not a good one for flippers. In the past, new homes typically lead the way in price reductions and I see no reason for it to be different this time around. Once their prices start to give way, the older, less desirable resale homes will be forced to come to terms. This however does not start to occur until flippers recognize and accept the situation. The snowball is already rolling down the mountain and it will only be a matter of time before it reaches a critical mass. These sellers are in the same boat as all the others who are also hoping to find a knife-catcher to bail them out. From the looks of it, most of Arcadia is still in the late denial stage.

To be consistent, I’ve maintained the same assumptions and proceeded with the same calculations for this property as I have with the others in this series. Thanks to reader llking for pointing out that I did not account for the construction loan. If they don’t have investors with cash and did in fact take out a loan, then these folks could already be underwater. This is a likely scenario, but since I cannot confirm the financials of the construction loan, I will leave it out.

Of course, the mortgage industry was still doing plenty of silly free lending with very none to low downpayments back in 2006 so their carrying costs could be much lower if they used an option ARM of some sort. Unfortunately for them, there is only going to be more and more competition on the market and prices still need to go much lower. TheArcadian reported in yesterday’s Inventory and Market Report that volume and foreclosures both rose while median sales price dropped 13% in just one month.

Are you still in denial?

I am Renter

There are renters and home owners. I am currently a renter. Why? Because –

1) Market prices are way over and above the fundamentals
2) It’s cheaper to rent than to buy a home of similar caliber
3) No strings attached

I am a renter and I’m not ashamed to declare it. In the olden days, homeowners were well respected and held in high regard because it meant they were responsible enough to save for a down payment and have a stable income to purchase a home. In a sense, they’ve “made it.” Renters on the other hand were often deemed the lower class of society because they did not, or could not, own their residence. This notion was thrown entirely out of the window during the bubble when anyone and everyone could get a home loan if they so desired.

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As a renter I’m often subjected to condescending remarks from homeowners who think they are somehow superior to me simply because I am a renter. Their smirk remarks around the cocktail table about how they’ve built a “mountain of equity” or that smug look on their face as they show off their new Hummer which was bought with a HELOC just makes my blood boil. It’s as if I’m being incredibly stupid for not indulging in their financially unsustainable lifestyle when in fact I’m just being the fiscally responsible person they’re not.

Being a real estate Scrooge the last few years, I understand how some folks might label me as a bitter renter, but I disagree. Sure I’d love to purchase my own home – for the right price. I rent because it makes sense to rent. I simply ran the numbers and decided that the money I was saving from renting versus buying a similar place is better off being invested in something other than real estate. Not only that, I enjoy the piece of mind from not having to worry about how my neighbor’s asking price is undermining my paper equity or how foreclosures on the block will affect the neighborhood. I don’t have to worry about the mortgage rate reset because I would only buy on a fixed rate mortgage. Anything else is too unstable and risky.

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There is also a misconceived notion that renters live in sub-optimal conditions. That’s not true. Many renters live in apartments or townhomes because they want to maximize their savings to minimize the mortgage payment when/if they buy a home. With the market as inflated as it was during the boom, you can rent a nice luxury 3000 sqft home for half the price it costs to own. Even now, it’s still cheaper to rent.

Lastly, I do feel bad for a handful of families that will lose their home due to mortgage fraud or scams, but the majority of the at-risk borrowers are just victims of their own greed and ignorance. The market needs to purge these homeowners squatters so they can go back to renting while people who can afford the mortgages move in to stabilize the fields.

I am a renter – hear me roar.

Empty McMansion #3

415 W. Palm Dr.

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Asking Price $1,999,000 ::: Sq-ft 4,475
Purchased Price $765,000 ::: Lot Size 9,480
Purchased Date 08/01/2006 ::: Beds 5
Days on Redfin 7 ::: Baths 4.5
$/Sq-ft $447 ::: Year Built 2008
20% Downpayment $399,800 ::: Area Baldwin Stocker
Income Required $499,750/yr ::: Type SFR
Est. Payment* $10,107/month ::: MLS# A08026688

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Today marks the 3rd day of our Empty McMansion series and this one just came on the market last week. Compared to the last two properties that needed over $500k for 20% downpayment, this one only requires $400k. Whoopie, I’m sure a lot of people out there have $400k cash just lying around in case overvalued property comes on sale.

$1,999,000 (asking price) – 6% commission – $765,000 (purchase price) -$1,006,875 (construction costs @ $225.sqft) – $61,200 (carrying cost @ $3400/month x 18 months) = approx. $46k profit

Purchase Price $765,000
Purchase Date 08/01/2006
1st Loan $535,000
Downpayment $230,000

All that work and all that stress for $46,000? Doesn’t sound logical to me, but then again I didn’t drink any of that toxic kool-aid either. This seller bought the property at the peak of the bubble in summer of 2006. It probably took them months to get permits and funding to build the property for sale today and nearly as long to construct it. For almost $2MM asking price, $46k is not a lot of negotiating room. It would take a year of carrying costs to wipe out $46k, but only a 3% price reduction to start put their books in the red.

How much do you think they spent on that “unique venetian plastered fireplace” or the “expensive Italian porcelain tile?” I don’t know how much, but I do know they’ll be regretting it soon enough.

Unlike other new homes, you will notice that the interior was professional designed…” It looks the same to me. It has that track-home look and doesn’t look a bit custom to me. Heck it doesn’t even have undermounted sinks in what looks like the master bath. For $2MM you’d think it’ll at least come with some nice fixtures.

Its neighboring house is also on sale. Apparently, they’ve drank the kool-aid too because I can’t imagine why anyone would pay $1MM for a 58 year old dump. Yes, if you purchase this $2MM new construction, don’t expect your neighbor’s house to look that great. This listing is currently at $447/sqft. In this slowing economy and dying RE market, I can’t help but wonder how many months and price reductions will it take to see this property.

Empty McMansion #2

1103 S. 8th Ave.

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Asking Price $2,880,000 ::: Sq-ft 7478
Purchased Price $750,000 ::: Lot Size 27,063
Purchased Date 04/19/2004 ::: Beds 7
Days on Redfin 113 ::: Baths 7.5
$/Sq-ft $385 ::: Year Built 2007
20% Downpayment $576,000 ::: Area Near Monrovia
Income Required $720,000/yr ::: Type SFR
Est. Payment* $14,561/month ::: MLS# A07162003

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Brand New Luxurious Estate at Prestigious location in Tree Street.

Riiight. Since when did 8th Street become a prestigious location? The seller would certainly want potential buyers to think that it’s prestigious when in fact it’s just a 6 blocks away from the Monrovia shooting last month. Let’s see, another house requiring half a million dollars downpayment and still over $14,000/month in mortgage payments for basically an overbuilt McMansion doesn’t sound appealing to me.

Assuming the same $225/sqft in construction costs as we did in yesterday’s profile, this house would have cost our specuvestors $225/sqft x 7478 = approx $1.683MM to build.

$2.88MM (asking price) – 6% commission – $750,000 (purchase price) – $1.683MM (construction costs) – $174,800 (carrying cost at $3800/month x 46 months) = just under $100k profit

Purchase Price $750,000
Purchase Date 04/19/2004
1st Loan $616,000
2nd Loan $77,000
Downpayment $57,000

Listing History
11/7/2007 $2,980,000
2/16/2008 $2,880,000

The mailing address for this property’s seller is on the same street as that from the property profiled yesterday. Do flippers congregate and live in clusters? Lately I’ve been seeing a lot of properties on the market where the seller’s mailing address is just a few blocks away right here in Arcadia. It makes me wonder if they decided to buy and flip property on a whim during a stroll in the neighborhood. The number of McMansions in certain parts of the city is overwhelming and with the reckless market psychology we’ve had in the past few years, it’s understandable how so many people got caught up in the storm.

The very act of flipping is going to cause some major problems because flipped properties sit empty. It generates no income yet have reoccurring monthly costs until the property is sold. Every month it sits on the market casts a larger financial anvil on the investors. This particular home has been on the market for almost 4 months with just one 3% price reduction.

If you made $720k/yr, is this a house you’d be willing to pay $14k/month to live in? In an area just a few blocks from recent gang-related shootings? I think not. With the higher interest rates and tighter lending standards, most people won’t qualify for a loan this size. The ones who do have documented income to qualify and enough cash for a $500k downpayment will probably not want to live here.

Things aren’t looking good for these sellers.

Empty McMansion #1

177 W. Norman Ave.

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Asking Price $3,080,000 ::: Sq-ft 6800
Purchased Price $1,150,000 ::: Lot Size 0.44 acres
Purchased Date 04/19/2006 ::: Beds 6
Days on Redfin 4 ::: Baths 7
$/Sq-ft $453 ::: Year Built 2008
20% Downpayment $616,000 ::: Area Baldwin Stocker
Income Required $770,000/yr ::: Type SFR
Est. Payment* $15,573/month ::: MLS# A08027264

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Yesterday’s post suggested the possibility that the SGV market will experience an increase in inventory of brand new McMansions over the coming months. I will proceed to document them as they appear on the market. Today we have a new listing for a mansion with an asking price of $3.08MM. Assuming they really did use good materials, it would’ve cost them approx $225/sqft x 6800 sqft = $1.53MM to build the house.

$3.08MM (asking price) – 6% commission – $1.15MM (purchase price) – $1.53MM (construction cost) – $88k (carrying costs at $4k/month for 22 months) = approx $127,000 profit.

Purchase Price $1,150,000
Downpayment $517,500
Mortgage $632,500

This is an example of specuvestors who came in too late in the game. The property was purchased at the peak of the bubble in Q2 of 2006 and torn down to rebuild this mansion. Since the property wasn’t completed until 2008, construction didn’t probably didn’t begin until 2007 which means it took a long time to obtain building permits.

The seller (who’s mailing address is just a few blocks away) put a hefty half a million downpayment so that’s good news for the bank, but not so good news for the flipper. Unless he got a substantially lower $/sqft construction price from the contractor, he doesn’t have a lot of wiggle room before the $4000/month carrying cost, negotiations and/or price reductions start to eat away at the earnings. Just 4 or 5% off that $3.08MM asking price and it will cut into their downpayment. Do you think these flippers are sweating bullets yet?

Who will pay $3.08MM for a house next to the storm drain in this dying RE market? Who has the cash funds for that extremely large downpayment? Who has the documented income to qualify for a loan of this magnitude? How long will this property sit on the market before a transaction is made? How long will the sellers hold out before reducing the asking price? How many reductions will it take? Only time will tell.

Supersized Trouble for Unsold McMansions

During the rise and peak of the boom, many homes were remodeled or completely torn down and rebuilt. Lending standards were loose and many people were able to take advantage of the cheap money available. Free-flowing credit allowed home equity withdrawals, refinancing and the means to build one McMansion after another. Widespread McMansion development was especially prominent in San Gabriel Valley cities like Temple City, Monrovia, San Gabriel and Arcadia.

As the credit crunch gets crunchier and flow of cash slows to just a trickle, the market is unable to sustain the rampant development of new homes. Even if investors were willing to take the risk, they can only do so much without the ability to borrow money. Leverage was extremely useful during the boom and it is equally as potent during the downturn. That being said, I still see many new homes in construction right now. What’s going on here?

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Once an investor buys property, their money is tied up. From the original close of escrow to the next close of escrow, they are responsible for all the mortgage payments, property taxes, insurance, HOA fees and any other applicable expenses. That was easy to stomach during the boom because prices were going up, but the carrying costs can easily burn a hole in their pocket when prices are falling.

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Depending on the city and floorplan, it can take anywhere from 3 months to a year or more to successfully apply for a permit to build a new home. If property lines need to be redrawn or re-zoned, it can really start to complicate things and extend the timeline. Only when the permit is granted can construction begin. City inspections can hinder the progress of the project even if everything is made to code simply because of scheduling. There are also other potential setbacks such as weather delays and construction mishaps.

The investor is shelling out thousands and thousands a month to keep things moving. Once construction begins, there’s no turning back. Many of the properties in construction right now were probably purchased during the spring and summer of 2007 before significantly downturns of the RE market were widely reported by the mass media. I suspect these permits didn’t get approved until Q3/Q4 and that’s why we’re still seeing McMansions being built.

If the old structure is still standing they can try to sell it, but once it’s been bulldozed to nothing but an empty lot, the investors have no choice but to continue on with rebuild in hopes of selling a new construction home for profit. It may not be the profit they were expecting, but at least enough to come out ahead or break even.

Empty Equity Burning McMansions
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Lately, I’ve seen plenty of homes in construction, but also many completed homes just sitting on the market. Almost all of these are million dollar McMansions. By default, real estate is not liquid and the higher the price point, the harder it is to sell because the buyer pool is just that much smaller. I’m starting to see quite a few empty, equity burning McMansions sitting on the market and I wouldn’t be surprised to see many more of them in the coming months as more homes are finished with few buyers to absorb them.

When the supply goes up, the prices must come down. When new construction home prices come down, resale home prices will be under a crushing weight. It’s a vicious cycle.

Get Out While You Can

1219 S. 6th Ave

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Asking Price $1,392,000 ::: Sq-ft 1942
Purchased Price $1,230,000 ::: Lot Size 26,414
Purchased Date 02/21/2007 ::: Beds 3
Days on Redfin 75 ::: Baths 2
$/Sq-ft $717 ::: Year Built 1922
20% Downpayment $278,400 ::: Area Near Monrovia
Income Required $348,000/yr ::: Type SFR
Est. Payment* $7,038/month ::: MLS# S515166

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

BUILD A DREAM HOME on this large lot”
“APPROVED City Architectual Plan to build a Single Family Home of over 8000sq feet
“Great opportunity for a Developer”

Here we have an 86 year old SFR on sale at $717/sqft. It wasn’t quite as high as the $952/sqft we saw last week, but it’s not much better. This is failed flip is being positioned as a great investment opportunity with the already approved city plan to build a mcmansion. If it’s such a great opportunity, why not keep the property and move ahead with it?

Purchase Price $1,230,000
1st Mortgage $984,000
2nd Mortgage $246,000
Downpayment $0

This property was purchased a year ago for $1.23MM at 100% financing and re-listed for sale 10 months later for $1.85MM (a $620k profit just for approved city plans?). Just 6 days after the initial listing, the asking price dropped to $1,392,000 (a $458k reduction). Oops, someone must have forgotten to check the comp listings. How many days before the next price drop?

There does not appear to be any improvements done to the property. I suspect that this property was originally bought to be a standard SGV flip – tear down, rebuild and sell for profit. Unfortunately for the seller, it took longer than anticipated for the city to approve the plans for the monstrous 8000sqft house. Combine that with the market downtown and the investor is left with nothing more than a burnt investment. It’s toast.

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Luckily for the seller, they have not yet bulldozed the house. He can still attempt to sell the property as is, but after 75 days it’s still on the market. Do you think the $1,392,000 asking price is a random number? This is probably the amount the seller needs to get out without being burned. I wonder if they’re still making payments on it.

Given the large lot size, I might pay a third of the asking price. But then again, 6th Street is getting awfully close to Monrovia so maybe not. What would you pay for this property in today’s market?