Some of you will remember the post I made in October 2006 Defying All Logic and Reason where I profiled 2 different houses that were nearly identical as an example of irrational exuberance.
From that post:
Despite much of the media fervor over a financial mania, or Housing Bubble, there is no end to the number of tv shows describing flipping, people interested in flipping, and general commitment to house flipping.
We even have some here in Aliso Viejo flipping million dollar homes (Bought Aug 2006 for 1M, selling now for 1.1M). Competing with virtually identical homes selling for nearly a quarter of a million dollars less…in the same neighborhood. Can you tell which is which?
The fever pitch of late 2006 left some people unable to contain themselves from overpaying for a property and embarking on a lark of flipping a perfectly decent house. After putting in the pergraniteel accoutrements, they placed it back on the market for 250K more with the attempt to sell it to some unsuspecting noob.
Unfortunately, they overpaid and therefore couldn’t cut the price when needed.
At the time, I presented 2 nearly identical homes listed for 1.1M and 875K and asked readers if they could point out the more expensive one. In excellent form, Rob Dawg responded:
The first picture is the expensive house; 4, count ‘em four palm trees. Obvious.
This was the 1.1M listed house:
Recently, I came across a new listing (nearly 1.5 years later) that looked suspiciously familiar. I had to check it out. Look similar?
Before anyone clicks on the link to see the new house price, take a guess on it in the comments. Remember, this was less than 1.5 years ago when people were still flipping houses!
I’ll give you a hint. The seller is already looking at a 250K loss from their purchase price not including any pergraniteel upgrades made to the home, realtors fees, or interest payments made to the bank. Guess the palm trees didn’t help after all.
**Caution, real estate does not always go up
You know a market fad is going out of style when mainstream television finally catches on. Just look at MC Hammer, his rise, his over-commercialization, the draw of marketers to him and his eventual collapse because he couldn’t afford to pay his bloated team, the abandonment by the public cause he was oversold and worn out. In a micro-economics sort of way, he was way over-speculated.
Looks like the seller already lost > 250K… check out the sales history:
Date Price Appreciation
Mar 05, 1991 $332,000 —
May 17, 1996 $278,000 -3.4%/yr
Aug 30, 1996 $305,000 38.0%/yr
Feb 19, 2003 $670,000 12.9%/yr
Aug 24, 2006 $999,000 12.1%/yr
Feb 07, 2008 $722,500 -19.9%/yr
Did someone just recently buy this so they can sell it at another lost? Of course, since they’re saving over a quarter of a million already, it’s a perfect time to buy. Real Estate only goes up… after it drops another 300K (being conservative here)!!!
I didn’t see the most recent sale… that means this one is an REO!
My bad on not realizing it.
Chuck Ponzi
Was going to guess $800k but bubblelicious’s comment spoiled the surprise for me.
So do you think the bank will get its asking price?
There are two other homes for sale in the same tract that are similar at $849K (MLS #S520231) and $895K (MLS # P602807). Both of these are range priced but who cares what the upper range is. The house at $849K is a short sale that was purchased in May of 2005 for $1,090,000 and they owe $872K. With costs, these folks are losing well north of $200,000 of their own money. That’s a lot of wampum. For any human, that should strike a chord of sympathy.
The house at $869K was purchased for $860K in August of 2005 with 100% financing. At the lower end of the range these folks are going to be writing a check to close and they better warn up the pen with the REO priced at $749K.
My guess will be that at least one of these goes back to the bank. How many other people who bought after 2004 that are going to be upside down? Lots. It is not going to pretty out there. You can get a decent house in Anaheim for $350K that was going for $550K two years ago. That’s a 36% drop. Using that math is $650K what we will see for formerly million dollar homes? I know of a REO in Lake Forest that I showed last year when it was priced at $575K as a short sale. The bank has it priced at $437K now. That place has seen a 35% drop too.
However, memories are very short and banks know this. They price these properties low to get everyone to jump at them. This REO in Aliso Viejo has already been put on hold. I suspect they’ve got a bunch of offers and the bank is going to counter. They have come up with a formula that works for them and the bank will counter everyone with, “Give us your best and highest offer”.
Someone is going to jump at the chance to get that “Million Dollar Home” and go $800K. I tell my clients not to get too excited, there will be plenty more houses at the same price. In this case two, just round the corner.
I was going to guess $850K but then I read the comments and saw the real price mentioned. They should have sold the house year ago and they wouldn’t have lost as much as now (well, it’s relative what we understand under the term “much”). I agree with bubblelicious that it will go down at least 200K more and then go up again to reach even higher price than it had in 2006. Although I work in Canada I am also interested in how the situation develops in California, or say whole United States. If you want to know how it looks like here in Toronto, look at e.g. Toronto MLS listings.
Good thing the banks aren’t already f’d. Oh wait.
Really Scary Fed Charts: March
I think a lot of the so called “flippers” out there had no clue what they were doing. The basic concept is still good, except now it would be wise to wait a couple of years before buying a house to flip. The right basic concept that will make money is: get a low price per square foot (for whatever area you are in), at the low end of a good area (good schools, good commute to work centers, etc.), and put in sweat equity for projects that you know how to do (that’s very important) with upgrades that people actually want (not quick and cheap jobs).
The basic concept is still good, but produces much smaller gains than many people in recent years were (greedily) expecting. I’m a CPA who loves reading up on investing and has studied real estate since probably infancy. One of the things I’ve learned is that any good investment strategy can work if you educate yourself and expect a fair return, not an above average one.
Greediness and ignorance is the worst possible combination when it comes to investing.
Also, you can’t make money without putting the work in. Being at the right place at the right time and knowing how to take advantage of it (or being able to) is not very common.