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Irvine Housing Blog

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How to Lose $2,650,000 in Irvine Real Estate

Posted: 03 Aug 2010 03:30 AM PDT

Today's featured property is the largest loss in Irvine to date at $2,650,000. Will the flipper turn it around, or will he be a knife catcher?


Irvine Home Address ... 29 BLACK HAWK Irvine, CA 92603
Resale Home Price ...... $3,599,999

This time, you have to face your future
Although it’s just a dusty road
It’s clear that backing down don’t suit you
I’d hate, to break your sacred code
People, along for the ride
High noon, getting closer

I think you’ll find, everybody loves a loser
So you’ll be fine, you won’t be lonely long

Morcheeba -- Everybody Loves a Loser

I recently wrote a post titled How to Lose $1,100,000 in Irvine Real Estate. That condo in the North Korea Towers was the largest closed-sale to closed-sale loser I had seen to date. Today's featured property shatters that record. 

This property was purchased in 2005 for $5,925,000. It was purchased at auction in 2010 for $3,275,000. The closed-sale to closed-sale loss is $2.650,000.

A $4,485,000 Option ARM!

This is perhaps the worst loan I have seen to date. Washington Mutual underwrote a cash-out refinance for $4,485,000 to the previous owner of this property. WTF!

This property was purchased on 5/9/2005 for $5,925,000. The owner used a $4,147,500 Option ARM first mortgage and a $1,777,500 down payment. Apparently, this owner is a big developer in Las Vegas. He was probably solvent when this loan was made. The prospects for recovery are pretty grim right now.

On 12/15/2006 he refinanced with a $4,485,000 Option ARM. I guess he needed $350,000.

It's loan like these that inflated high end prices beyond all reason, and it is the delinquency on these loans and eventual liquidation that is going to cause the high end to come tumbling down. With delinquency rates on $1,000,000+ loans over 15%, this isn't a one-off. This is one of many where the owners aren't paying. Since most of these jumbo loan are held on the balance sheets of banks, we aren't seeing the distressed properties hit the market yet. But since this one was WAMU which is not FDIC, the government is liquidating its holdings. More will follow. 

Foreclosure Record
Recording Date: 06/15/2010
Document Type: Notice of Sale

Foreclosure Record
Recording Date: 03/11/2010
Document Type: Notice of Default

Nerves of steal

If I had access to that kind of cash, I would not have touched this deal. I don't care how steep the price reduction is, there is almost no market for properties at these price points, and there is no valuation metric I trust. The flipper who bought this put $3,275,000 of his own cash down to buy a property he really has no idea what he can sell for. Maybe he will make the $350,000 he has priced for. Perhaps he will get bids over his asking price. Or perhaps, this property will sit there forever along with the numerous other over $2,000,000 properties waiting for buyers who are few and far between. I wish him luck. 


Irvine Home Address ... 29 BLACK HAWK Irvine, CA 92603

Resale Home Price ... $3,599,999

Home Purchase Price … $5,925,000
Home Purchase Date .... 5/9/2005

Net Gain (Loss) .......... $(2,541,001)
Percent Change .......... -42.9%
Annual Appreciation … -8.0%
Cost of Ownership
$3,599,999 .......... Asking Price
$720,000 .......... 20% Down Conventional
4.60% ............... Mortgage Interest Rate
$2,879,999 .......... 30-Year Mortgage
$711,843 .......... Income Requirement

$14,764 .......... Monthly Mortgage Payment

$3120 .......... Property Tax
$800 .......... Special Taxes and Levies (Mello Roos)
$300 .......... Homeowners Insurance
$500 .......... Homeowners Association Fees
$19,484 .......... Monthly Cash Outlays

-$1947 .......... Tax Savings (% of Interest and Property Tax)
-$3724 .......... Equity Hidden in Payment
$1240 .......... Lost Income to Down Payment (net of taxes)
$450 .......... Maintenance and Replacement Reserves
$15,503 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$36,000 .......... Furnishing and Move In @1%
$36,000 .......... Closing Costs @1%
$28,800 ............ Interest Points @1% of Loan
$720,000 .......... Down Payment
$820,800 .......... Total Cash Costs
$237,600 ............ Emergency Cash Reserves
$1,058,400 .......... Total Savings Needed

Property Details for 29 BLACK HAWK Irvine, CA 92603
Beds: 5
Baths: 6 full 1 part baths
Home size: 7000
($514 / sq ft)
Lot Size: .48 ac
Year Built: 2005
Days on Market: 7
MLS Number: 10-466827
Property Type: Single Family, Residential
Community: Shady Canyon
THIS IS NOT A SHORT SALE, CORPORATE OWNED REO BARGAIN . .(please see cancelled listings for pictures) Reminiscent of the Spanish Revival Estates of California's Montecito District, 29 Black Hawk in Shady Canyon is the perfect marriage between Old World ambiance and World Class amenities found only in the finest custom homes. Located on an expansive private lot bordering Bommer Canyon and the pastoral Irvine Ranch open preserve, this custom residence features 5 bedrooms, 6.5 baths, an office/library, a sun-drenched pool with cabana which includes a shower, fireplace & 1/2 bath. With the finest in custom features and fixtures, artisan applied Venetian Plaster, top-of-the-line appliances, state-of-the-art media and electronics, a finished 3-car garage and a 2,500 bottle wine room , 29 Black Hawk is the idyllic setting to enjoy the California lifestyle.

Still a bear at the high end

Many people seem to think the trouble has passed for the high end and that these properties somehow escaped the ravages of the bubble. Well, so far that has proven true because lenders are not foreclosing, owners are continuing to list at WTF prices, and very little is selling. Lenders are not going to give away these homes. They will have to foreclose and put these properties in the hands of owners who can afford them.

Take a careful look at today's featured property and think about the many that are like it. This property's value was inflated to $6M by stupid lending. The buyer who had $1,777,500 cash available generally would have purchased a home for no more than $2,777,500 as loans over $1M used to be very rare. You can't deduct the interest on a loan over that amount, and there aren't many people with the income to support the payments on loans that large. However, during the housing bubble, massive loans became common, and they were used to inflate property values all over the California coastline.

Nobody is underwriting $4,485,000 loans today, nor is anyone likely to any time soon. The buyer to replace this previous owner will not be so leveraged, and as a result, this house will sell for much less. Think about it, if the high end were a safe haven, wouldn't a cash buyer come along and pay $2,400,000 over the current asking price to get the value back up to $6,000,000? Doesn't the fact that a $6M home is selling for 45% off going to impact the values of other homes in the area. Is the buyer of this property getting this property at a steal?

Loans were the air of the housing bubble. Nobody is providing any air to the jumbo market. We have a huge number of homes that can only be afforded by a very small number of people. The high end is going to be crushed, and the fallout will reverberate through the entire chain of housing values. Picture it like an ice cream cone on a hot day. The top slowly melts downward, and the resulting ooze spreads out over the rest of the housing market.

Income-Price mismatch

The basic problem is a mismatch between the number of people who can afford a property and the number of properties available at any given price point. In Orange County, there are not enough properties being made available at the low end -- a phenomenon that has stabilized prices there, and there is an overabundance of properties available at the high end. Even Steve Thomas's made-up numbers show that.

The problem is much deeper than unemployment related market distress. There are simply not enough households that earn the kind of money required to support high end prices. During the bubble, all the home values were raised in the neighborhood, and many people could not afford they houses they lived in. In order for prices to remain high, when these people sell, they must sell it to someone who can afford the property. If that buyers is not available, the price much be lowered to find a buyer that can.

Banks are not foreclosing on high end properties because they know there is no replacement buyer available. Prices will need to take a big step down just like today's featured property. Lenders are fantasizing that borrowers will go back to work and make enough money to support these prices. It may work in certain areas, but most of jumbo loan land prices are going to fall significantly.

For those who think the high end is stable and the market has recovered, how do you explain this property?

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