Buying Time In California
The LA Times reports from California. “Sellers, builders and real estate agents have been reaching deeper into their bag of tricks in their efforts to move the ever-increasing homes-for-sale inventory. Agent Mac Donald considers it just one piece of her overall marketing pie. She’s been selling real estate for 22 years and says she personally would never advise clients to offer cars or trips when they list their homes.”
“‘It’s silly,’ agent Sarah Mac Donald said. ‘This is a price-driven market; it’s that simple. If it’s priced right, it will move.’”
“Mark Tacconelli, an agent in Ladera Ranch, has clients who are offering a brand-new Toyota pickup truck to whoever buys their 2,300-square-foot La Habra home, listed at $750,000. ‘If they don’t want a pickup, they can have a Prius,’ Tacconelli said, covering all bases. ‘Or if they don’t need a new car and just want to knock $15,000 or $20,000 off the price, that’s fine too.’ The man is practically begging here.”
“Does it really make sense to do business this way? Not from a buyer’s property-tax perspective. If the value of the car being given away is $40,000, why not just lower the price of the home by that much? After all, the lower the purchase price, the lower the annual tax bill. Of course you may not need the tax break, given that the interest on that hefty mortgage payment is tax-deductible.”
The Orange County Register, “Sherry Klapp tries to find hope in what’s become, at best, a challenging housing market. This real estate agent from Dana Point says a tough sales environment changes how everybody in her game does business, from buyer to broker, from seller to lender.”
“All these extra household expenses are apparently too much for some folks. Mortgage defaults, late property taxes and foreclosures are becoming common. Klapp says several sellers she’s working with are classically highly motivated to rid themselves of a suffocating house payment. ‘A lot of people overextended themselves,’ Klapp says. ‘They really weren’t looking down the road.’”
The Union Tribune from San Diego. “As recently as last year, no property in San Diego County was too old, too derelict, too small to be snatched up by the condo converters. But no longer. Once one of the nation’s leading conversion markets, the county now has a glut of gussied-up apartments for sale with too few buyers.”
“By the end of June, the number of converted units ready for occupancy or earmarked for sale later had grown to 6,922 in 111 projects. Making matters worse for converters, in June, there were 5,800 unsold condos in new projects. Phoenix, another hot conversion market, was second with 6,024 unsold units in 44 actively selling projects. Los Angeles County, with a population more than three times that of San Diego County, had 22 conversion projects with just 1,326 units.”
“‘Here’s the problem: A number of people bought these apartment buildings at prices higher than what they should have paid,’ San Diego real estate consultant Gary London said. ‘Now they’re stuck in a marketplace that will not allow them to do that, which is why you’re going to see financial distress. A lot of these guys are still in denial.’”
“In downtown San Diego, at the 777 Lofts at Sixth Avenue, price reductions of up to $90,000 have been advertised on selected units. In University City, the selling price of a 934-square-foot, two-bedroom unit averaged $440,000 in May through August 2005. This year, the same-size unit at Verano sold for an average price of $371,000.”
“Real estate broker Vince Provenzano is in the process of selling two four-unit properties in University Heights that he said were to be converted but stalled when the owner ran out of money. The interiors have been gutted and windows are covered with plywood.”
“When The Heights in Carmel Valley converted from apartments to condominiums last year, the owners renovated 150 of the 225 units, thinking they’d sell fast. It hasn’t turned out that way. The Heights has sold just 80 condos through August. Only 18 of those sold in 2006. At that pace, it could take three more years for The Heights to sell completely.”
“The owners now plan to put some of the units, with their new granite countertops and stainless-steel appliances, back on the rental market.”
“These developers in particular can find themselves in a bind as the pace of sales slows. That’s because many converters have big, short-term loans. Owners now are confronted with slower sales, a glut on the market and widespread price cutting and/or incentives to attract buyers. So they’re not paying down their loans as fast as they expected.”
“Brokers say some converters would like to find an exit. ‘All of them would entertain the option of selling in bulk,’ said Ed Rosen, senior vice president with Burnham Real Estate Services. ‘They’re all in play.’”
“Once a project has sold some of its condo units, however, unloading the complex to a buyer becomes difficult. Today, potential buyers are offering prices that are well below what most condo converters have put into the projects, brokers say.”
“Whether a project can find a buyer ‘depends on what (owners) can stomach,’ said broker Kent Williams. ‘We’ve seen people come to us and want out of a deal. We tell them what it’s worth, and they take a big gulp and say, ‘Maybe it makes more sense to hold on and see if the market comes back.’”
“Waiting for a housing uptick appears to be the strategy most developers are relying on, at least for now. ‘Time is your enemy to some extent,’ said John Ed Easley, (who) is consulting developers in downtown San Diego.”
“Many converters are talking with their lenders. ‘We’ve had conversations with our banks,’ said Paul Kerr of Davlyn Property Management, which is developing the 200-unit Adagio. ‘They’ve told us in no uncertain terms that they don’t want us to dump the price to pump sales up to 20 a month.’”
“Kerr said banks are supportive. ‘They know they’re better off hanging in there than doing a fire sale,’ he said. ‘In our conversations with lenders, we’ve told them, ‘We don’t want to toss you the keys, and we don’t think you want us to toss you the keys, because who will (manage the project) better than we will?’ And they know that.’”
“‘Do I think (by renting) you can cover 100 percent of your debt service? Probably not,’ Easley said. ‘”But that basically buys you time and allows you to wait for the market.’”
‘Kerr said banks are supportive.’
I can just see the meetings going on. ‘You don’t want us to toss you the keys, right?’ So the developers that completely misjudged the market agree with the lenders that made the same mistake to basically do nothing and take on the negative cash flow.
The Ventura County Star: ‘A real estate appraiser for 22 years, Katherine Owen is sure she can devise a way to guide her small company through the housing slowdown, even though her business is off 30 percent this year.’ ‘Owen, owner of California Appraisal Group in Agoura Hills, is using foreclosure appraisals to make up for some resale appraisal business that’s dried up. She’s handling 40 to 70 appraisals a month, hasn’t had to lay off any of her five employees.’
‘The reductions are coming faster than in previous slumps, said said Kim Dawson, a director of the California Escrow Association, because many companies are publicly traded and face constant investor pressure to keep profits growing. The trouble is no one knows how long this soft market will last.’
‘You don’t know if it’s a hiccup or a trend. I mean, people have been saying for the last five years that, OK, it’s going to slow down,’ she said. ‘It never did until now, and people are like, ‘Oh, what do we do?’ We have seen a drastic decrease in business.’
Back in June, 2005 I sold a 13 unit apartment building on the 800 block of East 8th Street in Long Beach to a guy who was going to condo convert it. It was a nice mid 80’s constructed building with tons of garage parking (so not problem to do the conversion). The guy who bought it must have seen the writing on the wall 3-4 months after he bought it because he re-listed it for a bit more than he bought if for, but not quite enough to break even with closing costs. Don’t know if it ever sold, but the listing is off of Loopnet now and doesn’t show a sale on the county recorders office. So, he may be in the same boat and decided to just keep renting the units and be cash-flow negative.
it amazed me to witness people taking on exotic loans when they should take out traditional loan when interest rate was at 40 yrs low. it amazed me even more to hear people trying to delay the inevitable by refinancing. this is just crazy. each time you refinance you run up cost and fees. and ultimately shorten the inevitable end. hahaha.
You hear about loads of chumps taking refis at Int-Only or OptionARM on 5% fixed loans to lower their payments… temporarily AND racking up fees and a higher principal.
Talk about burning the furniture and doors to heat the house…
The true Tsunami will not hit until the delusional majority, who are holding on for the “uptick” promised by housing-bull “experts” desperately trying to forestall a mass stampede for the exits, see instead a cascading avalange of foreclosures, distress selling, and fire sale pricing. At that point the huge overhang of vacant, speculator- or FB-”owned” houses will be dumped onto a market just as credit requirements are being drastically tightened.
The gleeful crowing of the fools who are rushing into today’s “buyers’ market” with “lowball offers” of 5-10% of 2005 peaks, will soon be replaced by piercing, girlish squeals and involuntary bowel movements as the floor drops out from under their feet. And that, friends and neighbors, is when the REAL buyers’ market will finally start to emerge.
And maybe even that will be too soon.
‘Involuntary bowel movements’, Priceless! hehehehehehe
“The gleeful crowing of the fools who are rushing into today’s “buyers’ market” with “lowball offers” of 5-10% of 2005 peaks, will soon be replaced by piercing, girlish squeals and involuntary bowel movements as the floor drops out from under their feet. And that, friends and neighbors, is when the REAL buyers’ market will finally start to emerge. ”
So true, and when things really bottom-out I fear the rows and rows of the crapbox clone McMansions “neighborhoods” will be avoided like plague from folks wanting to buy in good neighborhoods. Gangs, crime, poor upkeep will turn these developments into scary dumps. These 3000 to 4000 sq. ft boxes are a waste of space. When the stuff really hits the fan, people that bought one of thse monstrosities (in Central Ca.) will be remembering the “good ol’ days” when they lived in their old 1500sq ft bungalow in a decent neighborhood that had REAL equity, or the apartment they rented where driveby shootings and burglaries weren’t commonplace are both remembered with longing.
DOC
“‘You don’t want us to toss you the keys, right?’”
Actually, if the banks have any idea of what’s about to hit them, they’d much rather want the keys thrown at them now than later. After all, the loss is only going to get bigger as we go. Better to take a 100k hit now than a 250k hit later.
Now you are speaking to me directly. Certainly I am not making any new loans. I guess the “worst” one I have out there is somebody who borrowed $117K on a $126K 3BR new house in January 2004. There has been no default problem yet, and the borrower is a nurse, sort of recession-proof? Nevertheless, I am glad I don’t own any houses, in case I actually have to move into the one of which we are speaking!!
Can professional real estate people really not know the difference between a strong trend that will take years to play out and a bump in the road? Is it true that they don’t understand the significance of ” low affordability” coupled with a “change in buyer psychology”? Did the professional RE people really belief that “price did not matter?”
-“All these extra household expenses are apparently too much for some folks.
That statement reflects years of experience!
Homer Simpson says it best, ‘Doh!’
No. No. And yes, they did.
Hi Ben,
I just want to let you know that I just donated. Thank you for this blog. I’ve learned so much from everyone that participates on your blog.
I feel much better now that I am still a renter.
Hmmm, the LA Times/Dataquick numbers for SoCal are out…but I haven’t seen them run in the online edition of the LA Times Sunday Edition. Come to think of it, they didn’t have numbers last week as well. Have they stopped publishing the YoY tables for SoCal?
Here is the damage:
http://www.dqnews.com/ZIPLAT.shtm
LA County houses up 4.4% YoY, condos up 1.7% YoY.
OC County houses up 1.5% YoY, condos up 0.4% YoY.
Riverside County: 6.6%, -0.3%
San Bernardino County: 10.3%, 5.0%
San Diego County: 0.0%, -1.5%
Ventura County: 4.4%, 4.7%
Santa Barbara County: -4.4%, -11.2%
My zip code (Rancho Bernardo, in SD — 92127) had a 10% YOY price decline for used homes, with about the same number selling both years.
BTW, the median used home sale price in 92127 dropped from $957,500 to $860,000 — only $97,500, no big deal for a San Diego McMillionaire’s household wealth to absorb. By contrast, Rancho Santa Fe (Duke “Top Gun” Cunningham’s old ‘hood) saw a 21.2% median price drop which might have actually hurt a few folks: $3,475,000 down to $2,737,500 in twelve short months, for a decrease of $737,500 — ouch!
My brother-in-law just bought in 92128…tell him I said “hi”.
Hey GetStucco,
I grew up in RB (Gatewood Hills - 92128). My Mom and one of my brothers still live there. I remember my parents buying for $36,000 in 1969 and that same house now selling for $800,000. That’s just insanity for a 37 year old stucco home on less than a quarter acre. After college (SDSU), I moved to the Antelope Valley (Lancaster) working flight test at Edwards AFB.
I hear all the stories from my little sister who ended up buying in Temecula cause she was priced out of SD County. All her friends are drinking the Kool Aid and buying small homes in Westwood (92127) and Escondido for $700,000. She got in for $270,000 in 2002 and I told her don’t fall into the trap. Four years from now, they will be $250,000 upside-down and you’ll be the one that looks like the genius.
Unfortunetey I fear Temecula will end up like the Antelope Valley, …toast! The outlying areas always get it much worse. When SD County properties get affordable again, many will buy back closer to work and tell the lender that the Temecula house will be a rental. As soon as the ink dries on their new home 10 minutes from work, the home in Temecula will go back to the bank. Don’t believe? Watch, it will happen by the bushell load.
As for me, I was priced out of Lancaster / Palmdale (WOW, I still can’t feature that one to this day) and I pulled the D-Ring and punched out of California. I loved Edwards and flight test, but I owed my family a descent place to live and the Antelope Valley ain’t it anymore. Even if prices there took a 50% haircut, it has become such a rat hole that I would want to return. I thought you were leaving CA as well??
“I thought you were leaving CA as well??”
We’re just priced-out renters — much too early to say whether forever, though…
Just got back from Julian (CA). Anyone in the San Diego area wanting to have some fun should drive out there next weekend (via Poway/Rancho Bernardo from the west). HUNDREDS of open house and for sale signs on the way. HUNDREDS! I swear every other driveway/corner through Ramona and beyond up to Julian was peppered with RE signs of some sort. Many had multiple signs from different companies/agents. I jest not - over the course of the 40-45 minute drive, I could count on two hands and maybe one foot the total number of driveway/corners that DID NOT have at least one sign.
Do it. And bring your camera, damn it! (I didn’t)
I was in SD last weekend and the number of condo for sale signs is amazing and there is an arrow flipper on every corner pointing you to the new condo conversions…
there is an arrow flipper on every corner pointing you to the new condo conversions…
More of those good ’service sector jobs’ they keep bragging about.
I guess arrow flippers will never be outsourced to India! Ha!
It looks like the SFR market here in “the home of the homeless” is frozen up - a total of 18 sales spread over five zipcodes. So few sales that the YOY price numbers are basically meaningless. I also noticed a lot fewer realtor signs cluttering up the street corners this weekend.
On the other hand, condos seem to be moving, and the prices are flat to falling YOY. I’m guessing that this is because there was a lot more speculation in condos than SFRs in this area. But we’re still talking about condos with median prices around $600K, so these sales probably mean that another crop of FBs is about to be sheared. I can’t wait to hear the wailing when these new buyers discover that they just caught a falling knife.
The rental market is quite healthy, however. There is no shortage of applicants at market prices - dozens of applications for a unit that isn’t even vacant yet.
Just to follow up: On my evening walk, I noticed that while there were fewer signs on street corners, there are *more* condos for sale with signs out in front, although nothing seems to have changed in the single-family areas that I walked through.
One conversion that I walked past had a URL on the For Sale sign, so I looked it up. For reference, this is in a two-story apartment building, built in 1963, updated in 1968, unit sold in 1993 for $210K, sold again in 2000 for $342K, and now on the market for $798K. The brochure says it needs new paint, new carpet, and help from a handyman. Check out the tiny little rooms in the floor plan on the site - the bedrooms are are the size of walk-in closets. Of course it has the flipper-style granite, maple, and marble retrofits.
Something like this would rent for about $3000/month. But it’s “priced to sell” at $798,000.00
http://www.93816thstreet.com/
I like the “only 16 blocks to the beach” part. What is that, 4 miles? An easy walk to and from.
just perusing the sfh sales and prices in LA county on august dataquick chart. Some hi end coastal zips such as Hermosa Beach, pacific palisades,westlake village, playa del rey,Venice, Malibue, ect showing some significant yoy declines. In between areas like torrance, van nuys,whittier,glendale, pasadena,long beach, ect. hovering in the slightly + to slightly neg yoy, while the lower priced LA areas still showing outlandish +10-25%yoy( such LA Gems as Compton, pomona, South gate, scentral LA Watts, LA hawthorne, east LA, La Puente,San fernando,Wilmington, Bell,ect).
Obviously I haven’t done a complete market survey, but it looks to me as if the lower-end properties in the high-end zips are selling, thus pulling down the median. The medium to high-end properties in the high-end zips are just sitting there - frozen in time.
As for the “LA Gems” (ghettos) you mention showing large YOY gains, all I can imagine is a last gasp of sub-sub-prime lending causing the run-up. What I cannot imagine is that families with $200K household incomes have suddenly decided to move to Compton or Watts.
It is recent mostly hispanic immigrant families(Familia) buying up med +/-$400.000 overpriced 60-80 yr old 3/1.5 stuccos, using the entire arsenal of subprime loan products. It looks indeed like lending standards have declined so far that even recent immigrants combining several family members incomes can qualify to get into $400,000 homes in the Innor LA slum-burgs. My guess is there is some overappraisal fraud/no-doc,s/stated/no income verification going on in these parts, but then whos going to go into these gang-ridden barrios to investigate.
SM-
You’d be surprised, never say never
MrIncomeStream,
Since I know that you follow the “LA Gems” market (and I do not), please clue me in here: Are you saying that they are gentrifying? Or is Peter M’s explanation correct? Or some combination of both?
I’m curious because there might be something to do there after the bubble winds down - that is, if gentrification is a possibility.
It’s a combination of both. But I don’t think the recent illegal immigrant run on those area’s are going to stick. Those folks are getting raped and the first set of resets will do them in. But I do notice more shall I say racial diversification in at least one of “L.A. Gems”. I mean not every one can afford 800k for a 800 sqft 2/1 home in Culver City or 1100 sqft 2/1 condo in SAMO and anything less than 500k is the ghetto in Southern California. So do you drive from work 2 hrs for your ghetto or do you drive 15 to 30 minutes. A lot of folks are opting for the latter as evidenced from watching open house traffic from one of my ghetto palaces while overseeing some repairs earlier this summer. Also the ongoing fight with the ACLU and Downtown is very telling. Downtown decided to stick it out and go to the mat. Somebody knows something and there’s a lot of money on the line. If I were a betting man I’d put my money on downtown just based on their decision to fight. If I were an investing man. I’d say anything west of the 110 freeway/ and south of the 101/5 is a no lose proposition.
peter m, what’s up with that? My 90277 up 12.3%?!?! I’m renting here and waiting to buy. Hmmm… maybe this precipitates an even bigger, further, faster fall.
Not all the high-end coastal zips went down yoy. Manhatten Beach showed a + 25% yoy. Just noticing a general trend. In many cases the small sample of homes sold would not be conclusive. But by scanning 10 or so high-end coastal communities and about 2 dozen zips in those communities and seeing -5% or more YOY declines in more than half of those coastal zips i am seeing an overall trend.
If they are waiting for the market to come back then they are going to be waiting for a long time. I have done some investigating into the market boom and downturn in the US in the 70s and 80s and also those in Japan, England, and Australia. There is always a ration of boomtime/downturn and it fall between 0.6 and 0.625. This means that given the current boom (which has been the mother of all booms), it will take 8 to 10 years for the market to return to normal, that is, to hit bottom, from where it started. Now how long it will take to go back up to the current boom peak level … that could be decades.
I will wait until I am old and gray if that is what it takes. I will not be a slave to my home, and I will not be paying a flipper their profits. If a home owner feels richer because their house is supposedly worth $700,000, then more power to them. I feel richer having that money in the bank or in more liquid assets. I will continue to be an “ecstatic” renter until mortgage payments return to reality. I am stress free and loving it.
These days you can buy from a flipper who is losing his shirt on the sale, and still lose yours. I hope I am not old and Gray before I can buy my own property, but I refuse to be ripped off, and most of todays prices are a rip off.
Great point GH. We are still not at a point where even the seeming bargans are bargans. In a risk to reward calculation, teh risk is far too great to justify a purchase.
Try bargains and bargains. Need to proof better before I post.
-
Again, offering 1997 prices + 3.5% annual appreciation should protect you from any falling knives.
Amen, GH. Successive waves of fools, each smaller than the one before, are going rush in at each successive dip thinking the bottom is in, only to get slaughtered as each “rally” is wiped out by new and deeper lows. Just look at this chart of the market from 1929 - 1932, and ask yourself how many clever “falling knife catchers” in late 1929 were sleeping in boxcars by 1932.
http://www.gold-eagle.com/editorials_01/seymour062001.html
Great chart/quotes!
vulture I agree with you.
Some renters are accumulating tax free dividends and capital gains in their ROTH IRAs while their landlords get up every morning to go to their jobs so they can subsidize their renter’s housing.
This is the difference between the asset class and the debtor class. Eventually, most of the debtor class will be indentured servants to the asset class. I do not rejoice in saying this, I am simply stating this as an economic fact.
With rental prices about 1/2 the ownership costs you’d be insane to buy. If you bank the difference at most California rental prices you’ll have enough to buy a place outside California for cash in 10-15 years. And the bank doesn’t get all bent out of shape if you miss one or two monthly deposits to your savings account vs. missing one or two mortgage payments.
Better off financialy, not at risk of going bankrupt if you lose your job for six months, no massive exposure to a price drop. What’s not to like?
“… it will take 8 to 10 years for the market to return to normal, that is, to hit bottom, from where it started. Now how long it will take to go back up to the current boom peak level … that could be decades.”
I think you’re right on this one. Think we underestimate the after-babyboom effect which (if not mass-immigration) will postpone
a possible new housing boom until… more babies will be made.
Offspring will be the next bubble!
All of those illegal immigrant busboys, maids, and landscapers will not be able to afford these overpriced houses unless they cram 4 families into one home. I’m sure that will help home values with 30 people living in the house next to yours.
Think we underestimate the after-babyboom effect…
Hmm, aren’t the baby boomers going into retirement? That might accelerate some things a bit as they try to downsize. Or make the final drop steeper.
I think you’ve got the timing wrong, but I understand your reasoning. You are looking at past RE boom/bust cycles and projecting outward based upon historical precedence (not a bad approach usually.) However, as we have discussed numerous times on the blog, this RE bubble is really part of the larger credit bubble that has been developing for a long time and has gone parabolic since about 1998.
Currently it takes about 10 dollars of debt to generate 1 dollar of GDP. Government and personal balance sheets are a wreck No example that you have mentioned (Australia, Japan, past housing booms, etc.) remotely resemble the current situation. Never has there been a looser financial environment that has become totally disconnected from the real economy’s credit requirements. In other words: never has there been so much money floating around with so little underwriting and so little true economic demand (sub-sub-subprime anyone?). Thanks to GSE’s and derivatives, CDO’s, MBS, etc., it’s not at all clear who holds the risk for the paper.
Of course, all of this has been made possible by the ongoing bond bubble which has recently become unwieldy and dangerous to say the least. It fuels rampant speculation, distortions, and systemic risk. Ultimately all of this ends with a derivatives/hedge fund/currency crises of some sort, long rates skyrocket to 15%+ and liquidity dries up. At that point there will essentially be no housing market and no economy (thanks Greenscam, you a-hole!!!)
So what I am saying is it could take a week or a year for this “accident” to happen, but when it does, RE bottoms almost immediately - and it will take many, many years for it to recover any kind of upward bias. There will be none of this grinding down for 10-15 years stuff. Also, don’t be looking for any kind of a run up afterward either. JMHO.
These are all very good points - you really did your homework! However, I see these factors as affecting the degree to which the housing level rises, not as affecting the timescale ratio of boomtime to downturn. You have to stop and ask yourself the question, “What caused the other housing booms then?” I think there really is something in the 0.6-0.625 ratio. When I studied the graphs (one of them being Shiller’s graph - the Yale professor) and did the calculations for all the different booms, it was spooky at how I kept coming up with the same number.
Another question I’ve been thinking about is what *does* affect the timescale of boom/bust cycles and the only reasonable answer I can think of, that explains this constant, this ratio, is that it is market psychology - the psychology of buying and selling. Over the years people’s buying and selling psychology hasn’t changed much, which would explain why it’s the same even in countries outside the US. As for where I live, the Bay Area, telling someone here, “The Bay Area is special which is why the house prices are so high” is like telling them, “The sky is blue.” For most who live here, it is not questioned; it is a given. I think it will take 10-15 years for this type of thinking to change. The timing is all about psychology and if a person can become a good market psychologist, then he/she can become very good at timing markets.
Banks are going to take these investors down with them. The idiot investors should not listen to their bankers. They all will think things are coming back, but they are not going to come back in an near term scenario.
Gary posts ” Banks are going to take these investors down with them. The idiot investors should not listen to their bankers.”
The Lenders are too blame for thier so to be sorry state. If you could breath, you got the loan. No matter if you could ever pay it back. Now paying back the loan, they lent, is an issue?
“Soon”
Only “Soon?”
many “professionals” in real estate are excellent salespeople,and quite a few have intimate knowledge of the areas that they specialize in.very few have ANY understanding of economic pricipals AT ALL.i will also note that every single first rate salesperson i have met is seriously delusional,in real estate and in other fields…..
Ditto that: I had an excellent realtor who I did about a dozen (small) transactions with over the course of about 7 years. She was/is very hard-working and honest in the way she went about business, but she was absolutely clueless about markets in general. She was forever saying really embarrassing and insulting things like “the feds are getting ready to lower the mortgage rate,” and her idea of how strong the market was going to be was always an exact function of what had happened in the immediate past - thus she was always behind the curve on the state of the market, both as it was getting stronger and I as it was topping out. (She thought I did miracles at first with the crap I bought and fixed up and managed to make money on but now today is convinced you can make money on any old junk.)
Besides that she took absolutely no interest in either the state of the real estate market or the economy outside of her own very narrowly-defined region. But, I suppose people have always been like that, especially in America. She’s a really swell person and I’d use her again!
Over and over, I was told, “you should be in real estate! Anyone can do it!”
I took RE 101-103 …looked around the room and said NOT!!! and never looked back.
My wife did it for a decade, 1986-1995. Her net income (after expenses, taxes and 15.3% social security) put both our kids through private college without us needing a HELOC or them needing student loans. I prepared a good many dinners for us during that time, but it was worth it.
No, not frozen dinners, and Domino’s was only ordered occasionally.
“Sherry Klapp tries to find hope in what’s become, at best, a challenging housing market. This real estate agent from Dana Point says a tough sales environment changes how everybody in her game does business, from buyer to broker, from seller to lender.”
“All these extra household expenses are apparently too much for some folks. Mortgage defaults, late property taxes and foreclosures are becoming common. Klapp says several sellers she’s working with are classically highly motivated to rid themselves of a suffocating house payment. ‘A lot of people overextended themselves,’ Klapp says. ‘They really weren’t looking down the road.’”
Thats it in a nutshell. Most people who have bought in this market in the past couple of years are now finding out they have over extended themselves. Defaults will rise but in addition to that some people may be able to afford the payment but don’t like the lifestyle of having nothing left over. This is the NEW inventory and it has to sell. The only way you can sustain a RE market valued at 8 to 12 times income is to have prices continuing to rise, now that the market has softened the reality that ole Sherry pointed here kicks in. We are at the point where a great deal of people who purchased in the past several years have discovered they are in over their heads. This is where the REAL correction begins.
You know the market here in So Cal. If you are not making 175k and up …. with a nice down payment, you will wind up in a ditch somewhere down the road. Of course they don’t ever figure out how they got in the ditch.
“Most people who have bought in this market in the past couple of years are now finding out they have over extended themselves. Defaults will rise but in addition to that some people may be able to afford the payment but don’t like the lifestyle of having nothing left over.”
Reminds me of a guy I knew years ago that bought a “corvette” because he could swing it with bad loans. Nevermind that albatross was way out of his economic comfort zone. He did it because he could. A very bad, stupid short-sighted move. Just like all those follks who have bought houses because they “could” by using bad financing and deluding themeselves into thinking its “ok” because its a “home where we’ll live” or “sell for profit”–never mind the taxes, ARM reset, higher utility bills, etc…
Well, they’re half-way to Vegas on the desrt highway and the vette’s blown a gasket and they’re out of gas. Gotta love reality. Ouch!!
DOC
Housing starts…
http://www.elliottwave.com/images/ezines/charts_lg/housing_lg.jpg
The comical part isn’t how few starts there are, but rather how many. Here we are with housing basically in serious over-supply, and the builders are STILL going to be spitting out another million and a half new so-called homes every month, for a while yet.
I have to admit, these idiot greedy sellers of their crappy homes think the American population are stupid fools (well maybe). Think about this. Lets say, you buy a house for $750k and you (like a moran) take the free truck. The total interest payment made at the end of 30 years (using $750k, 6.5% interest) will cost you $1.706M in interest, whereas, if you take the price reduction of $20k will cost you $1.661M in interest (a whoppin $50k difference) or 128%. Even with the tax benefit (i.e. 30%) you are still at a LOSS. Stupid people are the only ones taking these stupid incenitives. Pure greed these greedbag sellers exhibit is sickening. BOYCOTT this GREEDY HOUSING INDUSTRY.
“I have to admit, these idiot greedy sellers of their crappy homes think the American population are stupid fools (well maybe). ”
The sellers did know for the past years that “American Population” is stupid. In late 1990s, the Scam Market proved the same thing.
Luckily, not all Americans are idiots. So, when all the idiots had bought a home there weren’t many left. Bubbles are good in that they do identify idiots among a population.
Jas Jain
Bubbles are bad in that they do reward idiots among a population — right up until the inevitable bust.
Then they buy basket ball teams.
This is why a drop in rates will not save a damn thing. The pool of idiots have already bought a home or finally grown a brain. Regardless, the pool of idiots buying homes is drying up. The League of Idiots will now channel there idiocy in another fruitless direction.
Not to mention the higher property taxes
“‘It’s silly,’ agent Sarah Mac Donald said. ‘This is a price-driven market; it’s that simple. If it’s priced right, it will move.’”
She’s a keeper!
Seriously. Why can’t I meet an agent like that…
“Seriously. Why can’t I meet an agent like that…”
In 2002′ I met an agent to look at a house and remarked that I was quite surprised how much the housing prices had gone up in our area since the late 90’s. He is an old school realtor. He looked me right in the eye and said, “we’re in a bubble.” How refreshing to hear an honest straight forward statement like that. I’ll be looking him up when mortgage payments are closer in line with equivalent rents.
DOC
Those condo buyers who bought into a building that never sold out are really stuck. They will have trouble unloading their condos if more than 50% of the units are rentals, as lenders will shy away.
if this blog is any guide to the zeitgeist of this megabust, there will be thousands upon thousands of developments and whole (largely exurban) communities that simply implode from lack of occupancy/hoa fees, etc. those units in such neutronified mcwart ‘neighborhoods’ that escape the bulldozers will sell at auction for pennies of their 2005 peak prices. just wait for 2008-2010!
Welcome to Pinal County, Arizona! Epicenter of all you just wrote about.
Let us hope that they have a good Penal Code!
Jas Jain
Driving north from LA to Yosemite you pass through several of these “exurbs.” Large patches of desert and sage brush with dozens of subdivisions and dozens more KB, Centex, etc. signs, pimping the upcoming developments.
Sounds like you’re describing Palmcaster, victorville, adelanto, hesperia,Victor valley,california city, rosamond, tehachapi,barstow,ridegcrest,apple valley,ect. Have seen groups of new homes going up in the middle of empty scrub desert: i’ll bet the hoards are lining up for those.
“The owners now plan to put some of the units, with their new granite countertops and stainless-steel appliances, back on the rental market.”
Which city’s Uptown are you writing from? Because if its from Chicago’s Uptown then the words you speak could not be more true. Throughout Uptown and Edgewater there are omnious signs of a momentous collaspe in the condo market - those familiar with these areas doubtless know what I am referring to here. The vacant lots with billboards touting the next great condo development are too numerous to bother listing. At the same time those that made it in under the wire and got built are hardly close to being sold. BIG trouble is afoot on Chicago’s north side!
I was driving around in Santa Monica,Venice and Marina Del Rey today, a sea of Open Houses-more than I have ever seen any where. I was on fourth street in Venice and I saw a pick up truck for Sotheby’s RE and it was full of Open House signs to be put up ,had to be 20 signs in the back, Really, just a ton of Open House’s. Well as they say at the dice table,”take the line, pay the don’ts”(thats us the dont’s-ha,ha).
Same thing in Manhattan Beach. There are at least four “For Sale” signs on every corner.
Funny you mention the sea of open houses, as I just saw six open house advertisements (three of them within 200 yards of my doorstep) on my short (1.5mi) drive back from church. But maybe our neighborhoods are different…
I understand that some terribly large percentage of Americans call themselves christians or catholics. Well, the flippers among them forgot something:
“Take care to guard against all greed, for though one may be rich, one’s life does not consist of possessions”
Now, I do not believe in the Christian god - but Jesus sure had a lot of good ideas going on, for sure.
Oops, my apologies. If I capitalize “Christian,” I think it’s appropriate to add the big G, as well. Sincere mistake.
You may not believe in Him, but He believes in you!
god = heathen diety (also ‘dog’ spelled backwards)
God = one true way to Heaven…
“God = one true way to Heaven…”
Except there’s no such thing.
Apparently you haven’t heard of “Prosperity Gospel” or the “Prayer of Jabez”
. http://www.amazon.com/Prayer-Jabez-Breaking-Through-Blessed/dp/1576737330
Time had an interesting article on Prosperity Gospel.
There were more than a few preachers taking them out to the woodshed, including OC’s own mega-church Rick Warren.
I am more of a Sojourners type of religon/spirituality.
A reading of Proverbs also helps keep me out of financial scrapes. Such as not being so willing to put our name and credit on the line in co-signing for a loan. (I’ve seen that lamented over on the RE “investing” boards these many months).
A guideline for what many Christians believe about finances would be found here: http://www.crown.org/
Larry Burkett has passed away but his idea was pretty simple: Stay out of debt. My sister called them for advice last year, lamenting that they couldn’t afford to buy a house, and wondering if they should move to a less expensive area. The advice surprised her. The counselor said home ownership wasn’t the main thing, but living within your means was of utmost importance.
Here’s the advice on homebuying from the website.
General guidelines
Purchase/rent only if payments – mortgage, taxes, insurance, utilities, phone, and maintenance – don’t exceed 38 percent of your net spendable income.
Don’t finance a second mortgage for a down payment and don’t finance closing costs.
If trading up, make sure it’s a need and not simply a desire.
Purpose to pay off the house as soon as possible, and avoid second mortgages and home equity loans.
The late Mr. Burkett’s view of the “bubble” economy echoes many of the sentiments here.
As the Bible teaches, debt is form of slavery. A person’s belief in God, or unbelief, is their own personal decision. However, I think everyone can agree on that principle.
It amazes me how many people are fooled into believing debt is an asset and managing debt can make money. If they wanted to see a cool 18% or more return, simply pay off their CC bill. Paying yourself 18% instead of Visa is a pretty good return…LOL
Dave Ramsey (www.daveramsey.com) does a good job tying together the “stay out of debt” and Gospel teachings. I’m not a Christian, but I am a big Dave Ramsey fan.
Cool. Now let’s not talk about religion. I’m eating my breakfast and want to talk housing.
my daughter and I got pictures in santa monica of the street corners with 20 open house signs, all for different addresses… ;-D
Quotes from last 2 condo conversion articles.
“So they’re burning through money set aside to pay lenders – called the interest reserve – faster than they planned.”
“That’s because many converters have big, short-term loans..”
“…many converters face being landlords much longer than they anticipated.”
This is happening in Tampa also. One thing the article did not point out is that these converters planned to sell these units quickly and did not factor into their business plans paying the property taxes or the insurance. We have a condo conversion here that is $1,000,000.00 in arears on property taxes. Someone bought the tax bond and if it is not paid the property will go up for auction in 3 years.
There is no way a bank would have loaned any money to a condo converter if they didn’t provide a budget that accounted for taxes and insurance. that does not happen, especially for such a large property.
yeah, well, this time it’s different.
A big part of the “plan” includes a sell out in 6 months, hence the short term loan. The cash dries up quickly when it has been over a year and less than a third of the units have sold, hence the, return to rentals model, just to hang in there.
It’s about time and money, with each loan extension the banker gives the converter the interest rate rises. I think the article explains it pretty well. In essence if the converter is not able to make the bank payment I don’t know how he can pay the taxes or insurance.
Exactly - it’s the time that kills the deal. It’s not that the developers are so stupid that they don’t account for taxes, insurance, (or drywall, or labor, etc). they just underestimate the length of time it will take to sell out the units.
and overestimate the price they can get for them!
And remember…they didnt account for sheetrock prices!!! Remember the “sheetrock bubble”!!! hahaha
And remember…they didnt account for sheetrock prices!!! Remember the “sheetrock bubble”!!! hahaha
bubbleboi,
Here is the link, maybe you can help me understand just what the bank was thinking.
http://www.tbo.com/newtampa/MGBQ98C13PE.html
the link would have been helpful with the original post. Thanks for including it now. I think issues have been addressed above.
And there is no way that a bank would have loaned 1/2 million dollars to someone with 50 Gs of income for a home,
and there is no way that a bank would have loaned 1/2 million dollars to someone with 50 Gs of income to with a FICO of 500 for a home,
and there is no way that a bank would have loaned 1/2 million dollars to someone with 50 Gs in credit card debt and 50 Gs of income with a FICO of 500 for a new home…
etc…
I can’t speak to residential lending standards. Commercial lending standards and procedures are different from their residential counterparts, which doesn’t mean thay haven’t gotten more lax in recent years. But a detailed budget is always included in the loan proposal for commercial loans. And a budget that doesnt’ account for taxes and insurance would never past muster.
a small point really.
I believe at a maximum a loan should not exceed 3 - 3.5 times the borrowers annual salary, so for a 50k borrower, certainly not over $175K. For $500K you had better be pulling down $150K and have a solid professional career established. I guess the banks were really speculating too!
Oh I forgot, these days “everyone” earns $200k a year
On Saturday I was driving east-bound on Huntington Drive in San Marino and saw three guys holding huge signs pointing the way to some new homes in San Marino. After driving a few miles further I reached San Gabriel and saw more people holding these signs pointing back towards San Marino.
San Marino, a wealthy area where just a rumor of a home available last year would have drawn hordes of people, is now just like any other bubble city with plenty of overpriced homes and very few lookers.
Mr. Vincent-
So true. The lowest priced house in San Marino — 2BR, 1BA, but a decent size at 1200 square feet — had its price cut TWICE. It came on the market back in May or June at $799k. And at the time, that was a very sensible price. I would have priced it at that level.
It didn’t sell. The price was reduced by $50k at the end of July, and by another $50 at the end of August. It was taken off the MLS last week but we drove past it last night and the sign is still there, for what that is worth. Maybe it has finally sold.
I myself made a ridiculous lowball offer of $300k — I knew it’d never be accepted, but it costs me nothing to make an offer, so… — and quite frankly, I’m glad it was turned down.
Still, that is remarkable. The lowest priced house in the best school district of all of SoCal, and it didn’t sell all summer long. The price had to be reduced by over $100k. And I still don’t know if it has sold.
Joe, I track that area and few other areas everyday on the MLS.
Your right about San Marino.
I started to notice inventory of lisitngs increase in that area with prices that are still 2005 for the most part. The highest price home in San Marino right now is close to 7 million.
There are also high priced homes in the ritzy areas of Pasadena that are sitting on market for what seems like “ever”.
300k Lowvall offer…thats funny. You have guts!
You just never know.
Many years ago we put in an equivalent offer (of your $300k) on a house that had been sitting for months and months. And they took it!
It turned out a divorce was in the works (which we did not know at the time), the list price was so high that we were the only offer and our offer covered their cost.
Interesting… I’m also watching San Marino, and yes I saw 1897 South Los Robles drop in price in two $50K increments to $699K and then finally disappear from realtor.com. 1010 Darby Road was listed at $850K and disappeared. The best deal from a square footage perspective seems to be 1885 Robin, and it dropped $175K from $1,150,876 to $975,876 (not sure what’s magical about 876 at the end). Still too rich for my blood.
They still have large sfh’s on monster-sized lots(1/2 acre or more)in San marino. In LA area, that large of a plot is somewhat outmoded and probably makes no economic/asthetic sense. Better to subdivide it and put up 2 SHF’s or cram 4-10 condos on it, as a more profitable use of precious/limited LA RE space.
These tenderfoot junior builders that think they can just power point construction from the windows of there BMW’s forgot just one thing in this biz.
The “juice’ the banks charge and the time frame of a project, will rip the profits right out of your little soft hands.
The Villa Vicenza conversion in the San Diego UT article is a mile away from my 1578SQFT home that was sold Sept 2004 for $840K! We have been renting in Carmel Valley since the sale, but I wouldn’t even consider Villa Vicenza for a rental home….it is a dump with new paint and granite. I would be really pissed if I was one of those people that bought a unit there, only to see the remaining units turn back to rentals….good luck finding a buyer now. On a another note The Heights conversion is just up the street from the rental unit we are in, it used to be called The Monarch before the attempted conversion 18 months ago. We also looked at The Monarch to rent before we decided on our current rental 2 years ago. We decided against it because it was noisy and the construction was poor, just what you would expect for a development built as rentals, not condo style ‘permanent’ homes. The walls are thin and most units have garages beneath them, great for keeping you awake a night when the neighbors return home. And the how we sold back in Sept 04, the exact same floor plan can now be bought for $700K (or less probably)
Villa Vincenza is a dump. A recarpeted, 20 year old, thin walled shoebox. It was amusing to watch the wannabe Italianate image that they tried to rub off on the place turn into desperation as time went on. Down came the tastefully designed signs in Mediterranean olive green and up went the bright red ones with huge lettering, bright red banners and sign twirlers. Same with their other property down the street, Verano. Good luck with that Spring Bounce guys…
I have never understood the incentives to purchase. Right now Richond American is giving away what appears to be 100k in incentives. This 100k = $1,700 per year in taxes (1.7% tax rate). These granite coutertops and stainless steel appliances will be passe’ in a few years so they really don’t add much value to the property. I look at what is my overhead costs. Right now they are 2 times what they would be if I rented one of those McMansions. Do the builders really care that they over charged the people they sold to 6 months ago and are they nieve to think that they are not going to be forced to really lover the price to reflect the new market conditions. I think it is a stall tactic in order to postpone the inevidible and hopefully control the rate and depth of the fall. What do you think?
Shakes
Oh yea I forgot to mention the extra $600 per month mortgage payment! Over $700 extra per month that people are paying or were paying to get some crappy countertops and stainless steel!!
Thanks, but I’ll wait
“In University City, the selling price of a 934-square-foot, two-bedroom unit averaged $440,000 in May through August 2005. This year, the same-size unit at Verano sold for an average price of $371,000.”
That’s a 16% YOY loss, or in dollar terms, $69,0000 — just above the San Diego median income. I guess it is no big deal if you plan to hold on to your investment property forever.
$69,000…
What is interesting about that number is that it was probably very close to the same amount going up YOY on the other side. With a little handy dandy math, one could start to extrapolate a classic bell curve since the bubble peaked around Q3-2005, and not a soft landing senario at all. (I know a little salt and not enough information to go on really, but next years data should be interesting.
Avoiding mortgage crisis is a priority
http://www.dfw.com/mld/dfw/15598421.htm
When the real-estate industry made it easy to borrow a lot of money, it also made it easy for people to get into financial trouble. Which is exactly what’s happening, as foreclosures are surging across the country.
Now we’ll see whether the key players can head off a crisis. (cont)
Hmmm the time to take action was while the horses were in the barn.
Many borrowers cannot even begin to afford the payment they will be facing once the terms reset and they are forced to start paying the loan in earnest, and it will come down to a simple math problem in which there simply is not enough money available through standard employment to pay the loan. The end-game is a foredrawn conclusion and no steps taken after a bad loan is made will undo what will be.
>>Lenders are talking about “foreclosure prevention” — ways to give homeowners more time to make payments or rework their debts. Hot lines have been set up to counsel strapped consumers.
“The fear is that fallout from a slowing housing market could stymie economic growth and hurt corporate profits.”
This is from an article today in Reuters on a possible bad stock market this coming week.
HIVtv
will they show episodes from the 2004-5 forever ?
market described as “steaming” hot
“steaming” pile of $hit.
Man, we gotta do something about these flies!
They ,(TLC),had a number of flipper shows on yesterday .They showed a few flips where the flippers couldn’t sell the POS by the end of the show while they had huge carrying costs .
One of the flips was in Westchester Ca. A brother/sister team and family bought a older home right across the street from where they lived . They planned on doing the job in 12 weeks and it ended up taking them 8 months to finish ,they went over budget ,and of course they wanted the highest price in the neighborhood ,(899K),in a dead market by that time . The show ended with them not selling yet .
Anyway, fix up flippers are different from hold and dumb flippers . Hold and dumb flippers want to hold the property for 1 to 2 years, or sell a pre-construction contract ,or sell from a new home tract after the home is built at a profit .Usually hold and dumb flippers don’t do anything to the property .Sometime hold and dumb flippers move into the property ,live there for awhile and wait for the appreciation only .
Sorry ,I mean hold and dump flippers …not dumb .
-
Freudian Slip?
LOL
I caught that one also…the brother managed to put a nail through his hand the first day!
http://www.theonion.com/content/node/53191
No words really. I guess when the consumer goes bust due to no Heloc money, and Cap Ex trickles to a halt, this mysterious sector of the economy will pick up the slack. It looks like it already is starting.
I used to live in Sherry Klapp’s neighborhood in Aliso Viejo as a renter. The day my roommates and I moved in she was at our door trying to get business. I can’t believe those homes are going for 600k to 700k now. You were so close to your neighbors that you could hear them argue, flush the toilet, and make love. I’m not kidding. If you’re curious check out Cape Victoria street in Aliso Viejo to get an idea. Unf**believable! I actually lived on Welbury. I noticed a home going for 599k. Crazy!
“…landlord Marceline Brown can only count on receiving on-time rent payments from one of her tenants: full-time crack dealer.”
What a rosy article the media reports on renting to drug dealers, when it comes to housing, they just cannot say anything negative. I guess the message is, “Stuck with a property in the ghetto, no problem, drug dealers are great tenants.”
Actually I am glad you brought up this topic. I live near an area here in Tampa called, “suitcase city”. It called that because there are a lot of apartments and the rent is very low and the population there is very transient. Things had been pretty quiet in suitcase city during the housing boom, I suspect it is because it was easy to find plenty of work as day laborers on construction crews. However that is changing, there has been an uptick in crime in this area, there was an article(sorry no link), I think St Pete Times last week, about the sky rocketing police reports there. And just anectdotally, there was one drug dealer that was stabbed almost fatally and another who was shot with a 38mm, also almost fatally, in the last month, both had gobs of cash on them and of course drugs. I believe that the reason for this new crime wave is 2 fold. Number 1, the jobs have dried up. Number 2, I think more of the FB’s are turning to drugs. It is the rich who cruise into this neighborhood with the money to buy drugs. The money to buy the drugs is just not generated there.
Sorry posted in wrong spot. My comment was in response to the linked article Jasunnyoutlook posted above.
“The Onion” is a fake-news site. You just got Punked. Very funny though. They have good writers sometimes.
It is so believable, not that the drug dealer was a good tenant, but that the media would paint such a rosy picture of the situation. Marceline Brown just like Barbara Corcoran.
You guys know that The Onion is a joke paper, right?
The Onion story may be a joke, but this one isn’t. File this one under creative uses for CA’s oversupply of houses.
http://cbs5.com/topstories/local_story_264014839.html
“Not only are Bay Area families moving inland in search of cheaper housing, but apparently so are Bay Area drug operations. Nearly 50 homes in the Sacramento and Stockton areas have recently been exposed as elaborate marijuana growing operations.
Since Aug. 2, agents have raided five homes in Sacramento, one in Rancho Cordova, 19 in Elk Grove, and 19 homes in Stockton, three of which were raided Thursday.
Marijuana growing operations in upscale neighborhoods are becoming a common problem in North Stockton. Police say that one bust turned up 500 to 600 plants in all, with rows of the plants filling the dining room and great room of the home. In the utility room, an elaborate electrical setup fed power to lights for growing.
Authorities believe the operations have the markings of a regional crime ring capable of purchasing dozens of multi-million dollar homes and thousands of dollars in sophisticated equipment.
Antioch real estate agent Kevin Parker was involved in the sale of 20 homes in the Sacramento area.”
Ok, rant about to begin.
No, the story following this is long enough. Apologize for the length but it’s from a registration site (DM Snooze). Here we have yet another example of pernicious influence of foreigners being allowed to participate in this market. This story sickens me but I am sure it’s not the last by any means.
Frisco townhome sales scrutinized
Exclusive: Criminal investigation focuses on possible fraud at trendy town square development
08:47 AM CDT on Sunday, September 24, 2006
By BILL LODGE / The Dallas Morning News
Some luxury townhome purchases in the trendy development surrounding Frisco’s new City Hall are under criminal investigation.
The questionable property transactions occurred in Frisco Square, a showcase for suburban growth aided by more than $50 million in city government investment. The investigation centers on a tight-knit group of investors led by Nigerian businessman Ademola Kumapayi. Mr. Kumapayi and his group repeatedly bought and sold luxury townhomes among themselves beginning in 2004. Often, their transactions appeared to inflate the values of those homes, according to property records.
VERNON BRYANT/DMN
Frisco Square, a showcase for suburban growth, was aided by more than $50 million in city government investment.
Lenders involved with Mr. Kumapayi and his group poured millions into a three-block stretch of Library Street and suffered at least eight foreclosures since December, property records show.
Some of those investors now say they face claims for hundreds of thousands of dollars in foreclosure costs rather than the payoffs Mr. Kumapayi promised.
Mr. Kumapayi declined to discuss any of the townhome transactions and referred questions to his Garland attorney, Grant Goens.
“I don’t think he [Mr. Kumapayi] did anything wrong,” Mr. Goens said. “He denies doing anything wrong.”
Agencies involved in the investigation include the Frisco Police Department and the Collin County district attorney’s office. Mr. Kumapayi has not been charged with any offense, and an investigation does not necessarily mean a crime has occurred.
Neither of the investigating agencies will discuss the case. But two investors, including one who filed complaints with authorities, said they were interviewed by prosecutors.
“I cannot comment on whether there is an investigation,” said Christopher Lee Milner, who leads the Collin County district attorney’s special crimes division.
Also Online
How a property flip can work (.pdf)
Marty Bitter, a Fort Worth resident who described himself as one of Mr. Kumapayi’s investors, said he was interviewed by Mr. Milner in June.
Mr. Bitter said the questions centered on the business dealings and on his relationship with Mr. Kumapayi.
Mr. Kumapayi’s investors say he paid them to borrow inflated amounts to purchase the townhomes. They also say he falsely promised they would never be responsible for mortgage payments.
That troubles George Roddy.
Mr. Roddy is president of Addison-based Foreclosure Listing Service, which tracks foreclosures in North Texas. He also leads Roddy Information Service, which tracks commercial building sales in the area.
Mr. Roddy said that paying someone to borrow money can be an indicator of mortgage fraud. And he noted that the FBI and other law enforcement agencies in North Texas recently established a task force to investigate the growing problem.
Although he is not familiar with Mr. Kumapayi’s real estate deals, Mr. Roddy urged investors to use caution when considering an offer to accept cash in return for borrowing large sums of money.
“When somebody offers you money to buy a house, that’s certainly not the norm,” Mr. Roddy said. “I would be wary of that.”
Paid to buy?
Mr. Bitter said Mr. Kumapayi paid him to buy five townhomes and promised that he would take care of all mortgage, insurance and tax payments.
But all five properties were lost to foreclosure, and Mr. Bitter said he would be lucky to avoid a bankruptcy filing.
“He [Mr. Milner] said there’s a rash of this going on in Collin County,” Mr. Bitter added.
The following example, compiled from public records, illustrates how the value of the property appeared to yo-yo:
•In September 2004, Mr. Bitter acquired a 3,500-square-foot townhome at 8426 Library St., which the Collin Central Appraisal District valued at $381,984 on tax rolls.
•Mr. Bitter borrowed $412,000 to buy the unit from Quantum Custom Homes, which built the townhouse.
•Records show Mr. Bitter also took out a second mortgage for $103,000 at the same time he acquired the unit, but he said he never received that money and doesn’t understand why.
•In March 2005, Mr. Bitter sold the home to Mr. Kumapayi. Deed records don’t show the purchase price, but the unit’s tax-assessed value increased to $622,932 two months later.
•Mr. Kumapayi sold the home back to Mr. Bitter in November 2005. It was foreclosed the next month. Its current tax-assessed value is $670,273. But the foreclosing lender was attempting to sell the property for $439,900 last month.
Rapid sales and re-sales of a house among members of a close-knit group can be known as property flips.
Flips can be used to increase a home’s appraised value quickly, to generate closing fees for some insiders, to obtain bigger mortgage loans, to fatten financial statements for future credit purchases or to set the market for a particular neighborhood.
“It can be any of those things,” said John Baen, professor of finance, real estate, insurance and law at the University of North Texas. “Another reason to flip them is to take your profits in some form of second [mortgage].”
Second mortgages on some of the Library Street properties ranged from $27,000 to $103,000 and were signed on the day of the original transactions, according to county property records.
Big plans
Frisco Square is scheduled for development for the next five to seven years. The new City Hall, which opened in July, sits in the middle. Builders and city officials are hoping to attract a theater, a hotel, several restaurants and other retail and residential development to the 150-acre tract.
Three restaurants and a furniture store have already opened. And portions of Frisco’s planned 350-acre Grand Park are expected to stretch to Frisco Square within a few years.
“That’s got to be a winner,” said Mayor Mike Simpson, who also predicted that Frisco Square would weather any unpleasant publicity about property flips on Library Street.
City Manager George Purefoy said he, too, believes in Frisco Square’s future. He expressed disappointment over questionable transactions in the development but said he was not surprised.
“I’m not shocked,” he said. “This could literally happen anywhere. This isn’t anything that’s … [unique] to Frisco Square.”
Frisco Square is within walking distance of Pizza Hut Park professional and amateur soccer complex. And you can see the Dallas North Tollway running alongside the development.
Clay Crawford, who lives there with his wife, said he’s concerned about the impact of foreclosures on nearby vacant units.
“Very few of those units appear to be lived in,” Mr. Crawford said. “It’s worrisome to me that they don’t appear to be able to sell those units to families who want to live in them. I’m concerned that we could have a collapse, and we could wind up with a bunch of unsold units.”
Mr. Kumapayi’s investors have suffered through eight foreclosures on Library Street. Four other units remain under the control of Mr. Kumapayi or his investors.
Any lender losses on those 12 properties could have ramifications for 11 other homeowners on the street, according to Dr. Baen, the UNT real estate expert.
Those homeowners and others on nearby streets may see unusual increases in their property taxes, the UNT professor said. New homebuyers may face higher-than-expected prices. Interest rates and insurance premiums may be bumped up. Or, as Mr. Crawford worried, the bottom could fall out of the neighborhood market.
Once homeless
Mr. Kumapayi is a former car salesman who was living in a Collin County homeless shelter in May 2000, according to court records in a child custody case. Seven months earlier, he told a judge he earned less than $1,600 per month from a mortgage company.
Within four years, however, Mr. Kumapayi and his associates were borrowing millions of dollars for the three-story townhomes.
As they repeatedly purchased and sold their townhomes among themselves, Mr. Kumapayi and his associates increased the paper value of their property by more than $1.5 million.
Now, however, some of Mr. Kumapayi’s investors say he paid them to be “straw buyers.”
Straw buyers are people or firms whose names appear on deed records as a mask for the real beneficiaries of real estate transactions.
In the 1980s, straw buyers pumped up land values along Interstate 30 in eastern Dallas County for landowners and developers in a massive fraud that bankrupted five lending institutions and cost taxpayers more than $1 billion.
More than 100 people, many of whom were paid to buy land in their names, were convicted on felony charges for their participation in that scheme.
Mr. Bitter said he met Mr. Kumapayi in 2004 by responding to a classified advertisement that suggested real estate buyers with good credit scores would be paid between $5,000 and $15,000 at loan closings.
Mr. Bitter also said Kumapayi & Associates paid him to place his name on deed records. Mr. Kumapayi was supposed to manage the properties, find renters and pay all mortgage notes, insurance and taxes, he said.
In addition, Mr. Kumapayi promised his buyers that the purchased properties would be held under their names for no more than two years, Mr. Bitter said.
“He does not make the agreed-upon mortgage payments, as well as payments for taxes and insurance,” Mr. Bitter said of Mr. Kumapayi. “He [Mr. Kumapayi] also was collecting money at closings. You’re getting a mortgage that’s high and paying the money to yourself.”
In April, a lender sold one of Mr. Bitter’s foreclosed townhomes to a man who borrowed $199,500 to make the purchase. Mr. Bitter had borrowed $313,500 to buy the same property in 2004.
Mr. Bitter said Kumapayi & Associates paid him “closing bonuses” after the townhome purchases. But he said Mr. Kumapayi later persuaded him to plow that money back into the investment program.
Mr. Bitter said Mr. Kumapayi told him: “The upside is that if you get $50,000 for closing and dividends, it could be turned into as much as $100,000 in a couple of years.”
“On paper, it looked pretty good,” Mr. Bitter said. “But that’s not reality.”
Without an attorney, Mr. Bitter filed a $5,000 claim against Mr. Kumapayi in a small-claims court in Frisco in January. He said he also filed a criminal complaint with the Frisco Police Department.
Grant Goens, Mr. Kumapayi’s attorney, said Mr. Bitter was not an unwitting dupe.
“Mr. Bitter needs to be careful about the statements he’s making,” Mr. Goens said. “All of the investors knew what they were getting into and the risks involved.”
Dr. Baen said the investors should have heard alarm bells if Mr. Kumapayi told them they would be paid to place their names on deeds for mortgaged properties.
“They sold their good credit,” the professor said. “There are no free lunches. The deal has to make sense.”
Similar stories
Others say their business dealings with Mr. Kumapayi are similar to those outlined by Mr. Bitter.
Tarrant County resident Nick Datoo said he worked with Mr. Kumapayi in a Library Street townhome purchase in March 2005. He said he lost $100,000 when Mr. Kumapayi failed to make promised payments and the lender foreclosed.
Frisco resident Abiola Ogunsola borrowed $490,000 in March 2005 to buy the townhome at 8364 Library St. The county appraisal district valued it at $263,112.
Ms. Ogunsola said she agreed to borrow more than the home was worth because she believed she would never have to make the payments.
“I put in $10,000 in cash,” she said. “He [Mr. Kumapayi] said I would get paid $1,500 every quarter. He only paid once. That was it.”
She said a lender foreclosed because Mr. Kumapayi did not uphold promises to make the mortgage payments. The property is valued for tax purposes today at $455,862.
“Somebody has to pay the bill,” Ms. Ogunsola said. “Nobody’s going to buy that property. It’s overpriced. I just want my name off the mess.”
E-mail kfarwell@dallasnews.com
Contrasting Values
Below are the values of two townhomes within the same Frisco Square development – one that prompted suspicions of fraud and one with more typical appraisals.
A PROPERTY UNDER INVESTIGATION
8424 Library St. (3,553-square-foot townhome)
$381,984: September 2004 tax appraisal
$515,000: Money borrowed by Fort Worth resident Martin G. Bitter from MC Mortgage Corp. of Woodland Hills to purchase townhome from builder Quantum Custom Homes Inc. in September 2004
Undisclosed amount: Mr. Bitter sells the townhome to Ademola Kumapayi in March 2005.
$622,932: May 2005’s taxable value listed by the Collin Central Appraisal District.
Undisclosed amount: Mr. Kumapayi sells the townhome back to Mr. Bitter in November 2005.
$670,273: May 2006 listed taxable value
$451,900: LaSalle Bank of Chicago lists the property in June 2006 with a Realtor.
$439,900: Price drops in June 2006.
A MORE TYPICAL TOWNHOME
8266 Library St. (2,805-square-foot townhome)
$250,000: Purchased Dec. 11, 2002, from the builder by William Clay Crawford and Kathryn Ann Kellen-Crawford.
$243,810: 2003 tax appraisal
$243,810: 2004 tax appraisal
$213,083: 2005 tax appraisal
$228,163: 2006 tax appraisal
Please join us on the pro-Va_Investor fest - see Ben’s previous post.
Thank you, Texas Chick. Some of us have known that such abuses are sure to take place during any bubble.
That is why it is important to check the bubbles at the first signs. An academic fraud like Bernanke came out against Fed doing anything to contain bubbles while doing everything to fan them.
Bernanke is a sworn agent of mafia-like group — Bankrupters and Fraudsters of New York City (BFNYC). Most Americans are screwed with Crooks in total control of the economy.
Jas Jain
Txchic…..This is the type of crime that makes my blood boil. All the more reason why appraisals cant be based on sale comps alone. I knew of a case where a developer/builder found straw buyers for a entire project . The builder left the country with all the loot .
The worst nightmare for a lender is to find out the buyers are straw buyers set up by the seller . Most lenders limit how many loans they will make in one project because of this risk ,but the sub-prime lenders lend on anything .
The ghost of Danny Faulkner lives on!!
“Nigerian businessman”
The loan docs were legit, he listed other assests as ‘unclaimed lottery winnings’.
Did you guys notice the name of the FB bagholder?
“Marty Bitter”
It sounds like we have a bitter homeowner - ROFLMAO!!!
Quote from “Energy and Housing Bite Short-Term Speculators” in the Sunday LA Times business section:
No patriotic American would root for an end to the housing boom — unless that patriot happens to be a renter who has been hopelessly priced out of the buyers’ club.
This jewel comes to us courtesy of tom.petruno@latimes.com . Please send him your love!
I am a renter, and I am extremely patriotic. I was a home owner at one time. I will not be a home owner at this time, because I will not pay the outrageous prices that are out there. I can afford a house in a nice neighborhood. I don’t want to pay the price being asked, because I can pay a lot less with rent and put the rest in the bank. I would much rather see my savings grow than to see myself become a hopeless debtor.
Amen!
Yup! I am both extremely patriotic and a renter too! I think one does his country good by buying value and when necessary, as opposed to buying because it’s “for the good of the country” or “for the good of the workers.” Value today means renting. I think it’s patriotic to make sure you have enough savings so that you don’t get on the dole. Thousands of FBs are going to be on the dole eventually. They are going to try to rob those of us who were not greedy.
Sam Vaknin: Wall Street October 1929
John Kenneth Galbraith in “The Great Crash” (from the linked article):
…(but the American people) were also displaying an inordinate desire to get rich quickly with a minimum of physical effort.
I discovered this blog when the Suzanne-researched-this ad was driving me out of my mind. I’ve been reading for a few months. You guys are hilarious.
I didn’t have the heart to read anything about housing when I still had a dog in the fight (April ‘05 - June ‘06) and things were going poorly. In a nutshell: Bought first house (Kansas City) in 1989 for 60K, moved up in 2000 for 179K, spent too much on dubious-quality remodeling, was diagnosed with stage III cancer at age of 48, decided I may not live to see retirement and might not be able to climb stairs much longer.
In May 2005 we bought a $290K empty-nester, low-maintenance home that needed updating but backed to a golf course. Then we put our old house on the market. And waited. It took 13 months to sell. Stressful it was, especially when the monstrous remodeling bills at the new house were coming in. There were times when we thought we’d made the biggest mistake of our lives, and oh did we ever get sick of the realtor lies & myths.
But now I guess we feel like the battered, starving Donner Party finally stumbling into California. We’re living in our dream home, custom built 20 years ago and solid as they come, and now beautifully updated. We took out a 30-year fixed 20 percent down mortgage at 5.625 percent. Once our old house sold we were able to pay off our remodeling bills in full and have a little cash to spare. We have no debt except the mortgage. Our house payments (P&I + tax + ins.) plus our HOA fee together are about 29 percent of our gross household income.
We always tried to live below our means. Also, we have no children and we’re lucky enough to be among those with employer-provided health insurance. The irony is that we were reluctant to buy our first house. We preferred to rent, but in our city most rentals are dives. (At one point we decided to spend more on rent to see if that helped, but all that got us was trendier colors, paper-thin walls and horrible management.)
Sometimes you just have to go for it, even if you’re risk-adverse like I am. I don’t know if my cancer will come back or if I’ll be one of the lucky ones, but either way–getting sick again or growing old–at least I’ll have a space I love.
I don’t see any need to take such a risk just to say that I am a home owner. Besides, even if I did buy one of these houses, will I ever truly own it? I would just work harder, have less fun, and constantly have to maintain my costly home. Looks like prices may come down to reality and then I may buy again.
It depends on your situation as to whether you should buy or rent. If you have a family, you should probably buy. If you are single or have no children, you should probably rent. One thing is for certain, you should never overpay to buy or rent.
Jerry,
I respectfully disagree about families buying. We have three childrent who are able to attend one of the best schools in San Diego County. They can do so because we rent.
If we were to buy (or if we stayed in our formerly “owned” home), our kids would be in one of the lower-performing schools.
IMHO, it doesn’t matter what the circumstances (except when one needs houses designed for handicapped/wheelchair access); unless you desire to lose hundreds of thousands of dollars, you should not buy right now (or in the foreseeable future).
“I don’t see any need to take such a risk just to say that I am a home owner. Besides, even if I did buy one of these houses, will I ever truly own it? I would just work harder, have less fun, and constantly have to maintain my costly home. Looks like prices may come down to reality and then I may buy again.”
Very wise.
It is this repeated mantra of sanity that will keep you (us) from getting sucked into manias. There is a botload of folks who are really going to take a hard thrashing over their “emotional” bad buing decisions. Many are experiencing the first taste of that thrashing now.
DOC
I agree buying is what all of us here on this blog would like to do, but if we were to buy today, our payments would exceed 60% of our gross pay to live in a moderate home in a decent neighborhood. Prices will need to fall 50% back to 2001 levels before we can think about buying.
Agreed.
The general consensus here is that we save and wait. What I think is overlooked here–is the high amount of discipline it takes to do just that.
I assert that that many of the folks that bought during this bubble knew deep down that they’re historically terrible savers. They decided its better to buy a house with this easy financing now, because they know they’d NEVER be able to save a down payment. Problem is, the same mentality that has caused money to slip through their hands will be borne-out in the accellerated forclosures to come. It’s inevitable as the tide coming to the shore.
DOR
OMG, you guys have got to check out this “foreclosure map” in San Diego County. Keep watching as the number of pushpins grows. This is absolutely amazing. Note the color of pushpins — green is for NODs — but if this is any indication of what’s to come, look out below!!!
http://www.sanmarcoshills.com/page.cfm?page=InfoForeclosureMap
Wow.
The map is still filling in with bubbles after 2 minutes, and I’m on a T1.
Not only that, but you can clearly see NODs and foreclosures in areas like Del Mar, La Jolla and Rancho Santa Fe — areas filled with **MULTI**millionaires (and billionaires) — which shows the damage from this bubble is not confined to waiters in $500K condo conversions in Vista.
GH: I would agree about waiting for prices to come down. In the last five years, houses in the midwest appreciated a little, but not to the degree that CA & FL houses did. By the time we bought our new house and put our old house on the market in May ‘05, prices here were down 7 percent from the previous year. Missourians/Kansans tend to be conservative, but if a trend involves fear, we’re always on the cutting edge. (Oh, and we’re number two in the nation per capita when it comes to suburban/exurban sprawl. Disgusting. LA is number one.) We lost money on our home sale. Again, we would have continued renting indefinitely if we could have found a decent place, but rentals here sucked. (I’m sure that’s changing now with all the condo white elephants sitting on the market.)
Housing will fall only by 20-30 percent in 2007. The real bloodbath will happen in 2008 when the majority of Option ARMs are reset and the growing recession that is looming hits the wall. The housing market will tank for years to come and flippers who got caught in 2005 and early 2006 buying and not being able to sell will lose their shirts. Real Estate is a bad investment as the flippers pumped up prices to astronomical levels just as the Nasdaq was at 5000…and went on to get a 60 percent haircut and at one point an 80 % dive after 9/11….Look for real estate to due the same thing over the next 5-10 years….Real estate will be a slow drag down…look at the Japanese real estate market….still not recovered after 15 years…and down huge from the peak. Game over for years to come.
Posted ” Comment by stockmarketguru
Housing will fall only by 20-30 percent in 2007. The real bloodbath will happen in 2008 when the majority of Option ARMs are reset and the growing recession that is looming hits the wall. The housing market will tank for years to come and flippers who got caught in 2005 and early 2006 buying and not being able to sell will lose their shirts. Real Estate is a bad investment as the flippers pumped up prices to astronomical levels just as the Nasdaq was at 5000 ”
I tend to agree with you. I think 07′ will be a slaughter but only a tune-up for 08′.
My question to you is this what is your best guess or “ballpark” guess for the S&P 500 in 07′ and 08′. I bailed out a week ago but do see a strong rally going on to day nearly 12 points in the S&P today…. Thank you in advance!