Tuesday, February 5, 2008

Bottom Feeders and Bottom Chasers

Although many people clearly don’t get it, or purposely choose to bury their head in the sand, by now it is indisputable that this is a terrible, horrendous, dreadful, suicidal time to sell a house.

I’m still waiting for our friendly visitor newquest, who attacked me because I apparently "have no idea what your [sic] are talking about," to post data proving otherwise.

Still waiting…

Anyhow, there are many reasons to sell in a catastrophically declining market: Divorce, interest rates resetting skyward, job relocation or loss, retirement, medical emergency, etc. All are legitimate reasons to defy common financial sense and just sell the damn thing at any price. But what all of these unfortunate circumstances have in common is a virtual guarantee that the seller will lose money on their investment.

Property owners who made sure rent vs. buy calculations lined up before buying have the option to rent their place out for positive or break-even cash flow while they go back to renting and try to improve their situations.

Everyone else, I’m afraid, is in for serious financial pain, or in some cases absolute fiscal annihilation.

As I covered in Comp Killers, one of the most significant dangers of selling a house in an ever-growing field of depreciating assets is a neighbor who needs to get out of their money pit more than you do. This could be an individual who bought in the last down cycle who has plenty of equity; they can afford a larger financial haircut than you can. For example, a retiree who would rather cash out and buy a Winnebago than wait 10 years for the market to go back up will be more motivated to undercut competing prices to ensure a sale.

Or it could be a bank who needs to get rid of their recently repossessed home pronto because of pressure to get keep the growing number of foreclosure and short-sale liabilities off their books. U.S. banks and mortgage holders have enough problems to contend with and certainly don’t need to enter the property management business.

Either way, once that house sells at auction or at a dramatically reduced price, a seller's competition just got stiffer and a big chunk of their rapidly dwindling equity just evaporated.

There are several kinds of financial punishment in a situation like this:
Lucky individuals get out in time to break even, before all the bank-owned properties inundate the market.

Not so fortunate souls only lose their down payment and have to start from scratch.

The truly pitiful lose their down plus any equity they’ve built up over the years. In some cases they actually lose their down and equity and STILL have to write a check for 15 to 20 Large to cover selling costs.

And then we have the financially ruined, guided by a sense of greed and entitlement. Some sellers flatly reject what they consider “low-ball” or “bottom-feeder” offers because they mistakenly believe they deserve more for their little plot of heaven. After all, their home is "special" and surely commands a premium over the hundreds of listings in the surrounding areas. So they ignore the surrounding market realities and only gradually lower the price. But the market stays one rung below them on the downward ladder. This is called “chasing the market down” and it is a vicious, unrelenting cycle.

As the market continues to collapse around them, they slowly realize if they had just priced their home competitively from the outset they would already be rid of the python around their neck. Most painfully, it dawns on the beleaguered seller that what they scoffed at as a “bottom-feeding” offer was their last opportunity to get out with the least amount of pain and financial penalty.

The seller’s snotty, indignant rejection of that “low-ball” offer was their greed-fueled, agonizing downfall, and one that will haunt them as they retreat from the enterprise of homeownership, hoping that their freshly devastated credit rating won’t follow them like a shadow to their new rental apartment.

Which brings us to this poor chap:

Address: 1100 Walnut #5, 90813
Newly Reduced Price: $279,000
Size: 2 beds, 2 baths, 890 sq. ft. (built in 1986)
$/Sq. Ft.: $314
Purchase price: N/A
Purchase date: N/A
MLS#: P558387
On Redfin: 372 days (Happy belated one-year anniversary!)
Description: Vaulted ceiling and a skylight in the living area lend dramatic dimension to this beautiful condo conversion. Asian cherry hardwood floors in living, dining & kitchen area, ceramic tile in baths, wall to wall carpeting in the bedrooms. Stainless steel appliances & in-unit washer/dryer combo unit included. 2 parking places in gated community garage. Pet friendly building, 2 dogs or 2 cats or combination. 5 Minutes to freeways, Blue Line and Long Beach Airport.

Stainless steel, you say? Prove it!

Nice, nice...show me more!

Okay, I believe you. Now how about a look at the guest bathroom?

Uhhh, okay. I get it. Stainless steel, roger that. I think the appliances are covered. Let's see some photos of the guest bedroom...

I guess they're really proud of their taste in Sears appliances?

Anyway, the funniest part of this listing is the erratic pricing activity during their desperate chase to the bottom:

Feb 03, 2007 - $339,500 (A bold start at $381 per square foot. Helloooooo Irvine!)
May 03, 2007 - $327,500
Aug 08, 2007 - $327,250 (Wow, a whopping 250 bucks off. I mean, why even bother?)
Sep 11, 2007 - $327,000 (Another paltry $250? Why not throw in a Netflix gift card instead?)
Sep 18, 2007 - $324,500
Oct 25, 2007 - $309,900
Oct 31, 2007 - $299,900
Nov 28, 2007 - $285,500
Dec 08, 2007 - $299,500 (A $14,000 INCREASE! Must be a stainless steel toilet somewhere)
Jan 12, 2008 - $279,900

So, after all of those pricing shenanigans, we’re left with an asking price almost $60,000 less than the original, delusional demand.

This property isn’t much fun to profile because we don’t know how much they paid. Judging by their bold (read: dumb) pricing strategy one could assume they bought long ago and have equity to burn. Then again, granite counters and stainless steel skinned appliances aren’t free and I’ll bet they refinanced at some point and used some equity for improvements. Any readers out there know the backstory with this place? I’m dying to know what the deal is.

Shockingly, even at this seemingly “low” price, we’re not even close to parity with local rents. And considering this place is north of Cherry east of 10th Street—each demarcations for no-man’s land by themselves—I can’t imagine many people subjecting themselves to such a questionable neighborhood for $300,000.

Not to pile on, but it's small for a 2 bed/2 bath, has two common walls, and your $260 per month HOA fee doesn’t include a gym, a yard, or a pool. Think about that for a minute.

Even if the price dropped precipitously to $200,000, it STILL wouldn’t align with local rents. These aren’t exactly comparable, but it’ll give you an idea:



Yikes! Unless this seller bought in ’91 and has incredible amounts of equity, chances are they are already upside down. That means they will eventually hit their financial breaking point, the price reductions will stop and the bank will take it back.

I guess he could just pull it off the market and live there until the market regains its pulse. But given the fact that this sap is still trying to sell in this brutal—and quickly deteriorating—market means this place has one word written all over it:


Assuming you would live in this neighborhood, what would you offer on this place?

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