Thursday, February 21, 2008

There Will be Blood (Monthly)

This purchase is like breaking up with your girlfriend while she's giving birth to your twin daughters: terrible timing.

Address: 5418 Heron Bay, 90803
Asking Price: $899,900
Size: 3 beds, 3 baths, 1748 sq. ft.
$/Sq. Ft.: $515
Year built: 1982
Purchase price: $947,500 (YIKES, BUDDY!)
Purchase date: 5/2007
MLS#: P605318
On Redfin: 128 days
Description: Spinnaker Coves. Highly upgraded luxury townhouse. All bathrooms have been remodeled. New granite in kitchen. New appliances. New A/C, heat pump and 75 gallon water heater. New window coverings T/O. Formal dining room, eating area off kitchen. Plasma above fireplace. All furniture is new and negotiable. Master bath has granite, new shower and spa tub. Hardwood built-ins with granite counters off kit. and dining rm. Gated complex with pool, clubhouse, lighted tennis courts, exercise rm. Will consider a lease. Furnished, $4,000 per month.

Bravo! An informative, grammatically correct, and typo free description! Somebody's definitely going to earn their commission when this place sells (in 2017).

To provide some perspective on how insane the bubble years were, let's look at the rampant appreciation over the years.

Aug 11, 1989 - $385,000
Dec 17, 1992 - $320,000
Sep 09, 2003 - $497,000 (this seller, whether knowingly or not, timed the market perfectly and hit the freaking lottery)
May 18, 2007 - $947,500

You read that right: Just shy of a million clams for a condo--errr, townhouse last year. Now, before the Kool-aid drinkers have a tantrum (by the way, where did the housing bulls go? You used to provide such valuable insults--errr, insights to this blog. I know you're still reading every day, but for some reason you've been awfully quiet in the comments section), this is in a very desirable area and I doubt anyone would claim it's not worthy of a premium. But a million clams? Not in a million years.

This is an object lesson in A) getting carried away with perceived premiums, B) what happens when you listen to the National Association of Realtors and other commission-heads when they tell you "Now is a great time to buy!!!!!!", C) dabbling in real estate when you don't have enough financial acumen to correctly count the change in your pocket, and D) Long Beach sellers' pricing strategies being driven by willful ignorance of real estate reality.

Let's crunch some numbers and see what our little rusty-knife catcher got himself into.

Assuming he/she put down 10% (they purchased before the first credit crunch in August '07) and financed the remaining $852,750 at 6%, they have a rough monthly payment (principle, interest, taxes, insurance) of $6,000.

Throw on top of that a monstrous $575 HOA fee, and we're talking about a monthly carrying cost of $6,575 (there are significant tax benefits, but they are largely cancelled out by property taxes and ancillary ownership costs).

So even if they could find someone to lease this place for the $4,000 a month they're asking, they would still bleed cash to the tune of -$2,575 per month! Wow. Get a tourniquet.

And remind me why someone would would pay $6,000+ per month to own a place they could rent for $4,000? Oh, that's right...THEY WOULDN'T.

Even more shocking is that this real estate mastermind bought a mere nine months ago and is already trying to sell it. The good news is, unless this seller knows some extremely efficient contractors, the upgrades were performed prior to their purchase. That means at least he won't be out that money when this place sells.

But he will still be out money. Lots of it.

If a mongoloid with a head wound from his fall from the turnip truck miraculously bought this condo tomorrow, for the pleasure of owning for a whole nine months this seller would lose more than $100,000 including commissions. Good Lord, that's gotta hurt.

And that doesn't even include the $60,000 they've already paid toward their mortgage.

But selling tomorrow isn't going to happen, and it's obvious this place won't sell for anywhere near current asking price. What's my reason? I've got 128 of 'em. At over four months on the market with no price reductions, this place isn't going anywhere. And the bloodletting will continue until they're so upside-down, they mail in the keys and hightail it out of there.

Want another reason? How about their neighbor just a few houses down:

He recently made a drastic price cut to $874,500 and he's still languishing on the market, so what hope does our seller at 5418 have?

Friends, my only hope is that my message is getting through to some of you. If this poor guy stands to lose more than 100 Large in just nine months, then what hope do any of you have staying above water if you purchase in the next few months?

This is going to get much worse, so bad that it will make my previous price predictions look mild in comparison. Don't even think about buying in Long Beach until the sellers catch on to what we already know: Prices have a long way to go before buying makes any kind of rational sense. If you don't believe that, then odds are you'll end up like this seller; desperately trying to stop the bleeding while you have a 1000cc IV of Heparin in your vein.

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