Wednesday, April 16, 2008

The Definition of Dumb

Just so we're clear on our definitions...

Investment Property [in-vest-muhnt prop-er-tee]: A property that is not occupied by the owner, usually purchased specifically to generate profit through rental income and/or capital gains.

Address: 2739 E. 10th St. 90804
Asking Price: $300,000
Year Built: 1903
Size: 3(?) beds, 2 baths, 1008 sq. ft.
$/Sq. Ft.: $298
Purchase price: N/A
Purchase date: N/A
MLS#: R800232
On Redfin: 99 days
Down Payment: $30,000
Monthly Payment: $2,000
Income Requirement: $75,000
Description: Investment property in very good conditions. It has 3 bedrooms and 2 baths new paint interior and exterior, large kitchen, living room and dining room area, front yard, a room for washer and dryer machine and the garage has been converted as a two separate rooms without permit. Ideal & Perfect for big family or first time buyers. It has parking for 6 cars with security gate and one of the rooms have an attic that could be as a storage room.

Hey, does the dishwasher come with the house? I prefer stainless steel, but I guess pink shorts will do:

I'm still unconvinced that this listing is for real, but I'll play along and assume it's not a joke.

First, now that we've established the definition of what an Investment Property is, I want to explore truth in advertising.

Definition Part One: "A property that is not occupied by the owner..."

Well, they certainly got that part right. A prospective buyer pulling in two-and-a-half times the median income (which is what it would take to afford the mortgage) would obviously be wise enough to live far, far away from this neighborhood. That security gate? You're going to need it. Furthermore, anyone pulling in the required $75,000 per year and coughing up a $30,000 down payment would certainly live in a much nicer place than this dump.

By the way, nice Christmas lights. It's mid-April, assholes.

Definition Part Two: "...usually purchased specifically to generate profit through rental income..."

First of all, "usually" purchased to generate profit? Really? Try ALWAYS. I mean, who purchases an investment with the intention of not generating profit?

Don't answer that.

So, the purpose of an investment property is to make money via rental income, eh? Let's put that to the test:

Monthly mortgage payment on this little parking lot with a roof: $2,001 (The Redfin listing indicates there is a $1.00 HOA fee)

Monthly rent on a nearby house: $1,800

1325 Roycroft Ave. , Long Beach, CA: Front House in fantastic area, close to Traffic Circle, freeways, hospital, schools, and parks, includes custom paint, new carpet throughout, dining room, pantry, laundry room with w/d, upgraded bathroom tiled shower stall with dual showerheads, walk-in closet, custom ceiling fans, wall mounted flat screen TV, stove, dishwasher, c/a beautifully decorated/landscaped backyard has stainless steel BBQ grill and dining area, Tenant pays ALL utilities, double car garage, Gardener included...

Okay, okay, they're not exactly comparable...the rental is 20 times nicer, in a better neighboorhood, comes with a barbeque grill, clean, attractive bathrooms, a two-car garage, a gardener, and a flat-screen TV, and all of the rooms are permitted. However, the rent vs. own calculations are in fact pretty close.

However, the mortgage payment does not include maintenance and repair costs on a house built at the turn of the century--LAST CENTURY. That monthly nut also doesn't include the up-front money it would take to make this sty inhabitable. And we haven't factored in the costs of bringing this place up to code. (By the way, I give them credit for trying to slip the two extra, unpermitted bedrooms into the listing description, but that is a major red flag. And my question is, if you turned your garage into an illegal aparment for your extended family and their fifth-cousins, can you still claim there is a one-car garage attached to this property?)

Once you add all of that up (not to mention the time and money spent trying to find reliable, sane tenants that would be willing to live in this craptastic hovel) you quickly realize that this little Christmas gift most certainly doesn't meet the rental income requirement of the investment property definition. Maybe they'll get it right in the last part...

Definition Part Three: " generate profit gains."

The premise of this part of the investment property definition is that you hold on to the property with the hopes of eventually flipping it for a profit. According to realtors and lenders, "real estate never goes down," so I suppose within that context this property meets the definition of an investment property. And as the mealy-mouthed commission-heads used to remind me in the comments section of this site: "Now is a great time to buy."

Let's see what DataQuick has to say about that:

Los Angeles County:

Mar-07 sales: 8,353
Mar-08 sales: 4,263
% Change: -49%
Mar-07 price: $540,000
Mar-08 price: $440,000
% Change: -18.50%

Holy haircut, Batman! In just 12 short months, the median home price in Los Angeles County was scalped by an incredible ONE HUNDRED THOUSAND DOLLARS. Not too many ways to spin that: We are at the beginning of a severely declining market and if you bought just one year ago you would be underwater on your mortgage by nearly 20%.

That means if you put down 20% last year, it's GONE. If you put down 10% and hoped to sell, you would have to write a check for at least 60 grand just to walk away with your credit intact. If you put nothing down on a median home in March 2007, then I sure hope you got a fixed rate and can afford your payment. Otherwise you're going to be another foreclosure statistic and your newly bank-owned house will only add to the inventory carnage.

The point is that if housing imploded this much in just 12 measly months, then how on earth could buying this moldy mudhut as an investment property at today's price make any kind of financial sense? If you bought this place, not only would maintenance costs eat you alive but within a few months you would be upside down on your mortgage.

But remember, the seller expects you to believe this is an investment opportunity. Let's review:

1. By definition, the owner does not live at the investment property. Judging by the looks of the place, there's no chance of investor living there. DEFINITION MET.

2. By definition, the investment property generates profits by way of rental income. Since local rents are near-parity with the monthly mortgage, this might squeak by into "definition met" territory. But, repairs and maintenance will produce negative cashflow quicker than a Britney Spears stint at rehab. Plus, nearby rentals are much nicer and competing for your renters. By definition, you need renters to generate rental income. DEFINITION NOT MET.

3. By definition, the investment property must generate profits in the form of capital gains, i.e. selling it for more than you paid. We are in a death-spiral of rapid asset depreciation, meaning buying today and expecting to extract "captial gains" within the forseeable future has about the same odds as a diarrhea-free Dodger Dog. DEFINITION NOT MET.

And while we're piling on, the listing claims "Alamitos Beach" but as you can clearly see, this ain't anywhere close to the beach. Hell, at almost two miles away from the ocean, I'm not sure this even qualifies as Alamitos Heights. Yet another example of a loser with a worthless property trying to claim a more desirable neighborhood.

Of special note, this is one of the few (or is it the only?) properties featured on this blog that has dipped below the $300 per square foot threshold. This should be a momentous occassion, but a cursory look at the house and the $298 per square foot is obviously wishful thinking.

This place will be lucky to sell for $240,000, and that's including the dishwasher.


  1. What a hilarious write-up!

    Thanks for sharing your witty analysis, look forward to more.

  2. Thanks for stopping by. If you keep reading it, I'll keep writing it.