Wednesday, May 6, 2009

Short Sell Hell

Address: 2999 E Ocean Blvd #840, 90803
Asking Price: $560,000
Year Built: 1967
Size: 3 beds, 2 baths, 1,510 sq. ft.
$/Sq. Ft.: $371
HOA Fee: $430
Purchase price: $829,000
Purchase date: 9/2005
MLS#: P680662
On Redfin: 44 days
Down Payment: $112,000
Monthly Payment: $3,200
Income Requirement: $160,000

One garage spot? In a 3-bedroom? Are you joking?

"Sorry, wifey, you're gonna have to sling your LeSabre on the street!"

Also, click on the Street View. Was there yet another fire in this building? A set of windows appears to be charred and boarded up, just like the top floor unit that burned (and led to the poor guy jumping to his death) a few years back. Yikes, how's that curse working out for you?

Anyhow, I featured this swanky little property today because I want to focus on equity dissolution.

In late 2005, smack dab in the middle of the housing bubble run-up, our short seller purchased this apartment for $829,000.

Stop rubbing your eyes, friends: eight hundred twenty nine thousand dollars.

But at the time, conventional wisdom (and those whose commission income depended on it) said, "Real estate always goes up," so $549 per square foot seemed like a great deal for an ocean-facing pad. Plus, an appraiser cashed a very large check to make sure the appraised value was "just right."

Succumbing to incessant pressure from realtors, mainstream media, and likely his friends and family--and not wanting to "be priced out forever"--he quickly jumped on this "amazing" deal. Assuming he put 10% down (not likely, considering this was in '05) and took out a jumbo loan for the remaining $746,100, his monthly payment was a wallet-nuking $5,800.


To reasonably afford that astronomical payment, he needed to make at least $235,000 per annum--three times the median income in this upper-echelon Long Beach zip.

Quite obviously, he made nowhere near that.

But, there was nothing to worry about because his mortgage broker told him that if the going got tough, he "could just refinance in two years" and even take out some equity to spend on cars, vacations, or whatever he damn well pleased--it's free money!

In 2007 the renter--ERRR...owner started to hear rumblings about property values decreasing nationwide. "Just a blip," he smugly thought. "Long Beach is immune."

"They're not building anymore land," after all.

Plus, everyone is talking about subprime, which is just poor people mucking everything up for classy, well-to-do real estate "investors" like himself. That riffraff has nothing to do with desirable properties like his in "prestigious" zip codes. Plus, the treasury secretary said subprime is contained.

But by 2008, the payments were becoming unmanageable. And news of the housing collapse was unavoidable. And now it had spread well beyond subprime. In fact, there were reports that prime loans were becoming just as dangerous because the loan amounts were so much larger and the unemployment situation was deteriorating so quickly.

Worse yet, property values in his highly-vaunted neighborhood had fallen so quickly that he was unable to refinance. When it was clear the housing market wasn't bouncing back and he couldn't reduce his mammoth, unsustainable payments, this seller finally decided to jump ship and on November 27, 2008 it went on the market as a short sale.

But the market was in worse shape than he originally thought. Despite four price reductions, there was still no interest in his "rare" apartment.

As it stands, if this property sold today for the asking price of $560,000, the total amount of evaporated "value" would be $269,000. That's a loss of $6114 for every month of ownership. Zap! Gone.

Furthermore, the personal financial loss to the seller will be in excess of -$300,000 (38 monstrous payments plus the 10% we're assuming he put down).

Three hundred thousand dollars.

Poof! And he walks away with nothing to show for his "savvy investment."

Of course, that doesn't include the cost of any upgrades (for $800,000+, I should hope those upgrades were already in place by 2005).

But that's not all.

Assuming the loan was for $746,100, a short sale at this price would result in a loss to the lender of at least -$219,000. However, after collecting three years' worth of payments (about $180,000), the lender offset their loss substantially, creating a loss of about -$73,000 after commissions.

Not a terrible loss by any means.

Unfortunately, those loss figures are predicated upon an awfully large assumption: That a new buyer would be willing to pay a 2004 price of $560,000.

Possible, but doubtful. First we have no idea if this price is approved, and as well all know by now banks aren't exactly in a hurry to get rid of inventory at a loss. This price may seem slightly high now, but by the fall it could seem completely WTF. Second, I'm not sure there is a bull market for Long Beach condos in old, outdated buildings with $560,000 price tags.

HOWEVER, don't sleep on game-changers like government incentives, easy money from the FHA, and incredibly low interest rates. The way things have been going in Long Beach lately, I wouldn't rule out pending status by the month's end.


  1. Brilliant once again, mate. Nobody hits the nail on the head like you do.

    Just imagine the sort of sweet pad this dude could have rented instead -- without ever having to take a loss or a massive hit on his credit.

    Love it when I see Darwinism in practice.

  2. I'm always floored by the number of multi-bedroom condos/apartments with one (or zero!) car parking in Long Beach. With street parking being virtually unavailable after 6 pm and the auto theft problem that's plaguing 90802 and very steadily moving into 90803 you are sentencing yourself to hell by *renting* a place with inadequate parking, let alone *buying* one. I just can't wrap my brain around how it doesn't seem to affect pricing...

    Furthermore, there must be some trick I'm missing in mortgage qualification. My husband and I have quite possibly the most stable jobs on the planet and great FICO scores and we're having to crawl through glass to get approved at 3X our take-home pay. With local income medians looking like they do, where the hell are these $500K+ buyers coming from?

  3. Jen,

    Has auto theft increased lately? I'd be interested to find out more about that.

    I feel bad about you and your hubby having to crawl through glass to get approved at 3X (TAKE HOME?!) income, but in all honesty, it is a good sign.

    If more lenders follow suit and return to conservative (read: normal) lending practices, property values will fall further to accomodate stricter standards, more people will be able to EASILY afford houses, providing more disposable income, allowing the consumer economy of ours to rebound.

  4. Re: Car theft--I've only been monitoring things casually over the last six months as we've been trying to decide what our next move is. Belmont Shore isn't experiencing a problem and Belmont Heights has a way to go to catch up with 90802--but not as far as you might think with the way people emphasize the difference between the neighborhoods. With city resources stretched thinner, I think a regress for Downtown could pose a significant problem for Belmont Heights.

    Anyway, we've given up--the market's just not right for us. Problem is that the rental supply in Long Beach just doesn't accommodate our needs (like parking). Off to Seal Beach (and longer commutes) we go!

  5. So glad I happened upon your Blog. I thought I was the only one in LB who thought home prices in LB are out of whack. I found a small condo (short sale) on third st, offered 160K, basically got laughed at by the bank. The condo sold in 2000 for $85K and was given a few nice upgrades, but no parking. I'm keeping my cash in my pocket till the prices come back down to earth and I'll keep checking your blog. Thanks!