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
Description: 8TH FLOOR CONDO @ THE GALAXY TOWERS WITH STUNNING OCEAN VIEWS, CATALINA ISLAND & CITY FROM EVERY ROOM. THIS RARE 3 BED 2 BATH CONDO IS A MUST SEE!

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.

*Gulp*

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.