You may remember this property from the Foreclosure Rage and ensuing posts and comments here. I thought you might like to know how it is all turning out.
8489 Fairway Chase listed yesterday at $499,000. The property was purchased in July 2005 for $780,214, and the back yard was subsequently improved with landscaping and a water feature. The previous owner went into default, and the bank took back the property with a low bid of $353,800 back in November. The house was delivered back to the bank in less than pristine condition – baseboards and crown moldings had been removed, as had the water heater, AC units, kitchen cabinets, counters and appliances, light fixtures and electrical outlets, toilets, and even the landscaping and water feature. From my observation, there also looked to be more than minor earthquake damage to the stucco.
The bank listed the property, and it sold quickly at $304,000. "Restoration" commenced and my best guess it that the owners had to have put in at least $75 ,000 – $100,000 to get the property visually sales ready. Visually being the key word, though the work they did looks first rate.
I don’t want to dredge up the original post, nor the original owner, nor the foreclosure "instability" that occurred. I will have to delete any comments referencing the previous owner, their profession or affiliations – sorry, but I can’t have the RSAA jumping all over Diane again like they did last time. That’s not what this post is about. anyway. But I do want to let you know how this property is playing out in this market and potentially setting comps for the neighborhood.
And I also want to point out that this listing "shines from pride of ownership" according to the listing agent, the infamous "Kristina" from Craig’s List (who in herself is a fun little story for you diggerdogs).
Skyler
There is an article in the online edition of the RGJ today that says the median price in Reno-Sparks fell to $188,000 in March.
Another bad month for the bottom callers.
Raymond
This month’s realtor happy talk is that pendings are up. And that sales volume is up. No mention, however, of the ever downward movement in median sales price. But who cares about prices? I mean, we all care a whole lot more about pendings and volume, right? That pesky median price thing is such a drag if you are trying to shill houses.
Fizzbow
Let’s say this house sells for $450K. That’s about a 45% haircut from what it sold for at the top of the bubble if we add in what the original owner spent on the landscaping and other improvements.
That’s about right at this point in the meltdown. The median is now closing in on being about 45% down from the bubble peak, so this house is right on course.
The guy who bought this house at foreclosure might make a few bucks, and good for him. But as for the neighborhhod values, well, downward and downward we go.
Are ya all smellin’ those burnin’ Somersette comps?
inclinejj
This is pretty thin for a buy at the sale..
304,000 purchase price
75,000-100,000 rehab
5%-6% real estate commissions
carrying costs and an installment or two of taxes..
Your working for min wage or less
BanteringBear
As inclinejj pointed out, this didn’t pencil out from the beginning. Trying to flip in a declining market is suicidal, unless you get an absolutely killer deal. More than $300k for a gutted home is NOT a great deal. Let’s be unrealistically conservative, and say that the buyer spent $50k on the rehab. Factoring in closing costs (on the purchase and sale), carrying costs, and commissions, this guy/gal needs to clear at least $400k just to get out whole. We all know they probably spent much more on the remodel (considering all that needed to be done).
Given prices are down 45% from the peak (likely more in many instances), in a very crude calculation, that’d put the current market value, based on the previous sale, somewhere in the neighborhood of $440k. They’ve probably got at least that into it. I’m betting they take a bath.
DownButNotOut
Wow! When will people like this figure it out? As BB points out, by the time you pay holding costs, interest, RE resale fees you’d have to be delusional to think this would work in this market. This guy is going to take a bath. I would’ve thought flippers were an extinct breed in these times but go figure.
BanteringBear
It’s not my intention to hijack the thread, but I thought, given the light comments lately, I’d post a link to a Bill Moyers interview with William K. Black (I don’t recall the link being posted before). It’s a must see. He was a regulator during the S & L crisis, and he pretty much sums up the bubble and subsequent meltdown.
Anybody (DonC?) who believes this whole bailout is working might want to rethink that. The banks are NOT well capitalized, and the government’s throwing good taxpayer money after bad in a naive attempt to hide the truth. It cannot work, and we’ll be worse for it. Some heads need to roll, and sooner rather than later. I had high hopes for Obama, but the whole Geithner choice really rubbed me wrong. Fuel to the fire…
BanteringBear
Oops, here’s the link:
http://www.pbs.org/moyers/journal/04032009/watch.html
inclinejj
anybody (DonC?) who believes this whole bailout is working might want to rethink that. The banks are NOT well capitalized, and the government’s throwing good taxpayer money after bad in a naive attempt to hide the truth. It cannot work, and we’ll be worse for it. Some heads need to roll, and sooner rather than later. I had high hopes for Obama, but the whole Geithner choice really rubbed me wrong. Fuel to the fire…
Well, the bailout is slowly working as is Tarp..but you can not expect over night results..
The Banks still have big problems with credit card debt and commerical real estate mortgage that will haunt them for years..
It took 10 years for the RTC to get rid of all the problem bank assets in the 80’s to early 90’s
MikeZ
It seems that the only way this flip made enough money to be worth it is if the buyer also has his own rehab/remodel business and did the work himself.
If you can get paid for the rehab work, then you can break even on the transaction itself and still turn a decent profit.
SkrapGuy
Obama/Geithner….Bush/Paulson……there is no difference. They are interchangeable. They are interchangeable because what is at risk is the continued hegemony of the monied class not only in America, but in the world. When the stakes are that high, it all transcends party politics. On social issues like abortion and stem cell research and same sex marriage, they can have differences, because in the overall in the scheme of things those amount to little and they provide a nice distraction for the masses. But when it comes to the monied few continuing their control over the world’s finances, it’s all bushobamapaulsongeithnerbernanke.
SmartMoney
Interesting article comparing average earnings to current home prices http://online.wsj.com/article/SB123853857749575441.html?ref=patrick.net Looks like we are still over-valued.
DonC
BB – I have no problem with the Moyer’s report. I actually think Mr. Black makes many good points. My main problem has always been the misguided notion that markets are self-organizing, self-regulating, and self-correcting. Only a fool, or a Chicago School economist who doesn’t get out much, or a House Republican, would think that. It’s just crazy.
He is also exactly on point about the counter parties. I can’t figure out why we haven’t extended regulations to those entities.
I also support the idea that we need to do much more in investigating what went wrong.
Having said that, this doesn’t mean the banks are insolvent. I don’t think they are. The mark to market rules have actually worked in that the legacy aka toxic loans have been written down to about their market values. The big issue going forward are the commercial loans which are not subject to mark to market. These could result in zombie banks. This is what the FDIC loan program is designed to address.
DonC
BB – Here’s a bearish article for you:
http://finance.yahoo.com/real-estate/article/106848/Home-Prices-Low-But-Still-No-Bargain
CommercialLender
DonC,
where do you get that “commercial loans [are] not subject to mark to market”? Unless I’m missing something, a loan held for investment is under different treatment than a loan held for sale, but there is otherwise no distinction between commercial or single family loans in that regard. Happy to be corrected on this…
And as I’ve said in the past, don’t for a minute think these banking institutions have written down their loans anywhere near current market (not that I’m taking a position on mark-to-market, but there’s few if any institutions I can think of adequately reflecting current market on their books). So, 2nd question for you: why do you think they have?
DonC
CL – The commercial loans aren’t securitized and therefore can be deemed to be intended to be held to maturity. The FASB rules don’t subject these loans to mark to market.
As to why I think the securitized loans have been marked down to market, that’s the consensus AFAIK. But let me reverse the question: Since these loans have been subject to mark to market, why would you think they haven’t been marked to market in line with the requirements? (Note that the Congressional Oversight Panel said that all valuation methods converged when evaluating the securitized loans so it’s not that one of the alternative methods will produce a different valuation).
FWIW I fully support mark to market and wish Congress would butt out. Hiding the problem strikes me as ridiculous and hardly inspires confidence, which is what is needed. There are other ways to deal with this other than hiding the ball, the best one being having tighter reserve requirements when the economy is booming and looser when it’s not.
CommercialLender
DonC,
I note you make a distinction between already securitized and not-yet securitized. The former is of really no concern to me at the moment as these were investments bought by end users with long time horizons. Huge losses if sold today on the open market, granted, but for the most part very many of these investors bought basically long-term bonds otherwise known as CMBS. Keep in mind, in commercial r.e. loan universe, the default ratio is on average, what, sub-3% now? Holders of already-securitized loans are not the ones shutting down the economy at the moment, though it is a bit different in the world of RMBS where average expected life of this paper was what 2-3 yrs? Too short, the music stopped there and too little value resulted. These RMBS holders are hurting the economy, because the time horizon was short and the leverage was way too much.
**
As for the not-yet securitized loans sitting on commercial lenders’ books, that is my beef in this post. $200B ish of comcl loans were done in 2006 and again in 2007 and a huge number spilled over into 2008, too. A great many of these were intended to but never securitized because the market died. The lenders caught with the bag, so to speak, did not and cannot adequately keep holding these as investments held to maturity because they don’t have enough required reserves. Also, these truly are ‘available-for-sale’ investments and will immediately be put on the market when/if the coml market recovers, and not ultimately held to maturity. But at what price will they command?
The fact the lenders are holding vast quantities of held-for-investment loans they never intented to hold makes my 2nd point: they are not remotely being marked adequately to todays ‘market’ and if forced to sell them to raise liquidity or to lessen their loss reserve requirements (many are struggling under this weight right now) then the companies are toast. The first to blink, dies, and many more will quickly follow in the mele. The fact that FASB does not require any mark-downs for this magical held-for-investment class further makes my point: they are not being marked so.
But is this business plan shift sustainable? Try this: a used car dealer accumulates hundreds of cars for sale, paying only his normal carry cost on them until they are sold. He sells enough to make profits, but then the market drops out and he’s left holding the inventory. Can he afford the carry cost of hundreds of cars indefinately, or will he be forced to liquidate them at any cost or to file bankruptcy? How long can he last? One thing he can’t do is hold all the cars for their expected useful life – that was never his business plan.
How many of our fincial firms and banks can afford to drastically change their business plans to suddenly hold vast amounts of securities on their books? I submit names you all have heard of are totally insolvent as they are simply paying their carry cost in hopes they can out-wait the market recovery. But they sure won’t tell you what their inventory is truly worth today, or runs on banks would occur en masse by both individuals and stockholders, but also by their own creditors. All but the very well-healed cannot keep these in inventory and cannot afford the loss reserves, but they sure won’t tell anyone that in their financial statements. That would be suicide.
DonC
CL – I think the answer to your question of how long can a bank hold the loans is: a very long time. But the problem is that so long as they are holding these loans they can’t afford to make any new loans. They are the prototype of the “zombie bank”, a bank in name only.
This does seem to be the big issue going forward. Right now we have the FDIC loan program. Coupled with the stress assessment, my hope would be that the zombie banks are forced to sell these loans, in effect forcing them to mark them to market even if the mark to market rule doesn’t apply. That would put these properties back on the market at affordable prices and the process of destruction and recreation could occur, as it should.