The Problem with Peak Purchases

Address: 353 N Colorado Pl #205, 90814
Asking Price: $345,000
Year Built: 1976
Size: 2 beds, 2 baths, 892 sq. ft.
$/Sq. Ft.: $387
Purchase price: $350,000
Purchase date: 5/2007
MLS#: S578872
On Redfin: 1 day
Down Payment: $69,000
Monthly Payment: $2,000
Income Requirement: $100,000
Description: Beautiful atrium setting in small, quite, secure, end of cul-de-sac complex. 1 car private garage, blocks to beach. New harwood floors;almost new appliances, great shape. Walking distance to stores, shops, restaurants. Shows well. Cool ocean breezes; pet friendly building. YOUR CLIENTS WILL LOVE THIS ONE IN A GREAT AREA (EQUITY SELLER)...3% COMMISSION.

"harwood"?

Let's start with the sales history:

Jun 20, 2009 - Listed $345,000
May 30, 2007 - Sold $350,000
Mar 24, 2007 - Listed
Jan 12, 2007 - Sold $416,839
Aug 05, 2006 - Listed
Aug 06, 1998 - Sold $87,000

After living in this apartment for eight years (pretty much to the day), the 1998 buyer put it on the market. He only paid $87,000 so he might have owned this thing outright by 2006, right? Pure gravy bubble profits, right?

Not so fast, mon chien.

You see, the pre-bubble buyer owned this place during the choicest years of the easy-credit, HELOC, cash-out refi panty party...and he couldn't help but bury his gaping maw in the trough.

See that strange sales price of $416,839 in January 2007? Most houses sell for $415,000 or $420,000--but that kind of number means it went back to the bank. A random collection of numbers generally indicates the remaining balance left on the mortgage.

That's right, my friends. That lunatic, likely through various refinances, sucked the bubble teat for almost half a million dollars. So when he sent the keys back to the bank, he walked away with nothing (well, except for ruined credit and possibly a deficiency judgment on his recourse loans) and had to kiss six years of equity goodbye.

"Oh, but he had medical bills! He had to pay for college tuition! He didn't know what he was signing! He was a victiiiiiiim!"

Oh, please. Stop it with that happy horseshit.

The fact is, this pig refi'd himself into oblivion, lived the high life for a few years, and stuck us with the tab. He deserves our scorn and condemnation, and frankly I'd like to see him in a debtor's prison for 30 years breaking rocks to work off his debt.

But, alas, we as taxpayers, who are ungraciously forced to pick up the tab, will likely see no such relief.

/rant.

So here is where it gets interesting. The current seller picked up the property for $350,000 two months after the bank listed it in Spring 2007. The lender (and by proxy, the taxpaying public) took a bath on it, but at least this guy got a "huge discount," from the previous price, right?

Well, we'll see about that.

The listing description claims it's an "equity seller" but I have a feeling it's on the razor's edge of becoming a short sale. If it sells for the current wishing price of $345,000, the loss after commissions (3%, in this case) will be -$15,000.

That sounds like a realistic down payment amount for 2007, so maybe he/she will break even.

But that, of course, fully depends on nabbing a new buyer willing to pay $387 per square foot for this tiny, plain, non-upgraded (save the laminate floors) apartment.

When the going rate in this neighborhood is $308 per square, I have heart-attack serious doubts about that happening. Peep it:

MEDIAN CONDO VALUES (PRICE; $/SQ. FT.)
Alamitos Beach: $220,000; $265
East Side: $225,000; $269
90814: $247,450; $308
Long Beach: $234,950; $261

Good luck with that. The fact is, there is nothing this small selling for anywhere close to $345,000.

Plus, this flat probably rents out for $1,400 a month, but the monthly mortgage payment would be at least $600 more. That is an awfully big premium for "owning."

Lastly, the income requirement is $100,000/year! Yowza! This seller, who didn't even last two years before the monthly payments overwhelmed his pocketbook, is a PRIME example of the importance of income requirements.

The traditional calculation for "affordability" is 3x Gross Annual Income = Home Price (I use 3.5x income because there is a difference between what is recommended and what real estate-crazy Coastal Californians will spend).

The median income in this zip is $54,170, making this asking price nearly SIX TIMES the median! That's simply not sustainable. Obviously, given the sale.

The reason banks used to religiously implement the 3x income rule is because they knew that was the sweet spot where a person could afford their payment for 30 years, have enough disposable income to live, and most importantly, could likely survive a disruption in income.

But at 6x income, forget about it. A 5% pay cut, a leaky water heater, or a toasted clutch on the Corolla will all but guarantee distress, missed payments, and foreclosure. With so much money going toward debt service, there simply wouldn't be any room to cut.

Which leads us to where we are today. The seller is trying to unload for close to what he paid in the hopes of salvaging his credit rating and minimizing the losses. But it's a lost cause.

I think this shoebox would be lucky to garner $250,000. If by some miracle he had a $100,000 down payment, he loses that but escapes with his credit.

But if he only put down 5% (which is much more likely in '07), this will be a short sale or foreclosure in no time as he learns just how slim his odds are of getting $345k, and he'll walk away with obliterated credit and (at least) a $15,000 loss.

I'll bet when he bought just two years ago he never thought he'd be face-to-face with those two horrendous choices.