415 W. Palm Dr.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Today marks the 3rd day of our Empty McMansion series and this one just came on the market last week. Compared to the last two properties that needed over $500k for 20% downpayment, this one only requires $400k. Whoopie, I’m sure a lot of people out there have $400k cash just lying around in case overvalued property comes on sale.

$1,999,000 (asking price) – 6% commission – $765,000 (purchase price) -$1,006,875 (construction costs @ $225.sqft) – $61,200 (carrying cost @ $3400/month x 18 months) = approx. $46k profit

Purchase Price $765,000
Purchase Date 08/01/2006
1st Loan $535,000
Downpayment $230,000

All that work and all that stress for $46,000? Doesn’t sound logical to me, but then again I didn’t drink any of that toxic kool-aid either. This seller bought the property at the peak of the bubble in summer of 2006. It probably took them months to get permits and funding to build the property for sale today and nearly as long to construct it. For almost $2MM asking price, $46k is not a lot of negotiating room. It would take a year of carrying costs to wipe out $46k, but only a 3% price reduction to start put their books in the red.

How much do you think they spent on that “unique venetian plastered fireplace” or the “expensive Italian porcelain tile?” I don’t know how much, but I do know they’ll be regretting it soon enough.

“Unlike other new homes, you will notice that the interior was professional designed…” It looks the same to me. It has that track-home look and doesn’t look a bit custom to me. Heck it doesn’t even have undermounted sinks in what looks like the master bath. For $2MM you’d think it’ll at least come with some nice fixtures.

Its neighboring house is also on sale. Apparently, they’ve drank the kool-aid too because I can’t imagine why anyone would pay $1MM for a 58 year old dump. Yes, if you purchase this $2MM new construction, don’t expect your neighbor’s house to look that great. This listing is currently at $447/sqft. In this slowing economy and dying RE market, I can’t help but wonder how many months and price reductions will it take to see this property.

1103 S. 8th Ave.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

“Brand New Luxurious Estate at Prestigious location in Tree Street.”

Riiight. Since when did 8th Street become a prestigious location? The seller would certainly want potential buyers to think that it’s prestigious when in fact it’s just a 6 blocks away from the Monrovia shooting last month. Let’s see, another house requiring half a million dollars downpayment and still over $14,000/month in mortgage payments for basically an overbuilt McMansion doesn’t sound appealing to me.

Assuming the same $225/sqft in construction costs as we did in yesterday’s profile, this house would have cost our specuvestors $225/sqft x 7478 = approx $1.683MM to build.

$2.88MM (asking price) – 6% commission – $750,000 (purchase price) – $1.683MM (construction costs) – $174,800 (carrying cost at $3800/month x 46 months) = just under $100k profit

Purchase Price $750,000
Purchase Date 04/19/2004
1st Loan $616,000
2nd Loan $77,000
Downpayment $57,000

Listing History
11/7/2007 $2,980,000
2/16/2008 $2,880,000

The mailing address for this property’s seller is on the same street as that from the property profiled yesterday. Do flippers congregate and live in clusters? Lately I’ve been seeing a lot of properties on the market where the seller’s mailing address is just a few blocks away right here in Arcadia. It makes me wonder if they decided to buy and flip property on a whim during a stroll in the neighborhood. The number of McMansions in certain parts of the city is overwhelming and with the reckless market psychology we’ve had in the past few years, it’s understandable how so many people got caught up in the storm.

The very act of flipping is going to cause some major problems because flipped properties sit empty. It generates no income yet have reoccurring monthly costs until the property is sold. Every month it sits on the market casts a larger financial anvil on the investors. This particular home has been on the market for almost 4 months with just one 3% price reduction.

If you made $720k/yr, is this a house you’d be willing to pay $14k/month to live in? In an area just a few blocks from recent gang-related shootings? I think not. With the higher interest rates and tighter lending standards, most people won’t qualify for a loan this size. The ones who do have documented income to qualify and enough cash for a $500k downpayment will probably not want to live here.

Things aren’t looking good for these sellers.

177 W. Norman Ave.

*Estimated monthly payment assume 20% down, 30-yr fixed @ 6.50%

Yesterday’s post suggested the possibility that the SGV market will experience an increase in inventory of brand new McMansions over the coming months. I will proceed to document them as they appear on the market. Today we have a new listing for a mansion with an asking price of $3.08MM. Assuming they really did use good materials, it would’ve cost them approx $225/sqft x 6800 sqft = $1.53MM to build the house.

$3.08MM (asking price) – 6% commission – $1.15MM (purchase price) – $1.53MM (construction cost) – $88k (carrying costs at $4k/month for 22 months) = approx $127,000 profit.

Purchase Price $1,150,000
Downpayment $517,500
Mortgage $632,500

This is an example of specuvestors who came in too late in the game. The property was purchased at the peak of the bubble in Q2 of 2006 and torn down to rebuild this mansion. Since the property wasn’t completed until 2008, construction didn’t probably didn’t begin until 2007 which means it took a long time to obtain building permits.

The seller (who’s mailing address is just a few blocks away) put a hefty half a million downpayment so that’s good news for the bank, but not so good news for the flipper. Unless he got a substantially lower $/sqft construction price from the contractor, he doesn’t have a lot of wiggle room before the $4000/month carrying cost, negotiations and/or price reductions start to eat away at the earnings. Just 4 or 5% off that $3.08MM asking price and it will cut into their downpayment. Do you think these flippers are sweating bullets yet?

Who will pay $3.08MM for a house next to the storm drain in this dying RE market? Who has the cash funds for that extremely large downpayment? Who has the documented income to qualify for a loan of this magnitude? How long will this property sit on the market before a transaction is made? How long will the sellers hold out before reducing the asking price? How many reductions will it take? Only time will tell.