Coronado Disconnect

825 Coronado Dr.

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Asking Price $980,000 ::: Sq-ft 1,914
Purchased Price $733,000 ::: Lot Size 7,344
Purchased Date 07/05/2005 ::: Beds 4
Days on Redfin 17 ::: Baths 3
$/Sq-ft $512 ::: Year Built 1948
20% Downpayment $196,000 ::: Area Peacock Village
Income Required $245,000/yr ::: Type SFR
Est. Payment* $4,955/month ::: MLS# A08031233

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

ARCADIA SCHOOL DISTRICT. FACING SOUTH. GORGEOUS HOME LOCATED ON A GREAT STREET IN THE PEACOCK VILLAGE, PRESTIGIOUS AREA, NICE NEIGHBORHOOD. THE HOUSE IS ELEVATED ABOVE THE STREET LEVEL AND HAS GOOD CURB APPEAL. UPGRADED, PERMITTED ADDITION AND PERMITTED PATIO WERE ALL COMPLETED IN 2007, NEW ROOF, NEW KITCHEN CABINETS, COUNTER AND APPLIANCES. .. LOTS OF MORE TO SEE. LIVING AREA IS 1914 S. F. , SPACIOUS, 4 BED RMS, 3 FULL BATH RMS, 2 STES. , GREAT OPEN FLOOR PLAN, VERY BRIGHT & AIRY, REAL HARDWOOD FLOOR THOUGH OUT. CENTRAL AIR. DETACHED 2 CAR GARAGE, PLENTY DRIVEWAY PARKINGS. EXCELLENT LOCATION, EASY ACCESS TO 210 FWY.

Here we go again with the ALL CAPS SCREAM AT YOUR POTENTIAL BUYERS signature realtor-speak. There has been much discussion among some of our readers lately regarding the realtor’s commission – who pays, how much to pay and why pay at all? Realtors are suppose to help their clients buy or sell a home and act in their best interest, but too often do we see the agents act in their own interest instead.

I’m always leery when interior pictures are missing because common sense tells me if it looks good, the seller would want to show it off. No photos of the inside usually equates to a bad, probably outdated interior. This particular realtor only put up one exterior picture of this property despite the recent renovations. That’s a shame because potential buyers won’t be able to see the seller’s new permitted additions, kitchen and patio.

Purchase Price $733,000
Purchase Date 07/05/2005
1st Loan $533,000
Downpayment $200,000

Listing Price History
March 2nd, 2008 $948,000
March 3rd, 2008 $980,000 (+$32k)

Yesterday we profiled a wishful seller who wanted to make 25% return on investment without doing a single thing to the property. That property, while expensive, was going for $369/sqft. Today we have yet another wishful seller who’s looking for a whopping $512/sqft. On top of that, they actually raised the asking price a day after the house was put on the market.

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This property was purchased in the summer of 2005 for $733,000 and was put on the market with some additions and upgrades for a $215,000 premium after two and a half years. That sounds a bit steep and unless they’ve been living with their head in the sand for the past year, they know housing has taken a turn for the worse and isn’t going to rebound anytime soon. Apparently these folks have been living under a rock because they decided to increase the asking price by another $32,000 to $980,000 in this dying RE market.

Other 4/3 single family homes in Arcadia are renting for about $2750, but this home is in the prestigious Peacock Village so let’s say that commands a 20% premium – putting it at $3300/month rent. Applying that to a gross-rent-multiplier of 180 would place this property’s value at $594k or 40% lower than the current asking price. Even if you gave it a higher GRM of say 200 or 220, it would still only be worth $660k or $726k, respectively. Best case scenario, it’s overpriced by about a quarter of a million dollars. Yikes!

This seller and their realtor are clearly at a disconnect with the market and raising the asking price certainly isn’t a good way to get out of this bind. Got any advice for these folks?

24 thoughts on “Coronado Disconnect”

  1. My advice would be to rent it, and suck it up for a few years. Refinance, rent, and take a hit to the tune of about 1500 bucks per month when you include all carrying costs (conservatively). They are going nowhere fast with that price. 1900 sq. ft.! Jeez.

    * Note the new BMW parked in the driveway.

  2. If this purchase was intended to be a flip then they probably used an ARM that would reset to a significantly higher rate. A 3-yr ARM would reset in a few months and can easily double their monthly payments. If they used a conventional 30yr fixed mortgage @ 5%, their payments would be a $2861 plus whatever they financed for the upgrades. I consider $1500/month negative cash flow as heavy bleeding.

    They bought near the height of the boom and would need to ride it out for more than a few years. It would take a few years just to hit bottom and unless we have another bubble, they probably would not see peak bubble prices for another decade.

    I say stick it out, live in it and forget about selling for profit. If they used a conventional loan back in 2005, their monthly payments aren’t that outrageous. If they used an ARM and won’t be able to afford the payments after the reset then they should cut their losses and get out NOW. Price it below the comps in the neighborhood and hope to find a knife catcher. If they wait a few months before lowering the price, they would be looking at even lower comps.

    They could always sell that 7series bimmer to offset their loses.

  3. Sell and write it off as fortunate they didn’t lose more. Renting is slow suicide. They’ll eat rent for a decade or more and depreciate through renter wear/tear. Add in a decade’s worth of renter headaches the $200k write-off is a bargain for a bad decision of such magnitude.

    NOTE: I’ve done both, renting out and selling at a loss during the last downturn. I was much happier with the sell at a loss scenario–the toll in emotion and toil of the rental sucked.

    Mike S.

  4. Arcadia vs South Pasadena

    Anybody have any thoughts on living in Arcadia vs S Pasadena? My wife and I are currently debating.

    She prefers S. Pas b/c the neighborhoods and houses are ‘cuter’ in her eye, and it’s closer to work. Plus, her dad has always been saying how great the city is since she was a kid. For me, it just feels too old and claustrophobic, like Santa Monica. (I do like SM, but just not living there)

    I liked the pics SBG took of Peacock Village, Nice wide streets, trees, and yards.

    It seems the High schools are comparable.

    Our other main concern is materialism and how it would affect our unborn children. I’ve heard Arcadians tend to be more gaudy and showy (compared to San Marino for ex). But i’ve also heard first-hand that it’s actually cool to be in band in Arcadia HS, which made me smile…

  5. Mike,
    How much profit would you need to make renting worth it?

    Did you live close by to your rentals or were you managing from long distance?

  6. Yes – it could definitely be that bad, SBG. Or, they could have rolled a substantial amount into the down and be looking at a 6% interest rate and be paying far less, based on those two little nuggets of info. You just never know until you run title and see what is really going on.

    I know I am losing approx. $600/mo. on one of my rentals BUT 1) I am renting to a family member and 2) I got the house for a steal in 2003 with a great 30 year rate. My suckitup loss there includes prop tax, insurance, gardener, maintenance, and the ever lovin’ mortgage. I think that 2005 had some fairly low 5 and 10 year ARMs – around 5.75% even for non-owner-occupied, if I remember correctly.

    Since I sold my primary residence, that little bit of sucking wind helps with taxes. Not much, though. I wouldn’t recommend it as a great tax strategy.

    Hard to raise the rent on family – but – it might happen.

  7. I’ve never been a landlord so I wouldn’t know, but I have heard the horror stories and headaches. Mike bring up a good point about the emotional turmoil. In some cases, it’s better to just rip the band-aid off once and for all instead of slowly peeling it away.

  8. South Pasadena has more of the San Marino feel to it. Just take a drive through both cities and see firsthand. It sure beats relying on my pictures.

    I don’t think you can get away from the materialism and it won’t make a difference whether you live in SP, SM or Arcadia. It’s in our media, our culture and our kinds. You sound like you have a grip on things so as long as you raise your kids right, you can’t worry about that too much. As for the ginormous AHS band – it’s bigger than my entire graduating class haha

  9. ky,

    I know several people who went to Arcadia High and they were all band members. It definitely added to their “cool factor”. 🙂

    I would consider South Pasadena a comparable city when it comes to certain neighborhoods. And just like Arcadia, it has its share of overpriced real estate (no-less desirable though). The great amenities, schools, parks and beautiful homes are shared by both cities.

    Although a commute from Arcadia to Pasadena is no big deal, it’s a different story if your wife is working in downtown LA or anywhere West of South Pas. Since I take it you guys plans to have children, the closer you guys are to home, the better!

    As for materialism, the fact that you’re already considering such issues gives your future children a big advantage. I went to a not-so-great high school in the San Gabriel Valley and materialism still existed in full swing. Although it’s not 100% effective, a healthy family environment, good communication and involved parenting are great steps in keeping materialism under control.

    Maybe we should start a South Pasadena Housing Blog to help you decide.

  10. This is a joke, right? Even the Redfin comps suggest the price should be south of $700K. It seems like they’re banking on “prestigious area” and “nice neighborhood” and not worrying enough about “probably crap house with high price.” They definitely are not getting any value out of their realtor.

    Do you think they ATM’d their house for the 7-series? Because if they think having a HELOC justifies their price…….

  11. It really doesn’t matter what they think because the market will react accordingly. A lot of ppl pulled HELOCs to fund their lifestyle during the boom so I wouldn’t be surprised if they did pull one for that shiny bimmer, although I can’t say for sure.

  12. On Rents. I use 20% over P&I when using a good management company with a fixed 30yr, non-PMI’ed note. I stay away fm exotic (toxic?) loans since I need the positive cash flow after a year or two to avoid hurting future house purchases. That figure seems to hold well as a planning figure given you substitute interest costs with maintenance costs over time. Look at the IRS’s depreciation schedule, it’s actually decent guide on outyear maintenance (assuming you don’t defer it). There’s fancier formula’s like 110x-to-120x rent:purchase and alike, but the above works for me.

    What most folks fail miserably at opportunity cost. Paying the bank several hundred bucks a month for the ‘priviledge’ of someone else living in your house may hurt, but it really cramps your agility when opportunities appear. It also cramps your next purchase NOW WE ARE BACK TO MORE RATIONAL LENDING STANDARDS. Varies by lender but they whack rental income by 20%-to-35% when figuring it as income on a loan app. If you’re $500/month under rent that drops your qualifying monthly carry by $600-to-$675, or about -$110k at today’s rates.

    Distance seems exogenous to the pain factor. I lived both close and afar though I was back in the area quarterly on business. The advantage of living afar was you don’t think about it as much. The advantage of living close is you do more maintenance yourself. Since tenants are ALWAYS demanding something they want you to pay for, the costs somewhat balanced out since you had less tenant interaction fm afar.

    NOTE: Tenants wanting things means they care–it isn’t a slight towards them. I think the world of most tenants I’ve dealt with, but the tension is an integral attribute of the renter-owner relationship.

    Jez… spent way too much time on this. Hope it helps.

    MLS

  13. KY –

    I agree with everything said here about the materialism thing. It’s everywhere – I was just having a conversation about it with a coworker who lives in the south bay area – the not so nice part of it and it exists in the worst of worse areas.

    We’re figuring out as we go along, the right life teaching/experience formula for our kids to learn how to manage money, the value of it, and to basically get periodic reminders of how blessed they really are. We know there isn’t a class or a quick fix for it, but constant life lessons. I let my child stay up a little late to watch the first part of Oprah’s Big Give last Sunday, they featured two very poor schools – one of which didn’t have playground structures at all. My child is young, so we didn’t have an indepth conversation about it, but I could see the internal struggles going on and I hope to revisit that one day. You know, plant the seeds now to open the doors of conversation in the future.

    On the South Pas/Arcadia topic – it really boils down to preference and needs. Great schools in both.

    S. Pas has much more of a small town feel, population of ~25k in 3.44 sq.mi., 3 elementary, 1 middle, 1 high school. Also, you may want to research the 710 freeway extension issue, I’m not up to speed on what is going on there.

    Arcadia population ~56k, 11.1 sq.mi. (less dense than S.Pas), 6 elem, 3 middle, 1 high school. We’ve been very happy with the schools and daycare which is of great concern, being a working parent.

    Anyway, I’m with your wife on this one, buy in S.Pas. I’d hate to have to compete with you on a house and drive up/perpetuate the high prices in Arcadia 😉

  14. i’m sure you’re joking about the S. Pas blog, but if you guys are thinking of expanding your content in the future, that’d be awesome!

  15. Hey Mike,

    So when you’re scouting around for rental property, you just try to see if you can rent it for 20% above P/I? What other numbers do you look at in your initial screening process? How much does management comp. cost?

  16. hey capbreeze,

    Thanks for the info. i grew up in Minnesota, and never had to really deal with keepin up with the Jones’. Hopefully my MN simpleness will rub off on my kids. My wife grew up in LA, and she’s changed a lot already. She actually doesn’t really enjoy shopping anymore!

    I’m thinking of buying in late 2010. If you stay outta my way, i’ll stay outta yours 🙂

  17. Good management is 6 1/2% to 8% with a reasonable fee (~$100) and expenses when tenants turnover. Seems like all the competent managers settle in that range as a fair return for their time/effort. Oddly enough, I found those charging less AND charging more were lousy property managers. In fact, the worst I ever dealt with was stiffing me for 10%.

    Like any heuristic, mileage may vary but I’ve found it a good rule of thumb for SoCal. Property condition matters obviously. No surprise this heuristic reflects how absurdly overpriced SoCal is. I stuck my money in commodities for the year and won’t bother looking until next winter.

    One final note. Money isn’t everything–I actually need to like a property. Amazes me people put up with owning crapshacks for the cash when they can clear about the same on something decent. Decent house = decent renters. Owning an embarrassment only makes sense for commercial property.

  18. Actually I know a little bit info on this house. The owners are professional RE investors with over 20+ properties in Arcadia alone. Yes, those Rich Taiwaness can really hold up the Arcadia house values. $533K loan with 5% interest only generates ~$2500 mortgage. The house can be easily rented out for $3200. So the worst is break even if you lump in the property tax, etc. I think they are not really serious in selling this property at all. My current market value estimation on this property is about $830K.

    BTW, I notice that the same listing agent is also selling the 310 South Golden West, also in the peacock village area. Again, the price is abnormal high.

  19. They’re obviously not serious at that price. But I don’t think these people owning 20 properties is going to prop up much of anything if no one is willing to buy.

  20. Neat you know the owners. Hope they are very rich in deed. The Japanese weren’t rich enough in the early 90’s and doubt these Taiwanese “pro’s” fare better.

    Don’t know where you get they break even. Just given your figure they are easily upside down $300–to-$600 per month given insurance ($90/m), tax ($750/m), management fee ($200/m), biennial tenant turnover (amortized $125/m), incidentals (we’ll call it “0”) maintenance (amortized [generously] at $200/m).

    Multiply it by 20, that’s $6k-to-$12k of carry a month and I suspect it’s toward the upper end of that figure.

    Consider price depreciation over the next decade with inflation and expect they’ll start losing their empire around 2012.

    MLS

  21. I guess we’ll all see if the rich Taiwanese really can hold up Arcadia house values. Being able to do so is one thing, but actually willing to jump into a struggling RE market is another. Personally, I don’t see it happening. Only time will tell.

    If they are “professional RE investors” then they should be serious about selling their property because the market isn’t about to turn around anytime soon.

  22. Agreed.

    It doesn’t matter who these “pros” are…Taiwanese, Japanese, Martians…doesn’t matter. A risky investment with a bad ROI and negative cash flow is a bad investment. Especially one that’s expected to continue to deteriorate over the next few years.

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