House depreciation vs Bank appreciation

Recently a friend a mine decided he wanted to sell his Moreno Valley home. He purchased his home for $90K in 1995 and listed for $399K in today's wild market.

His house has been on the market for more the 6 months and has been reduced to $369K. In light of his struggles to try to sell his home I told him that he can't be stubborn (I really meant greedy) in todays market place. It is flooded with homes and unless yours stands out you must make concessions.

I reminded him that his homes value is on the decline and that he had already maximized his return on investment. I also reminded him that national Banks currently have outstanding money market and CD yeilds that he can take advantage of (if he sells his home).

Lets disect his situation:

Option 1: Stay in the house

His house value will likely be on the decline and the market will continue to be saturated by homes. This is his worse option.

Option 2: Sell home for below market value

Lets say he sells it for 300K, that is still a handsome profit, plus CD rates are in the 6-6.25% range. He would be on pace to net about $220K from his home and collect about $1200 a month interest from his CD.

Home owners must realize that even though your home has tripled in value you are only "rich on paper" until you actually sell (good luck in todays market) and by making extraordinary concessions will place yourself in a good position with banking yields accelerating.

A bird in the hand is better than two in a bush.

What constitutes a flip?

Many bloggers have emailed me arguing that a flip is constituted when you hold a house for less than a year. However, many flippers hold on to their house for 2 years to take advantage of the tax exemption period on potential gains.

Take for instance 3605 BONITA RANCH CT, BONITA. This is a good looking home that was initially purchased on 2/3/2004 for $679,000. This flipper held on this property for for 2 years and listed it on the market on 3/16/2006 for $1,150,000. 215 days later and the price has been reduced by a measly $50,000.

OK, you are asking yourself what make this house any different from any other 2-year flip. Well, a picture says a thousand words, just look at the 2-year old beautifully landscaped backyard. Yeah, there is no such thing as a 2-year flip.

2001 versus 2006: Tale of two buyers

1536 BOXWOOD CT, SAN MARCOS

This home was first purchased in 2001 for $320K, and is currently listed on the market for $635,000-$665,000. Lets break down the buyer profiles in 2001 and 2006.

2001 Scenario:

Price:$320,000

Down payment (assume 20% to eliminate PMI): $64,000

Interest rate: 6.5%

Mortgage type: 30 year fixed

Monthly mortgage payment: $1620

Total loan payoff over 30 years is $580,000

2006 Scenario:

Price: $650,000

Down payment (assume 20% to eliminate PMI): $130,000
Interest rate: 6.5%
Mortgage type: 30 year fixed
Monthly mortgage payment: $3290

Total loan payoff over 30 years is $1,200,000

So what did we learn? If you financed your loan with a reputable bank they would have made sure your monthly payment did not exceed 35% of your monthly take home pay.

That would mean the 2001 buyer's yearly salary is about $58,000. The 2006 buyer's salary should be about $113,000.

This means your salary would have to double to afford the house in 2006, if you passed on this house in 2001.

Sure there are my exotic loans available today to make your monthly payment appear feasible however, over 30 years you're screwing yourself and your family's future.

My Flipping Investment

3552 OTTAWA AVE, CLAIREMONT

This beautiful 3500 sq ft, 4 Br, 4 Ba home was built in July 2006. It has all the modern conveniences and entails a luxurious lifestyle.

This home was listed on the market on 9/19/2006 (27 days ago) for $1,150,000. Well you may think it may be a bit overpriced and darn it, you want to know why?

Lets go back to 2005 when this mighty home was a mere shadow of itself at 806 sq ft, 2Br and 1 Ba.

Yes, that's right the investor/flipper purchased the home in June 2005 for $475K and repackaged it into this mini-mansion in a year.

I am not a homebuilder, but many of my friends state that building a home generally costs between $150-$200 sq ft depending on the quality and workmanship. At 3500 sq ft you can assume that he may have spent anywhere from $525-700K to rebuild the home.

A purchase price of $475K plus the bulding costs ($525-700K) puts us at $1,000,000-1,175,000.

It looks as if this investor may have not thought this one through.

Am I off here? Any builders out there?

To Flip or not to flip? That is the question.

513 Beach St in Encinitas was purchased in April 2005 for $632,670. It was listed back on the market on 10/6/2006 for $690,000.

According to Data Quick the median price of a home in this area from year to year is -24%. If that is the case the house should sell for $524K.

I think $524K is still expensive for a 1720 sq ft home ($304 psf) with $250 /per month HOA/MR. I would put this home on my list at $375-425K.

As it stands today, with a full offer, the seller would break even or barely come out ahead. However, this is simply another example of "greed gone wild".

To the eventual buyer of this home, I have one question for you. Do you think this home will increase or decrease in value in the next 5 years?

The answer is already in front of you.

Screw the house, lets flip land.

This 0.69 acre parcel on HUBBARD PL in Escondido was purchased on 10/24/2004 for $111,869 . The parcel was listed on the market on 9/12/2006 (29 days ago) for $249,000.

Here is what the realtors had to say:

"Steep lot yet grading plans where drawn for a house pad verses grading for a split level home. Grading plans are available for viewing with the owner/agent. "

So no real improvements have been made on this lot yet it has doubled in value. Plus, the bulk of the costs are yet to come.

Is the cost due to a housing shortage? Land shortage? I can't explain it.

San Diego County Foreclosure Tracker

All San Diego County (2815)

North County Coastal (353 listings)
Cardiff by the Sea (5 listings)
Carlsbad (62 listings)
Carmel Valley (28 listings)
Del Mar (15 listings)
Encinitas (20 listings)
Oceanside (212 listings)
Rancho Santa Fe (4 listings)
Santa Luz (2 listings)
Solana Beach (7 listings)

Central Coastal (106 listings)
Bay Park (15 listings)
Coronado (6 listings)
La Jolla (22 listings)
Ocean Beach (11 listings)
Pacific Beach (25 listings)
Point Loma (11 listings)
University City (16 listings)

Central Inland (580 listings)
Clairemont (33 listings)
College Area (44 listings)
Del Cerro (18 listings)
Downtown San Diego (25 listings)
East San Diego (44 listings)
Encanto (116 listings)
Linda Vista (27 listings)
Logan Heights (60 listings)
Mission Hills (25 listings)
Mission Valley (44 listings)
Normal Heights (25 listings)
North Park (35 listings)
San Carlos (28 listings)
San Diego (34 listings)
Sorrento Valley (5 listings)
Tierrasanta (17 listings)

North County Inland (685 listings)
Bonsall (5 listings)
Escondido (141 listings)
Fallbrook (52 listings)
Julian (7 listings)
Mira Mesa (61 listings)
Pala (2 listings)
Pauma Valley (2 listings)
Poway (30 listings)
Ramona (42 listings)
Rancho Bernardo (60 listings)
Rancho Penasquitos (37 listings)
San Marcos (77 listings)
Scripps Ranch (23 listings)
Valley Center (28 listings)
Vista (115 listings)
Warner Springs (3 listings)

East County (510 listings)
Alpine (13 listings)
Boulevard (3 listings)
Campo (9 listings)
Descanso (2 listings)
El Cajon (161 listings)
Jacumba (2 listings)
Jamul (14 listings)
La Mesa (47 listings)
Lakeside (53 listings)
Lemon Grove (43 listings)
Pine Valley (3 listings)
Potrero (1 listing)
Santee (47 listings)
Spring Valley (112 listings)

South County (581 listings)
Bonita (25 listings)
Chula Vista (334 listings)
Imperial Beach (11 listings)
National City (56 listings)
Otay Mesa (73 listings)
Paradise Hills (54 listings)
San Ysidro (28 listings)

How can you justify this?

I am a believer in supply and demand and in sensible economics however it is mind boggling to me to see how sellers price their home after 5 or 6 years of "ownership" . Take 6632 MAYCREST LANE in SORRENTO. The seller purchased this home on 3/30/2000 for $414,500 and listed on the market on 5/1/2006 for $1,150,000.

Is this a flip? That is irrelavent, was is important here is do you believe this home has legitamately tripled in value in the last 6 years. Has your salary tripled in 6 years, has the population tripled? Is there a housing shortage? The answers to the above is certainly NO. So how do you justify it?

The answer: you can't.