About $200k Haircut in Clairemont

[PerryChase]

This may be the price drop that some of you are waiting for in Clairemont. Granted, this house is a mess.

5111 JAMESTOWN RD, SD – Clairemont Mesa, CA 92117**
List Price: $389,900 – $389,900

Sales History
Date Price
08/13/2004 $575,000

Bedrooms: 3
Full Baths: 2
Partial Baths: 0
Square Feet: N/A
Lot Size: 7,700 Sq. Ft.
Year Built: 1959
Listing Date: 01/23/07
On Market: 2 days
Type: SFR
Status: ACTIVE
MLS #: 076006968

Description
Lender owned property needs extensive work. Great oportunity for the right buyer. Property was in the middle of a remodel which was not completed. This is a canyon lot with fabulous potential. Bring your contractors and investors.

http://sdlookup.com/PropertyDetails/tabid/53/forumid/1/view/topics/pid/A2FCAD9B/Default.aspx
http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?listing_num=076006968&mls=mls_sandiego&cKey=r7kv9jzj&source=SANDICOR&home_id=27662203&addedHome=true&cKey=5kvc03j9

[sdcellar]

Jamestown, how appropriate. You’d have to be drinking Kool-Aid to buy that dump. It may be a $200K haircut, but I’d say it’s still pretty shaggy and got a lot more trimming in store.

[barnaby33]

Having lived in Clairemont let me say, its still not a good deal, regardless of the amount of the price drop. Clairemont tracks the median pretty well and so while its a significant sticker price re-alignment its still to expensive for that area.

Second selling a fixer in this market is going to be tough.

Josh

[(former)FormerSanDiegan]

sdcellar –
That was Jonestown where Jim Jones and his folks drank the kool-aid. Jamestown was the first permanent settlement in the colonies (Virginia).

Anyway, even in good times, partially rehabbed houses are difficult to sell. The reason is that banks will not make traditional loans in cases where the home are not occupiable (e.g. if plumbing or heating is not working). Appraisers typically won’t appraise when incomplete, and if they do, they severely mark it down. a few years ago I had an appraiser refuse to complete the appraisal on my newly remodeled house because a single bathroom sink was not installed in the master bath (and it was even the second sink).

Cases like this deserve at least 100K off the going price. But this is a great example of what to expect in the coming year on the REO/foreclosure market from what I remember of the mid-90’s when I was looking. If enough of these come on the market and actually get sold, the published home sales numbers will appear worse than the reality (as opposed to today where they appear better than the reality).

[Bugs]

“Property was n the middle of a remodel that was not completed” can be interpreted as “interior is a shell; all new finishes are required.” Even if you skip the granite counters and travertine floors this could easily be a $75,000 cost to complete.

Appraisers can and do appraise properties in varying stages of completion on a regular basis. If an appraiser declined to finish an appraisal because of a missing bathroom sink it has nothing to do with whether or not they are capable of appraising the property that way. Almost certainly, the appraiser was aware that their client would not be able to fund the loan they were seeking for that property under their loan propram.

The most favorable loan terms go with loan programs that have specific requirements about borrower qualification and collateral quality. From there the terms get less favorable in relation to the wrinkles the deal presents. There are loans for properties in varying conditions, including pre-construction, but the terms for those programs are not as favorable as the programs that require an intact home.

With the unfinished bath, your otherwise perfect home became a square peg. The lender could have chosen to have the appraiser make the appraisal subject to the completion of the bath (or the remodel), but that almost always results in the lender retaining and controlling the funds used to complete the repairs. Another option would be to lend on the property in it’s “as is” condition, KNOWING that if they have to take the property back they’re going to need to complete the repairs themselves.

Either of those two alternatives will net less to the property owner, and the appraiser was probably aware or was possibly instructed that this would kill their client’s deal, so there was no point in completing the appraisal. The only way that loan would have been made under those terms would have been if the appraiser had lied about the condition of the home, which I’m sure is not what the property owner here would have wanted.

Anyways, back to the remodel in Clairemont Mesa, The financing of this property will likely involve a construction loan at those terms with the lender retaining fund control over the costs to complete, so the price probably reflects an anticipation that upon completion the home will be worth about $500k or more. It should not be interpreted as meaning prices for this area have dropped to the low $400k ranges.

[sdcellar]

FSD– Der… of course. Guess I was so pleased with the opportunity to make bad jokes, I didn’t take the time to get my history straight. Probably just the humor-center of my brain protecting its turf, lest the joke be squelched. Or at least that’s what I’m running with.

Interesting, your experience with an appraiser. I had a similar circumstance, but the appraiser went ahead and did it, just considered it a one-bathroom place. Of course, that brought the appraisal down, but I didn’t care as it was still high enough to qualify for the lower interest rate loan we were trying to get.

Still seemed like a pretty significant hit (even though it didn’t really matter). Certainly more than the cost to finish the work.

[Bugs]

There’s really no excuse for either of these appraisers to do what they did and just hearing about it pisses me off. These are the guys who are ruining my standing in the community as an appraiser. “Doesn’t matter” is a decision for the lender to make, not the appraiser.

This is an example of the problems appraisers face on a regular basis. What the appropriate terms for a loan are for a house with an incomplete 2nd bathroom is a lending decision, not an appraisal decision. But the reality is that many of these loan originators don’t want to go to the extra effort and work to make and justify that decision. They just want their deals to look clean so that their job is easier. Every appraiser has stories about lenders asking them to remove negative information about the subject property (lie by omission) from their appraisal reports because the offending information will “kill the deal”.

If it really was just a sink, the appraiser should have included the photo, estimated the cost to cure at less than $500 and say it would have no material affect on either value or marketability (which is 100% true) in the market. Then let the lender make their own decision and take responsibility for that decision. Instead, this lender was most likely pressuring the appraiser to lie for them so that their decision would be easier. I can virtually guarantee the appraiser didn’t just do this of their own accord.

It’s still no excuse, though.

[(former)FormerSanDiegan]

Bugs –

Thanks for the perspective regarding appraisal options. I think my case was a clear example of the appraiser taking the path of least resistance. The value would have been more than enough at that time (from my perspective)to make it subject to repair, but it was easier for them to suggest that they come back in a week to complete the appraisal. But perhaps the broker/lender needed to get it to 70% LTV in order to pocket a larger spread premium or something. Cleaner for all the parties, but a hassle for me worrying whether or not I would lose my lock (didn’t). In addition to the sink, there were a couple of contractors in the house at the time doing some clean-up work and the furniture was not all in place.

The main point on this Jonestown property is that the pool of buyers is further limited by limitations of available funds and extra hoops for a partially completed wreck.

[Bugs]

I just looked this property up and the story gets worse in some ways. Apparently, the bank is into the property for $487k, so even if they sell at $390k they’re taking a loss of $100k.

The property does back to a canyon, so it would have some view, but everything else looks rough. It’s not a shell – the pics in the MLS listing show what appears to be the original kitchen.

I looked up sales from the last 4 months and they range from a low of about $420k (another bank-owned foreclosure) to $550k for the fabulous remodel with canyon location and very nice landscaping. I reckon our subject would require a solid $75k+ in hard costs to equal this one. There are a bunch of sales in the $460k ranges, so with the canyon view let’s call it an even $500k if refurbished to average condition at minimal expense.

At $500k we’re talking about replacing the dated 1959 kitchen and bathrooms with very average quality Home Depot replacement fixtures and appliances. Some minor drywall and celing repairs (at least) and possibly a new roof or some exterior repair – one or the other but not both. All new paint and average quality flooring, and a little landscaping, particularly in the rear. You might be able to get all this done for $35k in hard costs, although $50k could easily happen. Let’s split the difference and call it $40k in hard costs.

So the cost to cure is $40k; the costs of sale at $500k would be $20k if at 4%; the property tax payment that’s due in April would be $3,450 because it would be based on the prior sale price at $575k; and figure another $400 for insurance. If the property was financed with a construction loan to do the remodel (non-owner occupancy) we’re looking at probably a $300k loan with construction loan terms, so that would equal $2,200/month even if it was interest-only; and we can figure at least 30 days to complete the remodel and another 5 months to sell and close the property – that’s 6 months, or $13,300 by my reckoning.

So without considering any profit, here’s what a potential flipper is looking at: $40k (rehab) + $20k (cost of sale) + $3.5k (Tax/Ins)+ $13.3k in holding costs. All that adds up to $76,800.

But wait, there’s more: We’re in a declining market and we could easily be looking at another 3% (~$15,000 from $500k) decline over the next 6 months; and the above costs include no contingency for unforeseen expenses (~$6,000 at 15% of costs) that commonly occur with remodels. So that’s another $21,000 in addition to the $76.8k. So now we’re at $97,000 in combined costs. Our investor has already sunk $90,000 in down payment, has spent 30 days physically putting the house together and has sweated the declining market for another 5 months before closing. You KNOW an investor isn’t going to go through all this without a payday, and considering all the risk and effort and costs and lack of liquidity of their own down payment, you KNOW that payday has to be at least $50k to make this worth their while.

Bottom line here is that if anyone buys this property for less than $350k they’re either taking some big risks or… well, there is no “or”.

[PerryChase]

Bugs, good post on that potential remodel. Sounds like you’re saying that an investor wouldn’t pay more than $350k for this house.

It’ll be interesting to watch and see what this house sells for. Can anyone with MLS access update us when that happens?

[bigtrouble]

Just food for thought:

Don’t forget, if the property is damaged or requires repairs you can get significant concessions from the seller (bank). Those concessions are often tracked independently by the REO departments, and thus they have greater latitude in that then they do in pricing.

[kicksavedave]

Man, if I had bought that dump for $575K, I’d walk away from it also. I wonder who/what put their signature on that contract in 04? Did they actually expect that toilet to eventually fetch $700K after it’s repairs?

[(former)FormerSanDiegan]

Nice work Bugs.
Pretty marginal, even at 350K. Now, if the identical situation were to come up in the Mount streets area of Clairemont, I’d consider it a reasonable deal.

[Bugs]

Jeez, the more I look into it the worse it gets.

Apparently the 2004 sale at $575k was not the result of an MLS listing so we’ll probably never know the circumstances of that sale. In looking at the sales data in the area there were a couple homes of similar size, age and canyon view that sold for about $570k, but both were in much better shape. Offhand (and without seeing anything in person) this sale price at $575k stands out. The properties that appear more similar are closer to the low $500k mark. If that’s correct we’d be starting off with an overpriced sale and $75k in the hole right from the beginning.

The only other listing in the MLS for this address was a listing in 06/2006, when it started at $550k and was subsequently reduced to $499k before coming off market 3 weeks ago. The seller was obviously trying to get out from under the loan without taking a short sale, but to no avail.

The listing itself includes the following blurb: “Plans and permits paid and approved for 1500 sf explansion w/as built appraisal valued at $1,050,000. Plan expands and adds 2nd story & balcony…” So we can chalk up some more costs to this seller (plans and approvals) that put them even farther behind.

I looked at the homes in the immediate neighborhood and I saw a house that’s a few houses down and has the same view. This house has a dynamite pool/spa deck and landscape package ($50k easy) plus a nice remodel, but no addition. It sold for $630,000 in 04/2006. This is the high sale for this portion of the neighborhood, and it shows that even if our subject property had been remodeled but not enlarged it wouldn’t have sold for more than about $600k tops and the $575k initial price was way too high.

The immediate neighborhood has homes built in the 1950s, most of which are in the 1025 sf ranges; and about 6 or 8 homes with additions, the largest being about 2200 sf. However, there is apparently a small pocket of some newer 1978yb homes in the 2200 -2400 sf ranges. I didn’t find any recent sales of those homes, but I’d be shocked if any of them were even close to $1,000,000, and I’m reasonably confident that our subject could not have legitimately appraised out at $1,050,000 even with a completed addition and maxed out landscaping. There might be an appraisal that says that, but it can’t be legit.

So we have an expansion/remodel that would have resulted in somewhat of a white elephant for the neighborhood (which is why nobody else ever went to those lengths). The cost wouldn’t have justified an $800k return, it’s as simple as that.

Bottom line is that this seller was either not getting good advice from their appraisers and realty agents, or (just as likely) was getting it but ignoring it. Their greed overrode their common sense and the market didn’t rescue them from their foolishness. Thirteen years ago this would have been a very familiar tale; I think that 3 years from now it will again be a very familiar tale.

[PerryChase]

$1 million for a remodeled house in Clairemont? Bay Park maybe.

Bugs, I think you’re right about this becoming a familiar tale a few years from now. I appreciate reading your professional comments on the real estate market. I’m not in the business but what you recount is exactly how I remember it.

[Author]

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