El Cajon Condo Blowout! (-27% in 8 months)

[temeculaguy]

You will get there, the pendulum always swings a little too far the other way for a short time so be patient, set your target price and stick to it. The rent multiplier will create a floor and a 1k a month rental will probably never go below 100k and probably will only spend a few months much below 150k before an investor or a renter decides it is close to a wash for them (depending on hoa/taxes being reasonable). Despite the vandals and the crime the numbers make too much sense at those levels. What I can say for sure is that they will not return to those sub 100k levels and I think those sub 40k prices may be misleading as they sometimes are fractional numbers of a multi-unit sale or a transfer between corporate divisions or relatives in order to keep the property taxes low. I could be wrong but even in the 1980’s it was hard to find a 2br for under 500/mo in the seediest areas making those a steal. Just think in terms of others, if you rent for 1,000 and can own for 1200 to 1400, after the tax credit it get real close to even and the average joe buys. If the purchase payment is double the rent and the opportunity of huge profits is no longer a near term reality the average joe continues to rent. If you see 130-150 ranges this winter, jump on it. Using this rent multiplier a poway or 4-s home that rents for 2k a month would be priced at 300k and even the most bearish would jump on that train.

[temeculaguy]

You will get there, the pendulum always swings a little too far the other way for a short time so be patient, set your target price and stick to it. The rent multiplier will create a floor and a 1k a month rental will probably never go below 100k and probably will only spend a few months much below 150k before an investor or a renter decides it is close to a wash for them (depending on hoa/taxes being reasonable). Despite the vandals and the crime the numbers make too much sense at those levels. What I can say for sure is that they will not return to those sub 100k levels and I think those sub 40k prices may be misleading as they sometimes are fractional numbers of a multi-unit sale or a transfer between corporate divisions or relatives in order to keep the property taxes low. I could be wrong but even in the 1980’s it was hard to find a 2br for under 500/mo in the seediest areas making those a steal. Just think in terms of others, if you rent for 1,000 and can own for 1200 to 1400, after the tax credit it get real close to even and the average joe buys. If the purchase payment is double the rent and the opportunity of huge profits is no longer a near term reality the average joe continues to rent. If you see 130-150 ranges this winter, jump on it. Using this rent multiplier a poway or 4-s home that rents for 2k a month would be priced at 300k and even the most bearish would jump on that train.

[4plexowner]

temeculaguy – remember that interest rates may go up as we move further into this real estate correction

you are saying that an El Cajon 1/1 condo won’t go below $150K because of the rent-to-own ratio

your analysis is correct (with exception of temporary overshoot below trend) BUT you aren’t considering how higher interest rates could change the scenario

here are monthly payments on a $150K, 30 yr fixed mortgage at different interest rates:
7% $998
12% $1543
15% $1897
18% $2260

at current interest rates and rents, a floor value of $150K makes sense

if mortgage interest rates rise to just 12%, we have to lower the condo value to $100K to make the rent vs own numbers work ($100K mortgage at 12% gives $1028/mo payment)

at 18% interest rates, which were reached in the late 1970’s – early 1980’s, the condo is worth $70K ($1055/mo payment)

[4plexowner]

temeculaguy – remember that interest rates may go up as we move further into this real estate correction

you are saying that an El Cajon 1/1 condo won’t go below $150K because of the rent-to-own ratio

your analysis is correct (with exception of temporary overshoot below trend) BUT you aren’t considering how higher interest rates could change the scenario

here are monthly payments on a $150K, 30 yr fixed mortgage at different interest rates:
7% $998
12% $1543
15% $1897
18% $2260

at current interest rates and rents, a floor value of $150K makes sense

if mortgage interest rates rise to just 12%, we have to lower the condo value to $100K to make the rent vs own numbers work ($100K mortgage at 12% gives $1028/mo payment)

at 18% interest rates, which were reached in the late 1970’s – early 1980’s, the condo is worth $70K ($1055/mo payment)

[garysears]

Thanks for the comments guys. Whenever I do buy I won’t be interested at all unless my total payment, including HOA and insurance and taxes is covered by the market monthly rent. I am not entirely ready to jump on a 30 year commitment without an out and I’m not willing to presume on my future ability to pay S.D. rents long term. I have no interest in not having my head firmly above water. The only question is how much of a down payment will be required to make the numbers work for me. At least I think I have some time to save now. For me this current downturn trend is a relief and I’m not in a hurry for it to end just yet.

[garysears]

Thanks for the comments guys. Whenever I do buy I won’t be interested at all unless my total payment, including HOA and insurance and taxes is covered by the market monthly rent. I am not entirely ready to jump on a 30 year commitment without an out and I’m not willing to presume on my future ability to pay S.D. rents long term. I have no interest in not having my head firmly above water. The only question is how much of a down payment will be required to make the numbers work for me. At least I think I have some time to save now. For me this current downturn trend is a relief and I’m not in a hurry for it to end just yet.

[temeculaguy]

4plex, you are right I did not calculate interest rate fluctuation nor did I even look at what a natural disaster or serious loss in employment would do to rents, I was simplifying it. I was actually thinking the 2/2 had a floor price of 130-150, not the 1/1.

Grey, don’t think you have ten years to save and it may be too optimistic to think you will be paying under market rent to buy from day one, those opportunities are rare. Just like the up cycle didn’t last forever despite popular opinion, nor will the down cycle. The overshoot time period can be a year or less so you need to be ready now and you need to be prepared to pay more than market rent for a few years in order to buy. My rule of thumb is that with 20% down and all closing costs paid upfront (not rolled in) it should be equal to market rent so the overage is the loss of interest on your downpayment. Another goal is to be paying 25% under market rent within seven years so if you choose to convert it to a rental there is enough cusion for it to always be cost nuetral or positive since you need the extra to cover repairs, vacancy, etc.

Don’t just hope it goes down, get ready for 12 months from now by deciding what you have saved and how much you need to save to meet a 20% on 150k=30k, you have 12-18 months to save a total of 30k or you may miss this one.

[temeculaguy]

4plex, you are right I did not calculate interest rate fluctuation nor did I even look at what a natural disaster or serious loss in employment would do to rents, I was simplifying it. I was actually thinking the 2/2 had a floor price of 130-150, not the 1/1.

Grey, don’t think you have ten years to save and it may be too optimistic to think you will be paying under market rent to buy from day one, those opportunities are rare. Just like the up cycle didn’t last forever despite popular opinion, nor will the down cycle. The overshoot time period can be a year or less so you need to be ready now and you need to be prepared to pay more than market rent for a few years in order to buy. My rule of thumb is that with 20% down and all closing costs paid upfront (not rolled in) it should be equal to market rent so the overage is the loss of interest on your downpayment. Another goal is to be paying 25% under market rent within seven years so if you choose to convert it to a rental there is enough cusion for it to always be cost nuetral or positive since you need the extra to cover repairs, vacancy, etc.

Don’t just hope it goes down, get ready for 12 months from now by deciding what you have saved and how much you need to save to meet a 20% on 150k=30k, you have 12-18 months to save a total of 30k or you may miss this one.

[garysears]

Out of morbid curiosity I made an “offer” on 765 E. Bradley Ave #41. (MLS #078015909) It is a REO unit that has been on the market for 5 months. The original asking price was 230K and was reduced to 175K at some point. I just wanted to see what kind of reaction I might get (or none at all) if I were to offer what I really want to pay. I am curious to see if I get a reply. If so, I think it means there is absolute desperation setting in on the part of the banks. Because I want a 50% discount on the original asking price.

By the way, regarding the crime and vandalism in this particular part of El Cajon, this morning when I was walking out to my car on the street to go to work I saw that 3 or 4 cars had had their tires slashed overnight. They were parked right on the street in front of the unit where everyone has to park. And there was also at least one attempted car jacking of a resident here who parked on Bradley Ave. Gangs are sometimes just hanging out on the steps of the complex. Hooligans seem to rove pretty freely around here at night.

Anyway, here is the text of my email offer in case it is entertaining. I know it is naive and ridiculous, but I am doing it for my own reasons and an informal test of true market conditions. If they actually make a counter offer and try to split the difference it will give me great hope for a future opportunity somewhere I actually want to live. If they accept my offer, I will be shocked, and ready to move in.

I am not pre-approved. I would have to make an offer based on the condion of getting approval. I was neither planning to buy nor ready to buy in this current market. It is not yet a “buyer’s market” IMO. The downturn is just beginning. I think a few more years into this will be much better for families looking to buy. Then I might get a reasonable price on a loan that is made with an actual expectation of eventual payoff.

I firmly believe rising ARM payments are going to force a lot of the increased number of “homeowners” (70% vs 63% historically) nationwide to default, and especially here in S. California with our ridiculous suicide loans. That is why this unit is for sale and many others like it. This growing crisis is already moving lending standards. Establishing basic standards once again is going to be necessary, is already slowly happening, and will further erode property values to more fundamentally sustainable levels.

Having said that, the MLS listing said 175K and make an offer. I went to the condo and toured it the other day. It was really in bad shape. It is in desperate need of new carpets and paint and all the cabinets and tile and fixtures are in poor condition and just plain ugly. (Pretty much what you’d expect from a deadbeat homeowner I guess). Oh yeah, the toilet wouldn’t flush. I don’t know why, and I didn’t spend too much time looking. I didn’t try all of the lights and fixtures. There is obviously thousands of dollars of work that will be required to make it something I want to live in. I am looking for a home for myself and my family and not a rental unit. I also note that this is not a desireable community to live in from a basic crime standpoint. (I know because I live at 425 E Bradley Ave).

175K is a bottom end price for a bottom end foreclosed unit in the lowest priced part of the county. I know the asking price supposedly takes into account the condition, based on a perceived fair market value of a liveable unit being in the low 200Ks. I don’t believe any unit in the complex will sell for 200K for many years to come.

I note that a 1bd/1ba condo in the same 765 E Bradley complex just sold for 102K (#51). I had a chance to see that unit and it was in much better shape.

I believe the floor of the downturn for 2bd/2ba condos in El Cajon will be set by investors rather than speculators which drove prices out of reach in the first place. Current rents cannot come close to making an investor cash flow positive and there is no longer speculative appreciation to count on.

There is just no sustainable reason for the disconnect between rents and property values.

We are headed dramatically the other way. A bottom end condo in El Cajon in general will likely settle in a few years below 150K, I hope, and I’m not interested in overpaying today. That estimate assumes a liveable, rentable condition unit and that interest rates don’t move much in the meantime.

There is also a bank owned (apparently, because it is not on the MLS) condo in the same building (#45). It is in much better shape and a much more desirable unit location. That is the one my wife and I would prefer. It will be interesting to see what the bank unloads it for, or which bank blinks first with the asking price. I haven’t got a response from the real estate agent so I don’t know what the asking price for #45 is. However, it is by far the more desireable unit.

My offer is 110K for #41 (as is) and I’m not interested in paying closing costs. I have taken into account the increase in rent value of a 2bd over 1bd (which will ultimately set prices again), the recent 102K sale of the 1bd/1ba in the unit, and the money required to make the unit liveable, plus the knowledge of where the El Cajon condo market seems to be quickly headed. My total cost, after renovation, would put it in the price range I am comfortable with. And yes, I know the asking price has already been reduced 55K. I don’t know how long that price reduction has been on the market, but it is still chasing the market down IMO (based on the much better unit and 200K asking price for 465 E. Bradly Ave #2).

If the bank is looking to move the condo off the books I can accomodate for 110K. Otherwise I will keep waiting. I just note that the market isn’t exactly moving and the “spring bounce” didn’t happen here in El Cajon condo land.

I have been watching the condo complex no more than 100 yds up the street from me at 465 and 469 E Bradley Ave. There is a bank owed (I assume based on the 273K sale OCT 31, 2006) foreclosure there for 200K (900sf 2bd/2ba #2) and 2 other units for sale (#11 and #6). The bank owned 200K unit is 50K+ less than the other 2 identical units, yet there has been no action on it for 2 months. It will be interesting to see what price will eventually move it off the books. I anticipate the other 2 will probably end up being foreclosures as well and will have to compete with each other based on the foreclosure sale price of #2 if it ever sells. Anyway, there are no takers on the unit after a 73K decrease in “value” (-27%) in only 8 months. (That unit is bigger and in much better shape than 765 E. Bradley #41 and it is going to sell eventually for a discount on the 200K asking price).

Forced foreclosure sales and auctions will end up setting price expectations, up to the natural floor of price/rent ratios based on the stomach for risk of real investors, IMO.

My offer is significantly less than what the bank is hoping for and I can only assume that if I hear from you again it is because the situation banks are in trying to move REOs off the books is more severe right now than the average person realizes.

Regards,

Gary Sears

[garysears]

Out of morbid curiosity I made an “offer” on 765 E. Bradley Ave #41. (MLS #078015909) It is a REO unit that has been on the market for 5 months. The original asking price was 230K and was reduced to 175K at some point. I just wanted to see what kind of reaction I might get (or none at all) if I were to offer what I really want to pay. I am curious to see if I get a reply. If so, I think it means there is absolute desperation setting in on the part of the banks. Because I want a 50% discount on the original asking price.

By the way, regarding the crime and vandalism in this particular part of El Cajon, this morning when I was walking out to my car on the street to go to work I saw that 3 or 4 cars had had their tires slashed overnight. They were parked right on the street in front of the unit where everyone has to park. And there was also at least one attempted car jacking of a resident here who parked on Bradley Ave. Gangs are sometimes just hanging out on the steps of the complex. Hooligans seem to rove pretty freely around here at night.

Anyway, here is the text of my email offer in case it is entertaining. I know it is naive and ridiculous, but I am doing it for my own reasons and an informal test of true market conditions. If they actually make a counter offer and try to split the difference it will give me great hope for a future opportunity somewhere I actually want to live. If they accept my offer, I will be shocked, and ready to move in.

I am not pre-approved. I would have to make an offer based on the condion of getting approval. I was neither planning to buy nor ready to buy in this current market. It is not yet a “buyer’s market” IMO. The downturn is just beginning. I think a few more years into this will be much better for families looking to buy. Then I might get a reasonable price on a loan that is made with an actual expectation of eventual payoff.

I firmly believe rising ARM payments are going to force a lot of the increased number of “homeowners” (70% vs 63% historically) nationwide to default, and especially here in S. California with our ridiculous suicide loans. That is why this unit is for sale and many others like it. This growing crisis is already moving lending standards. Establishing basic standards once again is going to be necessary, is already slowly happening, and will further erode property values to more fundamentally sustainable levels.

Having said that, the MLS listing said 175K and make an offer. I went to the condo and toured it the other day. It was really in bad shape. It is in desperate need of new carpets and paint and all the cabinets and tile and fixtures are in poor condition and just plain ugly. (Pretty much what you’d expect from a deadbeat homeowner I guess). Oh yeah, the toilet wouldn’t flush. I don’t know why, and I didn’t spend too much time looking. I didn’t try all of the lights and fixtures. There is obviously thousands of dollars of work that will be required to make it something I want to live in. I am looking for a home for myself and my family and not a rental unit. I also note that this is not a desireable community to live in from a basic crime standpoint. (I know because I live at 425 E Bradley Ave).

175K is a bottom end price for a bottom end foreclosed unit in the lowest priced part of the county. I know the asking price supposedly takes into account the condition, based on a perceived fair market value of a liveable unit being in the low 200Ks. I don’t believe any unit in the complex will sell for 200K for many years to come.

I note that a 1bd/1ba condo in the same 765 E Bradley complex just sold for 102K (#51). I had a chance to see that unit and it was in much better shape.

I believe the floor of the downturn for 2bd/2ba condos in El Cajon will be set by investors rather than speculators which drove prices out of reach in the first place. Current rents cannot come close to making an investor cash flow positive and there is no longer speculative appreciation to count on.

There is just no sustainable reason for the disconnect between rents and property values.

We are headed dramatically the other way. A bottom end condo in El Cajon in general will likely settle in a few years below 150K, I hope, and I’m not interested in overpaying today. That estimate assumes a liveable, rentable condition unit and that interest rates don’t move much in the meantime.

There is also a bank owned (apparently, because it is not on the MLS) condo in the same building (#45). It is in much better shape and a much more desirable unit location. That is the one my wife and I would prefer. It will be interesting to see what the bank unloads it for, or which bank blinks first with the asking price. I haven’t got a response from the real estate agent so I don’t know what the asking price for #45 is. However, it is by far the more desireable unit.

My offer is 110K for #41 (as is) and I’m not interested in paying closing costs. I have taken into account the increase in rent value of a 2bd over 1bd (which will ultimately set prices again), the recent 102K sale of the 1bd/1ba in the unit, and the money required to make the unit liveable, plus the knowledge of where the El Cajon condo market seems to be quickly headed. My total cost, after renovation, would put it in the price range I am comfortable with. And yes, I know the asking price has already been reduced 55K. I don’t know how long that price reduction has been on the market, but it is still chasing the market down IMO (based on the much better unit and 200K asking price for 465 E. Bradly Ave #2).

If the bank is looking to move the condo off the books I can accomodate for 110K. Otherwise I will keep waiting. I just note that the market isn’t exactly moving and the “spring bounce” didn’t happen here in El Cajon condo land.

I have been watching the condo complex no more than 100 yds up the street from me at 465 and 469 E Bradley Ave. There is a bank owed (I assume based on the 273K sale OCT 31, 2006) foreclosure there for 200K (900sf 2bd/2ba #2) and 2 other units for sale (#11 and #6). The bank owned 200K unit is 50K+ less than the other 2 identical units, yet there has been no action on it for 2 months. It will be interesting to see what price will eventually move it off the books. I anticipate the other 2 will probably end up being foreclosures as well and will have to compete with each other based on the foreclosure sale price of #2 if it ever sells. Anyway, there are no takers on the unit after a 73K decrease in “value” (-27%) in only 8 months. (That unit is bigger and in much better shape than 765 E. Bradley #41 and it is going to sell eventually for a discount on the 200K asking price).

Forced foreclosure sales and auctions will end up setting price expectations, up to the natural floor of price/rent ratios based on the stomach for risk of real investors, IMO.

My offer is significantly less than what the bank is hoping for and I can only assume that if I hear from you again it is because the situation banks are in trying to move REOs off the books is more severe right now than the average person realizes.

Regards,

Gary Sears

[temeculaguy]

Awesome offer Gary, rather than say “I want to pay Less” you made a cogent argument why they should consider your extremely low offer. I would be shocked if they entertained it but you never know they may counter with 150 or 160 and you can see where their head is at. Go get pre-qualified just so you don’t have to mention that you are not qualified in the beginning of your offer, it makes you more of a player if you can get it off their books in 30 days and throw in the gang members on the steps to the complex in your next offer, they may have never actually seen it and it will scare them, throw in the police case number of the carjacking or a link to the news article, make them feel they are never going to get rid of this thing. Go to megans law website, there are two sex offenders at 675 E. Bradley, one rapist and one child molestor, throw that in for good measure

[temeculaguy]

Awesome offer Gary, rather than say “I want to pay Less” you made a cogent argument why they should consider your extremely low offer. I would be shocked if they entertained it but you never know they may counter with 150 or 160 and you can see where their head is at. Go get pre-qualified just so you don’t have to mention that you are not qualified in the beginning of your offer, it makes you more of a player if you can get it off their books in 30 days and throw in the gang members on the steps to the complex in your next offer, they may have never actually seen it and it will scare them, throw in the police case number of the carjacking or a link to the news article, make them feel they are never going to get rid of this thing. Go to megans law website, there are two sex offenders at 675 E. Bradley, one rapist and one child molestor, throw that in for good measure

[garysears]

Good idea temeculaguy. In this case I wonder if it matters whether or not I am prequalified. The only way I hear back on this is if absolutely no one else is showing interest. I have suspected that might be the case, which is why I made my offer. I just wonder how much interest there is for foreclosed bottom end properties. But for future lowball offers I will definitely consider getting prequalified.

[garysears]

Good idea temeculaguy. In this case I wonder if it matters whether or not I am prequalified. The only way I hear back on this is if absolutely no one else is showing interest. I have suspected that might be the case, which is why I made my offer. I just wonder how much interest there is for foreclosed bottom end properties. But for future lowball offers I will definitely consider getting prequalified.

[what_a_disasta]

Why bother? I’d rather live in Dante’s Inferno than El Cajones. (sp?)

100k??? Not even if they paid me.

[Author]

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