los angeles SFR

[socalarm]

hi, i’ve been addicted to the forum for a month. you’re a great group. thanks for the provocative and vigorous discussions. they really helped my wife and i snap out of the RE echo chamber of myths.
we own a home in LA, and people seem to live in cognitive dissonance with the rest of the planet. their arrogant predictions appear to be based on urban myths. nobody can answer why ‘always a good time to buy’ RE hasn’t been increasing every year in perpetuity. it’s always related to ‘pent-up demand’ or ‘everyone wants to live here’…
i’ve been considering selling the house since last winter, but i had a 2/1 ARM that resets this fall. long story. i am not desperate because i’ve saved up for principle and can pay if i do have to stay on.
it seems to me condo in boonies< SFR in boonies< condo in major metro< SFR in major metro. do you think the situation will arrive as quickly and devastating here as it has in smaller cities or exurban/suburban areas? it crashed here in the 80s too (way before i arrived here) but it recovered fairly well in the main metro. there are too many people who need to work and live here. or am i now sounding like one of those airheads i described? open to thoughts. thanks

[powayseller]

I *love* your phrase: snapping out of the real estate echo chamber of myths.

Why are you not going to sell that condo? Do you think it can hold its value somewhat? If it’s not too intrusive, can you provide an insider’s view of the ARM situation – why you got it, how much it will go up, and what are your plans when it does?

[socalarm]

sorry, it never showed the complete post and i couldn’t get back in to edit it.
to continue the thought. is metropolitan LA relatively more insulated than smaller cities? by the time the tsunami reaches here, won’t it have affected all other places already?
we own a SFR. if we sell it this fall, i can’t say if i’m timing it really badly or getting out in the nick of time.
i couldn’t get out earlier because my ARM resets this fall…

[powayseller]

Why can’t you sell before your ARM resets? – prepayment penalty?

[socalarm]

ARM background. we bought a fixer with 5% down. we had no debts, no loans, sterling credit. bought under the market value in ’03, lower by 100k. put in that extra 100k in extensive remodeling. taking out those loans however, dinged our credit really badly. that left us in a temporary debt hole and we had to ultimately settle for a refinance with a 2/1 ARM that resets this fall and has a 6 month prepay. the bank has a reputation for being the worst of the subprime lenders.
i have taken care to keep track of my reset period, though i believe i’m not the typical ARM holder. it helped me come out of my temporary construction debt. i have kept an amount aside for the ‘missing’ principal. the house value has meanwhile gone up to twice our outstanding loan. it seems as good a time as any. but i wonder if already it’s too late out here. but like i said before, i don’t think anybody here cares to learn from other markets…

[zeropointzero]

I am not as familiar (forunately) with all the machinations of ARMs — is the 6 mo. prepayment pentaly:

a) a prepayment penalty that is in effect for six months after loan originates (in other words, you could pay off after 7 months)? If this the case – how much is the penalty?

or

b) is the penalty six months worth of interest? If this it the case, how long is prohibition on repaying?

Just curious. Good luck!

[socalarm]

thanks,
it’s b. they calculate 6 months worth of interest. there are other factors and i forget the exact method but it translates to roughly that basis.
of course, relative to the way prices are plummeting or about to, that figure is paltry.
if in a bind, i have the means to refinance but i don’t think it’s worth it any more to invest in “you can’t lose with housing”

[PD]

I had a prepayment penalty but I only had to pay it if I refinanced. When I sold, I did not have to pay the prepayment penalty even though we were within the prepayment penalty period. If you are thinking of selling, contact your lender and find out if you can sell without paying the penalty.

[mrquoi]

Advice: You can negotiate just about everything related to real estate. Try it with your lender.

We had a 5/1 ARM on our place in LA and only had a prepayment penalty if we refinanced, though our lender was willing to forgive the penalty if we refinanced through them. However, we sold, or at least we are now in escrow 😉

We used an ARM so that we could live comfortably on one middle-class salary while my husband was in school, plus we knew we would be moving in less than 5 years. We bought because the PITI (mortgage, taxes, etc) was about 1/2 the cost of renting a similar home — a post-war 3br in an area with very good schools and colleges, so we felt confident about being able to sell or rent it out. However, we bought in the old days (2003) when you could hunt down a place for under $250K, so it made sense. Lucky for us, we moved to that part of LA before the boom did.

[socalarm]

thanks, you’re right about that. i did try last year but they rank at the bottom of lender ratings (i checked a survey later) and they resoundingly said non !
i’m at 500k with my mortgage, and i’m assuming my home value is currently about twice that based on fundamentals. large lot, impeccable construction, quiet street. i still think the tsunami will take time to reach this category. not saying if, just when. and i want to eject from RE before it happens in this city. backpack and travel to return in 6 months and get back in if it’s a ‘soft landing’. if it isn’t i can’t lose by renting.
thanks PD. i checked online and it said there are two kinds of prepay penalties – ‘hard’ and ‘soft’. the former does not distinguish between a sale and a refi. i suppose you had a soft penalty clause. with my lender i’d put the chances at zero. they’re the quintessential predators.
i just hope our buyer is not the ARM kind. ‘the greater fool’ theory depresses me and i’d rather someone with real savings bought it…

[VCJIM]

socalarm,

What part of LA are you in? I sold my house in the valley last year, I believe I could offer some insight into the LA market.

Based on what I’ve read of your situation so far, you should sell.

[no_such_reality]

Don’t sell.

Really, I mean it .

Yeah, I know I’m on a limb here with that statement, but stop. You’re at 50% of current market already. Research it. It’ll be hardpressed to drop much below $500K if it is a well kept house, with a real yard, and functional living space.

Think about it. Are you going to go through two or more moves, a year or more of renting, to buy at what your current loan is at +/- 10% possibly at much higher rates not to mention future fixes/modernization?

If you sell, you’ll generate 6% or so in commissions, that’s on the inflated price. You then move and rent. Then go through the house hunt again, find a good place. Fix it up again. Hopefully all us wise people haven’t forgotten just what kind of condition the majority of homes we in during the mid-late 90s.

You look at homes today and it’s frequent to see new granite countertop kitchens, new sinks, new fixtures, new bathrooms, new carpet, new paint, new tile, etc. Not a chance of that after the downturn. It’ll be 5-6 years worn with 3 or more years of neglect on top of it. Remember looking at homes in the mid-90s? Or worse, window dressing paint, carpet cleaning etc.

If you’re really at 1/2 of were the market peaked for your zip code on comps, it may be cheaper staying put. Even after looking at the bulk of capital gains you may get if you try and sell now.

[socalarm]

vcjim. i’m near culver city, but in metropolitan LA, which tends to have lower values. i see ‘for sale’ signs slowly increasing. most of them seem to be in the better areas, so i think their sale could lead to better comps.

no such reality. thanks, i’m really happy you stuck your neck out for the contrarian view. that helps me a lot. my theory is this. i moved the place ‘up’ one category from wretched first home to a desirable place to live in. in a sense i created supply for a higher end category which has alway sbeen limited, and i assume less prone to the vicissitudes of RE values. i may not make a loss on the place, but wouldn’t i lose the chance to maximize my profit at least within the next 3-5 years, by not selling now ? again, contrarian views are welcomed. i’m still working on my rationale.

[no_such_reality]

Socalarm, depends on what you want to maximize, profit on the house, your family cashflow, family happiness, family wealth, they may not all stem from the same thing.

Here’s my thoughts, you could make a chunk of change selling, and maybe, maybe pay it back in transaction costs.

In the end, it really depends on four things:
1. Is this a home you’re happy to live in for the foreseeable future?
2. Can you afford to live in it?
3. How much hassle and uncertainty in living situation do you and your family want?
4. How much money is one way going to save over another?

I assumed the answer to 1 is yes. You answered 2 as yes. The answer 3 typical is who cares if you’re single and very little if married with school children.

So, that leaves you with an expected value question #4. That boils down to assumptions and you pretty much make the result come out any way you you.

Probably the easiest thing to do is hunker-down and really guess at how much you’ll clear out and how much it’ll cost to get back in.

For getting out, are comps, bed for bed, sq ft for sq ft comps in the neighborhood really moving in the last 30 days at $1,000,000? Or are they priced at $1,000,000 already only geting $900K and looking at $850K to get it moved if you want out quick?

To be fair, if you can sell, and sell quickly for $1,000,000 pocketing $450K and getting it tax free if you’re married, that’s a hard one to say no to. However, you really need to get the $450K clear. If it isn’t that much, you may end up burning all the profit up in trading fees. The commission, closing costs, new fix up. Plus… if rates return towards 8% and lending tightens, you’ll be looking at reinvest a chunk of that profit as the down payment on the next house.

Hypothetically, let’s say you can get out, but only at $850K if you want to go quickly. After commissions, it’s $799K, basically $300K profit to you.

Now, homes correct, from peak, quicky, say 2-3 years. Say, 30% (40% inflation adjusted), your original peak value home of $1,000,000 is now $699,000, needing a bit of work. Maybe just cosmetic, maybe more substantial.

$140,000 of your $300,000 is down payment. Est. $7,000 or so may get eaten in closing costs etc. Figure $25,000 in fixing, some bathroom upgrades, not remodels just fixtures, new appliances, carpet etc. Minor stuff, just adds up quickly. With tighter lending rules and increased tax base (~$400K to $700K) You’re looking at a $15,000 a year increase in monthly costs. Plus, you have to survive in the LA rental market for 2-3 years and time your lease right… for ease, let’s assume rent is a wash on your current costs.

So basically, you may be doing all that hassle for $130K clear and future negative cashflow of $15,000/yr. for 30 years. Do you have plans to do something great with the money in the short term?

Of course, if we go back to 8% mortgages, people will freak. But I think 7.5% is very realistic and it only changes that cashflow about $1000/yr.

One thing to keep in mind on the historical down turn numbers, the price decreases aren’t necessarily nominal, a big portion is inflation adjustment.

[socalarm]

great points. i did run some similar numbers earlier, except for some differences in the situation. i didn’t mention them clearly before or at all, so my fault. here goes:
1. i want to rent for a year, probably travel for two months without worrying about mortgage, taxes and maintenance. we’re still young with no kids and can take the chance.
2. i don’t want to net less than 400k. that means the absolute lowest offer i could consider would be 950k. anything less, you’re absolutely right, i will stay put.
3. my wife and i have our own small business, so far live/work from home. comfy but not workable in the long run. i’d like to focus on leasing a commercial space, business development, possibly hiring, etc to grow.
4. i could leave the profit in a CD or investment for RE only. our regular income would pay for rental+commercial space. meanwhile a CD would guarantee 6 or 7%, so i would probably gain more than sitting through a 3-5 year slump.
5. i could use previous construction experience in value engineering the second project. contractors are also far more eager to work well in a down market, materials are cheaper. i will only buy a 400k property, regardless of the market situation.

once my ARM resets, i will be able to pay but i can kiss 3 and 4 goodbye, and keep getting stretched to survive the slump…

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