[Bugs]

When a developer leases back a model home the lease rate is usually sufficient to cover the entire mortgage payment at 100%. In a good market a model home purchase/leaseback can be the ultimate flip. The property completely services its own debt, it is maintained professionally, and it is maxed out with all the upgrades and options imaginable, including the professional landscaping and yard improvements.

However, if the market goes soft between the time of purchase and the time the lease expires, such an arrangement can be a problem.

One example is what happened over at Bressi Ranch. An investment group bought 18 model homes from Lennar in early 2005, apparently at their retail pricing, which included all the options, upgrades and furniture. Lennar leased them all back while they finished building out their projects. When the leases were finished the LLC got the homes back.

Unfortunately for them by the tme they got the houses back the market had already gone from booming to squishy, and pricing had stabilized out. So they were sitting on 18 top-of-the-line homes, each of which had been priced $150,000 – $200,000 or more above the intial base pricing, but was now only about equal to the base pricing or perhaps only slightly higher.

This LLC was apparently successful in selling off a couple units right off the bat. Who knows, maybe a couple of partners decided to buy them. The other 16 were listed in the MLS for a while, with no success. As time wen’t on they started discounting the pricing but to no avail.

Finally the LLC ran an auction about 9 months ago. There was an article in the Union-Trib on it and a couple of our posters attended. To make a long story short, that auction failed miserably – lots of lookers and no serious buyers.

Since then the LLC has been selling one or two of these units off every month, at reduced prices that are generating outright losses of $50k and up, not counting brokerage fees or the mortgage payments they’ve had to pay while these homes langish on the market.

The last time I looked, there were still a couple of these listed in the MLS, and if the sell within their listing ranges they’ll generate $100,000 – $150,000 in overall losses by the time its all over.

Of the 7 residential “projects” at Bressi, 6 of them were built by Lennar. The 7th one was sold off by Lennar to Barratt, who bought the finished subdivision lots in 2005, apparently for about $500,000/lot. Barratt has been building 4,500 – 6,200 SqFt tract homes on these lots and selling them starting at $1,800,000 and up. I personally saw the appraisals on 3 of those sales, including one of the model homes. In the year that they’ve been selling those homes, it looks like Barratt has been able to sell off 9 of the units, including most or maybe all of the models. They still have another 15 to go, about 5 of which appear to be completed and just standing there.

Inasmuch as Barratt paid so much money for those lots they can’t really go smaller on their homes, They probably have a little room to drop pricing, but if they do so at this point the project will probably turn out to be a loser for them because of the length of time they’ve spent on it and the amount of carrying costs. By the time the model home leases are over I imagine those homes will be worth a lot less than their purchase prices.

The moral of the story is that a model home purchase with leaseback can turn out to be a bad move if the market isn’t booming and you don’t plan to live there when its over.

[Bugs]

When a developer leases back a model home the lease rate is usually sufficient to cover the entire mortgage payment at 100%. In a good market a model home purchase/leaseback can be the ultimate flip. The property completely services its own debt, it is maintained professionally, and it is maxed out with all the upgrades and options imaginable, including the professional landscaping and yard improvements.

However, if the market goes soft between the time of purchase and the time the lease expires, such an arrangement can be a problem.

One example is what happened over at Bressi Ranch. An investment group bought 18 model homes from Lennar in early 2005, apparently at their retail pricing, which included all the options, upgrades and furniture. Lennar leased them all back while they finished building out their projects. When the leases were finished the LLC got the homes back.

Unfortunately for them by the tme they got the houses back the market had already gone from booming to squishy, and pricing had stabilized out. So they were sitting on 18 top-of-the-line homes, each of which had been priced $150,000 – $200,000 or more above the intial base pricing, but was now only about equal to the base pricing or perhaps only slightly higher.

This LLC was apparently successful in selling off a couple units right off the bat. Who knows, maybe a couple of partners decided to buy them. The other 16 were listed in the MLS for a while, with no success. As time wen’t on they started discounting the pricing but to no avail.

Finally the LLC ran an auction about 9 months ago. There was an article in the Union-Trib on it and a couple of our posters attended. To make a long story short, that auction failed miserably – lots of lookers and no serious buyers.

Since then the LLC has been selling one or two of these units off every month, at reduced prices that are generating outright losses of $50k and up, not counting brokerage fees or the mortgage payments they’ve had to pay while these homes langish on the market.

The last time I looked, there were still a couple of these listed in the MLS, and if the sell within their listing ranges they’ll generate $100,000 – $150,000 in overall losses by the time its all over.

Of the 7 residential “projects” at Bressi, 6 of them were built by Lennar. The 7th one was sold off by Lennar to Barratt, who bought the finished subdivision lots in 2005, apparently for about $500,000/lot. Barratt has been building 4,500 – 6,200 SqFt tract homes on these lots and selling them starting at $1,800,000 and up. I personally saw the appraisals on 3 of those sales, including one of the model homes. In the year that they’ve been selling those homes, it looks like Barratt has been able to sell off 9 of the units, including most or maybe all of the models. They still have another 15 to go, about 5 of which appear to be completed and just standing there.

Inasmuch as Barratt paid so much money for those lots they can’t really go smaller on their homes, They probably have a little room to drop pricing, but if they do so at this point the project will probably turn out to be a loser for them because of the length of time they’ve spent on it and the amount of carrying costs. By the time the model home leases are over I imagine those homes will be worth a lot less than their purchase prices.

The moral of the story is that a model home purchase with leaseback can turn out to be a bad move if the market isn’t booming and you don’t plan to live there when its over.

[Bugs]

I’ll bet a lot of you guys could never have envisioned a builder dropping pricing by 15% or 25% all at once like that. The only reason I’m not surprised is because I’ve seen them do it before.

That’s why I’ve been saying that Riverside County really could see the 50% drop by the time it’s all over. Look at it this way; these builders were already donw by at least 10% off their peak pricing. If we add another 15% that adds up to 25% which by my reckoning is halfway to 50%. Moreover, the declines of the individual datapoints (volumes and prices) all seem to be picking up momentum.

Seriously, we could see another 15% drop (maybe more) by this time next year, and who among us doesn’t think this trend won’t last at least 1 more year?

[Bugs]

I’ll bet a lot of you guys could never have envisioned a builder dropping pricing by 15% or 25% all at once like that. The only reason I’m not surprised is because I’ve seen them do it before.

That’s why I’ve been saying that Riverside County really could see the 50% drop by the time it’s all over. Look at it this way; these builders were already donw by at least 10% off their peak pricing. If we add another 15% that adds up to 25% which by my reckoning is halfway to 50%. Moreover, the declines of the individual datapoints (volumes and prices) all seem to be picking up momentum.

Seriously, we could see another 15% drop (maybe more) by this time next year, and who among us doesn’t think this trend won’t last at least 1 more year?

[Bugs]

It’s bad, but you ain’t seen nothing yet.

Sit back, pop open a cold one and relax, because (IMO) it won’t get REALLY interesting til the end of the 3rd qtr 2007, possibly the beginning of 2008.

By then:

The last of the exotic financing programs should be officially declared extinct, and

The current batch of foreclosures will be listed for resale, and

The majority of the residential construction that’s going to get done will be done, thereby putting those people out of work to much ballyhoo, and

The YTD statistics for volumes and pricing will make apparent to everyone that 2007 is going down worse than 2006; and more importantly, it will become clear that this is not a temporary blip and things aren’t going to get better in 2008.

[Bugs]

It’s bad, but you ain’t seen nothing yet.

Sit back, pop open a cold one and relax, because (IMO) it won’t get REALLY interesting til the end of the 3rd qtr 2007, possibly the beginning of 2008.

By then:

The last of the exotic financing programs should be officially declared extinct, and

The current batch of foreclosures will be listed for resale, and

The majority of the residential construction that’s going to get done will be done, thereby putting those people out of work to much ballyhoo, and

The YTD statistics for volumes and pricing will make apparent to everyone that 2007 is going down worse than 2006; and more importantly, it will become clear that this is not a temporary blip and things aren’t going to get better in 2008.

[Bugs]

What would be entertaining would be a tell-all book from Mr. Learah outlining the behind-the-sense story at NAR.

He is probably contractually prohibited from doing this, but if he wasn’t such a book could set NAR back quite a bit.

[Bugs]

What would be entertaining would be a tell-all book from Mr. Learah outlining the behind-the-sense story at NAR.

He is probably contractually prohibited from doing this, but if he wasn’t such a book could set NAR back quite a bit.

[Bugs]

FWIW, I have often been baffled by Dataquick’s analyses and commentary. They must be using different data than the rest of us can get because they always seem to run counter to everything else I see.

For instance, Dataquick commented not long ago that during the last recession the average drop was 15%, but I could only identify just a couple of areas that “only” dropped by 15% on a house-to-house basis of comparison. The averages I saw on a regular basis were more like 20 – 25%, and I saw a couple market segments drop by nearly 40% off peak.

When Dataquick’s John Karevoll finally starts talking about big losses (if he ever does) THEN you’ll know that we’ve hit bottom and it’s time to buy.

[Bugs]

FWIW, I have often been baffled by Dataquick’s analyses and commentary. They must be using different data than the rest of us can get because they always seem to run counter to everything else I see.

For instance, Dataquick commented not long ago that during the last recession the average drop was 15%, but I could only identify just a couple of areas that “only” dropped by 15% on a house-to-house basis of comparison. The averages I saw on a regular basis were more like 20 – 25%, and I saw a couple market segments drop by nearly 40% off peak.

When Dataquick’s John Karevoll finally starts talking about big losses (if he ever does) THEN you’ll know that we’ve hit bottom and it’s time to buy.

[Bugs]

Except for the fact that this recent boom was about 3 times farther over the long term trend than the last boom was.

[Bugs]

VC23109,

If, as another poster suggested, that project was already $50k overpriced before their latest adjustment, they only really adjusted to $50k less than their nearest competition. It looks bad on the surface until you remember they probably bought the land prior to 2003 and based on those prior prices. They wouldn’t admit it, but they still have some room.

As for how low it will go, I think there ultimately has to be some correlation between wages and pricing. Working backwards from $320k and assuming the following: 5% down, 7% interest, ~33% max for mortgage payment and taxes (not counting insurance and HOA), we come out to the following:

$304,000 @ $7% = $2,010 x 12 = $24,129 + $3,600 taxes / .33 = $84,027 annual income. I don’t know that there are but one or two communities in SD County where the median household income is $84k; how many do you think there are in Riverside County? You can play around with the numbers and tax writeoffs and all, but no matter how you slice it even the $321k looks high for an “average” home in that area.

[Bugs]

“I doubt anything sold for anywhere near that amount in Bird Rock in the mid-90’s trough. Too low. I was perusing homes in the area during that time frame in the $400-500K range – 3/2, less than 2000 sq. ft., modest and in need of some sprucing up. I don’t doubt that some fixers sold for under $400K.”

I thought about that and decided I’d look some numbers up. The $165k was clearly too low, but I didn’t remember a lot of $500k sales during that time frame.

Public records currently list 67 properties in the 1200-2000 SqFt category that sold the Bird Rock area between 01/1993 and 01/1997. Of the 67, 5 of them sold above $500,000; 11 of them sold between $400,000 – 500,000; and 36 of them sold between $300,000 to $400,000; and 13 of them sold for less than $300,000.

By my count, more Bird Rock area properties sold between $300k – $400k than all other price ranges combined.

I tried to parse it a little further to pin it down, but I kept coming up with roughly 50/50 distribution all through the 300-400 range. That indicates to me that the median is probably at or close to $350k.

[Bugs]

The last time I looked a couple weeks ago, a couple of the units in the Bressi auction were still active listings.

[Bugs]

I would ask: “How can it NOT get better?” We’re still playing in the first quarter, not even to the halftime buzzer. The numbers of available properties is going up, financing options are going down, prices are in full-scale retreat, and the number of qualified buyers standing on the sidelines waiting for the right time is not that large. They’re visible only because of what they are not doing.

Even if this was the low point (it isn’t), there will still be further declines because the builders are still building more units than they have buyers for. They’re expanding an already-bloated inventory.

The-bottom-is-now-theory absolutely defies common sense. You can’t add 10% more houses to the overall inventory during the runup and have 25% of the buyers (the flip investors) leave the market after that runup, without there being a corresponding effect on the pricing.

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