What Goes Up Must Come Down

A friend of mine is looking to buy a property in southern California to live in, currently she rents. This would be the first time that she buys a property and she hopes to get it before the expiration of the $8,000 First Time Homeowner’s Tax Credit (although maybe she should wait because it seems like that credit might get extended and upped to $15,000 now).

So yesterday she called me up and asked me about the Chino/Chino Hills area. The properties there have come down by quite a bit (I think more than 40%) and as a result it is much more affordable than the prime real estate areas that are closer to downtown Los Angeles like Alhambra, Arcadia, Temple City, and Monterey Park (houses there are still around $400,000).

At her insistence I pulled up my email listing provided by my agent and started clicking on properties that were within her price range (less than $200,000). I was surprised to find two houses (yes, houses! not condos) that were selling for less than $200,000. I rattled off their addresses and off she went to see if they were to her liking. I haven’t heard back from her yet so I don’t know if they met her qualifications. But one of the listing’s description definitely caught my eye, it said:

**WOW** SOLD FOR $400,000 in 2007** BANK in & OWN this deal!! Association features pool, spa and playground!! Darling family home in move in condition! Bright living room features fireplace, sliding glass door and ceiling fan. Kitchen has a cushy layout with plenty of pantry space. Master bedroom features full bath. Both bedrooms have sky lights. Home has lots of large windows making it airy and bright. Property close to shopping centers, parks, and near the 71 and 142 freeways.

Can you guess what stood out in that description? Yes! It stating that this property sold for $400,000 in 2007! Mind you, this 1985 house has 2 bedrooms and 1.5 bathrooms. The house has a total of 974 sqft and the lot is 2,000 sqft. In addition, even though it is a house, you need to pay $166 HOA every month. The real kicker is that this REO house is selling for $148,750 right now!

What the frack right? How did it go from selling for $400,000 to $148,750 in two years?? I couldn’t believe it so I went over to Zillow.com and pulled up this address. This is the sales history for the address:

So it was true! I knew that the housing economy in southern California was depressed but I didn’t know it got this bad. Think about it, how would you feel if you bought a house in 2007 for $400,000 and it dropped to less than half it’s value within two years? No wonder people are walking away from their houses, it’s impossible to recoup their costs. Of course, you could always say that these people should have known the house was overpriced and never should have bought it, but hindsight is always 20/20 (well, except for people that were warning we were in a bubble like Dr. Housing Bubble) and it’s too late to say shoulda.

But I guess it is a good deal for people that saved to buy a house now. Though, on an ominous note… I wonder how much lower prices will go in the next few years when the Alt-A and Option ARM loan crises hits.

Let’s do some calculations to satisfy my curiousity of whether this is a good deal:

• Assume price bought is $148,750
• Put 20% down so get $119,000 mortgage
• Investment property so qualify for a mortgage loan with a 6.25% interest rate over 30 years
• Monthly property expenses total $1,149.04
  • Mortgage = 733.04
  • Insurance = 50.00
  • Taxes = 150.00
  • Misc maintenance = 50.00
  • HOA = 166.00

Looking on Rentometer.com I was able to find the average monthly rental income in that area in a two bedroom is between 1,200 to 1,400. So all things considered, the rental property should be able to cover its own monthly expenses assuming a good tenancy rate. And even if you have a lower tenancy rate, the monthly expenses of $1,1,49.04 should not be able to wipe you out. All in all, at first glance this looks like a possible buy. But of course, you need to go scout that area to see if the house is in good working condition, what kind of neighborhood it is, and if there are any other market factors that might affect its price (such as what other similar houses are selling for in that area).

Related posts:

• Deal or No Deal?
• Current Status (6/21/2009)
• House #3
• Real Estate Rate of Return
• Big Versus Small